WyoFile Energy Report

Recent no-bid on Powder River Basin coal tract may show preference for coal exports

— August 23, 2013

After nominating the Maysdorf federal coal lease for competitive bid seven years ago, and spending more than $80,000 for federal analysis of the lease by application (LBA), Cloud Peak Energy chose not to submit a bid when the tract — ultimately modified from its original form — came up for competitive lease sale this past week.

Dustin Bleizeffer

Dustin Bleizeffer

In fact, nobody placed a bid, including Alpha Natural Resources, whose Belle Ayr mine shares adjoining property and could mine the coal.

It’s the first time in the history of Wyoming’s Powder River Basin that no bid was submitted for a federal coal lease tract.

So is it a sign that America’s powerhouse coal mining district — which supplies nearly half of the country’s coal — is cracking under the pressure of demands to address climate change and other environmental concerns related to coal?

I spoke with some folks close to the issue and, together, they concede that a tougher regulatory environment has helped dampen the Powder River Basin’s outlook on the domestic coal market. However, they all seem to point to the availability of natural gas, local considerations (like the fact that the U.S. Bureau of Land Management reconfigured the lease, splitting it into two) and the potential export market, as bigger factors.

First, here’s what Cloud Peak had to say:

“We carefully evaluated the estimated economics of this LBA in light of current market conditions and the uncertainty caused by the current political and regulatory environment towards coal and coal-powered generation and ultimately decided it was prudent not to bid at this time,” Cloud Peak president and CEO Colin Marshall said in a press release. “In combination with prevailing 8400 Btu market prices and projected costs of mining the remaining coal, we were unable to construct an economic bid for this tract at this time.”

The current political and regulatory environment is rooted in the fact that President Barack Obama won a second term in office, and months later declared that — in the absence of Congress acting on energy and climate change legislation — he intends to use the full force of his administration to address climate change.

The U.S. Environmental Protection Agency is preparing its plan to cut greenhouse gas emissions, and coal-fired power plants are a primary focus of GHG-cutting efforts. By the way, this was cemented into law when the U.S. Supreme Court — during the George W. Bush administration — declared greenhouse gas emissions a pollutant under the authority of EPA.

No doubt, Cloud Peak expects the PRB’s domestic market will continue to play to utilities adept to shifting between coal and natural gas based on fuel prices and tightening EPA regulations. But PRB coal continues to hold a not-insignificant environmental advantage over eastern coals on the mining side — given a regulatory focus on mountaintop removal and other practices associated with mining coal there.

Cloud Peak is well-positioned in the western United States. The company, headquartered in Gillette, Wyoming, has touted its Spring Creek, Youngs Creek and other coal holdings in the greater Powder River Basin as strategic to its ambitions to sell more coal overseas.

Those mines are slightly closer to ports proposed in the Northwest, and they contain higher-value coal, while its Cordero-Rojo mine — for which the Maysdorf II North Coal tract was situated — is a continuation tract for those customers dialed-in to its 8,400 British thermal heating (Btu) unit coal.

Shannon Anderson, of the Sheridan-based landowner advocacy group Powder River Basin Resource Council, noted that Cloud Peak had already announced plans to cut back production at Cordero-Rojo. She said she suspects Cloud Peak prefers the prospect of selling coal for export rather than taking on a commitment to mine coal for current and prospective domestic customers.

Anderson noted that 5 percent of Cloud Peak’s coal production in the first part of 2013 went overseas and accounted for 18 percent of its coal sales revenue. “That’s where the money is,” Anderson told WyoFile.

Cloud Peak did not return a call for comment on Friday.

“I don’t see the domestic coal market completely dwindling,” Anderson said, adding that, conversely, Appalachian coal may be in an unstoppable decline, giving way for domestic pockets to open and be filled by PRB coal.

University of Wyoming professor of economics Timothy Considine, who works in the university’s School of Energy Resources, said he agrees that it makes no sense for a coal company to buy a large new tract of coal next to a mine where it plans to trim production.

“The one bright spot for U.S. coal is the export market offsetting some of the domestic market,” Considine told WyoFile.

He also agreed that the BLM’s reconfiguration of the Maysdorf tract — splitting it into two tracts and including coals that the BLM insisted must be mined in the interest of recovery vs. mining disturbance — was a key factor in Cloud Peak submitting no bid.

However, leaving the BLM high-n-dry without a bid is highly unusual, said Anderson, given the fact that coal companies that nominate tracts of coal in the Powder River Basin have, in the past, withdrew their nomination, or asked the BLM to delay a competitive lease sale. The BLM has, in the past, responded to such requests based on industry’s concern over changing markets.

Anderson said Cloud Peak could have just as easily told the BLM they would withdraw or delay their lease nomination.

So was it all for show? A dramatic, highly publicized and much reported event meant to instill fear among the public that the Obama administration has gone too far in its crackdown on coal’s environmental impacts?

Maybe. But that would be pure speculation. The fact that a coal company walked away from a 148-million-ton federal coal tract in the Powder River Basin cannot be viewed as a positive sign for PRB coal in today’s domestic market. Greenpeace latched onto the no-bid news and issued a statement to the press, suggesting the event speaks to suspected failures of the federal government’s federal coal leasing program in the Powder River Basin.

“The failure to attract a single bid for the Maysdorf II coal lease shows that the federal coal leasing program is stuck with outdated and inaccurate assumptions about the U.S. coal market,” Greenpeace stated. “With demand for coal falling in the United States as we move to cleaner forms of energy, Cloud Peak apparently sees too much risk in expanding its Cordero Rojo coal mine, even at the subsidized rates offered by the Bureau of Land Management.”

In the meantime, it’s worthy to note that a “white paper” effort launched by the University of Wyoming’s School of Energy Resources back in December 2012 was supposed to come up with a winning policy strategy for ensuring future markets for Powder River Basin coal. Would it include carbon capture and sequestration — forever regarded as cost-prohibitive? We don’t know.

Considine told WyoFile that the white paper effort languished in recent months, and he expects he and his co-authors will pick up the work again this fall semester.

So, today, Wyoming doesn’t have a good enough grip on the evolving coal market — in the economic or regulatory realms — to say what might be in store for its Powder River Basin coal. In the meantime, Wyoming’s governor and its three congressional delegates decline to talk about coal’s contribution to climate change or how the state should plan for a faltering industry that contributes some $1 billion to its local economy, or how to respond to those interests outside our borders that drive these matters.

— Dustin Bleizeffer is WyoFile editor-in-chief. A former Powder River Basin coal miner, he has covered Wyoming energy for 15 years. You can reach Dustin at (307) 267-3327 or email dustin@wyofile.com. Follow Dustin on Twitter at @DBleizeffer

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Published on August 23, 2013

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