Business Headlines

*After 40 Years of Boom, Bust Hits America’s Cowboy Coal Basin

published Sep 20th 2016, 6:00 pm, by Tim Loh

(Bloomberg) —
The last bastion of the American coal industry has been breached.

The bust that’s devastated Appalachia for five years has finally reached cowboy country’s Powder River Basin. For four decades, the 300-mile corridor stretching from Wyoming north into Montana thrived on the strength of the cleaner low-sulfur coal carved from its vast plains. No more.

After producing more than 400 million tons every year since 2004, the region’s output this year will drop by about 100 million tons, analysts say, undercut by cheap natural gas, growing utility use of renewables and new environmental rules. Since last fall, 1,100 workers, or 17 percent of the mining workforce, have lost their jobs, leaving the industry and the economy reeling.

“Has the Powder River Basin ever had a real bust? Not really,” said Matt Preston, a research director at the consulting firm Wood Mackenzie Ltd. “This year is a total collapse.”

Through Sept. 10, coal output in Wyoming, the biggest U.S. producer, is down 25 percent from a year earlier, while Montana is down 26 percent, according to the U.S. Energy Information Administration. Ted O’Brien, chief executive officer of Doyle Trading Consultants in New York, estimates that the output may drop to 332 million tons this year, from 418 million tons in 2015. Preston is even less positive, foreseeing a possible slide to 307 million tons.

The drop comes after a year in which three producers dominant in the region — Peabody Energy Corp., Arch Coal Inc. and Alpha Natural Resources Inc. — filed for bankruptcy. And it’s causing the basin’s residents, long accustomed to the booms and busts associated with oil and natural gas, to wonder if coal, a reliable cash cow for decades, may ever regain its clout.

The changes “have caused folks to think about ‘Economy 2.0’ and how do we get there, conversations that I’ve never actually had in Wyoming,” said Shannon Anderson, a lawyer for the Powder River Basin Resource Council, a community organizing group. “People are starting to think about it in a way that I think folks have never thought of it before.”

For Anderson, the issue came into sharp focus in the spring, she said, as she drove north of Gillette, the hub of the coal region. At one spot, she expected to see a sight that had been a standard for a generation in the area: freight trains lined up, laden with coal. Instead, “there wasn’t a single train,” she recalled. “It was somewhat shocking.”

The effect is being felt statewide. In 2012, when miners produced 401 million tons of coal, taxes on that output generated almost $1.3 billion in revenue to statewide coffers at every level of government, or about 11 percent of their total, according to a study reported in February 2015 by the Center for Energy Economics and Public Policy at the University of Wyoming in Laramie.

In June, Wyoming Governor Matt Mead proposed $249 million in budget cuts for 2017 and 2018, saying the state’s revenue could fall up to $510 million short of projections. In August, he sent a letter to state agency heads asking them to find ways to do without even more money.

“It’s hard if you’re in the public sector,” said Robert Godby, a professor of energy economics at the University of Wyoming and an author of the economic study.

It’s hard, too, if you live in Gillette, which in recent decades has invested much of the coal wealth into some of Wyoming’s nicest public schools, community centers and other amenities. “If you’re in Gillette now, you’re seeing so many houses on the market — people leaving if they can, people wondering where they can go,” Godby added.

Coal has a long history in the Powder River Basin. With Appalachian coal closer to the big city populations of the northeast, though, the region early on mostly served its surrounding area.

That changed in the 1970s, when approval of the Clean Air Act combined with cheaper shipping rates from railroad deregulation to smooth the way to eastern markets. Before long, power plants as far away as Georgia were deciding whether to install expensive “scrubbers” to reduce sulfur dioxide under the new clean-air rules, or buy the Powder River Basin’s suddenly cheaper low-sulfur coal. Production soared.

The basin offers two key advantages. Having developed under fresh-water conditions dating to the age of dinosaurs, the basin’s coal has a sulfur content that’s less than a fourth of the variety that formed even earlier beneath salt water in much of competing Appalachia and Illinois.

Secondly, while the region’s coal has less carbon per ton than Appalachia’s product, forcing plants to burn 50 percent more to generate the same electricity, it makes up for that with its sheer abundance. The coal is located close to the surface, eliminating the need for deep mines. Instead, the region depends on cheaper open-pit mining, using hulking excavators.

Powder River “was just booming — 40 straight years,’’ Godby said. “The best way to forecast output was to use a straight line, linear and up.’’

Now, though, the direction of that line has changed, and industry executives and analysts have big concerns about the future.

Cloud Peak Energy Inc. — one of the region’s only publicly traded miners that hasn’t declared bankruptcy — has responded by reducing headcount, cutting overtime and accepting $18.8 million in buyouts from three utility customers that wanted out of contracts covering 3.9 million tons of coal shipments this year.

“Utilities are continuing to delay their contracting activity for next year as they monitor their stockpile levels and natural gas prices through the summer,” said CEO Colin Marshall, speaking on the company’s second-quarter earnings call.

Right now, U.S. utilities have Powder River Basin coal stockpiled for more than three months of use, about twice as much as normal, according to Doyle Trading’s O’Brien. When they finally work through that in 2017 and start looking for more, they may discover that the Powder River Basin won’t be able to produce the fuel fast enough.

With underground mines, companies can quickly respond to increased demand from utilities just by adding extra shifts. Not so in the Powder River Basin, where the massive shovels and trucks used to scoop out hundreds of tons of earth at a time could take as long as six months to get up to speed, O’Brien said.

At the same time, the Obama administration’s Clean Power Plan could end the advantage held by the basin for decades. More and more power plants have installed scrubbers, reacting to tighter regulations for mercury and other pollutants.

“The big fall-off, in our view, is going to come where the big run up was — primarily the Powder River Basin,” said Howard Gruenspecht, deputy administrator of the Energy Information Administration, speaking at a Columbia University coal event.

Godby, the University of Wyoming professor, has been grappling with similar thoughts.

“In the five stages of grief, we’re past denial,” he said. “Now we’re into anger, depression and bargaining — and the bargaining is trying to figure out what the new normal is and how to make this work.”

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Hey, well Hillary Clinton is glad that all those people are out of work!–W.

The Author

Walt Alexander

Walt Alexander

Walt Alexander is the editor-in-chief of Men of Value. Learn more about his vision for the online magazine for American men with the American values—faith, family & freedom—in his Welcome from the Editor.

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