Powder River Basin (PRB) coal producers are experiencing a prolonged decline in the domestic market after years after rapid demand growth and at least two producers, Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI), find themselves in “tenuous” positions, said a new study.
The study is from consultant John Hanou of Hanou Energy Consulting LLC. Hanou is a veteran of the former consulting firm Hill & Associates. The study, “Powder River Basin Coal Supply, Demand & Price Trends 2012-2031,” was also written by Robert Burnham, president of Burnham Coal LLC. The study mostly covers the PRB in Wyoming and Montana, the nation’s leading coal production region, but also includes the Bull Mountains coalfields in Montana, where there is currently a single mine.
Alpha faces reserve depletion at its Eagle Butte mine in Wyoming, the study says. At current production levels, the mine will run out of reserves around 2029. Higher ratio reserves that are deeper underground and more expensive to mine are present but are not economical today, the study said.
Alpha’s Belle Ayr mine in Wyoming also has a major challenge regarding its reserve situation, the study said. To expand its reserve base Alpha had planned to lease the Belle Ayr North reserve tract, but lost that tract last year when Peabody Energy (NYSE: BTU), which owns a neighboring mine, outbid Alpha during a U.S. Bureau of Land Management lease auction. With limited options left, Alpha picked up the Caballo West federal tract in a BLM auction. The question now is how is Alpha going to access that coal, the study noted.
While Peabody has direct access to the Belle Ayr North tract using existing pits, Alpha cannot access the Caballo West tract without crossing Peabody surface property (and will have to open a new box cut). “We suspect negotiations between Alpha and Peabody are underway,” Hanou said in an Oct 2 statement. “Or Peabody may play hardball, not negotiate and eventually take over the Caballo West tract. Alpha has applied for the 253 million-ton Belle Ayr West LBA but it may not come up for lease before Belle Ayr depletes its existing reserves. If so, Belle Ayr may be forced to reduce production to extend the life of its current reserves or close prematurely.”
LBA, by the way, means “lease by application,” which is BLM’s official term to describe a lease application and the tract subject to that application.
Arch cuts back Black Thunder due to soft coal markets
Arch, on the other hand, was forced to idle three draglines at its flagship Black Thunder mine due to this year’s market conditions. Production will drop from 116 million tons in 2010 to 85-90 million tons in 2012, the study found. Beyond that, Arch must lease and develop a 1.4 billion-ton federal reserve west of the Union Pacific/BNSF Joint Line railroad at Black Thunder. U.S. Mine Safety and Health Administration data shows that Black Thunder produced 43.4 million tons in the first half of this year, which works out to an annualized production pace of 86.8 million tons, against actual production last year of 105 million tons.
“This will be an expensive endeavor and will require a box cut,” Hanou said about the need to cross to the other side of the Joint Line to open up this new tract at Black Thunder. “At an in-situ ratio of 4.0:1 (8:1 effective), we estimate the total material to be moved to open the boxcut is 800 million yards. In order to keep Black Thunder at a 90 million to 100 million tons of annual production, development must occur between 2018 and 2025.”
Peabody Energy’s North Antelope Rochelle mine, located near Black Thunder, is doing a bit better than Black Thunder, according to MSHA data. North Antelope Rochelle produced 51.5 million tons in the first half of this year, against 109.1 million tons in all of 2011. Black Thunder and North Antelope Rochelle are by far the two biggest coal mines in the PRB and the U.S.
Arch Coal was successful in leasing from the state and a private company the 1.3-billion-ton Otter Creek PRB reserve in Montana, but development of this reserve is dependent on the long-planned and oft-delayed Tongue River Railroad being built. “Construction of this railroad is at least five years away and still faces right-of-way issues and environmental scrutiny,” Hanou noted. Arch, which recently bought a stake in the Tongue River Railroad, is currently before the U.S. Surface Transportation Board seeking approval of a shortened route for the railroad to an interconnect point with the BNSF that would flow this coal into Upper Midwest markets.
Some market improvement may occur in the near term
“Our analysis suggests some market improvement over the next two years with demand increasing by about 30 million tons,” Hanou said, offering some good news for PRB producers. But under the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), the study envisions the domestic U.S. and Canadian markets declining by about 50 million tons over the next 12 years. So producers are eyeing the international market for growth and market share.
“The shakers and movers are Peabody, Arch, Cloud Peak Energy and a newcomer – Australia’s Ambre Energy,” Hanou said. “Signal Peak, with its new Bull Mountains longwall mine, is also pursuing the international market.”
Bull Mountains is that one existing mine in the Bull Mountains coalfield in Montana, which is shooting for a production rate in excess of 10 million tons per year and turned out 4.2 million tons in the first half of this year, according to MSHA data.
Ambre last year bought half of the Decker mine in the Montana end of the PRB and is in a court battle with mine co-owner Cloud Peak Energy about extending the life of this venerable operation beyond the end of its last major contract to supply coal to Detroit Edison. Ambre is also a major developer of coal export terminal infrastructure on the U.S. West Coast to get this coal into the Pacific Rim market.
While the PRB once cut a broad swath throughout the U.S. marketplace, high railroad rates lately have made such inroads far more difficult, the study found. “While the rail carriers lowered rates to compete with natural gas in the Midwest in early 2012, it isn’t clear they will do it again to compete along the East Coast,” Hanou said. “If not, non-participants in the international market may be left with the scraps. High cost mines are on the bubble and are likely to be closed. Low-cost virgin reserves like Otter Creek and Youngs Creek are likely to get developed, but only if the western export terminals get built.”
Obstacles to export growth include opposition from environmental groups, and towns and cities through which the 30+ trains per day must pass, the study noted.
Youngs Creek is a PRB reserve just south of the Montana-Wyoming line in Wyoming that established PRB producer Cloud Peak Energy (NYSE: CLD) recently bought from CONSOL Energy (NYSE: CNX) and oil producer Chevron (NYSE: CVX). Cloud Peak also bought from CONSOL the undeveloped CX Ranch coal reserves in the Montana end of the PRB.
On the positive side, the PRB has easily accessible reserves and world-class infrastructure, including a remarkable rail system, which have allowed it to meet demand, the study noted.
For more information on the study go to: www.hanouenergy.com.