ANNAPOLIS, Md., Oct. 2, 2012 /PRNewswire/ -- After four decades of rapidly escalating demand, Powder River Basin (PRB) coal producers are experiencing a prolonged decline in the domestic market. At least two venerable producers, Alpha Natural Resources and Arch Coal, find themselves in tenuous positions.
That is one of many findings detailed in a new supply/demand study from two of the world's foremost experts on PRB demand, production and markets, "Powder River Basin Coal Supply, Demand & Price Trends 2012-2031."
The strategic study, authored by John T. Hanou, president of Hanou Energy Consulting, LLC and Robert M. Burnham, president of Burnham Coal, LLC, covers the critical Powder River and Bull Mountain coalfields in Wyoming and Montana.
Alpha faces reserve depletion at its Eagle Butte mine. At current production levels, the mine will run out of reserves around 2029. Higher ratio reserves are present but are not economical today.
The Belle Ayr mine has a major challenge regarding its reserve situation. To expand its reserve base Alpha had planned to lease the Belle Ayr North LBA. But it lost the tract to Peabody Energy.
With limited options, Alpha picked up the Caballo West federal LBA. The question is – how is Alpha going to access the coal?
While Peabody has direct access to the Belle Ayr North tract using existing pits, Alpha cannot access the Caballo West tract without crossing Peabody surface property (and will have to open a new box cut).
"We suspect negotiations between Alpha and Peabody are underway," John Hanou said. "Or Peabody may play hardball, not negotiate and eventually take over the Caballo West tract.
"Alpha has applied for the 253 million-ton Belle Ayr West LBA but it may not come up for lease before Belle Ayr depletes its existing reserves. If so, Belle Ayr may be forced to reduce production to extend the life of its current reserves or close prematurely."
Arch was forced to idle three draglines at its flagship Black Thunder mine due to this year's market conditions. Production will drop from 116 million tons in 2010 to 85-90 million tons in 2012.
Beyond that, Arch must lease and develop a 1.4 billion-ton federal reserve west of the Joint Line railroad at its Black Thunder mine.
"This will be an expensive endeavor and will require a box cut," Hanou said. "At an in-situ ratio of 4.0:1(8:1 effective), we estimate the total material to be moved to open the boxcut is 800 million yards. In order to keep Black Thunder at a 90 million to 100 million tons of annual production, development must occur between 2018 and 2025."
Arch was successful in leasing the 1.3 billion-ton Otter Creek reserve in Montana, but development of this reserve is dependent on the Tongue River Railroad being built. "Construction of this railroad is at least five years away and still faces right-of-way issues and environmental scrutiny," Hanou noted.
Better news for all PRB producers: "Our analysis suggests some market improvement over the next two years with demand increasing by about 30 million tons," Hanou said.
But under the CSAPR rules, the study envisions the domestic U.S. and Canadian markets declining by about 50 million tons over the next 12 years. So producers are eyeing the international market for growth and market share.
"The shakers and movers are Peabody, Arch, Cloud Peak Energy and a newcomer – Australia's Ambre Energy," Hanou said. "Signal Peak, with its new Bull Mountain longwall mine, is also pursuing the international market."
While the PRB once cut a broad swath throughout the U.S. marketplace, high railroad rates have made such inroads far more difficult. "While the rail carriers lowered rates to compete with natural gas in the Midwest in early 2012, it isn't clear they will do it again to compete along the East Coast," Hanou said.
"If not, non-participants in the international market may be left with the scraps. High cost mines are on the bubble and are likely to be closed. Low-cost virgin reserves like Otter Creek and Youngs Creek are likely to get developed, but only if the western export terminals get built."
Obstacles include opposition from environmental groups, and towns and cities through which the 30+ trains per day must pass.
PRB producers must navigate the difficult water while dealing with higher production costs, as outlined in detail in the study. The PRB story has been staggering – one surge in demand followed by another. Its easily accessible reserves and world-class infrastructure, including a remarkable rail system, have allowed it to meet demand.
The new challenge is different and might be more daunting, but the study will allow you to make an educated choice of winners and losers. It is the most comprehensive look at the PRB market produced anywhere in the world.
For more information about this study please visit www.hanouenergy.com.
SOURCE Hanou Energy