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THE BTU GAP
by Elliott H.
Gue
Editor, The Energy
Letter
December 9, 2005
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Prices for coal have been on the rise of late, particularly for low sulphur coal from the Powder River Basin (PRB) in the western United States. But coal-fired power remains far cheaper than gas-fired power. This would remain the case even if gas prices were to fall back under $5 per million BTUs, less than one-third the current quote. Even better, the US has some of the world's most abundant reserves of high-quality low-sulphur coal. At least when it comes to coal, the US is energy independent. Several of the big US coal companies gave presentations at a Friedman Billings Ramsey Conference last week; their comments are worthy of note. The CEO of Arch Coal, Steven Leer, spoke about demand for coal over the next few years. He mentioned that the utilization of coal plants has been rising rapidly over the past couple of years’. In other words, coal plants around the country are running more often and standing idle less than they used to. This is certainly not news. But he went on to say that the traditional seasonal lull periods are disappearing rapidly. Traditionally, demand for coal-fired power has been highest in the summer and mid-winter for cooling and heating demand respectively. The autumn and spring represented lulls in demand. But, he is seeing these valleys in demand disappear—demand for electricity is more constant all year long. As demand for electricity in the US rises even during lull periods, the utes relied first on the nuclear plants to pump out the additional capacity. But with nuclear running at near-full capacity, coal plants are filling the void. Additionally, interest in building new coal plants is building. A few years ago, none of the utes wanted to build new coal plants; all the new construction plans were for plants running on natural gas. But with rising gas prices, coal is definitely back on the table—Arch estimates that new plants being planned for the next decade or so could represent upwards of 300 million short tons of additional annual coal demand. This is considerable when you consider that US consumption is currently running at about 1.1 billion short tons annually. Even more interesting is that Leer echoed the concerns about current utility coal inventories that Peabody Coal made in its conference call back in late October. He stated that many of their customers (utilities) are currently running on inventories of just 10 to 20 days’ worth of coal. This suggests that despite the warm autumn in the Northeast, there are plenty of utes running on uncomfortably low inventories. Most of these utes have stated that they'd like to push their inventories back to the 35- to 40-day range. Short-term demand for restocking those inventories will be high. Most of the demand will fall on low sulphur coal. There is a market for trading sulphur dioxide allowances--utilities can buy these credits to cover plants that would otherwise fail to meet new environmental regulations. But there's a problem right now: The cost of those sulphur credits is exploding to around $1,200 to $1,400 per credit. Because it will be some years before the utilities can install cost-effective scrubbers to remove sulphur, many are choosing instead to burn low sulphur coal. By doing this, they're able to avoid paying up big time for those sulphur credits. Much of this low sulphur coal is coming from the Powder River Basin (PRB) in the Western US. The coal miners with low sulphur reserves are benefiting from these high sulphur credit prices--they're able to sell their coal at higher prices to reflect the cost of sulphur allowances. Take, for example, a standard Western PRB coal containing 0.8 pounds of sulphur per million BTUs. Most Western coals are relatively low in BTU content compared to Eastern varieties--usually 10,000 BTUs per pound or less. Based on these figures, the cost of "removing" all the sulphur in a short ton (2,000 pounds) of PRB coal by purchasing sulphur credits (at $1,200) would be roughly $9.60. Eastern coals often have higher BTU content, meaning that they contain more energy per short ton. But take a standard 13,500 BTU per pound Eastern coal with a sulphur content of 1.5 lbs per million BTUs. Removing that sulphur would cost nearly $25 per short ton. It's clear that there is significant value in the PRB coal simply because it's so low in sulphur. Looking Ahead Right now, almost all of the coal mined in the US is destined for a power plant. The vast majority of what's left is the highest quality coal used in the manufacture of steel. Looking a bit further into the future, new uses will emerge. I outlined the Fischer-Tropsch process in great depth in TEL, September 23. 2005, Coal’s Electric. Suffice it to say there are ways of converting coal to a high-quality low sulphur diesel fuel or into natural gas. Coal liquefaction into diesel was widely used by Germany during World War II and the process has been greatly improved since that time. At least two of the larger coal mining firms are actively pursuing the technology and are in the process of constructing test liquefaction plants. The potential for these technologies is tremendous. To understand the importance, consider the BTU equivalency of coal, oil and natural gas. As most subscribers are aware, “BTU” is short for British thermal unit; one BTU is the amount of heat required to raise the temperature of one pound of water by 1 degree Fahrenheit. Consider that according to the Energy Information Administration, in one barrel of light sweet crude oil, there are roughly 5.8 million BTUs. A high grade PRB coal might have 10,000 BTUs per pound, roughly 20 million BTUs per short ton (2,000 pounds). But consider that PRB coal, while it's more than doubled in price over the past year, still trades below $20 per short ton. At $18 per short ton, that works out to a cost of roughly $0.90 per million BTUs for coal against about $10.34 per million BTUs for crude oil (at $60 per barrel). If we compare coal to natural gas, the BTU gap is even more obvious. Natural gas at $15 per million BTUs is more than 16 times more expensive than the PRB coal. I must warn readers that this analysis is currently somewhat "pie in the sky" in the sense that the capacity to realize the full BTU potential of coal doesn't yet exist. Nevertheless, with the value gap so huge, the potential of coal gasification and coal liquefaction to become important technologies over the next decade or so is obvious. Elliott H. Gue is editor of The Energy Letter.
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