Oct. 27, 2020 Seeking Alpha.com by Kirk Spano https://seekingalpha.com/article/4381730-no-debate-oil-shale-is-doomed
- Shale has huge competition to fill remaining oil demand.
- Zero cash takeovers for Permian producers is a very bad signal for the rest of the industry.
- Debt-laden shale companies simply cannot pay down debt at likely demand and prices – a last wave of bankruptcies and takeunders is coming.
- There might only be four or fewer independent U.S. oil and gas producers worth considering an investment in.
- I own puts on the SPDR Oil & Gas E&P ETF and three oil stocks because I expect retests of 52-week lows over the winter.
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Oil stock investors have become the biggest bag holders in the market the past several years. Those still holding onto oil stocks in the hopes for a brighter future and rebound are missing all the points I laid out in June of 2019 here: Here’s Why Oil Stocks Are Priced For Armageddon.
In the recent presidential debate, Joe Biden took the bait and said he’d see through a transition away from oil. I’m not sure why this caused a stir. Whoever is president next will have to do that as the secular trend away from oil is unstoppable.
Over the next decade, we will see oil demand reach its 2019 highs again, but then flatten and fall before the end of the decade. This spells doom for most oil shale drillers as they are heavily leveraged and sitting on second or third best “rock.”
If you own oil stocks, I agree with Pioneer Resources (PXD) CEO Scott Sheffield who said: “There’s only going to be three or four independents that are investable by shareholders…” I see most of the oil companies in the SPDR S&P 500 Oil & Gas E&P ETF (XOP) going bankrupt or merging to become married zombies.
I sold my most of my oil stocks in summer 2019 and the rest in January 2020. I currently own puts on three oil company stocks and the SPDR S&P 500 Oil & Gas E&P ETF (XOP) on what I expect will be a very rough winter in the oil patch.
Oil Demand Growth Is Gone
Oil companies from BP (BP) to Exxon Mobil (XOM) are adjusting their expectations on oil demand. As have OPEC, the IMF, EIA and IEA. All are revising their oil demand expectations down.
There’s a realization that technology for ICE vehicles, hybrids and EVs were all driving demand down. Now, coronavirus has likely accelerated the work from home economy to the point of no return. Many people will be working remotely, at least more than they were, forever.
Here’s BP’s latest outlook framework. I think the orange line is most likely, but the blue “net zero” is more likely than the green “business-as-usual.”
The EIA’s short-term energy outlook does not have demand rebounding until 2022 at least. Remember, this is Donald Trump’s EIA. They’re pretty much paid to be bullish.
Even OPEC revised demand down. The APT case is more realistic than the reference by far, in my opinion.
What’s most important for the OPEC scenarios is the explicit mention of technology. That’s the bogeyman for oil. Technology is simply making oil less viable economically.
Bloomberg provides a nice composite view of the long-term oil outlook among different forecasters. In each case, I’d ask you to consider motivations.
While at CES 2020 (January seems so long ago), it became apparent listening to auto industry engineers and executives that by 2025 the ICE engine as we know it will be mostly gone for sale, only super efficient models will be left. The reality that set in though was that EVs could dominate new car sales by 2030.
Couple that with the coronavirus causing a permanent to at least partial work from home arrangements for millions of people and it’s easy to see that oil demand growth is essentially dead, excluding a rebound to full economic activity after the pandemic.
Shale Has Major Competition
There’s now jockeying for position to see who will supply the oil for the rest of the oil age. Like any other commodity market, the lowest-cost producers will be the winners (or slowest losers). That means that OPEC will eventually go back into “drill, baby, drill” mode as soon as enough oil inventory burns off.
If you ask one question about oil ask this: Why would the lowest cost producers not produce?
In the updated graph by Rystad, you can see shale faces some major problems. Already, nearly 40m/d of oil are from existing conventional production. OPEC has the cheapest oil and Russia’s production will only decline slowly.
What’s new in the Rystad analysis is that deepwater is not on par with U.S. shale oil for cost. How did this happen? Primarily that’s from the existing and new deposits around South America. Brazil has several fields that are cost effective. Guyana and Suriname are newer fields that are cost effective and have major commitments from Exxon, Hess (NYSE:HES) (maybe the fourth investable company that Sheffield mentioned), Apache (APC) and Total (TOT) which is a noted bargain hunter.
Consider the reserves of each type of oil shown. Then project out how much oil will be needed in the next few decades. There are going to be a lot of stranded assets.
For shale producers that means that only the lowest cost oil will be produced. Given the massive amount of “high grading” in recent years, that means only the best remaining assets are competitive. Other than in the Permian, there’s very little cost competitive oil shale left.
The best “rock” is primarily in the Permian Basin where most U.S. production growth has been the past few years. But even for Permian producers there’s bad news.
Zero Dollar Takeovers Are A Sign
Recently, two big Permian Basin independent producers were acquired. Neither company was able to get any cash in their deals the way Anadarko was in a bidding war just two years ago.
The Occidental Petroleum (OXY) purchase of Anadarko was 78% in cash of $44 billion. A portion of that cash was from expensive debt issued by Berkshire Hathaway (NYSE:BRK.A) (BRK.B) that also returned an equity kicker to Buffett’s company.
In one of the past week’s deals, ConocoPhillips (COP) purchased Concho Resources (CXO) for $9.7 billion or about a 15% premium to its prior day’s closing price. The deal was all stock with no cash to Concho shareholders.
In the other deal, Pioneer Resources (PXD) acquired Parsley Energy (PE) for $7.6 billion – again all stock and no cash. This is a deal I suggested should happen back in May 2019:
“Pioneer also is a merger candidate with Concho Resources, Parsley Energy or Diamondback Energy. I could actually see Pioneer acquire Parsley. In such a transaction, they company would keep the Midland assets and likely sell the Delaware assets.”
from: Permian Pure Play Merger And Takeover Targets
The question that investors should ask is why no cash in these deals. I think that two answers are rather obvious:
First, there are no oil majors with the willingness or ability to offer cash for more oil assets that they can’t use over time. Think about both parts of that statement. Chevron (CVX) and Exxon are both losing money right now.
Chevron recently acquired Noble Energy in another no-cash deal. Exxon is in danger of cutting their dividend. Why would either company buy more oil assets given both have moved forward their expected dates for oil demand destruction? Obviously, they wouldn’t.
Second, although Concho and Parsley are both considered gems of the Permian, it’s entirely possible that neither is as valuable as perceived by many investors. How could that be? Both had significant debt and as we know fracked reserves decline quickly, meaning more capex to keep the treadmill running.
I would submit that with oil prices likely to stay under $60 per barrel another two or three years at least, based on lower demand, massive inventories, a few new large offshore developments and statements made by Saudi Arabia, that frackers simply do not carry anywhere near the value they were once thought to have. Hence, no cash.
The reality is that these deals, even for the best companies in the best U.S. oil basin, really are just survival tactics. Consider what that means for frackers with worse “rock” and worse balance sheets.
Shale Companies Have Massive Debt
The majority of still independent frackers are loaded with overwhelming debt. Those debt loads were based upon fantasies of long-term rising oil demand and at least stable oil prices around $80 per barrel. Reality has not been nearly that bullish.
The SPDR S&P Oil & Gas E&P ETF (XOP) is full of companies with bankruptcy or going to penny stock status risk. Company after company in XOP has massive net debt that without higher oil prices and higher demand they can never hope to repay, much less provide any value to shareholders.
What you see is that XOP companies carry roughly $288 billion in net debt. There’s simply no way, again, echoing Sheffield, that this debt can be repaid by most of the companies.
To be sure, they have assets, but I don’t both show those measures because i believe that net PP&E and total assets are both overstated by double or more. There are so many writedowns coming it’s going to be bloodbath not only for the oil companies, but for bondholders and banks.
The oil shale companies are going to engage in takeunders and mergers of the damaged to stay in business. The natural gas companies also are undergoing mergers and are slightly better condition due to the longer runway for natural gas vs. oil, and the likelihood that natural gas prices rise somewhat as affiliated gas production falls.
This winter, investors also should expect several more bankruptcies among XOP stocks.
Oil Bankruptcies Already Are Everywhere
There have been nearly 250 oil company bankruptcies in the past six years. There are about to be more over the winter. To avoid more pain of falling stock prices, investors should sell most oil stocks and cut their losses.
With debt out of control, oil prices lower than $60/barrel and demand in the dumps, oil bankruptcies have been spiking again. Two of the highest profile have been Chesapeake Energy (OTCPK:CHKAQ) and Whiting Petroleum (WLL). But they are certainly not alone since OPEC decided to try to capture more market share.
The Chesapeake case is interesting in that a dispute with pipelines could take the company from reorganization to liquidation. This bodes very poorly for oil pipeline companies, so keep an eye on that as well. The dividends of several pipelines companies are clearly at risk. If their dividends fall, so too will their share prices.
If Saudi Arabia is right that oil will be around $50 per barrel through 2022 or 2023 then, as the debt numbers above suggest, a lot of oil frackers are in big trouble given their breakevens and accumulated debt.
I think one need look no further than Continental Resources (CLR) for signs of trouble. Its two main basins, the Williston and STACK/SCOOP, both have problems. The cheapest oil in the Williston is gone and the STACK/SCOOP has earthquake problems that limit production and cause disposal costs to be higher.
With nearly $6 billion of net debt and essentially no cash, Continental looks headed down to penny stock territory. I fully expect either a take private at much lower prices or a bankruptcy reorganization. Harold Hamm buying shares is interesting. He’s been very bad the past five years at predicting the oil markets, so I do not know if he has a bankruptcy or take private plan in mind, or if he’s just blinded by his emotions for the company he founded and making a big mistake buying shares.
Occidental Petroleum (OXY) is another company that has been virtually destroyed by the bad judgment of the CEO. Vicki Hollub has virtually destroyed that company through some combination of hubris, greed and wrong analysis. The Anadarko deal will go down as one of the worst takeovers in history.
And now, it turns out the Anadarko board might have allegedly misled about the value of its assets in the Gulf of Mexico. A whistleblower complaint has been filed by an Anadarko engineer that Anadarko’s management deliberately lied about the value of their Shenandoah Field. Now, a shareholder lawsuit is pending alleging that Anadarko executives suppressed this information for years knowing it would be instrumental in selling the company and them getting their change of control bonuses.
Occidental tried to put a good face on things by paying Berkshire Hathaway its latest preferred dividend in cash. They should have paid in shares again. The company has no real cash. And, with oil prices languishing, there’s no way for Occidental to pay its debt by fracking more. In fact, by paying the Berkshire dividend in cash, they’re basically admitting that.
Occidental had hoped to sell more assets for higher prices. But, as the entire world is realizing, there’s no point in buying more reserves. They probably don’t matter. Occidental as a result is stuck with a bunch of junk assets from the Anadarko deal with the huge debt.
Occidental’s real value lies in its conventional assets and a host of small but potential growth assets (CO2, power) intermediate term. The shale assets outside of the Permian have little value. Their large Niobrara position is a third tier asset at best and I believe more of a liability.
Occidental Petroleum is a company that likely goes through a reorg if oil prices stay down. That would put the company possibly under the ownership of Berkshire.
Continental and Occidental are two of the larger holdings in XOP. When scanning the list from most net debt down, you see a host of companies with just massive problems. And now, with a few of the best companies absorbed, what hope does that ETF have?
Buy Puts On XOP
Just to disclaim, I own puts on Occidental, Continental and Exxon (XOM). These are the second or third times I have done this in recent years. So far, all of these trades have been profitable. I have discussed my shorts on Exxon in my “Peak Oil Plateau” webinars.
The weakness across the companies in XOP and the technical analysis are telling me that it’s very likely that the ETF double bottoms here over the winter. Here’s my quick chart showing my expectation for a double bottom on XOP over the winter.
MACD is showing no strength:
RSI has further to fall:
Ultimately, I do think XOP is delisted and SPDR directs investors to the SPDR Select Energy ETF (XLE). XOP is simply becoming not viable.
As such, I have bought a spread of puts for January 2020 at a few strike prices between $40 and $30 on XOP. I expect it to fall to about $29 per share in coming months. I can roll my puts out if necessary as volume on later dated puts become active.
If you use options and are looking for a way to make money on oil stocks, stop debating, flip the switch, sell your oil stocks which are facing major secular headwinds and buy puts on XOP and select oil stocks now.
A MAJOR COAL COMPANY WENT BUST. ITS BANKRUPTCY FILING SHOWS THAT IT WAS FUNDING CLIMATE CHANGE DENIALISM.
Cloud Peak Energy gave contributions to leading think tanks that have attacked the link between the burning of fossil fuels and climate change.
Lee Fang
May 16 2019, 4:20 p.m.
THE BANKRUPTCY OF one of the largest domestic coal producers in the country has revealed that the company maintains financial ties to many of the leading groups that have sowed doubt over the human causes of global warming.
The disclosures are from Cloud Peak Energy, a Wyoming-based coal mining corporation that filed for Chapter 11 bankruptcy on May 10. The company had been battered by low coal prices, including in international markets cultivated by the firm.
The documents in the court docket show that the coal giant gave contributions to leading think tanks that have attacked the link between the burning of fossil fuels and climate change, as well as to several conservative advocacy groups that have attempted to undermine policies intended to shift the economy toward renewable energy. The documents do not include information on the size of the contributions, yet, taken as a whole, the list of groups Cloud Peak Energy helped fund are indicative of how the company prioritized pushing climate denialism. The company did not respond to a request for comment.
The contributions are revealed in a filing that lists recipients of grants, creditors, and contractors. The document shows that Cloud Peak Energy helped fund the Institute of Energy Research, a Washington, D.C.-based group that has dismissed the “so-called scientific consensus” on climate change and regularly criticizes investments in renewable energy as a “waste” of resources.
Several of the groups that receive funding from Cloud Peak Energy have used aggressive tactics to attempt to discredit environmentalists. The Center for Consumer Freedom, one of the groups listed in the coal company’s filing, is part of a sprawling network of front groups set up by a lobbyist named Rick Berman geared toward attacking green groups such as the Sierra Club and Food & Water Watch as dangerous radicals.
Other organizations quietly bankrolled by Cloud Peak Energy have directly shaped state policy. The company provided funding to the American Legislative Exchange Council, a group that provides template legislation to state lawmakers. The model bills promote the fossil fuel agenda. One model bill declares that there is a “great deal of scientific uncertainty” around climate change; others are designed to repeal environmental regulations on coal-burning power plants.
The Montana Policy Institute — a local libertarian think tank that promotes a discredited claim that world temperatures are falling, not rising, and questions whether humans cause climate change — also received funding from the firm.
Cloud Peak Energy, the filing shows, funded Americans for Prosperity, the Koch brothers-backed group that mobilizes political opposition to Democratic politicians and climate regulations. The mining firm also financed Crossroads GPS, a “dark-money” group that funneled millions of undisclosed dollars into Senate races in support of GOP politicians during the 2010 and 2012 election cycles. The Western Caucus Foundation, which supports congressional efforts to deregulate the mining sector and sell off public lands for energy development, received funding as well.
Many of the political dollars listed in the filing appear routine among coal industry firms. The Wyoming coal firm provided financing to an array of trade groups, including the American Coalition for Clean Coal Electricity, the National Mining Association, and the American Coal Council, that lobby legislators on mine industry priorities.Join Our NewsletterOriginal reporting. Fearless journalism. Delivered to you.I’m in
Four years ago, falling coal prices led to a series of bankruptcies of the largest coal companies in America. The filings, first reported by The Intercept, similarly revealed that the coal industry had financed a range of activists and organizations dedicated to spreading doubt about the science underpinning climate change. Alpha Natural Resources disclosures showed that the firm had quietly paid Chris Horner, an activist known for hounding climate scientists.
Many political organizations are organized as 501(c) nonprofits, an Internal Revenue Service designation that allows donors to remain anonymous. Bankruptcy filings, which force companies to open their books, provide a rare window into secret political donations.
In 2016, Greg Zimmerman, an environmental activist, stumbled upon a presentation titled “Survival Is Victory: Lessons From the Tobacco Wars.” The slide deck was the creation of Richard Reavey, a vice president for government and public affairs at Cloud Peak Energy, and a former executive at Phillip Morris. Reavey argued that fossil fuel firms, particularly coal, should emulate the tactics of big tobacco, which similarly spent decades battling scientists and regulators over claims that its product harmed public health.
In the New York Times coverage of the episode, Reavey told the paper that his firm “has never fought climate change — never fought it, never denied it or funded anyone who does.” The bankruptcy filing from last week, however, suggests otherwise.
**
https://theintercept.com/2019/05/16/coal-industry-climate-change-denial-cloud-peak-energy/
Bankruptcy of
one of the largest domestic coal producers in the country has revealed that the company maintains financial ties to many of the leading groups that have sowed doubt over the human causes of global warming.
The disclosures are from Cloud Peak Energy, a Wyoming-based coal mining corporation that filed for Chapter 11 bankruptcy on May 10. The company had been battered by low coal prices, including in international markets cultivated by the firm.
The documents in the court docket show that the coal giant gave contributions to leading think tanks that have attacked the link between the burning of fossil fuels and climate change, as well as to several conservative advocacy groups that have attempted to undermine policies intended to shift the economy toward renewable energy. The documents do not include information on the size of the contributions, yet, taken as a whole, the list of groups Cloud Peak Energy helped fund are indicative of how the company prioritized pushing climate denialism. The company did not respond to a request for comment.
The contributions are revealed in a filing that lists recipients of grants, creditors, and contractors. The document shows that Cloud Peak Energy helped fund the Institute of Energy Research, a Washington, D.C.-based group that has dismissed the “so-called scientific consensus” on climate change and regularly criticizes investments in renewable energy as a “waste” of resources.
Several of the groups that receive funding from Cloud Peak Energy have used aggressive tactics to attempt to discredit environmentalists. The Center for Consumer Freedom, one of the groups listed in the coal company’s filing, is part of a sprawling network of front groups set up by a lobbyist named Rick Berman geared toward attacking green groups such as the Sierra Club and Food & Water Watch as dangerous radicals.
Other organizations quietly bankrolled by Cloud Peak Energy have directly shaped state policy. The company provided funding to the American Legislative Exchange Council, a group that provides template legislation to state lawmakers. The model bills promote the fossil fuel agenda. One model bill declares that there is a “great deal of scientific uncertainty” around climate change; others are designed to repeal environmental regulations on coal-burning power plants.
The Montana Policy Institute — a local libertarian think tank that promotes a discredited claim that world temperatures are falling, not rising, and questions whether humans cause climate change — also received funding from the firm.
Cloud Peak Energy, the filing shows, funded Americans for Prosperity, the Koch brothers-backed group that mobilizes political opposition to Democratic politicians and climate regulations. The mining firm also financed Crossroads GPS, a “dark-money” group that funneled millions of undisclosed dollars into Senate races in support of GOP politicians during the 2010 and 2012 election cycles. The Western Caucus Foundation, which supports congressional efforts to deregulate the mining sector and sell off public lands for energy development, received funding as well.
Many of the political dollars listed in the filing appear routine among coal industry firms. The Wyoming coal firm provided financing to an array of trade groups, including the American Coalition for Clean Coal Electricity, the National Mining Association, and the American Coal Council, that lobby legislators on mine industry priorities.Join Our NewsletterOriginal reporting. Fearless journalism. Delivered to you.I’m in
Four years ago, falling coal prices led to a series of bankruptcies of the largest coal companies in America. The filings, first reported by The Intercept, similarly revealed that the coal industry had financed a range of activists and organizations dedicated to spreading doubt about the science underpinning climate change. Alpha Natural Resources disclosures showed that the firm had quietly paid Chris Horner, an activist known for hounding climate scientists.
Many political organizations are organized as 501(c) nonprofits, an Internal Revenue Service designation that allows donors to remain anonymous. Bankruptcy filings, which force companies to open their books, provide a rare window into secret political donations.
In 2016, Greg Zimmerman, an environmental activist, stumbled upon a presentation titled “Survival Is Victory: Lessons From the Tobacco Wars.” The slide deck was the creation of Richard Reavey, a vice president for government and public affairs at Cloud Peak Energy, and a former executive at Phillip Morris. Reavey argued that fossil fuel firms, particularly coal, should emulate the tactics of big tobacco, which similarly spent decades battling scientists and regulators over claims that its product harmed public health.
In the New York Times coverage of the episode, Reavey told the paper that his firm “has never fought climate change — never fought it, never denied it or funded anyone who does.” The bankruptcy filing from last week, however, suggests otherwise.
**
WYOfile.com Arch Exit Signals Coal
ctober 27, 2020 by Dustin Bleizeffer 1 CommentTweetShare372PinEmail372SHARES
Wyoming’s second largest coal company confirmed last week what many miners and residents had feared: It will prepare to close its mines in the state even as it looks for a buyer for the properties.
Arch Resources Inc. operates the Black Thunder and Coal Creek mines in the Powder River Basin, both located in Campbell County. The company employs more than 1,100 workers in Wyoming, about 23% of the state’s coal mining workforce, according to the Mine Safety and Health Administration. Black Thunder, the second largest mine in the nation, accounts for more than 1,000 employees.
Arch said it will eventually close or sell all of its remaining thermal coal assets, which in addition to its Wyoming mines include the West Elk mine in Colorado and the Viper mine in Illinois. Although there are no target closure dates, the company will vastly shrink operations in Wyoming over the next two to three years, according to a statement.
“We view this systematic winding down of our thermal operations — in a way that allows us to continue to harvest cash and to fund long-term closure costs with ongoing operating cash flows — as the right business solution in the event we are unable to find an appropriate buyer,” Arch CEO Paul Lang said in a prepared statement.
Arch forecasts its Powder River Basin production will come in under 55 million tons this year, a 27% decline from 2019. The company plans to continue to reduce production in the basin “by an additional 50 percent over the course of the next two to three years.” In 2008, Wyoming’s highest coal production year in history, Arch produced more than 142 million tons from four mines in the state, according to WyoFile calculations.
The company’s “systematic” exit from thermal coal — which is primarily burned to generate electricity within the U.S. — comes as the market continues to shrink. Utilities are simultaneously running coal-fired power plants at lower capacities while speeding up the retirement of aging coal units in favor of more affordable natural-gas and renewable-power generation.
Coal accounted for more than 50% of U.S. electrical generation in the mid-2000s, but has sunk to about 20% this year, according to the Energy Information Administration. Industry analysts say coal’s slide will continue.
As it exits thermal coal, Arch plans to focus on its remaining mines that produce metallurgic coal used in steelmaking — primarily its Leer South mine in West Virginia.
“Arch is going to embrace these new realities as opposed to fighting them by continuing our pivot toward coking coal markets and pursuing a reduction and exposure in our thermal assets,” Lang said during Arch’s Q3 investor call last week.
The news, while not unexpected, is the clearest evidence to date that Wyoming coal communities are in for big changes.
Reality check for Wyoming coal
Arch’s plan to intentionally downsize its Powder River Basin production while preparing the mines for closure contrasts with past declarations by the industry and Wyoming elected officials.
Through a series of bankruptcies and the loss of nearly 1,000 mining jobs since 2016, Powder River Basin mining executives and state officials had projected hope that cost-cutting efficiencies and shedding debt would slow or level out a years-long production decline. Wyoming Gov. Mark Gordon has enthusiastically embraced the Trump administration’s efforts to roll back regulations on coal while boosting carbon-capture and refining technologies for coal.
The efforts have so far failed. More coal plants have been retired and slated for retirement under President Donald Trump than during Obama’s second term.
Like its coal utility customers, Arch doesn’t see a profitable future by sticking with thermal coal.
“They [Arch Resources] are publicly traded, they have access to capital and they are intentionally moving away from thermal coal,” University of Wyoming energy economist Rob Godby said. “This is a reality check. It shows you just how desperate things are.”
Arch’s announcement that it will exit the Powder River Basin came less than a month after a pivotal court decision to block a proposed operations merger of Arch and Peabody Energy’s western coal operations.
Arch’s Black Thunder and Peabody’s adjoining North Antelope Rochelle mines account for nearly two-thirds of all coal production in the Powder River Basin. Combining these, along with the companies’ Colorado operations, would have reaped an annual savings of $120 million, according to the proposal.
But the Federal Trade Commission ruled against the merger, claiming it would take competition out of the Powder River Basin coal market. That view dismissed arguments by Arch and Peabody that the actual competitive market is not necessarily in the basin, but nationally among thermal coal, natural gas and renewables competing for the U.S. utility market.
Arch and Peabody challenged the ruling, with supportive arguments from the state of Wyoming. But the Eastern District of Missouri upheld the FTC’s decision in late September.
“Arch’s plan to reduce production levels at its two Powder River Basin mines is extremely disheartening but not shocking given their response to the court’s decision blocking the Peabody/Arch merger,” Gordon said in a prepared statement last week. “That is the reason I supported that merger so strongly and was frustrated by the FTC and the Court’s decisions.”
There is no scenario where Powder River Basin coal recovers, Godby said. The likely outcome is that production shrinks quickly over the next few years to about half its current rate of production and remains there — for how long, nobody knows, Godby said. Arch’s planned exit from Wyoming coal is a harbinger for a vastly different coal economy in the state. “That’s why I say it’s a reality check,” Godby said.
Order or chaos?
According to Godby, and other analysts, the Powder River Basin has operated “over-capacity” for about a year. Essentially, the volume of production needed to financially justify keeping 12 mines operating in the basin hasn’t been matched by demand, let alone forecasts for declining demand.
“Eventually, somebody’s got to fail,” Godby told WyoFile in January.
Last week, he said that Arch’s measured exit from Wyoming coal is a preferable scenario than the continuation of bankruptcies among smaller operators that might not fulfill obligations to miners and the state.
A prime example is Blackjewel. The same day it filed for bankruptcy in July 2019, it locked gates to the Eagle Butte and Belle Ayr mines and sent miners home, sparking a year of chaos. Employees lost healthcare benefits, had to fight for wages and didn’t know whether they would ever return to work. Although the mines reopened under a new owner in 2019, Blackjewel still shirked obligations to miners and left Campbell County in a lurch, delinquent on some $37 million in taxes.
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If Arch ultimately sells its Wyoming mines, it would choose a buyer who could follow through on employee and reclamation obligations, CEO Lang said.
“If you’re going to have a consolidation [in the Powder River Basin],” Godby said, “it’s much better that it happens in an orderly fashion like this. They noted that they’re going to be open to their employees and suppliers, and they mentioned the communities so the communities can start to plan.”
Instead of digging in to compete on volume after being denied the operations merger, Arch’s plan to significantly cut production as it prepares to exit Wyoming might help avoid a continuation of bankruptcies and unmet liabilities among other operators in the Powder River Basin, Godby said. However, several remaining operators still face significant headwinds.
Now, Godby said, it’s up to the state to heed what is a clear warning shot from Arch.
“If you’re one of [Arch’s] thermal coal communities, things are going to change,” Godby said. “[Arch is] trying to give them as much advanced notice as they can.”
Shannon Anderson, attorney for the Sheridan-based landowner advocacy group Powder River Basin Resource Council, said her organization still worries Arch could sell its mines to a buyer that’s not financially capable of, or even committed to, meeting reclamation liabilities.
“There is a very small list of companies that are interested in coal mining these days, and none of them have the capital and corporate infrastructure to take over a mine as large as Black Thunder,” Anderson said. “A better focus is the plan Arch talked about, but we want to see the details, especially on reclamation and employee retirement and severance compensation.”
No replacement
For now, the state should be prepared to hold accountable any potential buyer of Arch’s Wyoming mining properties, Anderson said.
The state can help Arch make its planned exit less painful by insisting on a timeframe for completion of reclamation work, preferably with miners already on staff, Anderson said. “Reclamation work can serve as an employment bridge until mine closure, if prioritized and done right.”
A July report by the Western Organization of Resource Councils suggests that the scale of reclamation required for the thousands of acres of surface mines in the Powder River Basin adds up to nearly $2 billion. That represents a financial and jobs opportunity that can help miners and service companies just as mines are closing.
But so far, a coordinated plan to help miners and communities make an economic transition from coal has yet to materialize in Wyoming.
Sen. Michael Von Flatern (R-Gillette) said he expects that Gillette — at the center of the Powder River Basin coal industry — will likely shrink from its current population of about 32,000 to about 26,000. Prospects for the town of Wright, which began as a coal company town to construct the Black Thunder mine, might be worse, he said.
“I can’t see those people hanging around Gillette, not with oil the way it is now,” Von Flatern said.
However, decades of wealth from coal, oil and gas has built a self-sustaining Gillette and Campbell County economy, he said. Intense energy development has fostered the growth of an industrial services and manufacturing sector that’s expanded its clientele beyond local coal mines.
“Gillette itself is doing better than it would have 20 years ago,” Von Flatern said. “We’re a house town and service town now. We’ll always maintain a good share of the population.”
Gordon has said there’s no way to completely fill the economic and job gaps left behind as the coal industry recedes. However, his administration continues to push for coal programs beyond mining.
“I am committed to working with workers and communities in the Powder River Basin during this challenging period, and our statewide approach is aligned with local efforts such as the Carbon Valley Initiative in Campbell County,” Gordon told WyoFile via email after Arch’s announcement last week. “This announcement serves as a reminder of how important our work is to support coal production and to advance carbon capture.”
https://www.wyofile.com/arch-exit-signals-next-phase-of-decline-for-wyo-coal/
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Will taxpayers foot the cleanup bill for bankrupt coal companies?
May 9, 2016 Patrick McGinleyProfessor of Law , West Virginia University
Patrick McGinley served as counsel or co-counsel in cases challenging the alternative bonding systems in Pennsylvania (1981) and West Virginia (2003).
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- Patrick McGinleyProfessor of Law , West Virginia University
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Coal’s share of the U.S. energy market is rapidly plunging. Low-cost fracking-generated natural gas has overtaken the use of coal at America’s power plants. Impending implementation of the Obama administration’s proposed Clean Power Plan, which would place stringent regulations on coal-fired power plant emissions, has also helped to drive coal production to its lowest level in decades. Government sources predict further decline.
Fifty U.S. coal companies have filed for bankruptcy since 2012. Competition and more stringent environmental regulations played a role in this decline. But, just before coal prices collapsed, speculating top producers borrowed billions to finance unwise acquisitions. Now, unable to pay loan interest and principal, they have sought bankruptcy protection to restructure US$30 billion in debt. The bankrupt companies include Arch Coal, Alpha Natural Resources, Patriot Coal and Jim Walter Resources.
Last month Peabody Energy Corp., the world’s biggest private-sector coal producer, followed suit. Peabody seeks to restructure $8.4 billion in debt. Its capitalization has fallen from $20 billion in 2011 to $38 million at the time of bankruptcy.
Amid this turmoil, many observers fear that bankrupt coal companies will be able to shift their huge liabilities for reclamation, or restoring land that has been mined, to taxpayers.
Congress passed the Surface Mining Control & Reclamation Act, or SMCRA, in 1977 to prevent such a scenario. But, in my view, state and federal coal regulators have failed to ensure that coal companies have enforceable financial guarantees in place, as the law requires.
I have interacted with the coal industry for 40 years, first as a government enforcement lawyer and then litigating issues relating to coal mine reclamation cases on behalf of conservation organizations and coalfield communities. I believe that if the unfunded liabilities of bankrupt coal companies are not covered by new guarantees and additional companies seek bankruptcy protection, there is a real chance that taxpayer-funded billion-dollar bailouts will be necessary to cover their cleanup costs.
Planning for reclamation
SMCRA was designed to prevent bankrupt coal companies from foisting onto taxpayers the costs of restoring thousands of acres of mined land and treating millions of gallons of polluted mine water.
When Congress enacted the law, it identified many of the adverse impacts when mined land was not reclaimed:
…mined lands burden and adversely affect commerce and the public welfare by destroying or diminishing the utility of land for commercial, industrial, residential, recreational, agricultural, and forestry purposes, by causing erosion and landslides, contributing to floods, polluting the water, destroying fish and wildlife habitats, impairing natural beauty, damaging the property of citizens, creating hazards dangerous to life and property, degrading the quality of life in local communities, and by counteracting governmental programs and efforts to conserve soil, water, and other natural resources.
In the decades preceding SMCRA’s enactment, thousands of bankrupt companies abandoned mines without reclaiming them. Many of these sites remain untreated today. According to the U.S. Geological Survey, restoring streams and watersheds across Pennsylvania that were damaged by acidic drainage from mines abandoned before 1977 would cost $5 billion to $15 billion. Similarly, reclaiming mining lands abandoned in West Virginia before SMCRA will cost an estimated $1.3 billion or more.
SMCRA is designed to force a coal company to address and incorporate the cost of reclamation in its business planning. The law mandates that when state or federal regulators issue mining permits, coal companies must provide bonds or other financial guarantees to ensure that if they fail to fully reclaim mines, the state will have money available to do the job.
Most coalfield states administer the federal law through state-law-based regulatory programs overseen by the Department of the Interior. SMCRA offers states several options. They include requiring companies to provide financial guarantees in the form of corporate surety bonds, collateral bonds or self-bonds.
When companies use site-specific surety or collateral bonds, SMCRA requires states to calculate the cost of reclamation before any mining can begin. These studies must consider each mine site’s topography, geology, water resources and revegetation potential.
States may also set up an “alternate” to a bonding system that achieves the objectives and purposes of a bonding program. This option has been described by a court as a “collective risk-spreading system that … allows a State to discount the amount of the required site-specific bond to … less than the full cost needed to complete reclamation of the site in the event of forfeiture.”
Surety bonds and collateral bonds are backed by cash, real property assets and financial guarantees from banks and surety companies. If a coal company goes bankrupt, regulators can collect on these bonds and use the money to fully reclaim abandoned mined land. However, state-approved “alternative” reclamation funding systems and self-bonding by coal companies do not provide the same certainty.
For example, both Pennsylvania and West Virginia approved systems in which coal operators paid nonrefundable fees into state funds that would be used to reclaim any bankrupt coal company sites. But neither required site-specific calculations of what reclamation would actually cost. Pennsylvania imposed a per-acre permit fee, and West Virginia required a few cents per-mined-ton reclamation fee.
Regulators in these states – enabled by lax federal oversight – failed to ensure that companies set aside enough funds. As a result, these agencies have exposed taxpayers to potentially enormous reclamation liability.
Reclamation IOUs
In 2001 a federal district court found that West Virginia’s federally approved state “alternate” bonding fund was hugely underfunded and could not guarantee reclamation of mines abandoned by bankrupt coal companies as required by SMCRA. The court held that state and federal regulators’ decade-long failure to institute a fully funded bonding system had created
[A] climate of lawlessness, which creates a pervasive impression that continued disregard for federal law and statutory requirements goes unpunished, or possibly unnoticed. Agency warnings have no more effect than a wink and a nod … Financial benefits accrue to the owners and operators who were not required to incur the statutory burden and costs attendant to surface mining …
SMCRA also allows companies to self-bond, if they meet rigorous asset requirements. But a self-bonding corporation’s promise to reclaim is little more than an IOU backed by company assets.
In 2014 federal regulators began, in the Interior Department’s words, “exploring concerns related to the efficacy of self-bonding practices and procedure” used by states. Instead of taking action, they opted to study the issue despite strong indications of financial collapse on the horizon. Now enormous western surface mines and mountaintop removal strip mines in central Appalachia are covered by $3.6 billion in self-bonding obligations, of which $2.4 billion is held by bankrupt Peabody, Arch and Alpha.
Companies reorganizing under federal bankruptcy laws will continue to mine and market coal, hoping to shed mountains of debt and eventually emerge from bankruptcy. It remains to be seen whether they will be able to obtain conventional surety bonds after they reorganize, or whether bankruptcy courts will direct the companies to use their remaining assets to partially fulfill their self-bonding obligations.
One thing is clear, however. Against the backdrop of a century of coal company bankruptcies and attendant environmental damage, regulators ignored a looming coal market collapse with a wink and a nod. Properly administered, SMCRA’s reclamation bonding requirements should have required secure financial guarantees collectible upon bankruptcy.
Unfortunately, coal regulators viewed America’s leading coal companies like Wall Street’s mismanaged banks – too big to fail. As a result, American taxpayers may have to pick up an enormous reclamation tab for coal producers.
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Republish our articles for free, online or in print, under a Creative Commons license.
Republish this article
Coal’s share of the U.S. energy market is rapidly plunging. Low-cost fracking-generated natural gas has overtaken the use of coal at America’s power plants. Impending implementation of the Obama administration’s proposed Clean Power Plan, which would place stringent regulations on coal-fired power plant emissions, has also helped to drive coal production to its lowest level in decades. Government sources predict further decline.
Fifty U.S. coal companies have filed for bankruptcy since 2012. Competition and more stringent environmental regulations played a role in this decline. But, just before coal prices collapsed, speculating top producers borrowed billions to finance unwise acquisitions. Now, unable to pay loan interest and principal, they have sought bankruptcy protection to restructure US$30 billion in debt. The bankrupt companies include Arch Coal, Alpha Natural Resources, Patriot Coal and Jim Walter Resources.
Last month Peabody Energy Corp., the world’s biggest private-sector coal producer, followed suit. Peabody seeks to restructure $8.4 billion in debt. Its capitalization has fallen from $20 billion in 2011 to $38 million at the time of bankruptcy.
Amid this turmoil, many observers fear that bankrupt coal companies will be able to shift their huge liabilities for reclamation, or restoring land that has been mined, to taxpayers.
Congress passed the Surface Mining Control & Reclamation Act, or SMCRA, in 1977 to prevent such a scenario. But, in my view, state and federal coal regulators have failed to ensure that coal companies have enforceable financial guarantees in place, as the law requires.
I have interacted with the coal industry for 40 years, first as a government enforcement lawyer and then litigating issues relating to coal mine reclamation cases on behalf of conservation organizations and coalfield communities. I believe that if the unfunded liabilities of bankrupt coal companies are not covered by new guarantees and additional companies seek bankruptcy protection, there is a real chance that taxpayer-funded billion-dollar bailouts will be necessary to cover their cleanup costs.
Planning for reclamation
SMCRA was designed to prevent bankrupt coal companies from foisting onto taxpayers the costs of restoring thousands of acres of mined land and treating millions of gallons of polluted mine water.
When Congress enacted the law, it identified many of the adverse impacts when mined land was not reclaimed:
…mined lands burden and adversely affect commerce and the public welfare by destroying or diminishing the utility of land for commercial, industrial, residential, recreational, agricultural, and forestry purposes, by causing erosion and landslides, contributing to floods, polluting the water, destroying fish and wildlife habitats, impairing natural beauty, damaging the property of citizens, creating hazards dangerous to life and property, degrading the quality of life in local communities, and by counteracting governmental programs and efforts to conserve soil, water, and other natural resources.
In the decades preceding SMCRA’s enactment, thousands of bankrupt companies abandoned mines without reclaiming them. Many of these sites remain untreated today. According to the U.S. Geological Survey, restoring streams and watersheds across Pennsylvania that were damaged by acidic drainage from mines abandoned before 1977 would cost $5 billion to $15 billion. Similarly, reclaiming mining lands abandoned in West Virginia before SMCRA will cost an estimated $1.3 billion or more.
SMCRA is designed to force a coal company to address and incorporate the cost of reclamation in its business planning. The law mandates that when state or federal regulators issue mining permits, coal companies must provide bonds or other financial guarantees to ensure that if they fail to fully reclaim mines, the state will have money available to do the job.
Most coalfield states administer the federal law through state-law-based regulatory programs overseen by the Department of the Interior. SMCRA offers states several options. They include requiring companies to provide financial guarantees in the form of corporate surety bonds, collateral bonds or self-bonds.
When companies use site-specific surety or collateral bonds, SMCRA requires states to calculate the cost of reclamation before any mining can begin. These studies must consider each mine site’s topography, geology, water resources and revegetation potential.
States may also set up an “alternate” to a bonding system that achieves the objectives and purposes of a bonding program. This option has been described by a court as a “collective risk-spreading system that … allows a State to discount the amount of the required site-specific bond to … less than the full cost needed to complete reclamation of the site in the event of forfeiture.”
Surety bonds and collateral bonds are backed by cash, real property assets and financial guarantees from banks and surety companies. If a coal company goes bankrupt, regulators can collect on these bonds and use the money to fully reclaim abandoned mined land. However, state-approved “alternative” reclamation funding systems and self-bonding by coal companies do not provide the same certainty.
For example, both Pennsylvania and West Virginia approved systems in which coal operators paid nonrefundable fees into state funds that would be used to reclaim any bankrupt coal company sites. But neither required site-specific calculations of what reclamation would actually cost. Pennsylvania imposed a per-acre permit fee, and West Virginia required a few cents per-mined-ton reclamation fee.
Regulators in these states – enabled by lax federal oversight – failed to ensure that companies set aside enough funds. As a result, these agencies have exposed taxpayers to potentially enormous reclamation liability.
Reclamation IOUs
In 2001 a federal district court found that West Virginia’s federally approved state “alternate” bonding fund was hugely underfunded and could not guarantee reclamation of mines abandoned by bankrupt coal companies as required by SMCRA. The court held that state and federal regulators’ decade-long failure to institute a fully funded bonding system had created
[A] climate of lawlessness, which creates a pervasive impression that continued disregard for federal law and statutory requirements goes unpunished, or possibly unnoticed. Agency warnings have no more effect than a wink and a nod … Financial benefits accrue to the owners and operators who were not required to incur the statutory burden and costs attendant to surface mining …
SMCRA also allows companies to self-bond, if they meet rigorous asset requirements. But a self-bonding corporation’s promise to reclaim is little more than an IOU backed by company assets.
In 2014 federal regulators began, in the Interior Department’s words, “exploring concerns related to the efficacy of self-bonding practices and procedure” used by states. Instead of taking action, they opted to study the issue despite strong indications of financial collapse on the horizon. Now enormous western surface mines and mountaintop removal strip mines in central Appalachia are covered by $3.6 billion in self-bonding obligations, of which $2.4 billion is held by bankrupt Peabody, Arch and Alpha.
Companies reorganizing under federal bankruptcy laws will continue to mine and market coal, hoping to shed mountains of debt and eventually emerge from bankruptcy. It remains to be seen whether they will be able to obtain conventional surety bonds after they reorganize, or whether bankruptcy courts will direct the companies to use their remaining assets to partially fulfill their self-bonding obligations.
One thing is clear, however. Against the backdrop of a century of coal company bankruptcies and attendant environmental damage, regulators ignored a looming coal market collapse with a wink and a nod. Properly administered, SMCRA’s reclamation bonding requirements should have required secure financial guarantees collectible upon bankruptcy.
Unfortunately, coal regulators viewed America’s leading coal companies like Wall Street’s mismanaged banks – too big to fail. As a result, American taxpayers may have to pick up an enormous reclamation tab for coal producers.
