Coal Reclaimer - Kym Farnik

Unearthing Coal Economics

Reserves vs. Resources

The U.S. Energy Information Administration’s (EIA) seeks to answer the question of how much coal is left in the United States on its website. The EIA estimates that in the U.S. there 256.7 billion short tons of “estimated recoverable coal reserves,” which they define as “coal that can be mined with today’s mining technology, after considering accessibility constraints and recovery factors.” At 2013 productions rates, the EIA explains that the U.S. reserves would “last about 261 years.”

This may seem like a long period of time but the EIA’s definition of “recoverable coal reserves” leaves out an important factor: it omits any mention of whether or not those reserves can be extracted economically. This is a clear departure from the commonly accepted definition of “reserves”: those deposits that are technically, legally, and economically feasible to extract.

Whether or not coal can be economically extracted is key to understanding how much coal the U.S. really has left.  If coal is prohibitively expensive to extract, then how will it get to the power plants where it is needed to keep the lights on?

Profitability vs. Geology

Since coal has been extracted profitably in the United States for hundreds of years, it may seem strange to question whether it can continue to be mined profitably. Yet the recent bankruptcies of the nation’s formerly first, second and third largest coal producers should prompt interested citizens and policymakers to seriously consider this question and its implications.  Who will mine the coal (or pay to mine the coal) if it is mined at a loss?

Recent bankruptcies suggest that the combination of the underlying geology of coal and competition from falling prices of renewables and natural gas threaten to make mining coal profitably a thing of the past. When any substance is mined, the easiest deposits are extracted first. Succeeding layers are more costly to access,  further from existing rail lines and beneath larger amounts of rock and soil. The ratio of the amount of rock and soil that must be removed to coal – the strip ratio – continues to increase.

Due to these facts, Cloud Peak Energy’s Chief Financial Officer Heath Hill remarked on a recent earnings call that, “Historically, the increasing strip ratios and longer haul distances at each of the mines has led to a 5% to 8% annual increase to the underlying cash costs.”

A look into coal companies’ SEC reports confirms his math. For example, take Arch Coal, the second largest and now-bankrupt U.S. coal producer. In its reporting to the SEC in 2004, Arch Coal, showed operating costs at its Powder River Basin mines of $5.59 per short ton over the first three quarters of 2003. Despite pushing hard to cut costs before it declared bankruptcy, Arch’s third quarter 2015 operating costs in the Powder River Basin came out to $11.71 per ton. That’s a compound annual increase of 6.4%,  right in line with what Cloud Peak’s CFO predicted.

Or conversely, one could look at coal mine productivity. As coal becomes more difficult to extract, the productivity per hour of labor decreases. Between 2002 and 2013, Powder River Basin mine productivity fell by 25%.

Powder River Basin labor productivity 2002 to 2013

This phenomenon has translated into high fuel costs for ratepayers. From 2004 to 2013 increasing coal production costs led to an increase in the cost of coal delivered to power plants, which is seen most clearly in the EIA’s Electric Power Monthly data.

Coal vs. Competitors

As coal costs have risen, the prices of competing wind, solar and natural gas have fallen, reducing demand for coal and driving down the market price for coal down somewhat since 2013. Powder River Basin coal ended 2015 below $11 per short ton, below Arch Coal’s third quarter cost to extract it.

If these costs trends continue – coal’s costs increasing and its competitors costs decreasing – the coal industry may continue experiencing financial difficulties. Regulators charged with ensuring grid reliability should consider this prospect seriously. Without a swift transition to a renewable-dominated electric grid, directly subsidizing or bailing out large coal producers could be necessary in order to keep the lights on – an unwelcome prospect for those concerned about climate change and the public health impacts of coal. Coal’s cost trends underscore the need to transition to clean energy.

Self-Bonding vs. Bankruptcy

Clean Energy Action is working to expose the coal industry’s inability to pay for land reclamation. When a coal company begins mining an area, it is required by federal law to provide financial assurances to cover the costs of the reclamation work needed to return the land to normal use or its natural condition after mining has ceased. Coal companies must post a bond to ensure that funds will be available to finish restoration if the company goes out of business or cannot complete the reclamation for another reason. Some states allow coal companies to “self-bond”: if the company passes a financial stress test, the state will allow them to make a legally-binding promise to complete the reclamation in the absence of providing any money or collateral upfront.

CEA has alerted regulators to the fact that coal companies – facing dire financial straits and in many cases approaching bankruptcy – may no longer be “good for the money.”  Since CEA began spearheading this campaign,  three of the nation’s top four coal producers, Peabody Energy, Alpha Natural Resources and Arch Coal, have declared bankruptcy.Their insolvency threatens to leave mines, including one larger than the City of San Francisco, scarring the Wyoming prairie.

The Federal government has recently responded to citizen complaints from Wild Earth Guardians and the Powder River Basin Resource Council demanding certification that state programs comply with federal mine reclamation standards. Wyoming, Colorado and New Mexico have all received notices from the Federal government requiring them to demonstrate that self-bonding qualifications for Alpha Natural, Arch and Peabody satisfy federal law.

The collapse of faulty self-bonding programs represents further potential losses for the public. States’ failures to heed repeated warnings may leave taxpayers on the hook for the unpaid reclamation liabilities of bankrupt coal companies.

In Wyoming, the state has struck a deal with bankrupt Alpha Natural to allow the company to continue mining while securing only $61 million of Alpha’s $411 million in reclamation obligations. The math isn’t pretty – that’s less than 15 cents on the dollar.

In Colorado, $100 million of future reclamation work is self-bonded. The state has given assurances that it is “moving away from self-bonding” but has not yet offered details on how quickly.

This page was last updated in April 2016.

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