King Coal’s uncertain future

ColoradoBiz Staff //May 1, 2013//

King Coal’s uncertain future

ColoradoBiz Staff //May 1, 2013//

/ Photography and words by Lee Buchsbaum /

Bucking a nationwide trend, 2012 marked the second straight growth year for Colorado’s coal miners. Only two states among the top 10 coal producers – Colorado and Illinois – increased production last year. But trapped between a glut of natural gas and falling demand for its premium quality coal, producers are getting hammered in 2013. However, as King Coal staggers here at home and nationwide, are we setting ourselves up for a future of reliance on much more expensive and potentially environmentally worse natural gas dependency?

Historically, Colorado coal production peaked in 2004 when almost 40 million tons were extracted, mainly from Western Slope counties. With its high heat and relatively low sulfur content, Colorado’s “super compliance” coal has long been shipped to electricity generators nationwide, particularly eastern power producers like the quasi-government owned Tennessee Valley Authority. But over the last decade, many coal-fired power plants have installed sulfur emissions scrubbers and other pollution controls that allow them to burn cheaper local supplies.

Simultaneously, competition from cheap natural gas and a growing amount of renewables like solar and wind, have eaten into coal’s market share – now down to only a third nationwide. The Great Recession and increased greenhouse gas regulations as well as uncertainty over future Environmental Protection Agency restrictions over carbon dioxide have led to widespread coal plant shutdowns, fuel switching and the curtailment of plans to develop cleaner coal technologies.

According to the 2013 Colorado Business Economic Outlook Study published last December, beginning in 2011 production from Colorado’s 11 coal mines increased 10 percent, to 27 million tons and then to last year’s high of 28.5 million tons. Almost half the coal burned to make electricity in-state comes from Colorado mines, with the remainder railed in from Wyoming. The state’s 12 coal-fired power plants consumed 18.4 million tons of coal in 2011, supplying about 68 percent of the state’s total electricity, but that figure has been declining and will fall sharply as new legislation like House Bill 1365 – dubbed the Clean Air Clean Jobs Act – kicks in. Chris Carroll, one of the authors of the coal section of the Business Economic study and a former Coal Geologist for the Colorado Geological Survey (he’s now with the State of Wyoming) is not hopeful. Looking at the most current figures, not only does he believe “the last two years of growth are unsustainable, but production statewide is starting to crater.”

“One should not mistake recent growth for a permanent trend,” warned Stuart Sanderson, president of the Colorado Mining Association. “The outlook is still very guarded as provisions of HB 1365 have yet to kick in. This bill could reduce over 4 million tons of production per year, as power plants along the Front Range have to convert roughly 1,000 megawatts of coal-fired production to natural gas or shut down. This supposed solution also comes with a $1 billion price tag for consumers,” said Sanderson.

 

Local and Statewide Impacts

Mined in nine counties, statewide Routt County has been the leading coal producer for years. In 2011 more than 7.7 million tons were mined from Peabody Energy’s Twentymile Mine, the state’s largest producer. Last year, Peabody, the world’s largest publicly held coal company, opened the new Sage Creek operation, also in Routt County, to eventually replace Twentymile. To the south, the Bowie Mine in Delta County is back online at full production following several years of engineering problems. After partnering with commodities traders and Chinese investors, it is ramping up operations as management hopes to export up to 1 million tons annually out of the Port of Stockton, Calif.

Both Peabody and Arch Coal, the nation’s No. 2 producer and owner of the West Elk Mine near Paonia, also ship large volumes of local coal to the Gulf and Canada for export worldwide. Additionally, production at the Colowyo surface mine in Moffat County is increasing after new owner Western Fuels Colorado, headquartered in Westminster, continues to invest in the mine while hoping it too can jump on the exports bandwagon. “If those market opportunities present themselves, if enough coal port capacity gets built, and rail haulage rates don’t price us out, then Colowyo is one possibility to fill that market, too,” said Duane Richards, CEO of Western Fuels. Other coal producers with corporate headquarters in the Denver area, though without any mines in Colorado – Westmoreland Coal and Cloud Peak Energy – are both actively engaged in the exports market.

Ironically, as the U.S. reduces its coal dependence, coal usage is soaring throughout the developing world. Many studies suggest that by 2015, the black rock may surpass oil as the global leader. “Colorado coal producers are, of necessity, going to have to sell more outside the state, as well as more abroad. In 2011 over 2 million tons went overseas, mainly to Europe, and 2012 numbers will undoubtedly be higher,” said Sanderson. The only thing stopping Colorado and U.S. producers from really cashing in are the lack of terminal options, particularly along the West Coast, to facilitate shipment to Asia.

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“We can shut down coal usage here, but that won’t change things globally,” said Richards. Already the No. 1 coal burner, “China is moving quickly to build more power plants and even if they build solar, they have to back those plants up, and they’ll do it with coal.”

Though exports may not be the last hope of the state’s mines, “Finding a way to those markets is something that they have to try to make work,” said industry veteran Bob Burnham. Now a consultant, with almost 45 years under his belt following graduation from the Colorado School of Mines and a stint in the Army, he’s still somewhat skeptical that exports alone will save the industry. “Throughout my career, I’ve seen exports go up and down. Besides port constraints, even though we produce high quality coal, it’s located in the middle of the nation. Everything has to be hauled quite a distance. Transportation rates are going to be high no matter where the coal goes.”

The Colorado Division of Reclamation, Mining and Safety, the agency tasked with tracking both coal production and employment, reported that in 2011, the ranks of miners increased by 370, to a 25-year high of 2,411 coal miners by year-end. But since then hundreds of jobs in the industry have evaporated. Those jobs, on average, pay $115,000 annually per employee, including benefits. Recently, when Western Fuels purchased Colowyo from multi-national Rio Tinto International, “They were starting to reduce staff and many folks left because they didn’t want to stay to the bitter end. We ended up saving a lot of good jobs especially in terms of pay, benefits and retirement plans. What community wouldn’t want jobs like that? With these you can buy houses, pay for college and retire securely,” said Richards. Between the two mines and their Denver-area headquarters, Western Fuels now employs almost 300 throughout the state, with more in Wyoming and throughout the West.

The Colorado Geological Survey estimates that 2012’s coal production was worth $1.32 billion, valued at roughly $45 a ton. “The state of Colorado receives more for coal royalties than any other state except Wyoming. When you start reducing coal production, you take away money for schools and other infrastructure, not just from Western Slope coal towns but Denver and the Front Range as well,” said Sanderson.

 

Coal vs. Natural Gas

“Frankly I’m not optimistic about the struggle between coal and natural gas. There’s lots of headwinds against coal from natural gas, increasing regulations and growing competition from renewables like solar and wind,” said Richards. But natural gas and coal do not compete on a level playing field. Gas is not subject to the Clean Air and Clean Water Acts like coal is, and it’s becoming obvious that the environmental footprint of the state’s 11 mines is miniscule compared to the cumulative footprint made by the thousands of natural gas wells scattered throughout the state – with tens of thousands more on the way. “Conversion to a natural gas future will continue to create disruption in people’s front and back yards while causing a massive transformation of the landscape in the West. Is this a Faustian bargain that the state has embraced?” Sanderson asked.

Furthermore, as the natural gas rush continues, we’re only slowly becoming aware of the environmental costs involved. “There are now studies suggesting that more greenhouse gases than were previously thought are actually emitted during exploration, development, transport and generation,” said Sanderson. That includes fugitive methane emissions that escape into the atmosphere throughout the natural gas development process. This methane – which some studies suggest is 25 times more potent than carbon dioxide over a 100-year time frame  undercuts the climate advantage that cleaner-burning natural gas has over coal.

But beyond environmental concerns, how much of a bite will this conversion take out of our wallets? The “big push” today is to convert gas to a liquid to enable its export, said Burnham. Once shipped abroad, Liquid Natural Gas (LNG) can fetch higher prices by tapping into overseas markets where gas is less plentiful. In recent weeks Nobel Energy has announced plans for an LNG plant in Weld County and British power producers have signed off-take agreements with American suppliers. As more domestic and Colorado gas goes overseas, the currently “low gas prices are not going to stay at the levels we’ve been seeing. We’ll be competing with the rest of the world for gas while our utilities are forced to buy at higher international prices. Consumers will take the hit in both their electricity and home heating bills,” said Burnham.

Even though we’re rapidly purchasing more intermittent sources like wind and solar, it’s all backed up by gas. With the government essentially sanctioning gas, a monopoly on baseload generation, “There will inevitably be a natural gas shock that will give a huge jolt to the economy and GDP,” said a concerned Richards.