Fade To Black
Is dirty old coal making a comeback? Maybe by default. Post-Fukushima Daiichi, support for new nukes has melted down. Middle Eastern unrest and a virtual ban on drilling in the Gulf of Mexico are rocking the stability (and price) of oil supplies. Controversy over hydraulic “fracking” is sidelining development of America’s shale-trapped natural gas. Wind and solar power are hopelessly unscalable and unreliable.Hello, anthracite. Coal still produces 47% of electricity in the U.S. Even if the Environmental Protection Agency has its way with new emissions regulations–they’re target practice in the Republican House these days–coal would still generate 40% of all domestic juice, double the current share of natural gas and nuclear power. “Energy access is a human right,” insists Gregory Boyce, chief executive of Peabody Energy, the world’s biggest coal company. That’s not the voice of American arrogance. That’s the new credo of the developing world: For the 1.5 billion people around the globe with no electricity at all, coal, the most plentiful of fuels, is still the cheapest alternative.
Outside the U.S., which burns 1 billion tons of coal a year, demand is soaring. China’s consumption has doubled in a decade, to 3.6 billion tons a year, or half the world’s supply. Credit Suisse forecasts a continued surge to 4.4 billion tons a year in 2015. In India demand is up 50% since 2005 and growing so quickly the nation is facing a shortage of 200 million tons a year by 2014.
Boyce saw this coming. When he became chief operating officer of Peabody in 2003 he knew that if the company were to expand it wouldn’t be by sticking around North America. He had made his first visit to China in 2002 while running the global energy portfolio for mining giant Rio Tinto, dealing with the power elite in Beijing and the ports in Guangdong, trying to understand how that country, while becoming a leading importer of raw commodities, was still self-sufficient in coal. China was then mining 1.9 billion tons a year; Boyce doubted that even economic autocrats could order enough new mines opened fast enough to meet demand, then growing at 10% a year.
Peabody, Boyce thought, should position itself to sell coal to China, from Australia or the U.S., and maybe even develop mines in the Middle Kingdom–which no Westerner had ever done. “The only thing I can guarantee,” he told skeptical investors eight years ago, “is if we never go into China, then ten years from now we’ll be looking back and asking, ‘Why didn’t we try?’”
To underscore the strategic shift, Boyce spun off the company’s Appalachian mines (low-growth, low-profit underground operations) into a new listed company, Patriot Coal. Describing the move, Boyce points out the window of his office in St. Louis which looks due east, directly through the famous Gateway Arch on the banks of the Mississippi River. “Rather than look that way through the arch to the east, we looked the other way, to the Far East,” he says.
No one questions him now. Since Boyce took over Peabody shares are up tenfold (even when excluding the $2.3 billion market value of the Patriot spinoff) and output up 37% to 250 million tons a year. Earnings have climbed sevenfold to $800 million on sales of $7 billion in 2010, and Peabody’s market cap of $18 billion is more than 50% greater than the next biggest American miner, Consol Energy. Peabody is the only U.S. coal producer with a mine outside the country. International operations now generate half of Peabody’s earnings, up from only 2% in 2003.
That’s just a start: Peabody’s nascent projects in China aren’t even in operation yet. It’s the only non-Chinese company with a stake in GreenGen, a zero-emissions coal power plant project. This year it announced plans to develop two other energy centers–surface mines integrated with ultramodern power plants, one of which aims to remove and trap carbon dioxide emissions. In neighboring Mongolia Peabody hopes to join a consortium developing what could be the world’s biggest seam of high-priced metallurgical coal (used to smelt iron in the production of steel).
Boyce’s China strategy began in Australia, where coal is plentiful and demand relatively low. The proximity of mines to ports means it costs about $7 to move a ton to market, versus $40 in the U.S. Peabody bought its first big Aussie mines, in 2004, from German firm RAG Coal for $500 million. Two years later it added Excel Coal for $1.5 billion. Critics thought Peabody was paying too much because China was still supplying its own needs. “We were the first to say they will soon be a net importer,” says Boyce. Competitors wised up: In 2010 Peabody was stymied in its attempts to buy Macarthur Coal. It now ships some 30 million tons a year from Down Under.
Meanwhile, Boyce had been laying groundwork in China, visiting government officials overseeing the likes of Huaneng Power, the world’s largest electric utility. Peabody opened a Beijing office in 2005 and a trading desk soon after–the best way, says Boyce, to build trust in the market while gleaning information.
As if on cue, China flipped from being a net exporter to importing 150 million tons last year. India’s demand is surging, too. Peabody would love to help meet the need with U.S. supplies, if only the anticoal crowd would stop fighting its plan to build a $500 million export terminal near Seattle.
But rather than just sell China other countries’ coal, Boyce wants to mine it in China. “Partnerships and relationships are extremely important,” Boyce says. “There’s no reason to get in a hurry. That resource in the ground isn’t going anywhere. The only thing you have to worry about is if someone else is going to lock it up.”
Why would China want to share its anthracitic hoard with Peabody? To gain technical know-how. Most of China’s tons come from underground mines, which exact a dangerously high toll. Last year 2,500 Chinese miners reportedly died in accidents, an appalling number to be sure, but down from 7,000 in 2002. Peabody can mine on a massive scale, more safely. “We’re going to focus on bringing large-scale surface mining,” says Boyce. In Wyoming’s Powder River Basin, Peabody operates the largest mine in the world. Called North Antelope Rochelle, it moves 100 million tons a year of low-sulfur coal, with giant cranes scooping up 100 tons at a time and dumping it into trucks the size of a three-story house. “When they see what we do in Wyoming,” says Boyce, “the eyes get big.” Peabody’s 2010 safety record of 2.7 incidents per 200,000 hours worked is better than those in retailing, agriculture and construction.
Boyce also wanted to be dealt in on a new game. He learned a consortium of Chinese electric utilities, led by Huaneng, was picking up the clean-coal ball dropped by the U.S. Under President George W. Bush the Energy Department had backed FutureGen–a $1.5 billion project to build the world’s first zero-emissions coal-fired power plant–but cut off support in 2008. Peabody had been involved with FutureGen, so Boyce asked to join as the only non-Chinese partner in a project called GreenGen, buying a 6% stake.
The first, $1 billion phase of GreenGen rolls out this year: a 250-megawatt coal gasifier designed by Huaneng’s Thermal Power Research Institute, north of Beijing. The gasifier heats the coal, turning it into a stream of clean-burning synthetic natural gas plus a stream of CO2, which can be captured. GreenGen’s second phase will involve piping that CO2 from the plant and injecting it–in the form of a supercritical liquid brought above the boiling point under ultrahigh pressure–into mature oilfields in Bohai Bay, the site of huge oil reserves off China’s coast. It’s a trick that Anadarko Petroleum in Wyoming and Statoil in the North Sea have been using for the past decade: The CO2 pushes up more oil and becomes eternally trapped in the reservoir rock.
Designing gasifiers is hardly Peabody’s forte. General Electric, Siemens, Shell and others have been perfecting their own models for decades. So why do it? Because if GreenGen succeeds, 20 more plants will be built–and not just in China. EmberClear, based in San Francisco but listed on the Toronto Exchange, has already licensed GreenGen’s gasification technology and secured permits to build a replica in Good Spring, Pa. adjacent to a coal mine, with the aim of injecting CO2 into the state’s plentiful shale gas reservoirs. In January Huaneng and Columbus, Ohio utility American Electric Power (along with China National Offshore Oil Co.) announced a project to inject carbon emissions from AEP’s Mountaineer plant into U.S. oil- and gas fields.
Peabody will soon be scraping dirt in central Asia. Along with Huaneng it plans to build a 12-million-ton-per-year surface mine and a 1,200-megawatt plant in Xilinguole, Inner Mongolia. Another first: Some of the CO2 will be captured and sent through a process developed by Calera of Los Gatos, Calif. to sequester the carbon in cement for construction. It’s done by bubbling the CO2 through an alkaline brine, then mixing the resulting slurry with calcium chloride to yield a solid carbonate (see chart, below).
Peabody has invested $15 million in Calera (alongside venture capital honcho Vinod Khosla) on the strength of its test plant, connected to a gas-fired generator in Monterey Bay, Calif. In a study last year researchers at UC, Santa Barbara found Calera had the most cost-effective of four technologies: If integrated into an industrial complex, Calera could use by-products from plastics manufacturing for its inputs. Factor in the proceeds of selling the cement outputs, and it could reduce the cost of bringing coal down to the emissions quality of natural gas to less than 5 cents per kilowatt-hour. In theory.
“It’s green scamming–clean coal is an idea dreamed up by Madison Avenue,” scoffs Bruce Nilles, deputy conservation director at the Sierra Club, who has followed Peabody for years. “We remain highly skeptical that [GreenGen] can be done and that the economics to put the carbon underground makes any sense.”
Indeed, Boyce hasn’t yet disproved the doubters. In Lively Grove, Ill. Peabody and seven nonprofit power utilities are spending $4 billion to build a new underground mine and 1,600MW power plant. Although this Prairie State Energy Campus will feature advanced technology to scrub emissions clean, there’s no carbon capture. None either for Peabody’s recently announced Wucainan Energy Center project with the Yankuang Group in Xinjiang, which will feature a 20-million-ton-per-year surface mine, a coal gasifier and a 2,000MW supercritical power plant.
But coal is in Peabody’s future as far as Boyce can imagine. North of China, in the Gobi Desert of Mongolia, lies the world’s largest deposit of metallurgical coal, 6.5 billion tons. Met coal is ultrahard, high in heat content, vital for smelting iron ore and, as a result, sells for 20 times more than Wyoming’s subbituminous coal, or roughly $300 per ton. For the rights to develop this mother lode, Peabody is vying with mining giants Vale and Xstrata, steel giant ArcelorMittal, China’s Shenhua Group and a consortium of Russian and Japanese companies. Boyce feels good about Peabody’s chances; he opened an office in Ulan Bator in 2007 and has a small reserve block with a Chinese partner there. To help deal with what Boyce considers his biggest challenge–developing good managers–Peabody has hired Mongolian engineers to work in Wyoming and sent Mongolian engineering students to the University of Arizona.
“You have to be patient about this process,” Boyce says. “If you go in with a specific concept and expect it to happen within two months, don’t buy your ticket to China.”
Outside the U.S., which burns 1 billion tons of coal a year, demand is soaring. China’s consumption has doubled in a decade, to 3.6 billion tons a year, or half the world’s supply. Credit Suisse forecasts a continued surge to 4.4 billion tons a year in 2015. In India demand is up 50% since 2005 and growing so quickly the nation is facing a shortage of 200 million tons a year by 2014.
Boyce saw this coming. When he became chief operating officer of Peabody in 2003 he knew that if the company were to expand it wouldn’t be by sticking around North America. He had made his first visit to China in 2002 while running the global energy portfolio for mining giant Rio Tinto, dealing with the power elite in Beijing and the ports in Guangdong, trying to understand how that country, while becoming a leading importer of raw commodities, was still self-sufficient in coal. China was then mining 1.9 billion tons a year; Boyce doubted that even economic autocrats could order enough new mines opened fast enough to meet demand, then growing at 10% a year.
Peabody, Boyce thought, should position itself to sell coal to China, from Australia or the U.S., and maybe even develop mines in the Middle Kingdom–which no Westerner had ever done. “The only thing I can guarantee,” he told skeptical investors eight years ago, “is if we never go into China, then ten years from now we’ll be looking back and asking, ‘Why didn’t we try?’”
To underscore the strategic shift, Boyce spun off the company’s Appalachian mines (low-growth, low-profit underground operations) into a new listed company, Patriot Coal. Describing the move, Boyce points out the window of his office in St. Louis which looks due east, directly through the famous Gateway Arch on the banks of the Mississippi River. “Rather than look that way through the arch to the east, we looked the other way, to the Far East,” he says.
No one questions him now. Since Boyce took over Peabody shares are up tenfold (even when excluding the $2.3 billion market value of the Patriot spinoff) and output up 37% to 250 million tons a year. Earnings have climbed sevenfold to $800 million on sales of $7 billion in 2010, and Peabody’s market cap of $18 billion is more than 50% greater than the next biggest American miner, Consol Energy. Peabody is the only U.S. coal producer with a mine outside the country. International operations now generate half of Peabody’s earnings, up from only 2% in 2003.
That’s just a start: Peabody’s nascent projects in China aren’t even in operation yet. It’s the only non-Chinese company with a stake in GreenGen, a zero-emissions coal power plant project. This year it announced plans to develop two other energy centers–surface mines integrated with ultramodern power plants, one of which aims to remove and trap carbon dioxide emissions. In neighboring Mongolia Peabody hopes to join a consortium developing what could be the world’s biggest seam of high-priced metallurgical coal (used to smelt iron in the production of steel).
Boyce’s China strategy began in Australia, where coal is plentiful and demand relatively low. The proximity of mines to ports means it costs about $7 to move a ton to market, versus $40 in the U.S. Peabody bought its first big Aussie mines, in 2004, from German firm RAG Coal for $500 million. Two years later it added Excel Coal for $1.5 billion. Critics thought Peabody was paying too much because China was still supplying its own needs. “We were the first to say they will soon be a net importer,” says Boyce. Competitors wised up: In 2010 Peabody was stymied in its attempts to buy Macarthur Coal. It now ships some 30 million tons a year from Down Under.
Meanwhile, Boyce had been laying groundwork in China, visiting government officials overseeing the likes of Huaneng Power, the world’s largest electric utility. Peabody opened a Beijing office in 2005 and a trading desk soon after–the best way, says Boyce, to build trust in the market while gleaning information.
As if on cue, China flipped from being a net exporter to importing 150 million tons last year. India’s demand is surging, too. Peabody would love to help meet the need with U.S. supplies, if only the anticoal crowd would stop fighting its plan to build a $500 million export terminal near Seattle.
But rather than just sell China other countries’ coal, Boyce wants to mine it in China. “Partnerships and relationships are extremely important,” Boyce says. “There’s no reason to get in a hurry. That resource in the ground isn’t going anywhere. The only thing you have to worry about is if someone else is going to lock it up.”
Why would China want to share its anthracitic hoard with Peabody? To gain technical know-how. Most of China’s tons come from underground mines, which exact a dangerously high toll. Last year 2,500 Chinese miners reportedly died in accidents, an appalling number to be sure, but down from 7,000 in 2002. Peabody can mine on a massive scale, more safely. “We’re going to focus on bringing large-scale surface mining,” says Boyce. In Wyoming’s Powder River Basin, Peabody operates the largest mine in the world. Called North Antelope Rochelle, it moves 100 million tons a year of low-sulfur coal, with giant cranes scooping up 100 tons at a time and dumping it into trucks the size of a three-story house. “When they see what we do in Wyoming,” says Boyce, “the eyes get big.” Peabody’s 2010 safety record of 2.7 incidents per 200,000 hours worked is better than those in retailing, agriculture and construction.
Boyce also wanted to be dealt in on a new game. He learned a consortium of Chinese electric utilities, led by Huaneng, was picking up the clean-coal ball dropped by the U.S. Under President George W. Bush the Energy Department had backed FutureGen–a $1.5 billion project to build the world’s first zero-emissions coal-fired power plant–but cut off support in 2008. Peabody had been involved with FutureGen, so Boyce asked to join as the only non-Chinese partner in a project called GreenGen, buying a 6% stake.
The first, $1 billion phase of GreenGen rolls out this year: a 250-megawatt coal gasifier designed by Huaneng’s Thermal Power Research Institute, north of Beijing. The gasifier heats the coal, turning it into a stream of clean-burning synthetic natural gas plus a stream of CO2, which can be captured. GreenGen’s second phase will involve piping that CO2 from the plant and injecting it–in the form of a supercritical liquid brought above the boiling point under ultrahigh pressure–into mature oilfields in Bohai Bay, the site of huge oil reserves off China’s coast. It’s a trick that Anadarko Petroleum in Wyoming and Statoil in the North Sea have been using for the past decade: The CO2 pushes up more oil and becomes eternally trapped in the reservoir rock.
Designing gasifiers is hardly Peabody’s forte. General Electric, Siemens, Shell and others have been perfecting their own models for decades. So why do it? Because if GreenGen succeeds, 20 more plants will be built–and not just in China. EmberClear, based in San Francisco but listed on the Toronto Exchange, has already licensed GreenGen’s gasification technology and secured permits to build a replica in Good Spring, Pa. adjacent to a coal mine, with the aim of injecting CO2 into the state’s plentiful shale gas reservoirs. In January Huaneng and Columbus, Ohio utility American Electric Power (along with China National Offshore Oil Co.) announced a project to inject carbon emissions from AEP’s Mountaineer plant into U.S. oil- and gas fields.
Peabody will soon be scraping dirt in central Asia. Along with Huaneng it plans to build a 12-million-ton-per-year surface mine and a 1,200-megawatt plant in Xilinguole, Inner Mongolia. Another first: Some of the CO2 will be captured and sent through a process developed by Calera of Los Gatos, Calif. to sequester the carbon in cement for construction. It’s done by bubbling the CO2 through an alkaline brine, then mixing the resulting slurry with calcium chloride to yield a solid carbonate (see chart, below).
Peabody has invested $15 million in Calera (alongside venture capital honcho Vinod Khosla) on the strength of its test plant, connected to a gas-fired generator in Monterey Bay, Calif. In a study last year researchers at UC, Santa Barbara found Calera had the most cost-effective of four technologies: If integrated into an industrial complex, Calera could use by-products from plastics manufacturing for its inputs. Factor in the proceeds of selling the cement outputs, and it could reduce the cost of bringing coal down to the emissions quality of natural gas to less than 5 cents per kilowatt-hour. In theory.
“It’s green scamming–clean coal is an idea dreamed up by Madison Avenue,” scoffs Bruce Nilles, deputy conservation director at the Sierra Club, who has followed Peabody for years. “We remain highly skeptical that [GreenGen] can be done and that the economics to put the carbon underground makes any sense.”
Indeed, Boyce hasn’t yet disproved the doubters. In Lively Grove, Ill. Peabody and seven nonprofit power utilities are spending $4 billion to build a new underground mine and 1,600MW power plant. Although this Prairie State Energy Campus will feature advanced technology to scrub emissions clean, there’s no carbon capture. None either for Peabody’s recently announced Wucainan Energy Center project with the Yankuang Group in Xinjiang, which will feature a 20-million-ton-per-year surface mine, a coal gasifier and a 2,000MW supercritical power plant.
But coal is in Peabody’s future as far as Boyce can imagine. North of China, in the Gobi Desert of Mongolia, lies the world’s largest deposit of metallurgical coal, 6.5 billion tons. Met coal is ultrahard, high in heat content, vital for smelting iron ore and, as a result, sells for 20 times more than Wyoming’s subbituminous coal, or roughly $300 per ton. For the rights to develop this mother lode, Peabody is vying with mining giants Vale and Xstrata, steel giant ArcelorMittal, China’s Shenhua Group and a consortium of Russian and Japanese companies. Boyce feels good about Peabody’s chances; he opened an office in Ulan Bator in 2007 and has a small reserve block with a Chinese partner there. To help deal with what Boyce considers his biggest challenge–developing good managers–Peabody has hired Mongolian engineers to work in Wyoming and sent Mongolian engineering students to the University of Arizona.
“You have to be patient about this process,” Boyce says. “If you go in with a specific concept and expect it to happen within two months, don’t buy your ticket to China.”
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