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This article originally provided by The Wall Street Journal

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Expanding the Mined

How U.S. coal companies adapt to safety and environmental pressures may determine their future

By MATTHEW DALTON
November 12, 2007; Page R8

U.S. coal miners sit at the crossroads of worker safety and the environment -- two major public-policy issues that pose threats to the industry as a whole, but offer opportunities for individual companies that can adapt.

Increasing scrutiny of the industry's environmental and safety performance has put a premium on companies that can mine coal more safely while causing less environmental damage.

Producers that can adapt to these new requirements also may benefit as higher compliance costs force other mining companies to close production, leading to less supply and higher prices.

"The market price of coal must ultimately reflect the cost of mining it safely," says Mark Liinamaa, coal-company analyst at Morgan Stanley.

A string of tragic accidents at coal mines since the beginning of 2006 has elevated the issue of mine safety, prompting passage of the federal Miner Act in 2006 and similar legislation by the state of West Virginia. In 2006, there were 47 coal-mine fatalities, up from 22 in 2005, according to the Department of Labor. Coal mining was the country's fifth-most dangerous profession in 2006, according to the government's data.

"How we deal with the issue of mine safety may very well determine the future of our industry," Brett Harvey, chief executive of Consol Energy Inc., said during a speech in August to the Utah Mining Association.

Mr. Harvey's speech came just days after six Utah miners died during a cave-in at the Crandall Canyon Mine in Huntington, Utah, owned by Murray Energy Corp., a privately held company based in Cleveland. Three rescuers died in a second cave-in at Crandall Canyon as they were searching for the trapped miners.

The U.S. Miner Act requires two rescue teams to be located within an hour of every mine; more emergency underground air supplies; and the use of wireless communication and tracking systems to locate trapped miners. The act increases criminal and civil penalties against mine owners.

The Mine Safety and Health Administration, or MSHA, also issued emergency rules earlier this year that require underground miners to improve strength seals, which are designed to contain methane and dust in abandoned areas of a mine and should be able to withstand explosions. Some 14,000 such seals exist in mines across the country.

The MSHA has significantly increased its inspection and enforcement efforts, mine owners say. "The biggest impact more often not isn't the cost of a fine. It's how long the section is disrupted while the inspector's performing his job," Ben Hatfield, chief executive of International Coal Group Inc., in Scott Depot, W.Va., said on an October conference call with investors and analysts. A dozen miners were killed at International Coal's Sago Mine near Buckhannon, W.Va., in an accident in January 2006. Investigators attributed the disaster to a methane explosion ignited by lightning.

Digging for Details

Some analysts say that coal companies have yet to feel the full brunt of the new requirements. Miners still haven't replaced many of their underground seals or purchased all of the new safety equipment. The exact cost of fully implementing the new rules is difficult to calculate, analysts say.

"The thing I struggle with is trying to quantify it," says Pearce Hammond, vice president of institutional research at Simmons & Co. International Ltd., an energy-focused investment bank in Houston. "It's clearly had an impact on productivity, but the companies haven't been that forthcoming."

More requirements may be on the way. The House Education and Labor Committee approved legislation last month that would cut in half the respirable dust standard, intended to prevent the debilitating Black Lung disease. The move comes in response to a study by the National Institute for Occupational Safety and Health that found incidence of the disease had doubled over the past five years.

"Either the dust standard is OK and MSHA is not enforcing it like it should be, [or] it's too high," says Phil Smith, spokesman for the United Mine Workers of America, based in Fairfax, Va. "We think it's probably a combination of both."

The House bill would also subject so-called "retreat mining" -- in which roof supports are removed and part of the mine is intentionally allowed to collapse -- to closer scrutiny from the MSHA. The Crandall Canyon mine had received approval to conduct retreat mining, though it's unclear whether the practice played a role in the mine's collapse. Among the bill's other provisions is a requirement for mine owners to install underground air refuges where miners can wait for help after a mine cave-in. Sen. Edward Kennedy has introduced similar legislation in the Senate.

Industry analysts expect bigger mining companies with highly productive underground mines, like Pittsburgh-based Consol, the largest underground miner in the U.S., to be able to afford the new safety measures.

Trouble in Appalachia

But underground miners in the central Appalachian region, which includes southern West Virginia, eastern Kentucky and southwestern Virginia, are likely to be more affected. The mines there tend be smaller, older and higher cost -- and less able to pay for new underground mine-safety regulations. Miners have already been coping with higher labor and fuel costs associated with the region's underground mines.

As a result, central Appalachian companies such as Massey Energy and James River Coal Co., both based in Richmond, Va., have been trying to switch more of their production to surface mining, which in central Appalachia involves the controversial technique of mountaintop mining. Coal companies use explosives to blast the tops off of mountains, displacing thousands of tons of rubble into nearby streams.

But these companies face major obstacles on this front as well. Environmentalists contend that the coal companies and the federal government, which grants permits for companies to fill streams with debris, are violating the Clean Water Act. The environmentalists won a major victory earlier this year when a federal judge in the U.S. District Court for the Southern District of West Virginia blocked environmental permits for four of Massey's mountaintop mining operations.

The Army Corps of Engineers, which issued the mining permits, Massey and other miners have said they will appeal the ruling. Previously, the coal industry and the Corps have argued that courts should defer to the Corps's expertise on the environmental impacts of mountaintop mining. But this case and other pending litigation filed by environmental groups have, for the time being, limited surface mining in the Appalachian region. That leaves more market share for coal miners using other methods in other regions that don't have the environmental-permit problems of Massey and other central Appalachian producers. Those companies are Consol and other producers in Wyoming's Powder River Basin: Peabody Energy Co. and Arch Coal Inc., both based in St. Louis, and Foundation Coal Holdings Inc. of Linthicum Heights, Md. Consol owns mostly underground mines, while Wyoming miners get their coal from just below the state's rolling grasslands, without creating large amounts of rubble that contaminate streams.

Carbon Emissions

The other major environmental issue confronting the coal industry is global warming. Three years ago, the coal industry expected that dozens of new coal-burning units would get built in the U.S. over the next decade, as power companies would turn to coal for their fuel due to the high price of natural gas.

But as the likelihood of global-warming regulations has grown, power companies have backed off their plans to burn coal, which produces more than twice as much carbon dioxide, the main global-warming gas, as burning natural gas.

"The coal boom of three to four years ago is over," says Roger Ballentine, president of Green Strategies Inc., a Washington, D.C.-based energy and environmental consulting firm. Mr. Ballentine advised Dallas-based power company TXU Corp. during its private-equity buyout by Kohlberg Kravis Roberts & Co. of New York and TPG of Fort Worth, Texas, which resulted in TXU canceling eight of the 11 coal-burning power plants it was planning to build in Texas.

Any coal-burning plants from now on that do get built, Mr. Ballentine says, will need to be "carbon-capture ready," meaning they must be able to capture the carbon-dioxide emissions from these plants and inject the gas back into the ground.

That means plants must be located near a geological formation that can receive the gas, such as caverns far underground, and it means that plant capacities must be overbuilt to accommodate carbon capture and storage, thus lowering plant capacities.

"What doesn't make sense is building a plant that can't do carbon capture and storage," Mr. Ballentine says.

Write to Matthew Dalton at Matthew.Dalton@dowjones.com

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