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Thursday, May 31, 2007

Coal's Future in Doubt

by Richard Heinberg

MuseLetter Special Update (May 09 2007)

The earlier MuseLetter #179, "Burning the Furniture" {1}, consisted of a summary of the conclusions of a recent study by the Energy Watch Group (EWG) on future global coal supplies. That study, "Coal: Resources and Future Production" {2}, published on April 5, found that global coal production could peak in as few as fifteen years. This astonishing conclusion was based on a careful analysis of recent reserves revisions for several nations.

The EWG report has enormous implications for climate change, global energy, and particularly for future electricity supply and steel production in the US and China.

Previously, virtually everyone in the fields of energy policy and energy analysis - as well as nearly everyone involved in discussions about climate change - had assumed that the world's coal endowment was so enormous that no limits would be encountered anytime this century. The EWG's conclusions turn this assumption on its head.

So far, there is little indication that the study has received even a small fraction of the attention it deserves. Perhaps this is partly because it is only one study, and it comes not from the International Energy Agency (IEA) or the US Department of Energy (DoE), but from a relatively small European analytical organization that reports to the German Parliament.

A report by a group of Massachusetts Institute of Technology faculty that had been released just previously, "The Future of Coal in a Carbon Constrained World" {3}, and which garnered more notice, had mentioned no supply constraints - but the report's authors had not undertaken a serious new analysis of supply issues. Similarly, recent annual reports from the IEA, the DoE, and the World Coal Institute have simply repeated the familiar nostrum that the world has roughly two hundred years' worth of coal, without undertaking any new assessment of how quickly that coal can be brought to market, or when, during that two-hundred-year period, supply problems might begin to arise.

Therefore any new analysis of global coal supplies, following on the heels of the EWG report, warrants considerable interest.

A Cloudy, Sooty Future

We have not had to wait long. "The Future of Coal", a study by B Kavalov and S D Peteves of the Institute for Energy (IFE), prepared for European Commission Joint Research Centre, is ready in final draft and will be published within days.

Unlike the EWG panel, Kavalov and Peteves did not attempt to forecast a peak in global production. Future supply is discussed in terms of the familiar but often misleading reserves-to-production ratio. Nevertheless, the IFG's conclusions are broadly supportive of the EWG report.

The three primary take-away conclusions from the new coal study are as follows:

- "World proven reserves (that is, the reserves that are economically recoverable at current economic and operating conditions) of coal are decreasing fast ...

- "The bulk of coal production and exports is getting concentrated within a few countries and market players, which creates the risk of market imperfections.

- "Coal production costs are steadily rising all over the world, due to the need to develop new fields, increasingly difficult geological conditions and additional infrastructure costs associated with the exploitation of new fields".

Early in their paper the authors ask, "Will coal be a fuel of the future?" Their disturbing conclusion, many pages later, is that "The analysis in the preceding chapters indicates that coal might not be so abundant, widely available and reliable as an energy source in the future". Along the way, they state "the world could run out of economically recoverable (at current economic and operating conditions) reserves of coal much earlier than widely anticipated".

Kavalov and Peteves frame their study's purpose and boundaries this way:

"The goal of the study is not to project future coal demand, supply and prices, but rather to highlight some facts and trends that may affect coal supply in the future. The study thus endeavours to answer the following three questions:

(1) If Clean Coal Technologies achieve large-scale penetration, will the required coal supply be secured in the long term?

(2) If the coal supply is secured, where will it come from?

(3) What will be the corresponding trends in coal costs and prices?"

In other words, the authors are not attempting the same task as the EWG team: there is no quantitative analysis of reserves for individual nations here. Instead, the focus is on foreseeable challenges to coal supply, and how these will likely affect cost - and hence the attractiveness of coal vis-a-vis other energy sources.

In the course of their discussion, the authors highlight some of the same problems noted in the EWG study having to do with differing grades of coal and the likelihood of supply problems arising first with the highest-grade ores:

"... Although the world reserves of low-rank and hard coal are similar, their consumption trends are quite different. The world consumes much more hard coal than brown coal and the gap is growing continuously. In addition, the preference is naturally for coal that is easier (and cheaper) to recover. Without a corresponding increase in hard coal reserves, which will most likely be more difficult and more expensive to exploit than hard coal deposits in the past, the world is going to run out of higher-quality coal much earlier than it will of lower-quality coal ...

"Depending on the geology of deposits, in particular the depth of seams, coal is at present recovered in two ways: surface (open-cut) or underground (deep) mining. Surface mining is economic only when the coal seam is relatively close to the surface. It allows high coal recovery rates from deposits - ninety percent and more. Surface mining is more frequently used for lower-quality coal types. The majority of world coal reserves (sixty percent) are recoverable only by deep mining. This is true especially for hard coal, where deep mining accounts for 2/3rds of all recovery worldwide. The recovery rates in underground mining are much lower than those for open-cut mining - from fifty to sixty percent for the cheaper room-and-pillar technology to 75% for the far more expensive long-wall technology. Standard calculations of coal reserves, and hence reserves-to-production ratios, do not take into account feasible recovery rates. The amount of actual recoverable coal is therefore less than the widely published estimates of reserves, and the real reserves-to-production ratios are also lower."

Price Impacts

All of this translates to higher coal prices in coming years. This conclusion is highlighted repeatedly throughout the report:

"It is true that historically coal has been cheaper than oil and gas on an energy content basis. This may change, however ...

"The regional and country overview in the preceding chapter has revealed that coal recovery in most countries will incur higher production costs in future. Since international coal prices are still linked to production costs .., an increase in the global price levels of coal can be expected. On the other hand, any enhancement of world coal reserves may be hampered by the poor return on investment in coal mining over the past few decades. The low profitability has been due to the strong price competition in the world market and correspondingly low coal prices ... "

As prices for coal rise, "the relative gap between coal prices and oil and gas prices will most likely narrow", with the result that "the future world oil, gas and coal markets will most likely become increasingly inter-related and the energy market will tend to develop into a global market of hydrocarbons".

The report's authors indicate that these price increases may discourage the deployment of technologies to capture and bury the carbon from coal so as to reduce greenhouse gas emissions:

"Pursuing greenhouse gas reduction policies is in fact an investment strategy for future generations, where expenditure today pays off at some point in the future. Such an investment strategy involves spending substantial funds today - which many less developed countries simply cannot afford. In those countries, producing cheap and affordable electricity is more important than producing environmentally friendly electricity.

"In a hypothetical situation with global joint efforts to curb greenhouse gas emissions, it is believed that carbon capture and storage can secure the survival of coal. However, such an assumption is somewhat doubtful for the following reasons:

- "Carbon capture and storage technologies are still at the research and development stage ...

- "The largest techno-economic potential for carbon capture and storage is estimated to be in Europe, the USA and Australia. However, the USA and Australia in particular are the two industrialised countries with the softest greenhouse gas reduction policies at present. Bringing them into a Kyoto-like target-based mechanism for greenhouse gas reduction, especially in view of their recently launched Asia-Pacific Partnership on Coal Development and Climate initiative, seems rather doubtful in the foreseeable future."

A Wake-up Call on Coal

Taken together, the EWG and IFE reports deliver a shocking message. For a world already concerned about future oil supplies, uncertainties about coal undercut one of the primary strategies - turning supposedly abundant coal into a liquid fuel - that is being touted for maintaining global transport networks. The sustainability of China's economic growth, which has largely been based on a rapid upsurge in coal consumption, is thrown into question. And the ability of the US to maintain its coal-powered electricity grids in coming decades is also cast into doubt.

As noted in MuseLetter #179, if future coal supplies are dramatically reduced, this could be very good news for the global climate; however, that benefit would be tempered significantly if higher coal prices discourage the adoption of carbon sequestration technologies.

In summary, we now have two authoritative studies reaching largely consistent conclusions with devastating implications for the global economy. Surely these studies deserve follow-up reviews of the data by the IEA and the DoE. If the EWG and IFE conclusions hold, the world will need to respond quickly and with an enormous shift of investment capital in the directions of energy conservation and of developing renewable sources of electricity. Climate concerns are already drawing some nations in these directions; however, even the nations leading such efforts may not be proceeding nearly fast enough. For China and the United States, the world's two most coal-dependent countries, the message could not be clearer: whether or not global climate concerns are taken seriously, it is time to fundamentally revise the current energy paradigm.


{1} "Burning the Furniture" by Richard Heinberg, Museletter #179 (March 2007)

{2} "Coal: Resources and Future Production",

{3} "The Future of Coal in a Carbon Constrained World",

Bill Totten


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