2249. As Coal’s Future Grows Murkier, Banks Pull Financing

By Michael Corkery, The New York Times, March 18, 2016

Tens of thousands of miners were on strike and coal prices were skyrocketing in October 1902. Afraid of unrest, President Theodore Roosevelt sought the help of John Pierpont Morgan.

The powerful banker, who held great sway over the coal industry, brokered a deal with the miners that ended the strike.

“My dear sir,” the president wrote to Mr. Morgan. “Let me thank you for the service you have rendered the whole people.”

America’s coal industry is now facing another dark hour, but this time there are few financiers willing to save it.

Mr. Morgan’s bank, now JPMorgan Chase, announced two weeks ago that it would no longer finance new coal-fired power plants in the United States or other wealthy nations. The retreat follows similar announcements by Bank of America, Citigroup and Morgan Stanley that they are, in one way or another, backing away from coal.

While coal has been declining over the last several years, Wall Street’s broad retreat is an ominous sign for the industry.

“There are always going to be periods of boom and bust,” said Chiza Vitta, a metals and mining analyst with the credit rating firm Standard & Poor’s. “But what is happening in coal is a downward shift that is permanent.”

On Wednesday the world’s largest private-sector coal company, Peabody Energy, said that it might have to file for bankruptcy protection, following a path already taken by three of the nation’s other large coal companies.

Peabody has been trying to sell three of its mines in Colorado and New Mexico to raise cash. But the sale to Bowie Resource Partners appears to have stalled amid the difficult financing environment. Bowie did not comment. A Peabody spokesman said the company “stands ready to complete the sale of assets to Bowie.”

Coal, like railroads, steel and other engines of the nation’s industrial expansion in the 19th and early 20th centuries, helped drive Wall Street’s profits for generations. More than a century later, the coal industry is in a free fall and the banks are pulling away.

“Given the state of the coal industry today, I think Mr. Morgan himself might make the same decision,” said Jean Strouse, a biographer of the banker.

Some banks say they are trying to do their part to curtail climate change by moving away from coal projects and financing ventures that produce less carbon. But bankers also say there is a more basic reason for the shift: Lending to coal companies is too risky and could ultimately prove unprofitable.

Coal companies are being squeezed by competition from less expensive energy sources like natural gas and by stiffer regulations — pressures that show no signs of letting up.

As a result, even the most secure loans — like those made to companies emerging from bankruptcy, known as debtor-in-possession loans — are increasingly off limits for many banks, according to bankers and industry lawyers.

And it is not just big banks. Even many more daring investors like hedge funds and private equity firms, which are usually eager to pounce on industries in distress, are shying away from coal because of deep uncertainty about its future.

It is a starkly different scene in the oil industry, where investors are raising hundreds of millions of dollars to snap up the debt and equity of troubled companies that are struggling with an oversupply of oil. Despite the immediate stress, many investors expect the oil glut will burn off by next year and prices will rebound.

But in the coal country of Appalachia, it is unclear whether many unprofitable mines can ever make money again.

“There is certainly no $40 billion titan looking to make a big play in coal right now,” said Marshall Huebner, co-leader of the insolvency and restructuring practice at Davis Polk & Wardwell who has represented several coal companies in recent bankruptcies.

Despite the challenges, the coal industry still powers roughly a third of the nation’s electricity. Industry officials say the business will eventually bounce back, once supplies burn off and demand for coal rebounds in places like China.

“Coal is part of our future, and I think the banks are taking a shortsighted view,” said Mike Duncan, president of the American Coalition for Clean Coal Electricity, an industry group. “They are ignoring a huge market and buying into rhetoric that just doesn’t work.”

Environmental groups, meanwhile, are hoping the banks’ reluctance will hasten the collapse of coal. Groups like the Rainforest Action Network have been pressuring banks for months to reduce coal lending.

“With much of the world committed to stabilizing the climate, we need the banks to follow quickly with measures to end coal financing altogether,” said Ben Collins, a senior campaigner at Rainforest Action Network.

But the banks’ retreat could inflict collateral damage on an industry that employs tens of thousands of workers and needs financing not only to keep operating, but also to clean up coal mines after they close. If coal companies are unable to pay for the mine reclamation, taxpayers could be on the hook for the cleanup costs.

As big American lenders pull back, a few foreign banks, like Deutsche Bank, have been willing to step in, industry officials say.

In its latest annual corporate responsibility report, Deutsche Bank said it was phasing out financing for projects that employ so-called mountaintop removal mining, which environmentalists say is particularly harmful. But the bank’s policy statement did not commit to the type of broad reduction in coal exposure that many American lenders have made in recent months.

In a statement, a bank spokeswoman said that Deutsche Bank is one of the “most prominent banks when it comes to clean energy financing.” She added that the bank “has very strict guidelines governing any financing decisions. We conduct a thorough and detailed analysis on a case-by-case approach, drawing on a deep understanding of wider socioeconomic and environmental trends.”

Even most American banks are not cutting off funding to the industry overnight, saying that for the moment coal remains a major source of energy, particularly outside the United States.

JPMorgan, for instance, is halting financing of new coal-fired plants in wealthy nations like the United States, but will continue to lend to such plants in the developing world, where in some places the coal market is still thriving. To receive financing, however, these plants need to use certain environmentally sound technologies, according the bank’s new policy.

Changes to the coal lending policy at Bank of America have created tension between senior leadership and rank-and-file bankers.

Senior leaders wanted the bank’s energy lending strategy to reflect “a transition from a high-carbon to a low-carbon economy,” said James Mahoney, who oversees public policy issues at the bank and worked on the new coal policy. It is part of Bank of America’s current effort at “responsible growth” — which entails not taking undue risks like lending to a troubled industry, Mr. Mahoney said.

But the shift has been uncomfortable for some of the bankers serving the coal industry.

It put them in a difficult position to say to the companies they have worked with for years, ‘We are pulling back,’ ” Mr. Mahoney said. “It runs counter to everything we do as a client-focused company.

Speaking at an environmental conference at the United Nations in January, Bank of America’s chief executive, Brian T. Moynihan, acknowledged the internal tensions around coal but said that the bank was trying to pull back gradually from the sector.

“When you have real clients involved, these decisions get difficult,” Mr. Moynihan said. “But I think the view of the people working on it is: We have to help people make the transition.”

That transition seemed to accelerate last week with the warning from Peabody that it would miss $71 million in interest payments.

One of Peabody’s best hopes for avoiding bankruptcy, analysts said, was the potential sale of three mines to Bowie Natural Resources.

Bowie is a rare breed of coal company. It has been expanding its operations, focusing largely on Utah, a state that still relies primarily on coal to generate electricity. Still, Bowie in recent weeks has apparently had trouble raising the full $650 million in debt to acquire the mines.

In many debt deals, banks would cover the shortfall. But Deutsche Bank and Citigroup agreed only to make their best effort to raise the debt for Bowie. The banks did not commit any of their own money, as a traditional underwriter might do.

Those best efforts might not be enough.

1520. Natural Gas Production Falls Short in China

By Keith Bradsher, The New York Times, August 21, 2014

SHOUYANG, China — Jin Peisheng, a drilling rig foreman, knows the challenges of trying to extract natural gas from a coal seam under the cornfields here in north-central China.

Cracks in the subterranean coal are flooded with water that needs to be pumped out before the gas will emerge. The coal seams are so cold that gels injected into the well, which are meant to help release the gas, sometimes become gummy and block the flow instead. And there is constant concern about hitting the labyrinths of active coal mines that honeycomb the area.

“The big uncertainty is what’s underground — if there’s a tunnel, that’s a big danger. It would be dangerous for the miners,” Mr. Jin said.

Faced with severe air pollution from coal and a rising dependence on energy imports, China has been eager to follow the United States by rapidly increasing natural gas output. Replacing coal with natural gas has also been central to Beijing’s hopes to limit emissions of global warming gases in China, the world’s largest producer of carbon dioxide by a wide margin.

But China’s ability to extract sufficient natural gas is in serious doubt. Despite heavy investment and strong government support, China’s natural gas production is growing at a slower pace than its decelerating economy. China’s production of natural gas increased just 6 percent last year and 4.4 percent in 2012.

China’s main problem is that shale gas production has fallen far short of expectations. That has left the country relying on alternative methods considered also-rans by American standards, like pumping natural gas from coal fields.

Now, the Chinese government appears to be acknowledging the shortfall. Wu Xinxiong, the director of the National Energy Administration of China, unexpectedly said in a speech this summer that China’s target for domestic natural gas production in 2020 was only 30 billion cubic meters for shale gas and another 30 billion cubic meters for coal seam gas. Just two years ago, the National Energy Administration estimated that China would produce 60 billion to 100 billion cubic meters of shale gas alone by 2020.

If Mr. Wu’s forecast comes true, shale gas and coal field gas would each supply only 1 percent of China’s electricity generation needs in 2020.

“If the population and economy keep growing, and extensive energy use continues, sustaining China’s energy supply will be hard,” Mr. Wu warned.

Gas production has been slow to rise despite energetic efforts by Beijing to make it financially attractive for energy companies, including direct subsidies for shale gas production. The Chinese government also announced on Aug. 13 that it would raise urban wholesale prices for natural gas at the end of the month by roughly 18 percent for industrial users.

With domestic supplies increasing slowly, China has been looking elsewhere. It agreed in May to buy gas from Russia under a 30-year, $400 billion deal. And it has begun importing liquefied natural gas from Qatar, Australia and Yemen.

The natural gas is sorely needed. Beijing plans to retire four coal-fired power plants by the end of this year and replace them with gas-fired plants in an effort to reduce air pollution.

But China does not have enough gas for a larger-scale conversion of power plants to gas. So the national government has already told smaller, less influential cities to stick with coal for now, and has discouraged businesses from investing heavily in gas-fired equipment.

Gas had looked like one of the few remaining ways for China to reduce its addiction to coal. China’s nuclear power program slowed after Japan’s triple meltdown in Fukushima. Efforts to expand hydroelectric power have run into environmental concerns as well as the huge cost of resettling people from areas flooded when dams are built to make artificial lakes. Solar power and wind power are growing rapidly, but from small bases.

The revised figures from Mr. Wu represented China’s first official acknowledgment of what Western experts have been saying for many months: The country will not approach the success of the United States in shale gas anytime soon.

Shale gas deposits lie much deeper in China than in the United States, which greatly increases drilling costs. Chinese shale also tends to be laden with clay and is much wetter than American shale, making it harder to crack the shale and release the gas through pumping liquids and sand underground, the process known as hydraulic fracturing, or fracking.

After 40 million years of powerful earthquakes as the Indian subcontinent plowed into southern Asia, the main shale gas seams in western China are jumbled underground, instead of lying flat like a stack of pancakes, as in the United States, said Jeff Layman, a partner in the Beijing office of Baker Botts, the big Houston energy law firm.

In March, Sinopec, a Chinese oil giant, announced the country’s first commercially viable shale gas deposit, located outside Chongqing, and predicted annual production would reach a hefty 10 billion cubic meters by 2017. But the company has released few details, prompting foreign energy experts to begin asking whether all of the seams are truly shale, although Sinopec insists they are.

Neither Sinopec nor its rival, PetroChina, has announced any other large fields despite extensive drilling. Both of these state-controlled companies said in March that they were still drilling actively for shale gas in China even as they cut their worldwide exploration budgets for oil and gas after weak results.

Sinopec and PetroChina, which will hold earnings conferences on Monday and Thursday, respectively, are targets of broad government inquiries into possible corruption, including in their contracts with outside vendors. This has made their executives reluctant to approve further shale drilling contracts, said a Chinese oil industry executive who insisted on anonymity because of the legal issues involved.

China needs to develop better technology before tackling many of its shale deposits, said another executive, Yin Shenping, the chairman and chief executive of Recon Technology, a shale gas services company based in Beijing. “It’s obvious that the country has now decided to slow down the drilling process,” he said.

Lower expectations for shale gas have resulted in greater interest in another category of unconventional gas, so-called coal bed methane. In this process, natural gas is gathered by drilling into underground coal seams.

The United States, Australia and other countries have used this method for several decades. But they often tap the natural gas before coal extraction begins, to reduce the risk that gas will explode in coal mines.

China’s problem is that many of its coal fields already have working mines. China has 13 percent of the world’s coal reserves but 47 percent of the world’s production. Many Chinese coal mine operators have opposed nearby coal bed methane production, fearing that pumping sand and chemicals into wells to liberate gas might have the unintended effect of driving gas into their mines.

The Chinese government has negotiated with mine operators and villages here in Shouyang, 220 miles southwest of Beijing, to authorize a large coal bed methane project, led by Far East Energy Corporation, based in Houston. Michael R. McElwrath, chief executive of Far East Energy, said he believed the project would improve coal field safety by removing explosive gas from subterranean seams.

But the Shouyang coal field is unusual within China because the coal is fairly permeable, allowing gas to flow underground. If there are no more discoveries of permeable coal, Mr. McElwrath said, “we will have a nice little project but the industry will not take off.”

Far East Energy faces its own issues. In June, the company announced that it had shut a quarter of its 160 wells for various reasons, such as gummy gels or a lack of gas-gathering pipelines; it plans to restart most of those wells later. “We are considering a variety of strategic transactions to fund the coming year’s drilling activities,” Mr. McElwrath said, declining to elaborate.

Crews have been working here over the last several years, laboring in a countryside of yellow dirt so soft that even small streams cut steep-flanked gorges 50 feet deep or more. Some of the locally rented equipment uses designs seldom seen in the United States since World War II, an indication that China still lags in drilling rig technology. At each location, workers struggle with the many idiosyncrasies.

“In the United States, it comes to the surface easier,” said Robert Hockert, a longtime Wyoming shale gas and coal bed methane drilling manager who is now the China country manager for Far East Energy. “Here, you’ve got to work at it.”

1435. On Obama's Climate Plan: Potential Downside of Natural Gas

By Matthew L. Wald, The New York Times, June 3, 2014

Fracking for oil also produces natural gas in places not served by pipelines, like North Dakota. Flaring the gas releases emissions.Credit: Jim Wilson/The New York Times

CONVENTIONAL wisdom, strongly promoted by the natural gas industry, is that natural gas drives down American emissions of carbon dioxide, by substituting for carbon-rich coal. The climate stabilization plan announced by the Obama administration on Monday relies on that. But in other ways, cheap natural gas drives emissions up.

“It’s a seesaw,” said Michael W. Yackira, chairman of the Edison Electric Institute, the trade association of the investor-owned electric companies. Some of the factors are hard to quantify, making it uncertain whether, in the long term, natural gas’s net effect is positive for climate control.

The reduction is simple. When burned in a power plant, natural gas has a smaller carbon footprint than coal, and when it displaces

That part is easy to quantify. Coal generation peaked in 2007 at a little over two billion megawatt hours while in 2013 it dropped to 1.58 billion, according to the Energy Information Administration. (A megawatt-hour, or 1,000 kilowatt-hours, is the amount of electricity a typical suburban house uses in a month.) Over the same time, gas generation started at 857 million megawatt-hours and ended at 1.2 billion.

If all the increase in gas-fired generation replaced coal, then the switch produced savings of 113.1 million tons of carbon a year.

But natural gas is starting to replace nuclear power, which can be seen as wiping out about 10 percent of the savings, because a reactor has a carbon footprint of nearly zero. Last year the owners of five reactors announced they would retire them. Some had mechanical problems or political opposition; some did not. But all were challenged by the drop in prices on the wholesale market, driven down by natural gas. And several other reactors are losing money and could close this year.

There are two other easy-to-see effects. The fracking for oil that has opened vast new supplies of gas is producing much of it in places where there is no pipeline. In those cases, the natural gas is burned off, or flared, because there is no way to ship it economically.

According to the Energy Information Administration, last year the producers flared enough gas to have produced 27 million megawatt-hours. That pushed emissions up by 16.5 million tons, about 15 percent as much as the reduction in coal burning saved.

And some of the natural gas escapes unburned. Its main component, methane, is a global warming gas and is far more powerful than carbon dioxide, although it does not persist quite as long in the atmosphere. Even before fracking became widespread, when natural gas was expensive to extract, there were emissions of methane. But from 2007 to 2013, the increase in gas consumption added methane with a carbon dioxide equivalent of about 19 million tons. That would wipe out another 17 percent of the savings from displacing coal. The number could be higher; some experts use a different formula to translate methane into a carbon dioxide equivalent.

There are other less apparent effects, including stunting the development of zero-carbon generating stations.

“Natural gas has also displaced some investment in renewables and nuclear,” according to a paper published in May in Environmental Science & Technology, a journal published by the American Chemical Society. The paper, written by researchers at Duke University, said that weighing all the factors, “whether the net effect is a slight decrease or increase depends on modeling assumptions.”

Natural gas is suppressing the development of new nuclear plants, experts say, leaving the country with an aging fleet of reactors. James L. Connaughton, an adviser to Constellation Energy when it was trying to build a third reactor at the Calvert Cliffs plant south of the District of Columbia, cites the collapse of natural gas prices in 2008 as part of the reason that the company abandoned that project and four more that were to follow.

“Natural gas has made nuclear more challenging,” said Mr. Connaughton, who was also an environmental adviser to President George W. Bush.

It is probably also reducing the growth of wind energy, many analysts said. Wind contributes only slightly to generation capacity needs, but whenever it runs, it saves fuel, mostly natural gas, and that gas is now worth about half of what it was a decade ago.

“There is no question that depressed natural gas prices have had an adverse effect on the wind and solar industries,” said Kenneth Kimmell, the president of the Union of Concerned Scientists and the former commissioner of environmental protection in Massachusetts. “It’s stunting zero-carbon alternatives.”

He added, “Low natural gas prices decrease the benefit of energy-efficiency investments as well,” since the kilowatt-hours saved by installing a better air-conditioner or light bulb are worth less than they would have cost in a world with higher gas prices.

The problem, said Michael Greenstone, a professor of environmental economics at M.I.T., is that while zero-carbon technologies have advanced significantly in the last 10 years, “over the same period, there have been practically unimaginable advances in fossil fuels.”

Limiting carbon emissions will most likely mean resolving to leave cheap fossil fuels in the ground, he said. Almost nothing valuable is left undrilled or unmined, he said. “The history of leaving $100 bills buried in the ground is really a short one,” he said.

And while cheap natural gas helps spur economic development, it has some collateral benefits that are harder to measure, energy experts said. Paul Bledsoe, a White House aide who specialized in climate during the Clinton administration and now is a senior fellow at the German Marshall Fund, said that low natural gas prices enabled the “the suite of emissions reductions across the board” at old coal plants, including mercury, fine particles and sulfur dioxide.

Mr. Bledsoe said the low price was allowing the E.P.A. to push forward with rules limiting emissions of those conventional pollutants. Those rules have forced the retirement of many old coal plants, a step whose cost to the public is minimized by the availability of cheap natural gas as a substitute, he said; if natural gas cost today what it did in 2007, costs would be much higher and the E.P.A.’s ability to act would be much more limited.

Noting that natural gas was squeezing out some zero-carbon energy sources, Mr. Kimmell of the Union of Concerned Scientists said, “It would be a tremendous mistake to rely upon natural gas” to solve the climate problem.

“It’s not only just putting all your eggs in one basket, it’s potentially taking eggs already in the basket and allowing them to break.”