Coal Producer and Coal Generator Strategy to Survive
A block buster deal by Consol along with my continuing blogs with the ScottMadden Energy Industry update in the section on rates, regulation, and policy, is inspiring this insight. As noted in the industry update, several policies are set to minimize coal generation. However, the biggest harm to coal did not come from the government, but the natural gas industry. Shale gas revolution is causing the big harm. If gas prices were to be in the $4-7+/mmbtu range, many decisions to install control equipment at these power plants would have been easily made. However, prices are now at the point that it does not make too much economic sense to invest in a several decade old plant when a brand new gas plant can be built at roughly the same cost. The benefit of added capital cost in the past was made up by the lower fuel price over time.
Shale gas has placed a big question mark on the long-term price of natural gas in the US on the market participants. If prices were to sustain around $3/mmbtu, there is no doubt that a significant amount of coal retirements would occur, including possibly fully control plants, as low power prices are not covering existing fixed cost. Eventually the coal industry would be left with barely a shell from the past. However, before we all jump on that trajectory, I will be willing, as I have been in the past to be the counter forecaster to the rest of the market.
On the bearish side of gas, there is quite a bit of evidence that production cost may actually be coming down for shale. Also, producers have a strong zeal to continue to post strong production numbers in face of relatively poor economics, as share prices are being rewarded. The btu in the ground will still be there for a few years later, but money now is the key for many publically traded companies. Long-term thinking may be pushed to the wayside as management teams have options, and shareholders want dividends now.
On the bullish side, what is not discussed more is the demand response that is likely to occur, but just takes time. As noted in several post, the demand for natural gas in the industrial sector is very binary. There is not ramping of natural gas demand as a brand new chemical plant, power generator, or LNG export terminal comes online. All these investments take time and large amount s of capital. No one places a $1+billion dollar investment for a price move which occurred in a one or two year period. A sustained belief that prices will be relatively low allows investments to be made. As noted in the ScottMadden energy update over 35 Bcf/d are looking for export license. We have at least 5-10Bcf/d already approved and very likely. To put that into some perspective, total US demand in 2012 was around 70 Bcf/d. If around 40GW of coal retire plus the addition of the LNG exports, the total demand from those two activities can surpass the entire US residential demand in natural gas. This is not insignificant.
Note: Expect in the coming months a long-term gas price projection from All Energy Consulting.
With world markets natural gas price north of $7/mmbtu, the US natural gas prices will likely move in that direction, as LNG exports try to capitalize on the market differences. IF coal producers and generators can believe over the next few years, we will see prices north of $4/mmbtu, on a consistent basis coal retrofit decisions become more likely. The coal market participants must realize there will likely be no more coal builds with the number one reason, not being the EPA or natural gas prices directly, but the plain fact the cost of building a coal plant is very high as seen in the recent Turk Coal plant built by AEP. The article is honoring the plant, but that honor comes with a high price tag of $3000/kW, almost twice expensive as the state of the art gas plant. For this very reason, new coal plants will be limited. Therefore, the only coal demand in the US will be from the existing coal plants. Coal producers and generators need to realize this fact. If the units retire, there is no coming back for that demand. Therefore, it is of the greatest need to figure out a way to keep the units economical to the point they do not retire.
My strategy for the survival of the US coal industry is to be creative with coal contracts. Go back to the old fashion way of creating coal contracts which are plant specific and less commodity like (non-homogenous). Both the producer and generator need to do the analysis and/or hire third party like myself to evaluate the economics at each plant. A spread should be produce based on the local natural gas benchmark. This spread should be to the point that it enables the plant to economically run in the current poor gas price. For the shared suffering in today’s price, the producer will then get the upside when the market recovers. If the market does not recover it does not matter anyway. The industry needs to save what they can or it will be lost forever.
As noted in the article, I would be glad to facilitate and produce a contract which produces a win-win situation for both the coal producer and coal plant. I have the ability to produce unique solutions which can benefit both parties. Please do consider All Energy Consulting.
Stay tuned for the Long-term Natural Gas price outlook.
Your Energy Consultant,
614-356-0484
