US Coal Industry’s Beginning to Scrape Bottom of Barrel

by Leslie Glustrom, Clean Energy Consulting

From cybersecurity to new carbon regulations, the U.S. electric industry faces myriad challenges. The greatest challenge to U.S. electrical system security remains largely hidden in the country’s collective blind spot: the possible loss of significant coal supplies in the coming decade.

The prevailing but unspoken assumption has long been that if the U.S. needs more coal, then more coal will be produced. That assumption is no longer good.

Coal recoverability largely is governed by geology—a subject well-understood because coal is a solid that occurs in easily located beds. Much has been written about the impact of increased regulation and relatively low natural gas costs on the U.S. coal industry, but little has been written about the impact of geology on the prospects for U.S. coal supplies.

Though few have taken note, the U.S. Geological Survey (USGS) has analyzed U.S. coal supplies as part of the National Coal Resource Assessment project. According to the USGS studies, billions of tons of coal are buried in the U.S., but most of the coal is too deep to be mined at a profit. It is unlikely, then, that for-profit coal companies will mine much longer.

Analysis of U.S. coal geology and economics makes a strong case: The U.S. is rapidly approaching the end of economically recoverable coal.

The growing number of coal mines’ closing in Appalachia most visibly indicates the U.S. coal industry is rapidly approaching the last coal that can be mined profitably. Other signs appear in U.S. coal companies’ financial statements.

Coal prices have been rising at a rate that is two to three times faster than inflation (see Figure 1), but that hasn’t been enough to keep coal companies profitable. In theory, rising coal prices could make more coal economically profitable. In reality, the cost to mine coal typically has been rising faster than the price for which coal can be sold, profit margins have been squeezed, and in many eastern mines, profit margins are negative (see Figure 2).

figure 1

figure 2

Wyoming often is considered the country’s Fort Knox of coal, but USGS analyses indicate most Wyoming coal also is buried too deep to be mined at a profit (see Figure 3). Increasing overburden (i.e., dirt that must be moved to reach the coal) drives up coal production costs, and as production costs have risen, Wyoming coal production has dropped significantly in recent years, generally tracking the overall decline in U.S. coal production.

figure 3

In recent years, profit margins in the Powder River Basin have been less than 60 cents per ton in most quarters and negative in some quarters, according to Arch Coal, the No. 2 U.S. coal producer.

In the second quarter of 2014, Arch’s profit margins on Powder River Basin coal including the mighty Black Thunder mine—the source of more than 10 percent of the country’s coal—were a mere 18 cents a ton. Future increases in the depth to coal and reclamation requirements could shave profit margins further.

As profit margins thin or become negative, U.S. coal companies have begun reporting large losses (see Figure 4). Their stock prices have plummeted 80 to 90 percent.

figure 4

U.S. coal companies have hoped exports to Asia and elsewhere would tide them through this difficult time, but export markets are drying up, and exporting coal does not help U.S. utilities maintain adequate generation to meet U.S. demands.

With balance sheets increasingly in the red, U.S. coal companies cannot make the capital expenditures to mine coal that is more difficult to access.

Even coal industry veterans are talking about the end of the U.S. coal industry.

Eastern coal baron Robert Murray spoke at a recent coal conference about the “absolute destruction” of the U.S. coal industry.

And Bill Koch, CEO of Oxbow Carbon, which owns the Elk Creek coal mine in Colorado, said during a media interview, “The coal business in the United States has kind of died, so we’re out of the coal business now.”

Coal industry leaders expect no significant coal production increases in the Powder River Basin of Wyoming and Montana.

Greg Boyce, CEO of top U.S. coal producer Peabody Energy, responded as follows to a question about increasing prices’ supporting increased production from the Powder River Basin in a mid-2013 quarterly conference call with industry analysts:

” There has been discussion going around, around what is the—what’s the (line) capacity out in the Powder River Basin that can come back in as prices continue to increase. As we have talked before, our view is it’s fairly limited. You are going to get a bit of over time bump when people can run existing equipment harder. Once you get through that, which is a small component, then people are going to have to start spending real cash to repair equipment that’s been parked, replace engines, rear motors and the like. That will provide a bit of an increment, but then in reality, people have not spent capital to replace equipment that ultimately reached the end of its useful life or spent capital to overcome the annual increase in stripping ratio that naturally occurs in the Powder River Basin.

Coal production is rising in Illinois and Indiana, but these states are not large coal producers, and coal production increases in the Illinois Basin are not likely to compensate for declining coal production in Appalachia or the western U.S.

It might seem strange to be talking about coal supply constraints in a country that has assumed it had a 200-year supply of coal. The source of the confusion is the misreporting by the U.S. Energy Information Administration (EIA) of U.S. coal reserves. To be properly classified as reserves, coal deposits should be economically recoverable. The EIA, however, never has analyzed U.S. coal reserves for their economic recoverability. That what the EIA reports as U.S. coal reserves are not really reserves was acknowledged in a 1997 EIA coal update that since was removed from the EIA website, but then was repeated in the Footnote to Table 15 of the EIA’s 2012 Annual Coal Report, the most recent annual report available at press time.

Few people have read the footnotes in six-point font. The EIA acknowledgement is below—in slightly larger font than the original:

EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions, and after applying assumed mining recovery rates. This estimate does not include any specific economic feasibility criteria. (Footnote to Table 15, EIA 2012 Annual Coal Report)

Nevertheless, the U.S. is blessed with abundant renewable resources, and electricity storage technologies are evolving quickly. Will the U.S. electrical industry examine possible coal supply constraints and plan accordingly to meet U.S. electrical demand in the 2020s and beyond?


Leslie Glustrom is the former director of research and policy for Clean Energy Action. Currently she is the principle of Clean Energy Consulting, Reach her at 303-245-8637.

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