Tuesday, June 9, 2009

Peak Coal

The Wall Street Journal had a front page article in yesterday's paper discussing the waning supply of coal in the U.S. that is economically viable to retrieve (article; print version at WSJ site; or email me for a copy). The key concept here is "economically viable to retrieve." The U.S. has been called the Saudi Arabia of coal. While there is little doubt we have lots and lots of coal, the question now raised is how economically feasible is the extraction of this coal? This has stoked the "peak coal" conversation.

The article is a broad story on a detailed study conducted by the U.S. Geological Survey on the Gillette coal field in the Powder River Basin in Wyoming. In the past, U.S. coal reserves have been calculated very crudely: in 1974, the Bureau of Mines established a baseline reserve level and each year the Department of Energy has subtracted from that number the sum of annual coal production and mine waste. Seriously. The Gillette Field study, an exhaustive three-year endeavor, added an economic component in calculating reserves for the first time. It asked how much coal is economically feasible to mine at different price levels.

The study found that with coal selling at $10.50/ton (short ton) less than 6% of the coal would be extracted profitably (leaving an 8% rate of return for miner). If Powder River prices were $60/ton, 47% could be extracted profitably. The current price for Powder River coal is $8.75/ton. Yikes!

It is worth mentioning that coal in the U.S. is of different grades. Most western coal is lignite and sub-bituminous coal, which hasn't been subject to as much heat and pressure as bituminous and anthracite coal. Bituminous and anthracite coal burn at higher temperatures and also have a higher carbon content. They also trade in the low $40's. Western coal has the additional burden of higher transportation costs because of the distance between the mines and the end users. Here is a link to the Energy Information Administration page on coal production and prices for more information.

Coal Prices, June 2006 - June 2009:

What is interesting about this study is that this is the first time coal has been treated like oil and gas in that determining the true reserves is a function of commodity price and costs to extract. If this methodology is applied across the nation's coal resource, it might send shivers down the spines of coal users. Since electric utilities are the biggest users of coal and most coal burning plants, which have lives of 50 to 60 years, are fine tuned towards coal from a particular deposit, builders of new coal plants have to be pretty worried. Add to that the costs of "clean coal" technology and coal plants don't look so cheap any more.

There is an emerging voice suggesting that coal production peaked in the 1990's. For the coal to be economically feasible, coal prices need to rise. If coal prices rise, especially relative to natural gas, demand will drop. It looks like the low hanging fruit has been picked and the industry is counting on as-of-yet-developed technology to be its savior.

If you are interested in the peak coal subject, here is a link to a lengthy February 2009 study that has lots of supporting data. It's hard to read because it has funky margins, but it's still interesting. Here is a link to the government study on the Gillette Field. The link takes you to an abstract with a link to the report. The report is very dry, but the 68 images in the appendix are actually interesting and pretty much tell the story.

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