Is Illinois coal industry poised for a comeback? | St. Louis Public Radio

Is Illinois coal industry poised for a comeback?

20 hours ago

Publish Date: 2008-12-23 16:00:37

Author: Robert W. Steyer

Position: special to the Beacon

Is Illinois coal industry poised for a comeback?  <p>

After two decades of plunging and then stagnating coal production, the Illinois coal industry believes it can see some light at the end of the mine shaft.

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"The prospects are better than any time since 1970," says Joe Angleton, who has viewed the declining coal industry as a member and officer of the United Mine Workers of America and, most recently, as director of the office of mines and minerals in the Illinois Department of Natural Resources.

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"In five years, we could see 65 million to 70 million tons a year," says Angleton. That would exceed the annual production in the 1970s and 1980s. This year, Angleton expects 33 million tons.  

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Illinois' coal industry fell fast after a federal clean-air law was enacted in 1990, a year when Illinois mines produced 61.7 million tons. During the 1970s and 1980s, the state usually produced with a range of the low- to mid-60 million tons. Then, came a sharp decline to 49.5 million tons in 1995 and 31.9 million tons in 2005.

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The number of mines has also dropped, as has mine employment. There were 3,401 mine workers last year, down from about 10,000 in 1990 and just under 20,000 in 1980.

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The problem with Illinois coal is too much sulfur. Coal users, especially utilities, responded by purchasing coal elsewhere rather than absorb the costs of reducing emissions of sulfur dioxide.

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"With the loss of big markets, older mines closed, and surface mines ran out of reserves," says John S. Mead, director of the coal research center at Southern Illinois University-Carbondale. "Today, the market for Illinois coal is shifting."  

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In the short term, this shift has several components: the prospect of new mines opening; improved extraction techniques; and the chance to increase exports to meet the growing demand for energy especially among China, India and other fast-growing economies.

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"Illinois will be a very good fuel source," says Mead.  

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Illinois' optimism also is tied to federal environmental regulations requiring coal-fired utilities in the East to reduce emissions of sulfur dioxide and nitrogen oxides by installing scrubbers. The pollution control devices "can eliminate up to 95 percent of sulfur dioxide," says Phil Gonet, president of the Illinois Coal Association.

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The Illinois Basin -- Illinois, western Kentucky and western Indiana -- "will probably be a stronger area in the long run because a lot of power plants are installing sulfur scrubbers," says Michael Tian, a coal industry analyst for the financial research firm Morningstar. "Over the next five to 10 years, the growth rate will be there."  

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However, nothing is simple in the coal industry. In July, a federal appeals court struck down the scrubber regulation known as the Clean Air Interstate Rule, creating uncertainty for coal companies and utilities. The unanimous opinion by the three judges said the EPA had exceeded its authority. In mid-November, the EPA and the Justice Department asked the court stay its order pending a rehearing.         

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On Dec. 23, the court said the scrubber rules could remain in effect until the EPA revises the regulations to correct flaws cited by the court. The court didn't set a deadline.

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FIELDS OF SEAMS

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Without high concentrations of sulfur, Illinois would be an ideal coal industry state. It's centrally located; and its convenient access to rail and river transport cuts the shipping costs to utilities.  

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Illinois also has more recoverable reserves than any state except Wyoming and Montana. Illinois has more reserves than West Virginia and Kentucky combined.      Although Wyoming, West Virginia and Kentucky are the top three coal producers, Illinois ranks ninth, accounting for less than 3 percent of U.S. production.

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A perfect illustration of Illinois' coal dilemma is the St. Louis-based utility Ameren. It buys 94 percent of its coal from mines in Wyoming's Powder River Basin despite the huge deposits literally in its backyard. After the 1990 federal restrictions on sulfur dioxide emissions, the utility did the math. It decided that the cost of that long train ride from Wyoming was still cheaper than installing expensive pollution control equipment for sulfur dioxide emissions.  

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Low-sulfur Wyoming coal accounted for 456.6 million tons, or 39.6 percent, of U.S. coal production last year, says the National Mining Association and the U.S. Department of Energy. The coal is easy to extract.

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According to a September analysis by the Jefferies &amp; Co. investment banking firm, the normalized price for a ton of Powder River Basin coal for electric utilities was $16 to $26. The per-ton price was $50 to $70 for the Illinois Basin, which includes Illinois and western Kentucky and western Indiana. By purchasing most of its coal from the Powder River Basin, Ameren also is willing to sacrifice heat content. Even though Illinois coal produces more heat a pound, the total cost to Ameren still remains below that of Illinois Basin coal.

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The standard heat measurement is British thermal units (BTUs), and the Jefferies report says Powder River Basin coal provides 8,300 to 9,200 BTUs per pound versus Illinois Basin coal's 10,500 to 11,900 BTUs per pound. Coal in northern Appalachia can exceed 13,000 BTUs per pound.

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The cost of delivering coal based on BTUs "should be the most important driver of coal procurement strategies during the next three to five years," the Jefferies report says.

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Of course, utilities are always making cost calculations; and earlier this year, Ameren executives noted that transportation expenses for western coal were rising.      

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Ameren also is installing "wet" scrubbers at some plants, which enables the use of Powder River Basin coal or Illinois Basin coal. "Dry" scrubbers are cheaper, but they lack coal-burning flexibility.      

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"There won't necessarily be a shift from (Powder River Basin) to Illinois coal," Gary Rainwater, Ameren's CEO, told analysts during a Feb. 14 conference call. "We will be sure that we provide that flexibility given how the markets change and we might switch back to Illinois coal in the future."

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BACK TO THE FUTURE

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Some of Illinois' coal future rests in the "maybe" stage, as companies and investors try to develop plants to convert coal into synthetic natural gas. Such plans require a lot of money as well as a lot of time to get through the environmental and economic permit process.   

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Part of the future has slipped into the "maybe not" stage, as evidenced by the FutureGen project. An alliance of energy and utility companies wants to develop a coal-fired power plant in Mattoon, Ill. that would capture and store carbon emissions. The government dropped support early this year after the initial costs were higher than expected. Sen. Dick Durbin, D-Ill., accused the Department of Energy of "creating a false hope" about providing financial support. Proponents promise to lobby Barack Obama when he becomes president.   

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Some of Illinois' coal future is in the building stage. In early October, in Lively Grove, Ill., ground was broken for the Prairie State Energy Campus, a coal-fueled power plant that will be supplied by an adjacent Peabody Energy mine. The plant is expected to go on line in 2011 to 2012.   

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Most of the new coal production in Illinois will come from underground mines, thanks to improved mining technology and the fact that the environmental costs for large surface mines are higher than those for underground mines.

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"A lot of the prime surface mines are mined out," says Angleton, of the Department of Mines and Minerals. Surface mines produced 5.6 million tons last year, down from 18.6 million tons in 1990. Underground mines, which produced 43 million in 1990, contributed 26.8 tons last year.  

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Angleton is encouraged by a recent flurry of underground-mine permits. Approvals take about two years from start to finish. Given the environmental issues and the cost of developing a mine during a period of economic distress and tight credit, it doubtful that every proposal will be converted into a working mine.      Still, the combination of new environmental regulations, improved mining technology and coal users' constant search for the cheapest product creates some overdue optimism.

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"We hung on," says Angleton. "We have a chance to be a major player again."

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<i>This is the second part of series on coal. To read part 1, click <a href="/issues-politics/5582?task=view" target="_blank">here</a> .&nbsp;</i>

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<i>Robert W. Steyer is a freelance business journalist in New York. To reach him, contact Beacon issues and politics editor <a href="/contact_staff/susan_hegger" target="_self">Susan Hegger</a>.</i>

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</p> Robert W. Steyer special to the Beacon