By Peter Galuszka
During elections a few months ago, headlines, blog sites and televisions screens were crowded with news about the “War on Coal” being waged by President Barack Obama and his EPA chief.
Coal firms were laying off thousands of miners as their bottom lines took big hits. Virginia politicians including Kenneth Cuccinelli and Bob McDonnell were in the Southwest Virginia coalfields piling on.
The mood was equally dark at a Platts coal conference in Ft. Lauderdale Thursday and Friday, but the true despair is coming from the Central Appalachian fields of Eastern Kentucky, West Virginia and Virginia, which are especially distressed.
Does this mean coal is toast? Not at all, speaker after speaker said. Fields in the Powder River Basin in Wyoming and Montana – representing about half of U.S. production — are doing just fine. The Illinois Basin east and south of St. Louis is enjoying a revival, as is Pennsylvania anthracite (hard coal) which went into a steep decline about a century ago.
As for Central Appalachia, the bell is tolling. The killers are natural gas and high costs. Barack Obama is partly to blame, but some of his allegedly overwrought policies haven’t taken effect or haven’t really been formulated yet, despite how much coal executives love to talk about the administration’s “Train Wreck” of tougher rules on mercury and toxics, polluted coal-field air moving to cleaner places and tighter carbon dioxide emissions plans for new coal-fired electrical plants.
While one can whine all he wants about the Sierra Club and Michael Bloomberg’s stand against coal, the biggest culprit is natural gas. Hydro-fracking drilling methods and technology innovation in finding new fields have unleashed a flood of cheap methane. True, gas prices are edging upwards of about $3.50 per million BTUs, but they are low enough to cause havoc with coal.
According to Nick Carter, a West Virginia-based coal executive who is regarded as the Godfather of the Appalachian industry, says that when gas prices drop to $3 at that rate, they impact Powder River coal which is cheap and inexpensive to mine. At fifty cents more, it impacts Illinois Basin coal. But gas prices would have to rise beyond a level between $4.50 to $6 to make Central Appalachian, including Virginian, coal, worth mining. “We will be in a period of transition and there will be a new normal,” he says.
The impact of cheap gas cannot be underestimated. It is the reason one doesn’t hear much talk about utilities putting in advanced carbon capture technology to continue using coal. It is too expensive to do so. If gas goes to the $7 or $8 levels, says Seth Schwartz of Energy Venture Analysis, “companies would be investing in new controls. But if gas stays at near $3, “the utilities would just idle (coal-fired) plants,” he says.
Gas is also going to push a rash of coal company consolidation because it is much harder for smaller coal firms — and there are plenty in Virginia’s small coal fields — to continue to operate because they lack the capital to stay in business. Today in the U.S., the top 10 percent of the mines in terms of production produce 70 percent of the coal. Most are in the Powder River Basin.
Virginia’s two prominent coal firms are taking big hits. Bristol–based Alpha Natural Resources, which took over troubled Massey Energy in 2011, has seen its credit cut from B+ to BB. Its stock is down 88 percent. Richmond-based James River Coal saw its credit cut from B to CCC and its equities are down 91 percent.
True, there’s a bright spot in the metallurgical coal market to make steel. China, a big buyer, is starting to come back with bigger buys after an economic slowdown that should benefit met-heavy Alpha.
But the writing is on the wall. It’s brutal what is happening to Central Appalachian coal. It’s not coming back,” Schwartz says.
Sounds right and all the complaining about Obama and the EPA can’t turn it around. Indeed, if anything is killing Virginia coal industry, it is the free market.
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