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Burned out

Powder River Basin coal is fast becoming a "stranded asset"

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Nine years ago, Burlington Northern Santa Fe Railway Company embarked on a campaign to improve its freight service in and out of the coal-rich Powder River Basin of Montana and Wyoming.

Times were good, the coal industry was booming and BNSF was getting political pressure to beef up its Powder River Basin infrastructure to help meet the nation's seemingly endless appetite for fossil-fuel energy.

"The administration and Capitol Hill strongly believed that our investment in our coal network was insufficient and that much more investment was needed if we were to meet the forecast of demand going forward," Matthew K. Rose, the BNSF executive chairman, recalled the other day at the U.S. Energy Information Administration's annual conference in Washington. "We invested heavily, and now the capacity and the operations of the Powder River Basin lines are very, very impressive."

Then came Rose's headline remark: "Less than 10 years later, I don't anticipate that we'll see that level of coal volume again. That leaves us with millions of dollars in investment in what will eventually be stranded assets."

Say again? BNSF, the second biggest railroad in the country and the main regional rival to Union Pacific Railroad, the No. 1 rail company, sees an end to growth in the Powder River Basin coal industry?

That's what the man said.

And BNSF isn't alone. Union Pacific, which splits the Powder River Basin market with BNSF, reports similar hurdles, as noted in an item a few weeks ago on Forbes.com: "Even in late 2014, Union Pacific's management was forecasting—and adding manpower and equipment fora fantastic 2015. But so far, this year has proved to be a disappointment. The biggest surprise has come in coal. Electric utilities shifted en masse from coal to natural gas as gas prices dropped sharply in late 2014 and early 2015."

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The railroad industry's hard realism stands in contrast to Peabody Energy's upbeat insistence that a coal-market uptick is imminent. One thing about Peabody, the largest private coal company in the world, is that it is consistent in its outlook, even if it is consistently wrong.

BNSF, on the other hand, is a pragmatic company with pragmatic leadership (wholly owned by Warren Buffett's Berkshire Hathaway) that sees little sign that the coal producers' dreams are likely to come true.

Powder River Basin coal is competitively priced, but its market falls short of what the region's four major producers—Peabody, Alpha Natural Resources, Arch Coal and Cloud Peak Energy—need to achieve sustainable growth. The entire business model for the basin's coal-production expansion turns on exports that would go overseas via as-yet-unbuilt export terminals in the Pacific Northwest. But buyers for that coal are becoming increasingly hard to find, with many looking to other energy sources. Unfortunately for U.S. coal producers, global seaborne thermal-coal prices are poised, by most accounts, to stay low for years to come.

Rose's admission may not have been an easy one to make. He said Powder River Basin coal now accounts for about 20 percent of BNSF's traffic, down from 25 percent, and that it is "the fastest-changing story in railroading."

He noted also that U.S. electricity producers rely on coal today for less than 40 percent of their energy needs, down over 50 percent from a decade ago, and that he expects further "significant volume disruptions" as energy markets continue to evolve, in part as a result of pollution regulations.

Rose added that the railroad's loss of coal business is not going to be offset by shale-oil shipments. Ultimately, it all adds up to a net loss on the fossil fuel side of the railroad business. In the end, it always comes down to business, and no business wants to be left with stranded assets.

Tom Sanzillo is a contributor to Writers on the Range, a column service of High Country News (hcn.org). He is the director of finance for the Institute for Energy Economics and Financial Analysis, based in Cleveland, Ohio.

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