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As exports boom, US coal producers eye creative solutions for local customers

While export markets are providing an outlet for U.S. coal producers, maintaining a core base of domestic utility customers may require some creative contracting in today's market.

Coal consumption by U.S. utilities has continued to decline in recent years, but producers have been able to avoid some supply curtailment by tapping overseas demand. Consol Energy Inc. Senior Vice President of Coal Marketing Jim McCaffrey warned that because export demand can "come and go," his Pennsylvania-based mining company is working to keep a strong domestic core in its sales books.

"When I was in India in February, I was just blown away by the opportunity on coal," McCaffrey said during a May 10 panel on coal and exports at the Eastern Fuel Buyers Conference. "People would want to do deals nearly on the spot, or at least lay out deals, and it was certainly astonishing to me. We're not going to abandon the domestic market, but we are going to go where our netback and returns to shareholders are best."

India is looking to move away from lower-quality petcoke, so buyers are looking for other sources for coal.

"You got to love a country that's improving its pollution by burning coal," McCaffrey said during the panel.

U.S. coal producers are also eyeing places such as Turkey where officials are considering raising limits on the sulfur content of coal in order to use coal of a higher energy density. The move would likely be a boon to Northern Appalachia producers such as Consol, which targets about 20% to 40% of its coal production for export markets, McCaffrey said.

Ted O'Brien, who works in capital markets and marketing for XCoal Energy & Resources LLC, a major U.S. coal exporter, said he sees a strong demand for U.S. coal for the next three years.

All that coal flowing out of the U.S. seemingly has not had much impact on the ability of U.S. utilities to get coal when they need it. Duke Energy Corp.'s managing director of fuel procurement, Brett Phipps, said utilities are willing to work with coal producers in a way that gives both flexibility to either increase or reduce coal shipments.

Because of low natural gas prices, many coal plants are operating at relatively low capacity factors, Phipps said, and while coal remains important, "it's just not what it used to be."

"From a utility perspective, the export market is good," Phipps said during the panel. "It keeps [coal] operations alive."

However, if gas prices were to rise again, utilities might need some of that coal. Phipps expects the markets will be shaken up soon as supply tightens.

"The level of volatility you will see in the system has never been seen before. It's getting ready to happen," Phipps said. "The way that we have constructed things in the past is not going to work. Somehow you have some kind of relationship, a contract that gives you the opportunity for an export."

McCaffrey said suppliers are interested in more "creative contracts that work for suppliers and end users so both sides can get a fair deal most of the time." While utilities are able to get the best price with flexibility to shift among generation sources, coal mines often operate most efficiently if production is stable and can be planned in advance.