By Steve Fiscor, Editor-in-Chief

Judging by all of the reports coming from the region, the Illinois Basin (Illinois, Indiana and Western Kentucky) is experiencing a resurgence in interest as utilities scout for low cost and dependable coal supplies to accommodate the investment in new pollution controls or “scrubbing,” taking place to meet more stringent environmental controls. In a scrubbed scenario, Illinois Basin (ILB) coal is a suitable replacement for lower sulfur Appalachian coal. With increasing demand abroad, ILB coal may soon be taking advantage of international thermal markets.

John Hanou, principal, Hanou Energy Consulting, recently prepared a multi-client consulting study on ILB coals. His investigation is certainly the most current and probably the most comprehensive review available on the region’s coal geology, reserves, quality, historic, current and future coal production, coal control/ownership, transportation infrastructure, strip ratios, mine productivity and production costs for all active, idled and proposed mines. During his research, Hanou analyzed more than 300 mines, reserves and properties. He makes a bold 10-year production forecast. These predictions were based on estimated FoB mine, railcar and barge for all active projects.

The ILB contains substantial low cost surface and deep mineable coal reserves that are currently and will continue to be extracted in the future. While the ILB contains a substantial amount of low-sulfur reserves, most of the new production coming on line will be greater than 4 lb-SO2/mmBtu. Peabody Energy and Armstrong control the remaining large blocks of low-ratio surface mineable coal. Peabody, Foresight Energy, Drummond, CONSOL Energy, Alliance Resource Partners LP and Arch Coal control large blocks of deep mineable coal.

ILB producers are positioning themselves to nearly double production over the next 10 years. In 2010, production totaled 107 million tons. During 2011, production will likely expand to 116 million tons. By 2014, producers are planning to expand to 159 million tons and to more than 200 million tons in 2017. Hanou cautions that these expansions are market dependent. With its superior reserve base, Illinois will expand at a greater pace than Indiana or Western Kentucky, and most of it will come from underground mines.

Peabody Energy was the top ILB coal producer in 2010, followed by Alliance and Murray Energy. By 2017, Foresight Energy is projected to become the second largest ILB producer as it adds longwalls at Sugar Camp and Deer Run. In spite of Alliance opening Gibson South and taking one-third control of White Oak, Alliance will likely drop from the second largest ILB producer to the third largest producer. If Alliance would obtain 100% of White Oak, it will likely remain second with Foresight becoming a close third.

 

Reversing Trends
The ILB saw coal production grow steady from less than 100 million tons in the mid-1950s to the 140 million ton mark in the 1970s. For the most part production remained about 120 million tons until the Clean Air Act Amendments of 1990 went into effect. As utilities began to switch to lower sulfur coals, ILB production dropped steadily to about 90 million tons per year (tpy). Now that trend has reversed and production since 2003 has grown steadily to more than 100 million tons.

Major coal producers exited the ILB during the 1990s. In 1994, CONSOL Energy produced more than 7 million tpy. In 2002, its final operating Illinois mine, Rend Lake, closed. Similarly, the former AMAX Coal (now Alpha Natural Resources) Delta and Wabash mines’ annual production dropped from more than 5 million tpy to a little more than 1 million tpy in 1997 before closing in 2007. Arch Coal closed the Captain mine complex in 1999 after production declined steadily to more than 2 million tons from 6 million tpy in 1994. Arch Coal regained a presence in Illinois after it purchased a portion of Knight Hawk in 2006 and gained more momentum in 2011 with the acquisition of International Coal Group (ICG), which operated the Viper mine. Through a series of transactions, Peabody Energy transitioned away from mostly union production. Peabody acquired the Black Beauty operations in Indiana and Illinois, while closing mines in Illinois. It then spun off mines as Patriot Coal to complete the transition.

A direct reflection of the activity would be the amount of production represented by organized labor. At one time, the United Mine Workers of America (UMWA) controlled more than 90% of ILB production. On a tonnage basis, the union began to lose traction in the late 1980s and reached parity in the mid-1990s. It now accounts for less than 5%. Hanou does not believe the UMWA will recover in the ILB.

As UMWA mines closed, mine productivity improved as more efficient non-union mines opened. Starting in 2000, productivity flattened for a few years and declined from 2005-2007 due to reserve depletion and the Mine Improvement and New Emergency Response Act of 2006 (MINER Act), which required mines to install better seals. The ILB, however, has reversed that trend with more efficient underground mining and by tapping low-ratio reserves on the surface.

More recently, new names entered the ILB and began ramping up production. Armstrong Energy began producing in 2008 and quickly built production to more than 8 million tpy. Hallador Energy’s Sunrise mine came online in 2005 and grew to more than 3 million tpy today. The biggest ILB success story, however, is Foresight Energy. In 2000, the owner began to acquire reserves in Illinois. In 2006, it opened the Pond Creek (Mach) mine, which quickly ramped up to more than 5 million tpy. Foresight bought the former ExxonMobil Monterey mine, rehabilitated the property, and renamed it (Shay). It also opened the Sugar Camp and Deer Creek mines. Foresight’s production grew to more than 11 million tpy in 2011.

Currently, total mineable ILB reserves stands at more than 14.4 billion tons. Peabody Energy holds 4.9 billion tons (34%), followed by Drummond, 2 billion tons (14%); Foresight Energy, 1.8 billion tons (13%); White Oak, 800 million tons (6%); and CONSOL Energy, 800 million tons (6%).

 

Keeping Costs Low
“Since 2008 overall ILB productivity has increased and will likely continue to improve going forward,” Hanou said. “Low ratio surface mineable reserves have been accessed by Armstrong in West Kentucky and Knight Hawk in Illinois. Peabody Energy will be accessing low ratio reserves in Indiana. With new longwall technology, Foresight Energy has succeeded in developing the most productive longwall mine in the U.S. The company has several more longwalls planned in the next several years. Relatively thick, virgin, deep reserves are now being accessed and mined by room-and-pillar methods by Arch Coal/Knight Hawk, Alliance, Peabody Energy and Foresight Energy.

“During 2010 our cost curves [FoB railcar and FoB barge] indicate that all three states were somewhat in parity with Illinois and Indiana having the edge over West Kentucky for railcar deliveries, and West Kentucky having the edge over Illinois and Indiana for barge deliveries,” Hanou said. “Going forward, it is very apparent that Illinois will dominate the other two states as several very efficient, low cost longwall operations are opening soon.

“The low cost mine in 2010 was Foresight Energy’s Pond Creek longwall mine in southern Illinois,” Hanou said. Alliance’s room-and-pillar mines, Cardinal, River View, Dotiki, Elk Creek in West Kentucky and Gibson County in Indiana, Hanou explained, were very low cost, as were Peabody Energy’s Gateway mine in Illinois and Hallador’s Carlisle mine in Indiana.

“In the future, Foresight Energy’s Sugar Camp longwall mines in Illinois are expected to become the low cost mines,” Hanou said. “With Alliance now involved with White Oak, we expect the White Oak’s new longwall mine will also be one of the lower cost mines. Alliance’s existing room-and-pillar mines as well as its new Gibson South mine will also be low-cost operations. Hallador’s Carlisle mine, Knight Hawk’s Prairie Eagle mine, Arch Coal’s Lost Prairie mine and Peabody Energy’s new Gateway North mine are expected to be low-cost coal producers.”

 

Realizing its Full Potential
For 2012, total ILB production is estimated to reach 125 million tons—its highest level in more than 15 years. Moving forward, Hanou said planned production will exceed 150 million tons in 2013 and eventually reach 200 million tons by 2017. The region’s level of potential production could reach 250 million tons by 2017 and 300 million tons by 2021.

Looking at total 2016 ILB production vs. 2010, the projected difference would be 194 million tons vs. 107 million tons. Of the 87 million tons of added capacity, 58.5 million tons would originate from Illinois. Illinois currently produced 33.4 million tons in 2010. Coal production in Western Kentucky and Indiana would grow by 14.2 million tons and 13.8 million tons respectively. Illinois would overtake the other two states. Western Kentucky produced 37 million tons in 2010 and Indiana produced 36.7 million tons.

“This does not mean the capital has been invested,” Hanou said. “Of the 87 million tons of projected growth, 45% to 50% has been capitalized. This 40 million tons or so will come online no matter what happens. Other companies have announced plans to open mines, such Alliance Gibson County. The remaining companies are looking for markets so they can open new mines.”

These are not demand numbers, Hanou explained. “This is a supply study and this is planned production. Peabody Energy is expanding with the Lively Grove mine. The company’s Bear Run is expanding by 4 million tons. Armstrong is looking to grow from 6 million to 12 million tpy. Murray Energy is expanding the Galatia complex by 2 million tpy.” Mines such as Foresight Energy’s Sugar Camp mine, Peabody Energy’s Lively Grove mine, Solar Sources’ Charger mine, and James River’s Log Creek mine have been capitalized.

The study also assumes the higher cost mines will stay in business. “If they have the reserves, this study projects continued operations,” Hanou said.

The ILB has the ability to greatly expand production should the markets develop, Hanou concludes. There are some concerns. Supply is outpacing demand. Prices for natural gas are low and will remain until the economy improves. ILB coal still competes with coals from the Powder River Basin. Bottlenecks exist with transportation. Decision on environmental regulations and regional politics also influence the market.

Some of the potential new markets for ILB include power plants installing new scrubbers systems, new power plants (as much as 15 million tons), and thermal exports, which are expected to reach 6 million tons in 2011 and could possibly grow to 10 million tons or more in the future.

The Illinois Basin Coal Supply Study 2011–2021 is available in hard copy. Founded by John T. Hanou in 2010, Hanou Energy Consulting is based in Annapolis, Md. (www.hanouenergy.com). He can be reached at Tel: 410-279-3818 (E-mail: jthanou@hanouenergy.com).