By - Jim Vess

Coal mine prospects in the Powder River Basin are on a poor trajectory, Moody’s says

Energize Weekly, November 6, 2019

A string of coal mining company bankruptcies in the Powder River Basin (PRB), straddling Wyoming and Montana, has changed the basin’s competitive landscape, but not its “poor overall long-term trajectory,” according to an analysis by Moody’s Investor Services.

“All of the rated coal companies that produce PRB coal are now focusing on metallurgical coal production in other basins, which eases their credit exposure from producing in the declining PRB area in Montana and Wyoming,” the report said.

Moody’s expects that PRB production will “likely fall significantly in 2020.” In 2018, basin mining companies had 476 million tons in production capacity, but produced only 324 million tons of coal, according the federal Energy Information Administration (EIA).

EIA forecasts production in the Western region, which includes the PRB, will fall from 418 million tons in 2018 to 339 million tons in 2020.

“Several PRB-focused companies have exited the basin following bankruptcy protection filings, including Cloud Peak Energy, which worked exclusively in the region; Blackjewel, which had acquired assets in the PRB from Contura in December 2017; and Westmoreland Coal,” the Moody’s analysis said.

Contura Energy is paying $81 million to a newly formed mining group to exit two Wyoming mines that were initially going to go to Blackjewel before it went bankrupt.

Peabody Energy and Arch Coal, both in bankruptcy proceedings, have a proposed joint venture enabling Peabody to optimize its mining assets and reduce costs. Peabody owns the North Antelope Rochelle mine and Arch owns the Black Thunder mine – two the largest mines in the PRB.

Industrywide, coal mining is facing a suite of risks from refinancing issues to environmental pressures. In the PRB, Moody’s said, “certain risks are more significant … compared to other North American coal-producing basins, including the shift toward renewable energy and social opposition to exports in the Pacific Northwest.”

Transportation is a key issue for the PRB. The social and environmental efforts opposing a proposed Pacific export coal terminal weigh heavily on the basin. The Moody’s report notes that the Appalachian region primarily uses Maryland and Virginia ports for export and that the Illinois Basin region relies on Louisiana ports.

“PRB coal is far from any North American coast and relies heavily on rail transport to reach export markets,” the Moody’s report said. “Producers exported about 8 million tons of PRB coal in 2018—about 2 percent of production—primarily to coal-fired power plants in Asia. Cloud Peak Energy, in particular, exported somewhat higher-heat and better-located coal produced at its Spring Creek mine in Montana through British Columbia.”

PRB’s low-sulfur coal grew in demand in the 1990s with the adoption of tighter air emission standards for Eastern coal-fired power plants. “But coal-fired power plants’ adoption of scrubbers and the retirement of many older units built before the passage of the Clean Air Act has diminished the appeal,” the report said.

Still, PRB coal represents an important cargo for railroads such as BNSF and Union Pacific. Moody’s said, “the railroads will likely attempt to work with coal customers to help mitigate the impact on export economics during periods of low pricing.”

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