Coal downturn hits railroads hard
Federal transportation board rejected a proposed Montana railroad due to coal bankruptcies.
In the latest ripple effect from the coal industry’s troubles, the federal Surface Transportation Board cancelled a proposed railroad in southeastern Montana on Tuesday. The Tongue River Railroad project was designed to connect the proposed Otter Creek coal mine to an existing BNSF Railway line. Arch Coal, one of several large U.S. coal companies that have filed for bankruptcy, pulled its application for mine permits last month but Arch and its partners still wanted the federal government to keep the proposal for the railroad alive, in hopes that they could revive the mine project in the future. Ranchers, who have fought the rail line for decades, appealed to the Surface Transportation Board to reject the railroad, given the bankruptcies and the weak market for coal.
“Its downfall was there’s no market to legitimize the construction of the infrastructure – the railroad and the mine both,” says Clint McRea, 54, a rancher who would have seen nine miles of the railroad built on his property if the project went forward.
The demise of the Tongue River Railroad is a window into a major upheaval the railroad industry is facing, due to the downturn of coal in the Powder River Basin and elsewhere. For decades, coal has been a mainstay of the freight railroads in the West. The emergence of the Powder River Basin as the nation’s largest coal field was thanks in large part to the deregulation of the railroads in 1980, which made rail shipping cheaper and meant low-cost Wyoming coal could compete with higher priced coal from Appalachia, Illinois or Colorado, according to Robert Godby, a University of Wyoming economist. Coal made up nearly 40 percent of the freight by weight carried by rail and almost 20 percent of rail revenue in 2014, according to the Association of American Railroads.
Consequently, recent bankruptcies of several major coal companies and the decline of coal production have had major repercussions for freight railroads: Coal shipments have plummeted, thousands of workers have lost jobs, rail companies have started holding off on projects like the Tongue River Rail Road and are streamlining their track networks because of lower traffic. For example, BNSF is in talks with unions to stop using its terminal in Sheridan, Wyoming. Coal shipments in that part of its network are down 50 percent compared to last year. Crews would be transferred to Gillette. Company-wide, BNSF has furloughed 4,600 workers, about 10 percent of its staff, since last year.
He expects that, with his seniority, he’ll be able to keep working for BNSF but will have to commute 100 miles each way to Gillette. “I’ll do what I have to do to weather the storm.”
Declaring that the country is in an “energy depression,” Matthew Rose, BNSF’s executive chairman, told an energy summit in Billings, Montana, earlier this spring that the sting from coal is even greater when combined with the drop in oil shipments. “The weakness in the coal business was masked by the offsetting growth in crude by rail. Now that oil prices are low, the real impact of declining coal is being felt,” Rose said.
While oil shipments likely will pick up when prices rise and drilling increases, the railroad industry recognizes that coal’s slump may be permanent. “At the end of the day, coal is declining at a very steep rate and that means a significant shift in what our freight railroad will move,” Rose added.
Railroads had hoped that Powder River Basin coal would find new markets abroad, which would have kept coal trains running even as the U.S. demand for coal shrank. But protests on the West Coast, where rail lines terminate, have blocked efforts to build new coal terminals for sending Powder River Basin coal to Asian markets. “The permitting process has become a weapon to stall or to stop new projects,” Rose said, referring to long-delayed coal export terminals proposed in Washington State.
The other main railroad carrying Powder River coal, Union Pacific, has faced similar disruptions. Plummeting coal shipments was the big theme of a gloomy first-quarter earnings call that Union Pacific held with industry analysts last week. Union Pacific’s workforce company-wide was down 11 percent compared to last year, driven largely by a 43 percent drop in revenues from coal shipments compared to the first quarter of last year.
Shipments of Powder River Basin coal were down 38 percent. Shipments from mines in Colorado and Utah were down 35 percent, according to Eric Butler, executive vice president for marketing and sales.
Company officials acknowledged that they had failed to predict the downturn and forecasted that the decline will likely continue for the immediate future and beyond. Stockpiles of coal at electric generating stations are enormous—enough coal to supply electricity for 108 days, 41 days more than last year at this time—because of the unseasonably warm winter and low gas prices.
“Coal is going to continue to have difficulty,” Lance Fritz, Union Pacific chairman, president and chief executive officer said on the call. “It’s not going back to where it was four or five years ago.”
That means railroads are looking for new products to take coal’s place. BNSF, for instance, touts its expertise in shipping parts for wind turbines. “Last year we moved almost 2,400 blades in a single year,” Rose says.
Elizabeth Shogren is HCN's DC Correspondent. Follow @shogrene
