Forget Oil, Coal Remains King

WRIGHT, Wyo., Aug. 24, 2008 -- A mammoth shovel scrapes about 70 tons of coal shards off a 60-foot-high black wall like ice cream from a long, deep vat.

The power shovel's boom pirouettes and dumps its load into a truck bed with a resounding thud, kicking up a haze of black dust. Four scoops later, the outsized truck — think 12-foot-tall tires — brimming with a fresh dark mound, rolls off. Without missing a beat, the shovel dives back into the bounty, releasing its next load just as another truck backs in.

The scene — repeated around the clock here at the world's largest coal mine, Peabody Energy's North Antelope Rochelle Mine in the Powder River Basin — underscores both the abundance and the grimy nature of the USA's most plentiful energy resource.

As oil and natural-gas prices remain high and lawmakers agonize over whether to drill for oil in environmentally sensitive areas, coal looms as an antidote — still relatively cheap despite recent price surges because of a boom in exports.

While coal-fired power plants generate half of U.S. electricity, coal is the biggest carbon dioxide producer, accounting for 40% of worldwide emissions. CO2 is the chief culprit in global warming. To environmentalists, coal is public enemy No. 1.

Peabody, the world's largest coal company, sits squarely at the vortex of these countervailing forces.

Until recently, it was a bright spot in a bear market, its shares up more than 40% the first half of the year. Falling oil and natural gas prices have pushed them down about 30% since early July, but shares are still up about 700% since 2003. Peabody closed at $57.09 Monday, up 1 cent.

Pointing to robust overseas sales, analyst David Khani of Friedman Billings Ramsey predicts shares will more than double in a year. Foreign markets deliver more than half of Peabody's profits, up from 1% in 2003.

In the USA, Peabody is perhaps the staunchest opponent of stringent regulations to cap greenhouse gas emissions even as stalwarts such as ExxonMobil and American Electric Power have softened their stances.

A bill to curb global-warming gases fizzled in Congress in June, partly because of opposition from Peabody and the coal industry. It would have forced utilities and others to buy permits to emit carbon, passing the costs to consumers and boosting electric rates up to 45% by 2020.

About 30 coal-fired power plants are under construction around the country, the most in a generation. Peabody, along with partners, is building a $3 billion, 1,600-megawatt coal generator in Illinois, the biggest U.S. coal plant in 25 years.

Peabody is "the large, unrelenting, unrepentant poster child for the coal industry," says Sierra Club director Bruce Nilles.

Yet the likelihood of climate-change legislation after a new president takes office has prompted U.S. utilities to cancel or delay about 60 coal plants the past year. That has injected at least a sliver of uncertainty into the coal industry's future: Some experts say its prospects are bleak if technology to capture CO2 at coal plants and store it underground — preventing its release through the smokestack — proves too expensive for utilities.

In an interview at Peabody's St. Louis headquarters, in his corner office facing the gleaming Gateway Arch, Chairman and CEO Gregory Boyce shrugs off any worries. He says coal is just too plentiful to be cast aside, especially with power demand soaring. He notes Peabody's coal has 50% more energy value than Exxon's oil reserves, and the USA has 27% of the world's coal, a 200-year supply.

"It's a good time to be Peabody," says Boyce, an affable man who speaks in a confident baritone. "There's not enough natural gas. There's not enough renewables (such as wind and solar energy) to go around. So I'm not concerned that coal is going to disappear. For us not to use that resource, we are just shooting ourselves in the foot."

Boyce dismisses the Sierra Club's criticism. He says Peabody backs climate-change regulation, but only after carbon-storage technology is developed; it could take at least 10 years. Otherwise, he says, consumers will be socked with added costs without any benefits.

"The U.S. economy is not healthy," he says. "The cost of electricity has only just begun to rise. Therefore, we ought to be prudent in how we go about regulation."

David Hawkins, climate-center director of the Natural Resources Defense Council, calls that "a self-defeating position" aimed at squashing regulation. Utilities, he says, won't deploy costly carbon-capture technology unless they face high fees to emit CO2.

Boyce laments that the Bush administration recently scuttled a big demonstration project to sequester CO2 called FutureGen because of its $2 billion cost. Peabody is one of 12 companies that had agreed to chip in $30 million each to FutureGen. Although Nilles says Peabody could have funded the entire project if it wished, Peabody's position is that developing such costly new technology is too risky for any one company to take on alone.

Far from phasing out coal, Boyce wants to expand use of "clean coal" to solve the energy crisis. "Clean coal" would be scrubbed free of CO2 thanks to carbon-capture technology. Peabody kicked in about $9 million this year to an ad campaign touting "clean coal." Boyce is leading a push for coal that's turned into a liquid — with part of its CO2 captured in the process — to replace gasoline for vehicles and gasified coal to supplant natural gas, though environmentalists criticize the initiatives.

"We wonder why we pay $4-plus for gasoline," says Boyce, moments before holding up a half-inch-long bottle filled with colorless liquid coal. "Coal has to be a big centerpiece of our energy strategy because it's our major reserve base.

"There's a perception out there that coal is dirty, and we have to change that," he adds, noting that coal plants already have cut emissions of some pollutants and boosted efficiency to slash CO2 discharges. "Black is the new green."

Thinking globally

The company was plodding along when Boyce joined as president and chief operating officer in 2003. U.S. coal demand was rising 1.3% a year, and Peabody stock was mired at about $7, adjusting for splits.

Boyce, 53, a lifelong mining executive who previously headed international coal giant Rio Tinto in London, decided to tap a ravenous appetite for coal in developing economies such as China and India. At Peabody, he led mine acquisitions in Australia, a major supplier to Asia, and opened trading offices in London and Beijing. Today, Peabody is the only U.S. coal company with overseas mines.

"I was thinking I need to get a big part of the business that's growing 8% a year vs. relying on the U.S. market growing 1% to 2%," Boyce says.

That's paying off big time. China built 96,000 megawatts of coal-fired power plants last year, the equivalent of all of Britain's coal plants. The country is putting up coal plants at the rate of one every other week. India plans to build 75,000 megawatts of coal power by 2012.

Buoyed by foreign sales, Peabody recently said it expects per-share earnings of $2.50 to $3 in 2008, nearly double last year's results, on the production of about 230 million tons of coal, equivalent to 20% of the U.S. total. Its coal fuels 10% of U.S. electricity and 2% of worldwide power. It's also benefiting from a tripling in the price of coal to make steel.

Yet the torrid global market is squeezing the U.S. as mining companies divert coal to countries willing to pay much higher prices. U.S. coal exports should jump 39% in 2008 to 82 million tons, says Stifel Nicolaus analyst Paul Forward.

That, in turn, has tightened supplies. Prices for Appalachian coal have jumped from $45 to more than $100 a ton since last year. Citing soaring coal costs, dozens of utilities recently announced electricity rate increases of up to 30%.

Most of the exports are from Eastern mines, such as those in the Appalachians, that sell coal with higher energy content and are closer to Gulf of Mexico ports.

About 65% of Peabody's output — and 40% of U.S. production — is from the more productive Powder River Basin, a virtual Saudi Arabia of coal. Prices there are far lower, about $12 a ton, partly due to the coal's lower energy content. Also, coal can be extracted more easily from seams as thick as 100 feet vs. typical 3-foot seams in Appalachia.

Yet even Powder River coal is riding the export wave, with some heading to Europe and Asia and prices up 50% since last year. Peabody is also sending a growing portion of the region's coal to Eastern utilities to replace foreign-bound Appalachian coal.

The supply crunch is delaying shipments, forcing utilities to scramble to keep coal-fired plants running. "We're having to work very hard to get our coal delivered," says Vince Stroud, head of regulated fuels for Duke Energy.

If the shortage persists into next year as expected, utility inventories will likely fall so low they might have to scale back coal generation, replacing it with pricier natural gas, says Seth Schwartz, a principal at consulting firm Energy Ventures Analysis. Alternatively, he says, utilities will face another steep price increase — up to 70% — for coal, further pushing up power prices.

Boyce makes no apologies for the exports, saying utilities "are competing on a global basis to buy that coal, and they've never had to do that before."

Digging deeply

Perhaps no mine is better suited to meet surging demand than the 80-square-mile North Antelope Rochelle. It's an other-worldly moonscape gouged with 180-foot-deep pits, some flanked by football-field-length walls of coal, others already shorn bare.

Despite its size, the mine grinds along with assembly-line efficiency. After workers set off explosives to form a pit, a skyscraper-high shovel called a dragline removes the rocks and dirt covering the coal. Coal production is so high that several trucks typically queue up at garagelike structures where coal is unloaded and crushed into smaller bits.

From there, small piles are whisked on plastic-enclosed conveyors to towering silver silos, where coal is briefly stored until it's plopped onto open-car freight trains crawling at about 1.5 miles per hour. About 20 trains a day roll in on two lines, each toting away about 12,000 tons of coal.

After years of minimal capital outlays, Peabody recently spent about $200 million to ratchet up production. Expenditures include a larger dragline, a 3.5-mile-long conveyor to minimize fuel-hogging truck trips, and a new train-loading facility that blends various grades of coal from different silos, providing utilities with more customized mixes.

In a room lined with PCs and video screens, new software tells dispatchers precisely where trucks are so they can be routed efficiently, and warns of low tire pressure or worn brakes. Workers seem unfazed by coal's role in the global-warming debate.

"We're mining something that's helping the whole country," says supervisor Lyle Ramsey, 60, as he surveys a pit. "It bothers me that people don't understand what's going on."