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By Andrew Holland on Jul 16, 2012 with 5 responses

The Death of American Coal Producers — and a Potential Lifeline

Tags: coal, EPA, natural gas

The following article was written by Andrew Holland for Consumer Energy Report‘s free Energy Trends Insider newsletter.

Companies mentioned: Patriot Coal Corp. (NYSE:PCX); Peabody Energy Corp. (NYSE:BTU); Arch Coal Inc (NYSE:ACI); Alpha Natural Resources (NYSE:ANR)

Last Monday saw reports that Patriot Coal will seek bankruptcy protection. This pulled down the share prices of competitors like Peabody Energy, Arch Coal, and Alpha Natural Resources.

As much as the coal producers claim that this is because of an Obama Administration “War on Coal,” it’s more about market realities . As the price of natural gas has fallen to below $3.00 per MMBtu, due to the growth in domestic production of gas from the shale gas boom, it is mostly cheap gas that is undermining coal demand. Therefore, the coal industry should not expect the outcome in this year’s Presidential election to provide much relief.

However, the recently-finalized EPA rulemaking on Mercury and Air Toxics Standards (which the Senate failed to overturn in June by a vote of 46-53) and the June Supreme Court decision that validated the EPA’s authority to regulate greenhouse gas emissions will put the nails in the coal industry’s coffin.

There are two important things to note here as the coal industry falls on hard times. First, coal mined in the East (especially Pennsylvania, West Virginia, and Kentucky) is generally inferior in terms of purity and, especially, sulfur content to coal mined in Wyoming’s Powder River Basin. Eastern coal has relied on nearby markets consisting of older, less efficient coal power plants. The newer, more efficient plants, using ‘Supercritical’ and ‘Ultrasupercritical’ technology tend to be in the West and utilize the cleaner Powder River Basin coal.

Second, while the domestic market for coal is collapsing, there remains robust global demand for coal, especially in East Asia and India. Up to now, the only major coal shipment ports are on the East Coast, and coal cannot be exported from the West Coast in sufficient quantities. Shipping a bulky, low-margin commodity like coal from the East Coast to Asia through the Panama Canal is neither cost effective, nor is there sufficient shipping volume available to do it. However, on the West Coast, where large vessels often make the return trip to China half-full of worthless ballast, the economics are different. Coal could be quickly transferred by train from the Powder River Basin to ports in Washington, Oregon, or British Columbia, if the ports are authorized by local governments.

The decision point here will come over the next year or so as decisions are made about the ports. The ports will require both state and federal approval (the EPA has expressed interest in assessing the proposals and Army Corps of Engineers has jurisdiction over the region’s waterways). This is already an issue in this November’s Washington governor’s election, and will be fought over the next year.

The conclusions are these: (1) Coal extraction companies that rely on eastern coal are due for a decline in competitiveness and productivity due to long term market and environmental forces, and (2) Western-based coal extraction companies could follow – but they have a potential lifeline in Asian export markets.

  1. By John on July 17, 2012 at 11:25 am

    Coal’s days are numbered due mostly to their incessant reliance on government support that is soon to dwindle. Carbon Capture and Sequestration is simply another coal industry fiction making the elusive mantra opt “clean coal” a massive deception on the public but yet, the federal government intends to put billions of taxpayer dollars toward the big lie.

    When Duke Energy proposed its supposed clean coal plant in Edwardsport, IN, they said it would cost $1.2 billion and include CCS but now that it is almost complete with a price tag of $3.5 billion, the idea of CCS is out of their business plan. Why, because they know that adds an additional 50% to the capital cost of the facility and requires anywhere from 25-40% of the energy that is produced just to capture and compress the CO2 for shipment to who knows where.

    Coal interests have held up the promise of “clean coal” for three decades but have never delivered on their promise.

    Sometimes coal interests are their own worst enemies. 

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    • By Andrew Holland on July 18, 2012 at 3:26 pm

      Agree – “clean coal” right now is just a buzzword that is used here in DC to make coal more palatable in tv commercials. 

      I’ve said for a long time that coal could never be competitive if it was forced to internalize its actual costs. Its not just the emissions – its also the mining, which actually kills people.

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  2. By Alice Finkel on July 18, 2012 at 1:57 pm

    It is sad when a US president goes to war against lucrative and abundant forms of energy such as coal, offshore oil, oil shale kerogens, and energy from fracking.  But some presidents are ideologically antagonistic to private sector markets, preferring top down government control of all sectors.

    The people of the US must decide what type of economy they wish — a Soviet style central command economy or a freer market oriented economy.

     

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    • By Andrew Holland on July 18, 2012 at 3:28 pm

      Alice – I think you missed my point. It isn’t the US President that has gone to war against forms of energy such as coal, etc. It is natural gas – i.e. energy from fracking – that has done-in coal. The nature of a free market economy is for competition to determine who wins. And – right now, natural gas is out competing coal by just about every measure. That means that coal companies go out of business; this has very little to do with some nefarious Administration plot.

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  3. By Russ Finley on July 21, 2012 at 1:35 pm

     

    Nice article Andrew,

     

     We import large amounts of the dirtiest oil from Canada and unless activists can put a halt to west coast coal exports, we will be exporting the dirtiest source of electric power. There is a tremendous amount of money to be made exporting coal, which would partially alleviate oil import trade imbalances. This is going to be an interesting test. Will environmental activists defeat the profit motive for once? I’m not holding my breath.

     

     On the other hand, the law of unintended consequences coupled with the law of compensating errors are always hiding in the shadows. Success at restricting coal exports might provide an inadvertent boost to nuclear all around the world when the economic and physical limits of renewables start to become more apparent.

     

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