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A new normal: Wyoming coal faces a diminished role
Coal

A new normal: Wyoming coal faces a diminished role

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GILLETTE - Darryl Anderson hired on at the Black Thunder coal mine in 1981. He was young, fresh from the North Dakota oil fields, with a new wife and baby on the way. 

Wyoming coal, in those days, was still an experiment. Black Thunder was just a shovel and truck operation. A drag line added years later would eventually make it one of the biggest coal mines in the world. 

But that was still far into the future. The industry was centered around Appalachia at the time. A shift that would transform the coal sector was only just beginning.

The Clean Air Act had been passed a few years prior. The new law raised the bar on pollution standards at power plants across the country. 

Western coal, previously disfavored because of its relatively low energy content, was now in vogue thanks to its low amounts of sulfur. Eastern coal packed a high energy punch, but, heavy in sulfur, it was less desirable under the new standards. 

The mines emerging on the Wyoming prairie stood to benefit from the change. Recruiters for the new businesses spread out across the country in search of workers, offering high wages and good benefits. 

For an rig hand like Anderson, they also promised something the oil patch could not: stability and freedom from the dramatic cycles in the crude business.   

Sitting in his auto repair shop here one recent morning, Anderson recalled his employee orientation at Black Thunder. An instructor informed the group of new hires they were now 100 percent covered by the mine's medical plan. The question was asked: Is anyone's wife pregnant? 

"Of course, I raised my hand, and they said, 'well, everything’s taken care of now.' There were no deductibles, nothing, it was amazing," Anderson recalled. "None of them do that anymore. None of the mines have that sort of medical plan anymore."

***

Today, a change in government policy is once again driving a shift in the coal market. But where Wyoming once benefited from new regulation, today it stands to lose. 

Coal represents the bedrock of Wyoming's economy now. The Cowboy State is the country's top coal producer. In 2014, Wyoming's mines hauled about 396 million tons of coal from the earth, or roughly 40 percent of America's output. Some 23,000 people are employed, directly and indirectly, by the sector, amounting to about 6 percent of the state workforce. And coal companies annually contribute about $1 billion in tax revenue to Wyoming's coffers. 

Yet coal is also the most carbon intensive way to produce electricity, making it a chief culprit behind the rise in global temperatures. The U.S. Energy Information Administration estimates coal plants were responsible for 76 percent of the power sector's carbon emissions in 2014.

The final version of the Clean Power Plan announced by President Barack Obama last week aims to cut carbon emissions by 32 percent in the next 15 years, effectively shifting the country away from coal and toward less carbon intensive forms of energy. 

For Wyoming, the question is less whether coal use will decline. That seems all but assured. The question is by how much. 

The U.S. Environmental Protection Agency projects coal use will fall from roughly 40 percent of American power generation in recent years to 27 percent in 2030.

However, much will depend on states, said Robert Godby, a professor who studies power markets at the University of Wyoming.  

Each state is given its own carbon reduction target under the plan. States have considerable flexibility in deciding how to meet their goals, Godby noted, meaning the impact on coal will to be dictated to some extent by the choices states make.

"So far simulations suggest the Powder River Basin would be hit slightly worse than the general market as a whole," he said. 

The reason largely comes down to the age of the power plants that burn Wyoming coal, Godby said. New regulations on mercury emissions have prompted a recent round of closures among older plants in the eastern United States. 

But among those remaining, plants burning Powder River Basin coal tend to be older, he noted.  

"A lot of those plants that were built in the '70s, '80s and '90s to take advantage of Wyoming coal will be the end of their depreciatable life in 2030," Godby said. 

***

The shift in regulations comes amid a wider upheaval in energy markets. A nationwide drilling boom has positioned natural gas as a cheap alternative to coal. In April, natural gas generation exceeded coal generation for the first time.

Total coal generation through May was down by almost 16 percent compared with the same time last year, according to an analysis by Doyle Trading Consultants, a research firm. Total power generation was down about 1 percent while natural gas was up 18 percent.   

Coal companies have also felt the pinch of weak prices, brought on by a global supply glut. Many firms bet on growing Asian demand at the beginning of the decade, only to have the ensuing tide of coal met by a slowdown in the global economy.

Those factors have weighed heavily on companies like Alpha Natural Resources, which announced last week it will seek bankruptcy protection. Alpha is the country's largest producer of metallurgical coal, used to make steel, which it mines in the eastern United States. 

Alpha's metallurgical revenues slumped to $625 million over the first half of 2015, down from $782 million the year prior, according to the company's most recent financial filing. 

Alpha's western mines actually saw revenues increase, though the company attributed much of that to shipments delayed by rail constraints the year prior.

The Bristol, Virginia-based coal company operates the Belle Ayr and Eagle Butte mines near Gillette. Both produce steam coal for electricity generation. Revenues from those operations there were up to $211 million through June compared with $209 million the year before. 

Many analysts who track the industry believe Powder River Basin mines will remain competitive due to their low production costs. But market shifts mean a round of consolidation and production cuts are increasingly likely. 

In the past, annual 2 percent growth in electricity demand bred a sense of complacency among coal companies, providing little incentive to cut costs, said Hans Daniels, who tracks the industry at Doyle.

Today, companies' futures will be determined by their ability to control costs and by the quality of their coal, he said. Mines around Gillette generally produce coal with lower energy content than their counterparts in the southern part of the basin. 

"This is a sustained decline," Daniels said. "What we’re going to see is really the survival of the fittest."

Some form of cutbacks in production seem likely in the near term, as companies respond to a decline in demand. 

Cloud Peak Energy is in the process of implementing a 10 million-ton cut in production at Cordero Rojo, a mine with low energy content coal. 

Arch Coal, Cloud Peak and Peabody Energy all reported declining shipments from the Powder River Basin over the first half of 2015, though analysts said it was unclear if that was a response to the market or spring rains that slowed rail shipments from the basin. 

Coal's falling market share also means there is more potential today for consolidation in the ownership of Powder River Basin mines, said Jim Thompson, director of U.S. coal at IHS Energy. In the past, monopolistic concerns would have prevented a company active in the basin from acquiring another of the region's mines.

But with natural gas use on the rise, "I think that argument has a lot less power than it had," Thompson said. 

Still, barriers to mine sales remain. Mines like Belle Ayr and Eagle Butte will likely be difficult to sell for the simple reason that their high production costs and low energy content coal make them less attractive to investors. 

"The problem is these companies are not really desirable right now," Daniels said. "I’m not sure there is a lot of money out there to invest in a super coal company."

***

Don Edwards, the owner of the Fireside Lounge, in Gillette, remembers when the coal silos at Eagle Butte were built in the 1970s. Construction workers filled the bar around the clock. Men off the graveyard shift would come into the bar and switch places with men headed back to the mine. 

In the years that followed, the Fireside became a popular gathering place for miners getting off the night shift, its bar often packed around 6 a.m. 

But on this morning in late July, the bar was empty. Today, instead of stopping in for a drink, miners come to the drive-through, buy a six-pack and head home. Many seemed to be worried about their jobs, he said. 

"Everyone is conscious about it, but no one is freaked out yet," added his son, Scott, who helps run the bar. 

As for Darryl Anderson, he left the mines years ago to start his auto repair shop. But he still tracks the coal industry closely. His is what he refers to as a "trickle-down business," reliant on the fortunes of miners in need of car repairs. 

Coal has been good to the community, he said, helping Gillette build a beautiful community college, recreation center and entertainment center. But Anderson worried whether that money would be there for future projects, like the construction of a new high school or an aquatic center the city is pursuing.   

City government, he added, continues to act like coal's boom days haven't ended. He likened Gillette's plight to a football player who wrecks his knee and then returns to play again. 

"We’re not going away, but the boom is over," Anderson said. "We’re going to have a new normal here. That’s what Gillette is going to be, a new normal."

Follow energy reporter Benjamin Storrow on Twitter @bstorrow

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