August 21st could go down as a small watershed moment for the US coal industry. As the Associated Press put it, “For the first time, nobody has bid on a tract of federal coal offered for sale in Wyoming.”
On Wednesday, the Department of Interior’s Bureau of Land Management (BLM) held a controversial auction for 148 million tons of publicly-owned coal, called the Maysdorf II LBA. “Auction” is a loose term here, since most so-called-competitive federal coal auctions have only one bidder. For yesterday’s auction, that company was Cloud Peak Energy, which applied for the lease in 2006 to expand its Cordero Rojo mine. However, in a move that surprised seasoned BLM officials, Cloud Peak declined to offer a bid - for the tract of coal that the company itself requested.
On the surface, Cloud Peak’s decision is important for one straightforward reason – 148 million tons of coal is likely to stay in the ground. With the threat of climate change looming, we can’t afford to unlock new sources of carbon pollution.
However, we can also take away three important lessons about the state of the US coal industry:
1. The outlook for domestic coal is bleak. Really bleak.
Coal use is declining year on year in the US, as we move toward cleaner forms of energy. However, despite that trend, coal companies have so far continued to seek new coal leases in the West, speculating about a rebound in the domestic market. Cloud Peak’s caution on the Maysdorf tract has popped a small hole in that fantasy.
Cloud Peak CEO Colin Marshall cited “current market conditions and the uncertainty caused by the current political and regulatory environment towards coal and coal-powered generation” in a statement confirming the no bid. 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.
Marion Loomis of the Wyoming Mining Association echoed these concerns, “It just shows the softness of the market right now. They don’t want to make investments until they make sure there is a market available for that coal.”
Cloud Peak is the fourth largest coal producer in the US and necessarily bullish on Powder River Basin coal (it doesn’t mine coal in any other part of the country). If Mr. Marshall has doubts about the long term profitability of new coal investments, it’s worth reflecting.
2. Coal companies, and their investors, should be wary of stranded assets.
US coal companies have generally sought to expand their reserves, betting that they represent resources that can be mined and sold for profit at a future date. The usual attitude might be summed up by this statement: “We have trillions of tons of coal resources in the world,” Vic Svec, spokesman for Peabody Energy, told me. “You can expect the world to use them all.”
The strikingly callous disregard for our collective future that such an assumption represents will be familiar to anyone familiar with global warming’s new math - but that’s hardly surprising, especially coming from a company like Peabody. What’s more interesting is that Cloud Peak’s decision not to expand its coal mine makes Peabody’s PR guy look more wrong than sinister – like he’s trying to put on a bold face while his company is downgraded even further into junk territory.
Analyses from Carbon Tracker have warned that money invested in expanding fossil fuel reserves represent wasted capital as it becomes increasingly clear that most of the world’s fossil fuels are unburnable. Coal reserves are at particular risk of becoming stranded assets for several reasons. As the most polluting fossil fuel, any serious action to reduce carbon pollution must dramatically reduce coal consumption. Further, coal-fired power plants are major sources of deadly air pollution, so efforts to improve air quality are pushing the world’s top coal consumers – China and the United States – to rein in coal now. Finally, competition from cleaner energy is accelerating coal’s decline even in the absence of sweeping carbon regulations.
Still, with poor credit, growing debt, and falling stock prices, some coal companies continue to seek new coal leases in hopes of funding their present off their mythological future. But yesterday, Cloud Peak demonstrated that having millions of tons of coal on a piece of paper may not actually create any real value for a company. They refused to bid for fear that this asset would be stranded in a shrinking market.
3. BLM manages one of the largest coal reserves in the world – and is clueless about coal markets
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 US coal market.
In the Maysdorf II Record of Decision, BLM cites two studies to justify the long term demand for coal from the proposed lease. One projects coal will be 52-58% of domestic electricity generation by 2030 – a future so implausible, it’s more humorous than scary. The agency then “concludes that during the time that the proposed Federal coal lease reserves would be produced, the demand for coal-fired electric generation in the United States will still require coal be a major part of the U.S. energy portfolio.” And later, “The effect of denying the Maysdorf II LBA North would be that… the Cordero-Rojo Mine would not be competitive in the national coal market to meet the future coal demand in the U.S. that is expected to last until at least 2035”
However, as Cloud Peak is demonstrating, reality is a bit more uncertain. After seven years of applications and environmental studies, the Maysdorf reserves were just not worth it.
With a risky domestic outlook, Cloud Peak appears to be doubling down on the coal export market, with a sharp focus on expanding its Spring Creek mine in Montana to create what it admits is an ‘export-focused mine complex’ designed to extract publicly owned coal to ship to Asian markets. [For more on why that’s a shaky prospect in itself, see here and here]
The Bureau of Land Management has failed to adapt to the collapsing US coal market, the coal mining industry’s increased focus on exporting our coal to foreign markets, and continues to assume these lease sales are needed to ‘meet the national coal demand.’ For an agency tasked with managing one of the world’s largest coal reserves, that’s a damning display of cluelessness.
This should be a wake up call to the Department of Interior. Secretary Jewell should take this opportunity to establish a moratorium on new federal coal leasing in the Powder River Basin, and reform the federal coal leasing program to take into account the coal industry’s export ambitions, and address concerns that it is fueling climate change and cheating taxpayers.