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The end is nigh for Northwest coal export

Posted by Bobby Hayden at Sep 25, 2013 02:00 PM |

Coal boosters have been hit by a perfect storm of growing regulatory challenges, legal obstacles, community and political opposition, and signs of financial weakness.

The end is nigh for Northwest coal export

Ross Macfarlane, Senior Advisor, Business Partnerships

Part 2: Legal, regulatory and financial hurdles mount for coal industry

By Ross Macfarlane
Climate Solutions

Dwindling global markets and dire forecasts abound for thermal coal exports from terminals in the Pacific Northwest, as outlined in Part 1

Even the Wall Street Journal weighed in this Sunday, noting that cooling Chinese demand was creating overwhelming headwinds for coal companies.  These factors alone likely doom these proposals given the proponents’ need to raise billions of dollars from financial markets that are increasingly skeptical about the short and long-term prospects for the global coal trade.

 

The End is Nigh

 

With that context, the terminal developers are desperately hoping to find any way to streamline permitting and regulatory paths and shorten their timeframes to build these terminals. Instead, coal boosters have been hit by a perfect storm of growing regulatory challenges, legal obstacles, community and political opposition, and signs of financial weakness.

Consequences of carbon pollution to be considered by WA Department of Ecology


WA Department of EcologyWashington State is taking a much bolder and deeper look at the consequences of the two proposed Washington terminals: Cherry Point and Longview. 

The Department of Ecology’s decision on the scope of the Environmental Impact Statement (EIS), announced on July 31, requires an in-depth analysis of rail transportation impacts to local and neighboring communities in Washington and out-of-state, human health impacts in Washington, cargo-ship impacts beyond Washington waters, and an evaluation and disclosure of greenhouse gas emissions of end-use coal combustion in Asia. 

Most notably, Ecology has said that the impact statement needs to look at the greenhouse gas emissions.  Cherry Point alone would export 48 million metric tons of coal, which equates to a staggering 100 million tons of carbon dioxide, more than the carbon pollution from every activity in the state of Washington combined.  The decision requires a close look at regional congestion impacts: independent studies have confirmed that coal shipments would completely close major city center streets by an additional 1-3 hours every day, 365 days a year. 

The Department of Ecology’s announcement also confirmed that the schedule for project review and permitting is likely to be lengthy.  The already 20-month-long process for the agencies to issue scoping notices will be followed by a draft EIS in approximately two years, a final EIS - which will take an unknown additional amount of time - and finally a multi-year permitting process. 

Cherry Point WA

An aerial view of Cherry Point, Washington - courtesy of NOAA.

Ecology is acting on clear legal independent authority from the Army Corps of Engineers, who has approved a far narrower scope for the environmental review.  The Corps’ recent decision to prepare separate EIS documents for the two projects does not affect the substantive scope, and may only further delay and confuse the process.

Powder River Basin coal company Cloud Peak predicts that Gateway Pacific wouldn’t get built until 2018 or 2019 at the earliest.  This estimate is likely very optimistic.  They know that lawsuits are a certainty if any permits are approved, and Washington law makes it hard to move forward on major projects prior to litigation being completed.  And there have already been significant missteps by the developers. SSA Marine, the parent company of Gateway Pacific Terminals - the company that is behind the project at Cherry Point – was ordered to pay $1.65 million in July to settle a suit from 2011 regarding land-clearing violations to the Clean Water Act. 

Ecology’s decision is also likely to impact the scoping for the Millennium Project near Longview Washington, which commenced in August 2013.  This project is approximately one year behind the Gateway Pacific Terminal in the scoping and review process. 

The significance of Ecology’s scoping decision can be measured in the howls of protest coming from the proponent’s astroturf group, the Alliance for Northwest Jobs and Exports.  They have labeled Ecology’s decision ‘unprecedented’ (it’s not) and claimed that it will affect any export projects in the state (it won’t). Their outrage only underlines the significance of the State’s scoping decisions.  There is no sign that the state is likely to back down, as its decision was well founded in Washington law and a record level of comments supporting a broad review from a wide range of public officials, communities and organizations.

Morrow Pacific Project Delayed Yet Again.

In August, Ambre Energy, the financially shaky Australian startup company behind the Morrow Pacific project, requested and received a fourth extension for its deadline to provide requested information to the Oregon Department of State Lands regarding its needed approval, after a five-month request for a delay in March of 2013 had expired.  Ambre has again failed to provide information that the state has requested, leading to continued delays. 

Public and tribal opposition are at record highs

Totem Pole Journey - Lummi NationThe Lummi Tribe and other tribes are making themselves absolutely clear about one thing: there will be no compromise, no financial settlement for Cherry Point. 

In a letter to Colonel Estok, District Engineer of the US Army Corps of Engineers, The Lummi Nation expressed their unconditional and unequivocal opposition to the proposed Gateway Pacific Terminal.  Claiming substantial impairment to the Lummi treaty fishing right harvest at Cherry Point - classified as a “usual and accustomed” fishing area – the Tribe is calling on the Corps to carry out its trust responsibilities.  The Corps has jurisdiction over wetlands and piers and must deal directly with the 5,000 member tribe in a “government to government manner honoring tribal sovereignty.”   Corps officials have said that if SSA Marine and the Lummi can’t agree on ways to mitigate damages caused by GPT, they’ll have to consider halting the review or denying permits for the proposal altogether.

But the Lummis aren’t alone – they’ve been joined in their opposition to coal export by the Quinalt, Cowlitz, Nez Perce and Yakama tribes, as well as the Associated Tribes of Northwest Indians, the Coast Salish Gathering, and the Columbia River Inter-Tribal Fish Commission.

Totem Pole Journey - Lummi Nation

Photo from Kwel Hoy': A Totem Pole Journey - courtesy of Paul K. Anderson

Public opposition to the proposed terminals is reaching unprecedented levels.  Recent polling results show that public support for the terminals is declining and opposition mounting. A majority of residents in both Washington and Oregon now oppose coal exports.  It is also clear from the polling results and other evidence that the intensity of the opposition is much stronger and deeper than expressed support.  The more than 125,000 comments on the Gateway Pacific Terminal scoping and the more than 16,000 comments on environmental permits for the Morrow Pacific project set records in both Washington and Oregon.   On Thursday September 19 2013, opponents of the Millennium project far outnumbered supporters in a hearing held in Longview. Although the scoping period is only beginning for the Millenium project, the state already received over 7700 comments, of which all but 183 are expressing opposition or serious concerns.

The Financial Challenges Keep Piling Up

Ambre Revenue Graph - SightlineAmbre Energy continues to send clear signals that they lack the investment backing and financial stability to complete the two projects they hope to build. 

In August, Ambre and Cloud Peak announced  that they were unable to settle a lawsuit relating to their joint ownership of the Decker mine.  Late last year, the companies had indicated that Ambre would purchase Cloud Peak’s 50% interest.  After several missed deadlines, the companies stated that the settlement was not moving forward, apparently due to Ambre’s inability to raise the necessary $130 million, according to the Sightline Institute. It may be a telling sign that no one is willing to front Ambre the cash to take control of Decker, which produces relatively high energy-density coals compared to other PRB mines and is geographically well positioned for west coast exports. 

This is just the latest evidence of Ambre’s financial challenges, which were well documented in a Sightline report from February 2013 which The Australian termed “well researched” and damning.  The most recent indication of Ambre’s financial uncertainty comes from the Australian Securities & Investments Commission (ASIC), who recently rejected an application by the company to postpone holding its annual general meeting and publishing results – Ambre’s third such request in the last three years (they still haven’t published their 2012 results or held their annual general meeting).  Aside from their difficulties in settling with Cloud Peak, renegotiating the terms of convertible notes by South Korean power generators (Ambre’s future customers) seems to be behind Ambre’s secrecy and noncompliance with the ASIC.   

As a money-losing start-up company with no history of successful projects, it is unclear where Ambre hopes to raise the more than one billion dollars that its North American President, Everett King, has acknowledged will be needed to complete the Millennium and Morrow Pacific projects.  This challenge is likely to prove particularly daunting in light of the current market conditions and growing analyst consensus that the “window for coal export projects is closing.” 

Meanwhile, over in the Powder River Basin (PRB), financial challenges are infecting railroad projects and new leases.  Officials for the Tongue River Railroad - owned by BNSF Railway, Arch Coal, and Forrest Mars Jr. – asked federal regulators to postpone the environmental analysis until next year due to budget challenges.  This will delay the issuance of the draft EIS, which is expected to outline “significant environmental impacts” from the 42-mile railroad, the only possible access method way for Arch Coal to get coal from the proposed Otter Creek coal tracts in the Powder River Basin mine to export markets.

In a first for Wyoming, a federal Powder River Basin coal lease auction received no bids – not even from Cloud Peak Energy, who had submitted the lease application seven years ago for the 149 million tons tract next to its Cordero Rojo mine. 

That’s right.  Zero.

Citing market conditions and political and regulatory uncertainty, Cloud Peak concluded that no company could extract the coal profitably.  On Wednesday September 18 2013, the BLM rejected a bid by the Kiewit Mining Properties for the Hay Creek II coal lease, citing that the bid did not meet fair market value.  The bid, at $0.21 per mineable ton, is one-fifth of what Peabody Energy paid for federal coal tracts last year.

“This represents a high degree of uncertainty about whether coal will stay robust in the future”, said the director of the University of Wyoming School of Energy Resources.  “The bottom has just dropped out of the market.”

Running out of options

So, why are these companies still pushing ahead with these projects if they’re so burdened by financial, legal, and regulatory challenges?  When it comes to future growth, coal companies that have a major presence in the Powder River Basin – especially a pure play PRB company like Cloud Peak Energy – simply don’t have a bright future.  Coal in the US is declining.  Export markets are their last hope, and it is getting harder and harder to see light at the end of that tunnel.

Light tunnel

Take Cloud Peak.  Cloud Peak has repeatedly stated that its future growth prospects are tied to developing an “export related complex” with a proposed expansion of its Spring Creek Mine and new mines at Youngs Creek and on the Crow Reservation.  The company is currently shipping coal through an export terminal in British Columbia, but they are clearly struggling to make a significant profit in exporting coal. In Cloud Peak’s 2nd quarter earnings report, the company noted earnings of $2.8 million on 1.4 million tons of coal shipped to Asian markets through the Westshore terminal in British Columbia.  That was up .4 million tons from the same period in 2012, but Q2 2013 saw a “19.6% decline in revenues from [their] logistics services business due to lower international prices for seaborne delivered coal”.  Also worth noting is the fact that of the $2.8 million in earnings from its international sales, Cloud Peak earned $2.6 million from a “hedging program”, essentially betting against its own product.  Clark Williams-Derry’ has an excellent post on why this is a really big deal

Don’t Hold Your Breath

It seems clear that if one of the strongest Powder River Basin players is struggling to make any money in seaborne coal at today’s prices, it will be very hard for any company to enter this market unless prices rise significantly.  With all of the project-specific legal, regulatory, and financial challenges continuing to mount, we’re not holding our breath. Too bad for some of the coal companies, but  people around the world can begin to breathe easier with less coal pollution choking our atmosphere.   

 

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