Tongue River Railroad: there are many markets for coal it will haul

The Tongue River Railroad Co. (TRRC) says it’s a big stretch for environmental critics to claim that the coal it will haul has no markets, and that the railroad will haul so much coal that it will be an environmental train wreck.

The TRRC, part owned by Arch Coal (NYSE: ACI) and the BNSF Railway, on June 7 filed with the U.S. Surface Transportation Board (STB) its response to environmental critics of its December 2012 application for a new rail alignment.

The railroad, in the latest iteration of a decades-long project, wants to build a rail segment from Arch Coal’s planned Otter Creek strip mine in Montana, and from another origin point nearby at the undeveloped Montco coal mine, that would run 42 miles and terminate at the existing BNSF spur line running to the Colstrip power plant. From there, these coal-loaded trains could fan out along the BNSF system to points like coal-fired power plants in the Midwest, and to planned or existing coal export terminals in Oregon, Washington and British Columbia for shipment to customers of this Powder River Basin coal around the Pacific Rim.

Only two sets of comments were filed in opposition to the December 2012 application, the railroad noted. There were the comments of the Northern Plains Resource Council (NPRC) and a landowner along the proposed alignment for the TRRC line, the Rocker Six Cattle Co. And the comments of the Montana Environmental Information Center, National Wildlife Federation and Sierra Club. The railroad calls these two sets of comments jointly the “Opposing Comments.”

A third comment was filed by Jay Schollmeyer, for and on behalf of United Transportation Union, General Committee of Adjustment. These comments do not oppose the issuance of the requested construction and operation authority, provided (as will be the case) that BNSF will be the sole operator of the TRRC rail line, the railroad noted.

“No slave to consistency, NPRC argues in its Comments that the Application should be denied on the grounds that: (a) no coal will move on the line because there is no market for it; and (b) so much coal will move on the line that the environmental costs of transporting it require denial of the Application, obviating the need to prepare an Environmental Impact Statement (‘EIS’) pursuant to the National Environmental Policy Act. MEIC essentially mimics these arguments, although it does not go so far as to call for the termination of the environmental review process.”

The TRRC added: “The Opposing Commenters cannot have it both ways: there cannot at the same time be both an absence of any market for the coal that the TRRC line would transport and severe environmental impacts from transporting large quantities of such coal. In fact, the Opposing Commenters are wrong both in their assessment of the coal market and in their assessment of the environmental impacts of constructing and operating a rail line.”

Tongue River Railroad offers statements of support from domestic utilities

As to the market assessment offered by the opposition, major Upper Midwest utilities that are likely candidates to use coal from the area that TRRC would serve have expressed support for the TRRC railroad as a means of transporting the coal that each could use in power generation operations on behalf of the large numbers of electricity consumers that they serve. “Specifically, major coal users DTE Energy, Minnesota Power and Wisconsin Electric Power Company, in separate submissions attached at Exhibit 1 to this Reply, support the TRRC Application,” the railroad added. “These letters of support from significant current users of Powder River Basin (‘PRB’) coal underscore that there is an ample public need for the TRRC line and that the Opposing Commenters are far afield in their effort to prove otherwise.”

The TRRC pointed to support of its plan from other parties, including the Montana Coal Council, Montana Chamber of Commerce, Western Environmental Trade Assn., the Billings Chamber of Commerce and Southeastern Montana Development Corp. Republican Congressman Steve Daines, Montana’s sole House member, also supports the TRRC application.

“Moreover, as TRRC has shown in prior submissions, and will underscore here through detailed expert rebuttal testimony of its witness Seth Schwartz, there is in fact a significant and growing domestic and international market for coal moving from the Otter Creek/Ashland area, one of the largest remaining areas of low sulfur, sub-bituminous coal in the United States not today benefiting from rail transport options,” TRRC said. Schwartz is a prominent coal industry consultant and the president of Energy Ventures Analysis.

“He shows, for example, that the coal generated at the planned Otter Creek mine that the TRRC line would serve will have certain transportation and other competitive advantages over coal from other sources that will make it attractive primarily to Upper Midwest utilities,” said the TRRC about Schwartz. “He also shows that the export market will be available to this coal through existing Canadian ports that are in the process of expansion or through existing and planned U.S. ports, and that there is demand for this coal in the growing overseas markets.”

Otter Creek mine to produce 20 million tons per year at peak output

Arch Coal’s planned Otter Creek mine is expected to produce 20 million tons of coal annually at full production. Even based on the abnormally depressed 2012 coal market, this amount constitutes less than 5% of the 419 million-ton PRB coal market and less than 2% of the 1,061 million ton coal market for the entire United States in that year, the railroad pointed out.

The U.S. Energy Information Administration (EIA) forecasts that total demand for U.S. coal will increase at an average annual rate of 0.2% from 2011 to 2040. EIA further predicts that Montana PRB coal will be the fastest growing coal supply region in the U.S. with a projected average annual growth rate of 2% from 2011 to 2040. EIA predicts even greater growth in production for low-sulfur Montana PRB coal, like Otter Creek coal, projecting that such coal will increase at an average annual rate of 2.8% to 2040, from 24.4 million tons in 2011 to 54.1 million tons in 2040. By 2016 (before the Otter Creek mine is expected to begin production), EIA projects that the entire PRB coal region will resume its growth and will reach 500 million tons per year by 2023, which is more than 80 million tons above its 2012 production level, the TRRC said.

Otter Creek coal is expected to fare well in the competitive domestic coal market because of the low cost to extract that coal relative to other mines. The primary domestic market for Otter Creek/Ashland area coal is electric utilities in the Upper Midwest because of the shorter rail distance required to serve these customers. There are secondary markets in the southern states for some of this Otter Creek/Ashland area coal as well.

In addition, there is a large and growing export market for U.S. coal, and Otter Creek/Ashland area coal is well-situated to supply it. While most Montana coal has been used domestically rather than exported, over 13 million tons of Montana coal were exported in 2011. According to the International Energy Agency (IEA), thermal coal shipped by ocean vessel more than doubled from 356 million tonnes in 2000 to 791 million tonnes in 2011.

IEA projects that coal imports into South Korea, China and other southeast Asian countries – the countries most likely to import Otter Creek/Ashland area coal – will grow significantly this decade from 496 million tonnes in 2011 to 652 million tonnes (or 719 tons) in 2017. According to IEA, Europe, a secondary market for Otter Creek/Ashland area coal, is expected to continue to net import about 200 million tonnes through 2017.

Railroad says two reports done for the environmental groups are wrong

Relying primarily on two reports prepared at its request – a March 2013 report by Synapse Energy Economics titled “Declining Markets for Montana Coal” and a November 2012 report by Power Consulting titled “Changes in the Market for Montana Powder River Basin Coal between 1986 and 2012” – NPRC claims that there is no domestic market for Otter Creek coal. But those contentions are refuted by the other cited data about growing coal demand, TRRC said.

Schwartz said in his attached report that his opinions can be summarized as follows:

  • Contrary to the claims by NPRC and its consultants, the domestic market for PRB coal is huge and it is not declining. While the market is no longer growing as fast as it was in 1986 (at the time when the TRRC rail line was originally approved), it now averages 450 million tons per year, three times larger than it was in 1986.
  • The drop in the domestic market in 2012 was an anomaly due to very mild winter weather and extremely low natural gas prices. This short-term event has already ended and is not a trend of declining markets for PRB coal.
  • The Montana PRB domestic market is not severely limited by the sodium content of the coal or by transportation factors to just a few power plants as NPRC claims. There are a large number of power plants which use Montana PRB coal with similar quality as Otter Creek today or have used Montana PRB coal in the past. Further, there are many more power plants which are designed to use this high-sodium coal.
  • While there are some power plants that have announced plans to retire due to new rules from the U.S. Environmental Protection Agency, they constitute only 10% of the existing domestic market. Most large plants are already compliant with the new EPA rules or are investing in emissions controls. Excluding plants that have plans to retire, existing plants that could use Montana PRB coal currently consume about 118 million tons per year.
  • The export market is potentially huge for Montana PRB coal. NPRC claims that this export market is “dwindling.” The fastest-growing coal markets in the world are Asian countries which are the logical market for PRB coal exports, including China, South Korea and other countries in Southeast Asia.
  • The committed expansion of the existing ports in western Canada provides enough port capacity to handle the proposed production from the Otter Creek mine, were one to assume that the entire production of the mine would be exported. In addition, there are several proposed new port projects on the U.S. West Coast that could serve coal exports.
  • Montana PRB coal has been competitive in the world markets and is likely to be competitive in the future. Cloud Peak Energy’s (NYSE: CLD) Spring Creek mine in the Montana PRB has been exporting over 4 million tons per year of PRB coal to Asia.
  • The Otter Creek mine and development of other Ashland area coal reserves would not create increased coal demand or require increased demand in order to be economically competitive.
  • The Otter Creek reserves are becoming steadily more economic as existing mines in the Montana and Wyoming PRB deplete their best coal reserves and are forced to mine higher-cost reserves with higher strip ratios. While the undeveloped coal reserves at Otter Creek will have strip ratios of 3.0:1 (cubic yards of rock per ton of coal), new leases to maintain production at existing PRB mines now have strip ratios over 4.0:1 and up to 5.0:1.
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.