Tech Talk - of Wheat and Coal

The release of the latest assessment of the IPCC on the future of the planet, failing their push to cut greenhouse gas emissions, has brought forth headlines and supportive editorials in papers around the world. Yet I could not help but note a couple of things that form the basis for this tech talk. The first was that the report discussed the impacts of climate change (for which I suspect in this case they mean global warming) on agricultural production. They stress the negative impacts on crops such as wheat, and so, being curious, I went to the Wikipedia page that provides a table of wheat production over the past eighteen years, and plotted the data.

Figure 1. Global wheat production in millions of metric tons (after the Food and Agricultural Organization via Wikipedia)

Clearly wheat production is growing rather than, as the IPCC report implies, declining with the increase in carbon dioxide levels and longer growing seasons in parts of the world. More to the point – which is providing more food – (h/t Joules Burn) the two staple crops wheat and corn, have both seen growing production, but it is the slower pace of growth of wheat (at about 0.9%) over corn (at about 1.6%) that is of current concern, and which is to be addressed with new investments in the International Wheat Yield Partnership that plan to more than double yields in the next 20 years. This is needed in large part to match the continued growth in world population, which is likely to continue to rely on wheat to provide roughly 20% of the calories that this population will consume. Gains come both from increased land acreage being used, but also from the yields of that land. In the UK, for example, yields now average 7.8 tonnes per hectare up from 2.5 tonnes in 1940, the current target is to reach 20 tonnes per hectare in the next 20 years. Given that the global average is still down around 3 tonnes per hectare, the ability to bring this productivity to the broader community will give significant help to feeding the world.

I mention this because of the clear disparity between this information and the way that material is presented by the IPCC. Further the real needs of the world and its nations are now increasingly being addressed with less attention to the strident demand of the more alarmist of those who push the climate change agenda, in part perhaps because of the overhyping of the message. The latest illustration of this comes from Japan.

Following the devastation of the tsunami following the Great East Japan Earthquake on March 11, 2011 the Japanese public has been very nervous about the use of nuclear power, banning the restart of 48 nuclear power stations until after a new series of safety checks. This has had two short-term consequences, the financial melt-down of the power companies, which is now being addressed through government bailout and the need to switch to alternate fossil fuels to replace the power that the country obtained from the reactors. The switch was largely to natural gas, and to oil but this has proved to be an expensive undertaking with companies feeling that they could only raise power prices to a limited degree, hence their need now for government funding.

Figure 2. The changing face of electricity supply in Japan following the Earthquake, (MIT technology review )

But the sustained high cost of the gas and oil is estimated to be costing the companies over $30 billion a year and even with the government bailouts this is not an acceptable long term solution, given that it is likely to be years before the safety changes are made in the reactors, and also given the continued public opposition to restarting the reactors. As a result the companies have sought permission to switch back to coal-fired power plants. Concurrently the Japanese Coal Energy Center has been looking for coal resources around the world ranging from Mongolia to Mozambique.

in 2012 Japan was the second largest of the coal-importing nations at 189 million tons (behind China at 289 million) and current plans are to increase the amount of power that the fuel will provide by roughly 20% through construction of new power stations. (Some of these will be needed since, while some nuclear power stations may come back on line others are proving to be too expensive to restart under the new codes, and thus will be permanently closed).

It is this clear benefit of cost that is driving the change, and that benefit is unlikely to disappear over the next couple of decades. The renewable energy industry has not been able to overcome the advantages of coal’s ubiquitous presence and low cost of production. In the case of Japan supplies are anticipated to come from Canada and the United States easing their dependence on Australia and perhaps helping reduce their costs as they develop more international suppliers. Glencore, for example, their Australian supplier, has now reduced costs to $88 a ton, from the $95 being paid last year. It is estimated that there is currently a glut of about 5% of the coal market, and the reduced demands for thermal coal in the United States and Europe is unlikely to change that picture in the short term.

The longer term remains more cloudy, since the potential for the United States to enter, in a significant way, the LNG market and potentially to change those supply costs is not yet clear. It seems, however, unlikely that the volumes that will become available will not have much impact on price, and if that remains the case then coal will continue to grow as the price differential continues to add pressure for the its use in generating cheaper electricity.

Whether this will change the recently better-defined coal resources off the British Isles into a reserve remains, in the short term, unlikely, but even in the UK power costs can only rise so far before the public complaints begin to have an effect.

Tech Talk - Coal prospects

Last week was the annual Society of Mining Engineers annual meeting, this year in Salt Lake City, with the title “Leadership in Uncertain Times.” To illustrate the point it had some 6,000 members or more in attendance, as I hear and was quite successful from that point of view. However, through the grapevine I also heard that some of the mining companies are less optimistic of the future, with job offers made for this summer being withdrawn in several cases.

There is a considerable question as to the future of coal, as the title reflects, and this has as much to do with concerns over the construction or not of additional coal-fired powered stations around the world and the changing market as older plants are withdrawn from service. Some of the reason for uncertainty can be seen in the predictions from the EIA for the domestic coal market over the next year or two.

Figure 1. The decline in coal production in the United States over the past two years. (EIA)

The EIA note that last year was the first that production had fallen below 1 billion tons in the past 20 years. It does however forecast that production will increase this year by 3.9% before falling 1.5% in 2015. In both years however it will remain above that billion ton mark. I have written recently about the recent report “Warning Faulty Reporting of US Coal Reserves,” (in which the conclusion is drawn: “Rather than having a “200 year” supply of coal, there is now abundant evidence that the US is rapidly approaching the end of economically recoverable coal.“)

The two stories are, to a significant degree, discussing different topics, although the beginning of the Clean Energy report also discusses the rising price of domestic coal, and why – as it rises – so the switch to other fuels can be anticipated to continue. However, in that regard it is worth noting this other graph from the EIA.

Figure 2. Spot price of coal by basin over the past three years (EIA )

For those who forget 1 MMBtu (million Btu) is roughly equivalent to 1,000 cu ft of natural gas. The EIA also record natural gas prices and, in comparison to the coal price, that of natural gas – for equivalent energy – is considerably higher.

Figure 3. Natural gas prices (Henry Hub) (EIA )

Why then does the Clean Energy Report suggest that coal costs are going up, when as the plot above shows the spot price has been remarkably stable?

Figure 4. Cost of delivered coal in the US from 2004 – 2012. (Clean Energy)

Notice however, in this case, that the cost is for delivered coal, and the cost of that delivery is what has been going up over the past few years. (And you wonder why Warren Buffet invested in railways?

Figure 5. Changes in Railroad freight costs since 1981. (Association of American Railroads)

If you look at the plot you will see that the cost per ton-mile has increased fairly steadily over the past four years from just above 3 cents to 4 cents a ton-mile, which explains a significant part of the increased fuel costs. Railroad income has risen, since 1981, from just under $3 billion to $12 billion.

So what is the future likely to be? Well there is an additional source of income to the industry, outside of the US power plants, and that is through exports. Yet here the story is not really that different. Since 2005 the value of coal exports from the United States have tripled. This is not just a volumetric increase (which has happened with steam coal) but includes an increase from higher prices for metallurgical coal. (Powder River steam coal at 8,800 Btu sells for around $12.35, while the 13,000 Btu Northern Appalachian coal goes for $68.65 a ton. (This is one of the discriminating factors within the coal market that the Clean Energy Report fails to fully discern). Exported coal saw a steadily rising price from 2007, when it averaged $70 a ton through 2011, when it was priced at $148 a ton before falling to $118 in 2012 and to $96 in 2013. Roughly 46 million tons went to Europe in 2013, down from 51 million tons in 2012, while roughly 22 million tons went to Asia (down from almost 26 million tons). Of this about half the European and a third of the Asian coal was steam coal needed to feed coal-fired power plants.

The problem that the industry faces is that this downturn in both domestic and export demand that became evident last year is likely to continue into the next few years. In the case of Europe pressure to close coal-fired power plants continues, despite increasing concerns that the existing base is approaching a point where supply will no longer be able to meet demand. The Sunday Times carried a story this Sunday about Npower and their owner RWE, which produces 10% of the electricity in the UK, but which is writing off hundreds of millions of dollars as it devalues its current power stations, which are being closed by regulation, even as it fails to build replacements, which it is reported to find unattractive in the current political climate. Last December the NPower CEO noted that over the past year the spare capacity in the UK had fallen from 15% to 5% and if that continued this year (and there are more scheduled closures) then by next winter the reserve may be gone and the country may see the start of blackouts that will continue for some years.

In the same vein the United States is also cutting coal-fired production. An article in Motley Fool points to the trend over the next few years.

Figure 6. Projected coal fired power plant closure effects (EIA via The Motley Fool)

However this projection is possibly a little disceptive, since it does not foretell what might happen if “clean coal” can get a grip on the industry. As TMF points out:

But EIA's retirement projections may be too high. While air emissions standards will result in heavy fines, utilities may still foot the bill because of coal's relatively cheap production costs.

With natural gas prices up 50% this year to a four-year high, energy companies are scrambling to find cheaper energy. According to data compiled by Bloomber, an average natural gas plant makes $3.04 a megawatt-hour off its fuel, compared to a whopping $31.58 for coal-fired plants.

While coal might seem like a no-brainer bet, "clean coal" is far from a sure thing. Southern Company has been working hard to bring its 582 MW Kemper County, Miss., clean-coal plant online, but the $5 billion project is currently 65% over budget.

A Department of Energy report estimates that clean coal costs are roughly double that of coal, but companies like Southern Company are hoping to reinvent coal's future.

Unfortunately building new coal demand, when set against the destruction of current plant in both the US and Europe, will take some years and thus, while the future for coal might, in the long term be strong, in the shorter term one can understand why coal companies might be hesitant to hire new engineers. The reduced demand will, inter alia, lengthen to time that current supplies last, though I perhaps need to address that issue in a subsequent post.

P53. Pick Points

Half-a-dozen or so stories that might be of interest:

There does appear to be a little recognition out there now that oil prices have hit a floor, and may perhaps be bounding up a little. I suppose if I was that kind of blogger I would point to the post where I said so, but let’s be a little cautious a week or so longer. Ecuador thinks that the price should really be $80 (per barrel) but would be happy with $60. Although Shell admitting they weren’t replacing their withdrawals from reserves, might also have helped. With some of the excess oil that has been held in tankers now coming onto the market perhaps others are seeing the sort of signal that says we may now see a crawl back up in price. It was only a month ago that something like 80 million barrels was being held in these vessels, given that a VLCC (Very Large Crude Carrier) can hold up to 2 million barrels, and with 45 tankers having been used that way, there was a lot to ease back into the market. Shell sold their first two tanker loads (some 1.2 mb) back at the end of January and it seems that others are now also finding a sale.

The lower supply price for natural gas is now reaching the point (as winter demand dies) that supply companies are starting to pass on their savings to the customer. For example up in Canada, Enbridge Gas Distribution has just go permission to drop their price from 30.4 cents per cu.m to 23.5 cents. For a household using 3,000 cu m per year, this will save some $230. (That price converts to a drop from $8.60 to $6.65 per kcf). Similar things are happening in New Hampshire with the utility there, Unitil Corp, is getting a new rate of 69 cents per therm, (or $6.90 per kcf), which is down 26% on recent prices, and 56% from last summer’s peak ($15.50 per kcf). There are some out there, however, that have picked up the message I have mentioned here earlier, that as rigs drop off, so availability will again become tight, and thus prices could double again by next year. Next January’s futures are up 49% on April. However, while I was looking at a 20% shortfall some time into early next year, with the current fall in production, some are seeing 5% drops by the fourth Quarter. And looking back in history (which I favor)

The last time drillers stopped rigs at this pace was seven years ago, when futures advanced 86 percent. The world's biggest hedge funds have already started to close bets on a drop in prices, government data show. Natural gas tumbled 30 percent this year, the worst start since 2006, as sales weakened with the recession.

I usually only just look at the weekly EIA numbers for crude, gasoline and natural gas, (and those comments may be a few hours delayed since I am working in Sweden) but it is worth having a quick peak at the coal forecasts, which come out on Monday’s. For reference here are the current spot prices for coal:

Source EIA

In case you were wondering why most utilities are buying Powder River Coal from Wyoming. The amount of coal being produced and used is remaining fairly stable.

Source EIA

The blue line for last year shows record production levels, that are, at this time, not anticipated to occur this year because of the economy. However, when one looks at the international market, where last year saw record prices of up to $300 a tonne, (sometime I will start correcting for the difference between short tons (US) and metric tonnes (most others)), the market is currently looking at prices of around $115. Of course that view came from New Zealand, where a new coal offering was fully subscribed. Australia is hoping to settle, for the moment, at around $70. But those who think that the global slowdown will seriously reduce consumption, might want to consider that China’s imports were at the highest level in 22 months in February, at 4.88 mill tons, and with prices being bruited of $62.10 per ton in Newcastle, Australia, they may not be the only ones that come calling. (But part of the demand relates to internal Chinese politics over the price utilities will have to pay the mines for coal). It might also be worth noting that in order to sustain their economies both China and India are pouring money into infrastructure, and that means steel, and steel means iron, and iron means coal. India is going into elections this year, in case you had forgotten. However the number of ships lined up to take coal at Newcastle has dropped from 70, eighteen months ago, to 15.

Well having just skimmed around the big three tonight, I thought I’d leave room for a couple of pictures. Back when we went to Cork for the ASPO Conference , Colin Campbell laid on a piper to lead us in to dinner. Well I was led to where I was ended up deciding to eat tonight by pipers* in the Stockholm Gamla Stan.


Pipers in Stockholm

And then when I wandered back to the hotel, I found that the Royal Palace had been surrounded by a belt of snow about a street wide, and some 20 cm (8 inches or more) thick of artificial snow. Maybe they thought I missed it, or was expecting it (it was snowing when I arrived). Anyway, not a good picture in the light, but just to show, these are normally the steps up to the Royal Palace.

Snow covering the stairs into the Royal Palace

(it’s artificial, and 20 cm plus deep)
* I actually dined on moose, and cloudberries, just around the corner.