Hurdles mount for Northwest coal exports

How high are the stakes for Western coal producers?

 

The U.S. coal industry has had little to celebrate in recent years. Domestic demand for the energy rich, black rock is declining. A surge of renewable energy has come online. Natural gas is absurdly abundant, and thus cheap. And now, state and federal environmental regulations to shrink the carbon footprint of electricity generation are poised to tighten the squeeze.

All of which has left coal companies searching for "some story," says University of Wyoming energy economist Rob Godby, "to say, 'we're sitting on an asset that's still worth something.' " The story they've seized upon is the insatiable hunger of developing Asian countries for coal, and the incredible moneymaking potential markets in China, India, South Korea and Vietnam offer – if only U.S. mining companies could get their product across the Pacific.

Coal trains in the Wyoming's Powder River Basin.
Logistically, the easiest way to do that is to build new railroads from Montana and Wyoming to ports in Oregon and Washington, perhaps the worst states politically to try to build new projects having anything to do with coal. As recently as last year, six coal export terminals were being proposed in the Pacific Northwest. The projects met with unprecedented public opposition, and now only three are still on the table. Soon, the number may be down to two.

Last month, Oregon denied an application from Ambre Energy – an Australian company that also mines in the Powder River Basin – for a permit to build a dock at the Port of Morrow on the Columbia River, effectively nixing the project. The company, the port and the state of Wyoming are now suing over the decision, arguing that the state improperly rejected the permit application not because of the impacts the dock would have but because of its distaste for the product to be shipped from it. 

How much does the ultimate outcome matter for Montana and Wyoming, home of the Powder River Basin, the largest coal producing region in the U.S.? The Port of Morrow project was the smallest of the three remaining export terminal proposals. It would shepherd about 9 million tons of coal a year overseas, while the two others, both in Washington, could ship a combined 90 million tons. When you consider that the Powder River Basin produces some 400 million tons of coal annually, export via the Port of Morrow represented a fairly small opportunity. 

The Washington ports, however, would be much more meaningful, conveniently allowing Powder River Basin producers to export about the same amount of coal they're expected to lose demand for domestically when carbon regulations take effect, says Godby. 

"It’s a tremendous growth opportunity for U.S. coal producers, particularly in the Powder River Basin," adds Andrew Moore, managing editor of Platts' Coal Trader, a daily newsletter covering domestic coal markets. Even though China is beginning to grapple with the extremity of its coal-driven pollution problems, and is preparing to launch the world's largest carbon market, Moore says coal demand in Asia is still likely to rise in coming years: "The hope of increasing and improving quality of life in those developing countries is likely to trump environmental considerations."

Still, there are no guarantees that Asian markets could absorb a large influx of Powder River Basin coal says Godby. U.S. producers would have to compete there with coal coming from Australia and Indonesia, two of the world's powerhouse producers who enjoy much closer proximity to the coal-hungry countries and existing infrastructure to deliver it. "And the big port projects have a lot of uncertainty," he adds. Building out the infrastructure to get the coal over big, rugged mountains to the coast is no simple task. It will require a huge investment from the railroad companies, and will confront opposition, no doubt, from communities that might have to endure multiple trains an hour. (Godby estimates that, owing to the mountainous geography, each train could only carry about 6,000 to 6,500 tons at a time.)

And then there's the competitive market U.S. coal would face in Asia, he says. "Which will make the rate of return on those projects relatively low. If you’re an investor, do you want to take on a project that long term with so many risks?"

Maybe not. So why go to all the effort, in the face of such challenges? "(Coal companies) don’t want to see the door closed now," explains Godby. "And they want to keep positive news in play, so that, longer term, they have a second option" – beyond the declining domestic market. 

Cally Carswell is a High Country News contributing editor.