Big Coal’s Export Lifeboat Hits Stormy Seas

The coal industry’s export strategy faces decreasing financial value and will increase environmental damage.

Russ Childers, left, of Seattle, sits among other protesters as they demonstrate against trains carrying coal for export moving through Washington state on Thursday, October 17, 2013, in Tacoma, Washington. (AP/Ted S. Warren)
Russ Childers, left, of Seattle, sits among other protesters as they demonstrate against trains carrying coal for export moving through Washington state on Thursday, October 17, 2013, in Tacoma, Washington. (AP/Ted S. Warren)

A year and a half ago, the U.S. coal industry—faced with a steady decline in domestic coal consumption—seemed to have found a lifeboat. The industry planned to export vast amounts of western coal from the Powder River Basin of Wyoming and Montana, shipping the coal by rail to new export terminals planned on the West Coast in Washington and Oregon and then overseas to Asia.

At that time, plans for six new coal export terminals were underway; together, the terminals were projected to be able to handle more than 150 million tons of coal per year. Coal industry executives spoke enthusiastically about the overseas prospects, with Cloud Peak Energy Inc. proclaiming in an announcement of its first quarter results in 2012 that, “International demand for our coal continues to grow, and international thermal coal prices remain robust.”

But in recent months, the lifeboat has begun to look a lot less seaworthy. China, the prime driver of world coal demand, is taking a number of steps to reduce coal imports, including producing and using domestic coal more efficiently, banning new coal-fired plants in areas with heavy air pollution, and boosting the use of natural gas, nuclear energy, and renewables. These efforts helped pop a bubble in coal prices that occurred from 2011 to 2012, with the Newcastle benchmark spot price down about 40 percent from its level in early 2011. At the same time, a wave of stateside opposition to the construction of U.S. coal export terminals and the related increase in train traffic has been building in the Pacific Northwest and across the West into Montana. It is a movement reminiscent of the broad opposition to the proposed Keystone XL pipeline that would transport crude oil gleaned from tar sands from Canada to the Gulf Coast, built around a combination of issues involving local traffic and health concerns and global climate change effects.

China’s softening demand for coal appears to have taken a toll on the rush to construct coal export terminals. From August 2012 to May 2013, three of the planned terminals’ developers—in Grays Harbor, Washington, and Coos Bay and St. Helens, Oregon—backed out of the projects.

Three others remain, in Longview and Cherry Point, Washington, and Boardman, Oregon. All three are in the early stages of complex environmental reviews, where public hearings are giving hundreds of opponents a platform for protest.

The large numbers of protestors carrying signs and wearing t-shirts with the slogan “Beyond Coal” have an unlikely ally in their skepticism—key financial analysts, who are doubtful about the terminals’ financial value.

  • In a July 24 research report with the arresting headline “The window for thermal coal investment is closing,” Goldman Sachs downgraded its price forecasts for coal by 13 percent and 11 percent for 2014 and 2015, respectively, and said seaborne coal demand would peak in 2020. “Earning a return on incremental investment in thermal coal mining and infrastructure capacity is becoming increasingly difficult,” the report said.
  • In June, Bernstein Research issued its own report, headlined “Asian Coal & Power: Less, Less, Less… The Beginning of the End of Coal.” It concluded that China:

… will cease to import coal in 2015 and will see a decline in coal consumption in absolute terms in 2016 as hydro, nuclear, renewables and gas-fired generation take market share in the power sector. … We expect that China will start aggressively decommissioning coal-fired power stations and replacing them with nuclear or renewables by the second half of this decade.

  • A May 2013 analysis by Deustche Bank predicted:

In the medium to long term, thermal seaborne coal markets face a combined threat of steadily growing supply in the largest producing regions and a leveling-off or decline in demand in consuming regions.

  • “We’re seeing the beginnings of a big structural shift, particularly in the Chinese energy sector,” SuperCritical Capital Managing Director Richard Morse told the New York Times last month. “For global markets, this is a significant bearish signal for coal.”

The coalition opposed to the construction of coal export facilities and the rail traffic they would generate is fighting on a number of fronts. They are mobilizing large numbers of people to take part in so-called scoping hearings that begin the environmental review process, and they are working to elect a slate of candidates in a county election in Northwest Washington that could determine the fate of the proposed Gateway Pacific Terminal in Cherry Point, Washington—a terminal that could export up to 60 million tons of coal per year.

The November election of county commissioners in Whatcom County could be critical, as that commission has to issue a permit for the terminal. One indication of the election’s high stakes is the amount of money the political arm of Washington Conservation Voters has spent to elect four progressive candidates to the county council—more than $160,000 so far. Coal interests have responded with nearly $150,000 in contributions to support a local political action committee that supports the terminal.

Another indicator of coal’s market weakness: A federal coal tract offered for sale in Wyoming in August failed to attract a single bid—the first time this has ever happened. Most of the rights to Powder River Basin coal are held by the federal government, which periodically sells leases for the minerals. That region accounts for about 40 percent of U.S. coal production.

During President Barack Obama’s time in office, the administration sold leases for more than 2 billion tons of coal in the Powder River Basin, despite its rhetorical commitment to battling climate change. When burned for electricity production, the coal mined in the basin accounts for about 13 percent of total U.S. carbon emissions each year.

The federal coal-leasing program is coming under increased scrutiny. Earlier this year, a probe by the Department of Interior’s Office of Inspector General found that coal companies were underpaying for the federal coal they buy by tens of millions of dollars. Another investigation by the Government Accountability Office is expected to be released in the near future. A report last year by the Institute for Energy Economics and Financial Analysis found that taxpayers had been shortchanged by nearly $29 billion over the past 30 years.

In addition to the concerns about the financial aspects of the federal coal program, there are also shortcomings in how the program is evaluated for its environmental impacts. Earlier this summer, the Army Corps of Engineers, which conducts environmental reviews of the coal export terminals, said that it would not consider the facilities’ climate change impacts. But separate Washington state environmental reviews will include the climate impacts of the two proposed facilities in that state.

Those two issues—whether the coal program is achieving fair market-value returns for American taxpayers and whether the federal government is giving adequate consideration to coal’s broad environmental impacts—have convinced a number of activist groups to urge two steps: a time out on federal coal-lease sales until the Department of the Interior can take the necessary steps to ensure that taxpayers are getting a fair return and a broad-based programmatic environmental impact statement that would look at the full environmental costs of the federal coal program.

Tom Kenworthy is a Senior Fellow at the Center for American Progress.

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Tom Kenworthy

Senior Fellow