Production Costs and Coal Reserves

Numerous factors affect the competitiveness of Kentucky coal. One is the cost of mining. Kentucky has a large number of small mines and few large operations. Larger mines are able to capture the benefits of economies of scale. The productivity of Kentucky coal operations has not kept pace with that of other states and of the industry nationwide (see Figure 13).

Figure 13: Coal Mining Productivity

Western states dramatically increased their share of the coal market over the past 20 years. Between 1990 and 2004, Wyoming’s share of the U.S. market skyrocketed while Kentucky’s share declined significantly (see Figure 14).

Figure 14: Coal Distribution

Wyoming coal seams are thicker and more easily accessible than Kentucky coal seams – a key difference between eastern and western mining reserves. The limited accessibility of the remaining coal resource drives up costs for Central Appalachian companies, leaving them at a competitive disadvantage. Figure 15 shows that while Kentucky remains in the top five states in terms of estimated recoverable reserves according to the Energy Information Administration (EIA), the state’s reserve base is the smallest of the five and is considerably smaller than the reserves of the top three states. If the state is broken down by region, the EIA data show that 61 percent of Kentucky’s estimated recoverable reserves come from western Kentucky, while only 39 percent come from the Appalachian region of the state.

Figure 15: Estimated Recoverable Reserves

Stakeholders and experts debate the issue of how much technically and economically recoverable coal remains in Kentucky. Different sources use different definitions of what is recoverable. In 2007, a National Academies of Science study called for a federal commitment to more accurately estimate how much recoverable coal remains.¹² At current rates of recovery, the EIA data on estimated recoverable reserves suggest over 100 years of remaining Kentucky coal. But EIA states in its report “US Coal Reserves: 1997 Update” that:

The usual understanding of the term “reserves” as referring to quantities that can be recovered at a sustainable profit cannot technically be extended to EIA’s estimated recoverable reserves because economic and engineering data to project mining and development costs and coal resource market values are not available.¹³

In the same report, EIA estimates only about 19 years of recoverable coal from existing mines based on current rates of removal; the rest of the recoverable reserves would require opening new mines. A 2000 U.S. Geological Survey (U.S.G.S.) report estimated that only nine percent of the remaining coal resources in Central Appalachia are economically recoverable. It concludes: “much of the remaining coal in all five coal beds and zones is thinner (<3.5 ft.) and deeper (>1,000 ft.) than the coal that has been mined.” The U.S.G.S. report says only that mining in the region “will continue throughout this decade and into the next given market conditions.”¹⁴

Similarly, EIA indicates that coal in the Appalachian region is becoming more difficult and costly to mine because so many of its resources have already been used up. In the 2008 Energy Outlook report, EIA notes: “Although producers in Central Appalachia are well situated to supply coal to new generating capacity in the Southeast, that portion of the Appalachian basin has been mined extensively, and production costs have been increasing more rapidly than in other regions.” As a result, EIA predicts that this region will continue to decline relative to western producers over the next 25 years.¹⁵ Similarly, a 2008 article on the future of coal concludes that while there are numerous uncertainties in the industry, “[w]hat will likely continue to occur is the shift in coal production from the eastern United States to the western United States, a trend that has been steadily increasing since the mid-1970s.”¹⁶

This trend puts Kentucky at a disadvantage relative to western states in particular, although eastern Kentucky is losing competitiveness relative to other regions as well. A 2008 article on the relative competitiveness of coal in the United States makes the following projections:

Central Appalachian productivity will decline by a total of 6 percent over the next five years as producers continue to move into thinner and more geologically challenging seams. Northern Appalachian productivity will not decline as rapidly as Central Appalachia, with only a 2.5 percent drop over the next five years… Even though Illinois Basin production capacity will grow over the mid term, productivity is expected to decline through 2010. Productivity in the Powder River Basin is expected to flatten over the next three years, but remain the highest of all the U.S. coal basins.¹⁷

Coal is a finite resource and Kentucky’s remaining reserves suffer from several competitive disadvantages. The industry will continue to play a central role in energy production in the Appalachian region for the short term, but Appalachian coal does not provide a solution to the long-term economic and energy needs of the Commonwealth.

12. National Research Council. 2007. Coal: Research and Development to Support National Energy Policy. Retrieved May 11, 2009 (http://www8.nationalacademies.org/onpinews/newsitem.aspx?RecordID=11977)

13. Energy Information Administration. 1999. US Coal Reserves: 1997 Update. Retrieved May 11, 2009 (http://tonto.eia.doe.gov/ftproot/coal/052997.pdf)

14. U. S. Northern and Central Appalachian Basin Coal Regions Assessment Team. 2001. 2000 Resource Assessment of Selected Coal Beds and Zones in the Northern and Central Appalachian Basin Coal Regions. U.S. Geological Survey Professional Paper 1625-C. Retrieved May 11, 2009 (http://pubs.usgs.gov/pp/p1625c/)

15. Energy Information Administration. 2008. Annual Energy Outlook 2008: With Projections to 2030. Retrieved March 20, 2009 (http://www.eia.doe.gov/oiaf/archive/aeo08/index.html).

16. Stagg, Alan. 2003. “Coal as a Competing Fuel Source.” Natural Gas and Electricity 22(6): p. 18.

17. Hunt, Gary L. and Hans Daniels. 2008. “Coal: Inconvenient Truths.” Public Utilities Fortnightly 146(2): p. 7.