Analysts have long predicted coal mines in the Powder River Basin would need to close. But few would have singled out Black Thunder as the mine to take the hit.
Black Thunder is the second-largest coal mine in the United States. It boasts a deep seam that produces an energy-rich variety of coal, a combination that has long made it one of the most profitable mines in the Powder River Basin of Montana and Wyoming.
In 2019, Black Thunder produced roughly 72 million tons of coal, or about 10% of total U.S. production, according to federal figures.
But the mine’s owner said yesterday that it plans to wind down production at the massive facility in the coming years. Arch Resources Inc. said it anticipates production at Black Thunder will register about 55 million tons this year. The St. Louis-based mining company expects to halve production in the coming years to around 27.5 million tons.
The announcement represents a continuation of Arch’s pivot away from thermal coal, used in electricity generation, as it reorients its business toward metallurgical coal, used in steel fabrication (Climatewire, Sept. 30).
Arch executives made clear in a conference call announcing their quarterly earnings yesterday that they would entertain options to sell Black Thunder. But company officials stressed that any potential buyer would have to be able to cover the mine’s extensive reclamation obligations.
“What we do not want to do, and I don’t think our shareholders want, is to get into a situation where we lose control of the asset that has some potential future liabilities,” Arch CEO Paul Lang told analysts. “We have seen that play out in the Powder River Basin, and we are not going to do that.”
In the meantime, he said, the company will pursue a “systematic winding down” of Black Thunder and its other thermal coal mines. Black Thunder accounts for almost 90% of Arch’s thermal coal output.
“Prior to this spring, the industry was going through a transformation that is now being accelerated by the global health crisis,” Lang said. “Arch is going to embrace these new realities as opposed to fighting them by continuing our pivot towards coking coal markets and pursuing a reduction and exposure to our thermal assets.”
The announcement follows a decision by federal regulators to block Arch’s proposed joint venture with Peabody Energy Corp. on antitrust grounds. Peabody operates several mines in the Powder River Basin and is the nation’s largest coal mining company by volume.
But even more damaging to Black Thunder’s future has been the dramatic contraction of America’s coal industry. About 140 coal units representing roughly 15% of U.S. capacity have closed over the last four years.
Just as challenging is the fact that coal plants are running less. Last year, in a likely first, the capacity factor for the U.S. coal fleet dipped below 50%.
The decline has created a smaller U.S. coal market. Production in the Powder River Basin fell, but the number of mines there remains unchanged. That has produced an oversupplied market for the region’s coal, leading many analysts to predict that mine closures are on the way.
But most of those predictions assumed the shuttered mines would be in the northern part of the basin, where more coal has been dug out of the ground and the quality of what remains is poorer (Climatewire, Nov. 4, 2019).
“It’s a game of chicken of who’s going to go first,” said Gregory Marmon, an analyst who tracks the industry at consulting firm Wood Mackenzie.
In the immediate term, Arch’s decision to throttle back production at Black Thunder will likely help other mines in the basin, he said. Wood Mackenzie, like many analysts, is predicting a modest rebound in coal generation next year, an assumption based on expectations that the economy will improve and natural gas prices will rise as drillers curtail output.
Still, any relief would likely be temporary. Black Thunder shows why. In many respects, the challenges facing the mine can be traced to places like Minnesota, where Xcel Energy operates the Sherburne County Generating Station.
Sherco, as the plant is commonly known, purchased 11.4 million tons of coal from Black Thunder between 2016 and 2019, according to federal figures, making the Minnesota coal plant Arch’s second-largest customer over that time.
But the plant’s coal purchases have plummeted in 2020. Through the first half of this year, orders were down 1.3 million tons, or roughly 66% compared to the same time last year.
That is not unique. Coal generation across the United States is down this year because of weak electricity demand thanks to the coronavirus. More concerning for Arch and Black Thunder is what happens next.
In July, Xcel received approval from Minnesota regulators to idle one of Sherco’s three units in the spring and fall. It will close one of the plant’s units for good in 2023, then shut a second in 2026 before closing the facility down altogether in 2030.
Sherco is not alone. Xcel plans to close two units at its Comanche Generating Station in Colorado in 2023 and 2025, respectively, leaving one unit operating at a plant that bought 8.6 million tons of coal from Black Thunder between 2016 and 2019.
In Michigan, Consumers Energy has signaled it may move forward the retirement of units at its J.H. Campbell plant from 2031 to 2025. Campbell purchased 9.1 million tons of coal from Black Thunder in recent years, the fourth most of any plant.
“Every power plant closed is a lost customer. That is the part of the issue the PRB faces,” Marmon said, referring to the Powder River Basin. “If you lose a major customer like that, you have to compete on price to take the customer of another mine.”
Black Thunder might be the first mine in the Wyoming and Montana basin to drastically scale back production. It likely won’t be the last.
Reprinted from Climatewire with the permission of E&E News. Copyright 2020. E&E News provides essential news for energy and environment professionals at www.eenews.net.