The Tongue River Railroad Co. told the U.S. Surface Transportation Board on May 14 that, despite the claims of opponents of its Montana rail project, there is a viable mine that Arch Coal (NYSE: ACI) is permitting to anchor this line.
The railroad is involved on a long-running proceeding for the latest alignment of its project, which would see the start of a rail line at two points for prospective coal mines in the Otter Creek region of the Powder River Basin, with the line merging into one and then ending with an interconnect into the existing BNSF Railway system at Colstrip, Montana. Arch Coal, which is developing the Otter Creek mine at one of the origin points, also owns a stake in the railroad, as does the BNSF.
The railroad’s May 14 comments were submitted in response to March 26 contentions of project critics Northern Plains Resource Council and Clint and Wally McRae d/b/a Rocker Six Cattle Co. (jointly called “NPRC” in the filing). The railroad was also responding to April 9 comments of Jay L. Schollmeyer, for and on behalf of SMART-Transportation Division, General Committee of Adjustment GO386 (SMART-386).
The railroad wrote: “Following substantial document and deposition discovery of two TRRC co-owners, NPRC submitted its supplemental comments in late March 2015. NPRC’s Supplemental Comments consist of the comments themselves supported by reports from two new experts, Thomas Sanzillo regarding the market for coal and Michael Nelson regarding financial fitness and public interest issues, verified statements from a few landowners and a real estate agent, and many other exhibits.
“Despite the massive size of NPRC’s Supplemental Comments, they do not come close to meeting their burden to demonstrate that the construction and operation of the TRRC rail line would be ‘inconsistent with the public convenience and necessity,’ as the Board would need to find in order to deny TRRC’s Application under section 10901. As discussed further below, many of the arguments made in NPRC’s Supplemental Comments are completely unrelated to the discovery conducted since mid-2013 and could have been presented in NPRC’s 2013 comments on the Application. Those arguments should be discounted by the Board as they are being raised too late in this proceeding. TRRC nonetheless shows here that those arguments have no merit.”
- First, NPRC argues, as it has previously in this proceeding, that there is no need for the TRRC rail line because there is no domestic or international demand for the Otter Creek/Ashland area coal that would be transported by the rail line and because Arch Coal is purportedly unable to develop the Otter Creek mine in the foreseeable future. “As explained below and in the attached Supplemental Verified Statement of Seth Schwartz, NPRC’s latest arguments along these lines, which are asserted now by its third and latest coal market witness in this proceeding, are not well-supported. They are based on a distortion of the discovery record in this case and are inconsistent with the most recent long-term EIA and private forecasters projections of growth in the market for Powder River Basin (‘PRB’) coal.” Schwartz is with consulting firm Energy Ventures Analysis.
- Second, NPRC reiterates many of the arguments made in its 2013 comments regarding TRRC’s alleged failure to meet the financial fitness test. “These arguments are similarly without foundation. They are legally deficient since the financial fitness test has minimal applicability in this case given that TRRC seeks to build a new rail line without existing customers. In any event, TRRC has previously provided ample evidence showing that it meets the financial fitness test.”
- Third, NPRC argues that the TRR rail line is contrary to the public interest. “Most of those arguments are unrelated to the discovery received by NPRC and could have been made in NPRC’s 2013 comments. Moreover, none of them has substantive merit as described below.”
- Finally, SMART-386’s submission raises only the question of whether TRRC, in addition to BNSF, will operate the TRRC line. “The short answer, as TRRC has noted previously and as discussed further below, is no.”
Otter Creek mine is working through the permitting process
The Otter Creek mine, being developed by Arch, is the subject of a permitting proceeding at the Montana Department of Environmental Quality (MDEQ) and a draft EIS is expected regarding the mine application in the coming months, the railroad noted.
When developed, the Otter Creek mine will be an important source of sub-bituminous coal as it is located in a generally contiguous 1.5 billion ton coal reserve, one of the largest remaining undeveloped reserves of low sulfur, sub-bituminous coal in the United States. The railroad said that the discovery provided by TRRC confirms that there is every reason to believe that a market will exist for Otter Creek coal several years from now when the Otter Creek mine is likely to begin producing coal. NPRC nevertheless argues the opposite – that TRRC’s discovery shows that “[c]oal markets are struggling and will not create sufficient demand for Otter Creek in the foreseeable future.” NPRC continues by claiming that “[t]his collapsing coal market is not cyclical; it is part of a long-term structural change.”
Said the railroad in response: “As explained by Mr. Schwartz, NPRC’s claim that that there has been ‘a structural, long-lasting decline in demand for coal’ is inconsistent with current coal projections. As even NPRC’s latest coal market expert, Thomas Sanzillo, recognizes, current coal projections show an upward trend in coal production over the long-term.
“While the increase in production is not expected to be of the same magnitude as it was expected to be in projections from a few years ago, the long-term coal projections still forecast an increase in coal production. While the coal market has been volatile and struggling in recent years – making it difficult to predict precisely what the market will be when the Otter Creek mine will begin producing coal – TRRC’s recent discovery and the Supplemental Verified Statement of Mr. Schwartz confirm that a market will in all likelihood exist for Otter Creek coal in several years when the mine may begin producing coal and the TRR is constructed. Significantly, the Board’s [staff] also has concluded that there is a market for the coal that will be transported by the TRR based upon extensive modeling of coal demand using the Integrated Planning Model (‘IPM’), a model created by its third-party contractor, ICF International. This model is ‘widely used, both in the United States and globally, by private sector companies . . . and financial institutions, as well as public sector entities, . . .’
“Contrary to NPRC’s claims, there is ample reason to believe that the markets will support the opening of the Otter Creek mine, and the need for the TRRC line, in the foreseeable future. NPRC’s reliance on TRRC’s discovery as support for its claim that there will not be sufficient demand for Otter Creek coal is misplaced and based on a distortion of the record. For example, NPRC is simply wrong when it claims that lack of demand is demonstrated because TRRC’s owners purportedly are not prepared to dedicate significant resources to the TRR and Otter Creek mine. In fact, Arch and BNSF, two co-owners, have expended significant resources to fund the permit process for the TRR as well as the Otter Creek mine.”
The Montana DEQ is currently taking comment until June 10 on a draft air permit for Otter Creek Coal LLC for this new mine. Otter Creek Coal (OCC) has combined coal lease interests at Otter Creek in Powder River County for a total of approximately 17,900 contiguous acres. The maximum coal production under the draft permit would be limited to 35 million tons per rolling 12-month time period.
The OCC mine will be operated in keeping with a typical western surface coal mine and extraction facility, the department noted. Development will begin with construction of an access road from Highway 484 across the Otter Creek valley, then branching to the area to the northeast and southward parallel to Otter Creek. This road, with excavated sediment ponds, will serve as sediment control during initial construction and pit development, and provide access to the primary crusher and dragline erection sites. Simultaneously, a rail loop, live storage silos and train loadout will be constructed west of Highway 484, opposite the mine access road at the terminus of the Tongue River Railroad.