Coal's comeback
Source Marvin Gandall
Date 04/08/16/23:47

Is coal the low-cost energy the world is looking for?
By Dan Roberts
Financial Times
August 17 2004

Five hundred kilometers east of Yellowstone National Park, under the big
skies of the state of Wyoming, the global energy landscape is changing
shape - 220 tonnes of rock at a time.

With each swing of his house-sized bucket, the operator of a mechanical
dragline is uncovering a 25m seam of coal and revealing an unlikely comeback
for one of man's oldest and dirtiest forms of fuel.

Coal's renaissance is a slow, quiet process. Despite the noise of that
monstrous extraction equipment, the attention of the energy world has mostly
focused on the rising prices of two more glamorous hydrocarbons: oil and
natural gas. Others prefer to hope for solar, wind or nuclear alternatives
that do not contribute to global warming or air pollution.

Yet, to the horror of environmentalists, King Coal is back. The fuel already
fires more than half the power stations in the US - and reliance on coal is
increasing for the first time in decades as rising natural gas prices choke
off the so-called ?dash for gas? among electricity generating companies. A
sympathetic US government predicts that coal's contribution to global energy
consumption will double to 50 per cent by 2015 as developing countries,
particularly China and India, also seek a supply of low-cost energy more
reliable than oil and gas.

At home and abroad, White House support for coal is viewed with intense
suspicion. Europeans fear that encouragement for coal-fired electricity
plants kills any hope of reaching international consensus on carbon dioxide
emissions. George W Bush's domestic opponents assume that, at best, his
interest reflects the opportunistic pursuit of mining votes in swing
election states. At worst, large donations from the coal industry to
Republican groups demonstrate another powerful reason for campaign finance

Whatever their motives, politicians on both sides of the presidential race
are increasingly talking about coal for a simpler reason: geology.

In a country where oil derricks and hydroelectric dams are the iconic images
of energy wealth, it is often overlooked that the US has more coal than any
other nation. Not only does the US possess a greater share of the world's
coal than Saudi Arabia does of oil. But its energy content - measured in
British thermal units - is five times that of Saudi Arabian crude and
slightly greater than that of all the oil and gas in the Middle East put

Of course, oil's great versatility has historically made it a much more
valuable commodity. Despite abundant domestic resources, US dependency on
imported hydrocarbons has continued to grow because of rising demand from
the transport sector.

But as last year's electricity blackouts demonstrated to 50m people in the
north east, energy scarcity can manifest itself in ways other than the
sports utility vehicle running dry. Policymakers find it comforting that, at
a time of increased political instability among many oil and gas exporters,
almost all the electricity generated in the US is derived from domestic fuel
sources. In theory, Mr Bush's investment in hydrogen technology even
promises future substitution of oil in vehicles powered by fuel cells -
perhaps one day with hydrogen produced directly from coal itself (see

What has really prompted the renaissance of coal, though, is growing
disillusionment with America's previous wonder-fuel: natural gas.

Throughout much of the 1990s, low prices and seemingly abundant domestic
supply encouraged electricity generators to move away from traditional
coal-fired steam plants to more-efficient gas turbines. This 175,000MW of
new gas capacity came on line just as gas production began to peak - causing
dramatic price spikes and growing demand for imported gas.

So, now, for the first time in a generation, power companies are turning
back to coal. The US Department of Energy estimates that 92 new plants are
proposed across the country, representing 59,000MW of potential electricity
and $69bn of investment. With so much environmental controversy surrounding
each plant, it can take up to a decade for planning permission to be
granted, if at all. Nevertheless, six plants are under construction and due
to come online in 2006 or 2007. The government predicts that 148 new coal
plants will have to be built by 2025 to keep pace with demand.

Elsewhere, the potential growth in demand for coal is even more striking.
In, Asia utility companies are planning around 1,000 new coal-fired plants
with far less environmental scrutiny than in the US. One hundred are already
under construction, mostly in China, which has the world's third-largest
coal reserves and a huge demand for power.

Nowhere is this trend clearer than in the financial markets. The benchmark
price of coal in the US has doubled since May 2003 to around $60 per short
ton. Commodity prices of other kinds have risen too, not least for oil, as
growing demand from China coincides with a global economic recovery. But
coal prices used to move at glacial pace, regardless of the cycle.

Another sign that investors are beginning to wake up to coal's growth
potential is the sudden interest in the handful of quoted coal producers in
the US. For much of this year, shares in coal mining companies outperformed
every other sector of the economy.

They have also attracted speculative money from hedge funds, eager to learn
more about the changing energy landscape. Peabody Energy, the world's
largest coal producer, saw 180 research analysts and fund managers dial into
the conference call for its latest quarterly earnings.

Yet despite its recent profit growth, Peabody, based in the medium-sized
Midwest city of St Louis, Missouri, remains a tiny player in world energy
markets. It provides the coal for more than 10 per cent of US electricity
needs and boasts btu-equivalent energy reserves equal to 30.5bn barrels of
oil, but it made profits in the second quarter of less than $50m and has a
market capitalisation of just $3.3bn. By comparison, ExxonMobil, the world's
largest oil company, boasts smaller oil and gas reserves of 28bn barrels of
oil equivalent, but made $5.8bn in the second quarter and has a market
capitalisation of $292bn.

The reason for the valuation discrepancy is clear at Peabody's largest coal
mine, North Antelope Rochelle. Located near the town of Gillette, in eastern
Wyoming, it is one of dozens of similar facilities dotted up and down the
basin of the nearby Powder River. One glance at its 25m high cliffs of coal,
stretching as far as the eye can see, reveals the true economics of the
industry: coal is literally dirt cheap.

Giant open cast mines in western states like Wyoming have been the source of
almost all the recent growth in US coal production as well as dramatic
reductions in its cost. In contrast, the older underground or mountain-top
mines in the eastern Appalachian states face steady decline. Larger reserves
of coal in Illinois are also deemed uneconomic as environmental standards
tighten because they contain much higher concentrations of polluting

Viewed as a resource, rather than a threat to the global climate, the
deposits of the Powder River Basin seem like one of those generous flukes of
nature almost unlikely enough to convince sceptics of a divine presence.
Compared with the difficulty of mining narrow seams of coal hundreds of feet
below the surface - common in much of Europe or the Appalachians - Wyoming
coal production is more like collecting a pre-arranged stockpile.

In common with most coal, seams in the basin were formed some 320m years ago
in the swampy river deltas of the Carboniferous period. A unique combination
of geological subsidence and prolific plant growth is required to produce
consistent layers of dead vegetation that are sufficiently covered in
stagnant water not to rot or dry out. Such conditions persisted in Wyoming
for as long as 60m years and produced the thickest deepest seams of coal
ever found - up to 60m thick in places - with an unusually low sulphur

North Antelope Rochelle, the world's largest coal mine is eerily quiet. Just
700 employees gather enough coal to provide electricity for 6m American
homes. The extra-terrestrial atmosphere is compounded by an inhuman scale,
with vehicle wheels twice the height of a man and freight trains a mile and
a half long.

Yet somehow enough miners make a living from the Powder River Basin to give
the nearby town of Gillette a bustling, frontier feel, and the proud civic
boast of ?America's energy capital?.

If America is the Saudi Arabia of coal, then the Powder River Basin is
equivalent to the Gulf Kingdom's legendary Ghawar field, which at one point
produced one in every 12 barrels of crude consumed worldwide.

Somewhat less similarity exists between the men running each industry.
Compared with the oil sheikhs of the Organisation of Petroleum Exporting
Countries, America's new coal barons wield their political power quietly.

Irl Engelhardt, Peabody's chief executive, is proud of his humble roots.
Colleagues tell of his upbringing on a farm in Illinois, where he remembers
his mother crying at the kitchen table over unpaid energy bills. Apocryphal
or not, the story explains a passion Mr Engelhardt has for arguing that any
extra costs imposed on the energy industry by environmentalists will hit
those on low incomes the hardest.

One of the many lobby groups sponsored by the industry has calculated that
America's poorest households spend nearly a third of their household budget
on energy costs. ?If we talk only about climate change as a narrow issue
then we will only be talking to the environmental community,? says Mr
Engelhardt. ?If we narrowly focus on climate change and we increase the cost
of energy in this country, people on fixed incomes will lose all of their
disposable incomes.?

The revival of the coal industry has nevertheless proved lucrative for those
who stuck by it during the wilderness years. Mr Engelhardt, who has been at
the helm of Peabody since it was spun off from Hanson, the Anglo-US
conglomerate, in 1997, plans to cash in up to 40 per cent of his shares and
options by December 2005 - a windfall potentially worth up to $10m. Despite
its opposition to much of the environmental rhetoric used by some Democrats,
Peabody and other mining companies like it are also anxious to downplay the
assumption of automatic support for the Republicans.

As John Kerry, the Democratic party's presidential candidate, courts the
mining vote in swing states like West Virginia, both political parties are
claiming coal credentials by calling for increased federal spending on
research into clean combustion technology.

Lobby groups, such as the Coal Utilisation Research Council, Americans for
Balanced Energy Choices and The Center for Energy and Economic Development,
argue as if replacing imported gas with coal has become a homeland security
issue which few red-blooded American politicians could possibly disagree

The National Mining Association wears its political colours more freely,
blasting a tax plan by Mr Kerry for ?killing Western economies?.

Mr Engelhardt concedes life may be tougher initially under a President
Kerry. ?There would be pressure on the new administration from the
environmental community, which is a strong base of support for the
Democrats,? he says, although he predicts that Mr Kerry would probably end
up taking many of the same decisions as his predecessor. ?This country has
no practical alternative (to coal),? he says. The theme is echoed by others
in the industry like Arch Coal, the US's third-largest coal mining company,
which also reveals the industry's ambivalence to scientific evidence of a
link between carbon dioxide emissions and climate change. ?If, in fact,
climate change is an issue, then the solution is technology,? says Deck
Sloan, Arch Coal's spokesman. ?Coal is indispensable.?

Campaigners against one of the new coal-fired plants under construction in
Arizona see things differently.

The sunshine states of America's south-west have among the fastest-growing
populations in the country, with high electricity demands from air
conditioning, but critics worry that Tucson Electric's plans for two new
coal plants in Springerville will only turn up the heat. Local
environmentalists claim the development will increase Arizona's carbon
dioxide emissions by more than 10 per cent.

One group called Western Resource Advocates estimates there are more than 35
proposed new or expanded coal-fired power plants in the region. If all the
additional 23,500MW is developed, it would add about 168m tonnes per year of
CO emissions - a 58 per cent increase from 2000 levels.

Elsewhere a similar battle is being waged over mercury emissions. Coal
producers worry that the Environmental Protection Agency's plans to regulate
the amount of mercury permissable in power station exhausts may hamper the
growth of coal. On the other hand, environmentalists are convinced that the
EPA is already backing down in the face of strong political support for

The case is forcefully put by Robert F. Kennedy Jr, the nephew of President
John F. Kennedy and environmental campaigner, who this month publishes a
book - Crimes Against Nature - alleging that pro-industry officials have
taken control of EPA policy. If he is right, it suggests the coal barons are
wielding more power in Washington than their critics ever thought possible.

If he and others are wrong, the environmental backlash risks depriving the
US of its greatest natural resource at a time when energy security has never
seemed more important.

Fight for clean fuel enlists technology

The need for clean coal technology has become one of the surprise battle
cries of the US presidential campaign, with both Republicans and Democrats
promising more government support for industry research but few shedding
much light on what it means.

At one level, cleaning up coal-fired power plants can mean doing little more
than what the industry is already required to do. Emissions of pollutants
such as sulphur dioxide and nitrogen dioxide have been falling since the
1970s because of tougher government standards.

Though older plants can be fitted with scrubbers to clean chimney fumes,
more progress can be made with new plants using so-called ?fluidised bed
technology? - which attempts to remove unwanted pollutants before they head
up the chimney. Coal, pulverised to the consistency of face powder, is burnt
with limestone to remove sulphur and minimise nitrogen dioxide formation in
the boiler. This approach is planned for a number of coal plants in
development and could significantly improve air quality if widely used.

The hunt for zero emissions has also gone one step further through power
plants that use a technology called gassification. In these plants, which
have not yet been built on a large scale, coal is first converted into a
synthetic gas before being burnt in a manner more akin to the way turbines
are used in natural gas power stations. This also allows the hot exhaust
fumes to be reused to drive a second steam turbine. This ?combined cycle?
approach is used in natural gas plants to improve efficiency, further
reducing output of carbon dioxide.

In perhaps 10-15 years this technology could theoretically be used to
capture and store all carbon dioxide before its release into the atmosphere,
as well as to generate hydrogen for vehicles powered by fuel cells. It
should also help control emissions of mercury from power plants.

Despite some scepticism about how affordable or reliable such integrated
gassification combined cycle (IGCC) plants will be, the technology got a
boost in June when General Electric, the largest gas turbine manufacturer,
made a strategic acquisition of IGCC technology from ChevronTexaco.

In Wisconsin, however, regulators demanded that Wisconsin Electric Power
explore the option for its new plant only to reject it as not

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