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Growing US met coal beyond traditional regions may be long shot in fickle market

Coal industry hopes that the U.S. can increase exports of metallurgical coal — a recent bright spot for companies with coal mines in Central Appalachia — by expanding production to untapped regions could be a long shot, as many analysts are hesitant the good times will last long enough for such an expansion to be prudent.

Much of the U.S. metallurgical coal mined today comes from Central Appalachia, particularly the area in and near southern West Virginia, where high costs to mine thinning seams discourage production of thermal coal but can be justified for projects tapping into reserves of high-quality steelmaking coal. Expanding U.S. metallurgical coal production to nontraditional supply areas would be a boon to the industry, the National Coal Council wrote in a recent report completed at the request of U.S. Department of Energy Secretary Rick Perry. However, such expansion could be a tough sell for major producers or potential investors.

"With a limited global supply base, the ability for the U.S. to expand its production of metallurgical coals beyond the traditional supply regions would enhance the ability for U.S. coals to be exported," states the report, written primarily by industry stakeholders, including representatives of Consol Energy Inc., Peabody Energy Corp. and Alliance Resource Partners LP. "By way of example, there are large metallurgical coal reserves in Oklahoma, Arkansas and Alaska that have not been developed. All three states could develop high-quality metallurgical coal projects that would produce coal attractive to the international market if appropriate infrastructure is concurrently developed."

Combined, those three states produced about 1.6 million tons out of 774.6 million tons produced by U.S. coal miners in 2017, according to U.S. Energy Information Administration data. West Virginia alone produced 92.8 million tons in the same period.

Generally, the U.S. has been considered a swing supplier of metallurgical coal. When prices are high enough, U.S. suppliers will increase production to meet demand.

While metallurgical coal companies are enjoying higher seaborne demand and prices right now, that demand has been notoriously fickle, and new coal projects are typically viewed as longer-term investments. Lately, investors have been content to enjoy the higher margins and are pushing coal companies toward shareholder value initiatives, such as stock buybacks, rather than capital investments.

"Companies (and investors) seem unwilling or disinterested in investing in multi-hundred-million-dollar greenfield coking coal projects," Seaport Global Securities LLC analyst Mark Levin wrote in a Dec. 10 analyst note. "To some degree, this makes a lot of sense. Making a big bet on the coking coal price three or four years into the future when the project comes online without having off-take agreements with pricing floors is inherently very risky, particularly when share buybacks are more attractive and investors aren't rewarding companies with supply growth."

Boosting the odds?

The National Coal Council report goes into little detail about how the Department of Energy should encourage greenfield metallurgical coal production, other than suggesting "select government initiatives at the federal and state levels" could support continued production in traditional U.S. supply regions as well as expanded coal production in nontraditional regions with metallurgical coal.

However, there are already relatively few permitting hurdles, and it would be difficult to do much at a federal or state level to encourage coal development in those regions, said Alan Stagg, president and CEO of Stagg Resource Consultants, a company whose services include evaluating the prospects of coal reserves. Stagg says it is unlikely any major coal producers will look to significantly expand development, particularly as long as Appalachia has the capacity to meet demand while seaborne markets remain promising.

"The market has come and gone a couple of times and it's still sitting there undeveloped," Stagg said of the Arkoma Basin lying under Oklahoma and Arkansas. "I think everyone is leery about taking it on."

The region is characterized by thin seams, coal beds that dip in several places, gassy mines and relatively little infrastructure compared to Appalachia. Although the area's reserve of high-quality coal has been a point of fascination for certain segments of the coal industry for the past two to three decades, Stagg said major coal companies are unlikely to move in and develop it.

"From a practical standpoint, it's a difficult situation and there have been several passes at it," Stagg said. "Can it become a major producing area? I don't think so. … I don't see that at all."

Current mining activity

Since 2012, Ouro Mining Inc. has been actively developing the Heavener underground metallurgical coal operation along the Arkansas-Oklahoma border, a project that is expected to produce up to 2 million tonnes of saleable coking coal per year over a 20-year life using a unique longwall underground mining technique. A timeline on the company's website said it spent the first half of 2018 meeting with U.S. coke foundries, keeping up with its permitting and acquiring mining rights.

Local media reports suggested the project was stalled when the metallurgical coal industry was rocked by a steep drop in international pricing around 2014. The website said Ouro has "continued to de-risk" the project since 2014 with various economic and other studies. Ouro did not respond to a request for comment.

Of the three states identified in the report, Oklahoma may have the most potential because Alaska has very little infrastructure for transporting coal around and out of the state. The Arkoma Basin has historically been mined for metallurgical and thermal coal, with much of the commercially mineable resources falling on the Oklahoma side.

"We still have good-quality coking coals in the Arkoma Basin in eastern Oklahoma, but some of those resources have been used recently for combustion in power plants," said Brian Cardott, a geologist with the Oklahoma Geological Survey.

While Oklahoma has only two underground mines — one in temporary cessation and another idled while contracts are renegotiated — interest in developing underground coal mines in the state has been higher in the past five years than in the past three decades, said Rhonda Dossett, the coal program director for the Oklahoma Department of Mines. She is anticipating at least two new surface permit applications in 2019 and another underground permit application might be coming in the next two or three years.

"Our coal production has been in a slow decline for many years as the 'easy' coal had been mined and federal regulations [affecting] coal increased," Dossett wrote in an email. "I hope that the metallurgical market does improve. Oklahoma needs the coal industry for electric power generation and the jobs coal provides in rural communities."