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Home My WebLink AboutAPA2952- SUSITNA HYDROELECTRIC PROJECT FEDERAL ENERGY-REGULATORY COMMISSION PROJECT No.711 .. _0) ~~ ~ 3==0·8c~ -====-- ANALYSIS OF FACTORS AFFECTING DEMAND,SUPPLY AND PRICES OF RAILBEL T COAL PREPARED BY DAMES &MOORE DRAFT REPORT UNDER CONTRACT TO Alaska Power Authority ========.J [}{]~~~~=~IID~®©@ SUSITNA JOINT VENTURE SEPTEMBER 1985 DOCUMENT No.2952 N). N ~~(j"--~ .::J- ,~~a <:J 0 lrJ ~ rn fY\ Document No.2952 Susitna File No.40.12.1 iK \1{'l.S ,Se F-li=rL nD.'2-452 SUSITNA HYDROELECTRIC PROJECT ANALYSIS OF FACTORS AFFECTING DEMAND, SUPPLY AND PRICES OF RAILBELT COAL Prepared by Dames &Moore Charles Mann Marvin Feldman William Wade Under Contract to Harza-Ehasco Susitna Joint Venture Prepa red for Alaska Power Authority ,0 •..'~.:··t .: ;.". Dr'a:ft Repor,t, '~.•c September 1985 ARLIS Alaska Resources Library &Information Services Anchorage,Alaska TABLE OF CONTENTS 2.0 COAL PRODUCTION AND TRANSPORTATION COST ESCALATION 1.0 INTRODUCTION:ALASKA RAILBELT COAL 1.1 Purpose of This Report 1.2 Organization of This Report . . . . . ..... . ... . . .. 1 1 1 4 Ll M I N 0')..-...q ...q 0 0 3.40 ,r~~1lt ID 3.5ID I"- M M i__JJ - 2.1 Historical Coal Price Trends in the Twentieth Century •••4 2.1.1 A Note on Productivity • • • • •• • • • •6 2.2 Factor Cost Escalation Rate Estimates ••10 2 .2.1 La bo r Ra t es • • • • • • • • • • • • • • •11 2.2.2 Energy Price Escalation.•••••••••••18 2.2.3 Royalties.• • • • • • • • • • • • • • •••19 2.2.4 Non-Escalating Production Costs.• • • • • • • •19 Escalated Production Costs for Beluga and Nenana Mines 1983-2050 •••••••••••••••••••••••••23 Rail Transportation Cost Escalation •••• • • • •24 2.4.1 Current Alaska Rail Tariffs.• • • •••••24 2.4.2 Rail Cost Escalation • • • • • •34 2.4.3 Conclusions Regarding the Railroad Cost Escalation •37 3.0 EXPORTS OF ALASKA COAL TO THE PACIFIC RIM MARKET AND PROJECTED NETBACK PRICES ••••••••• • • • • • • • • • • • • •38 3.1 Introduction to Pacific Rim Markets For Alaska Coal •••••38 3.1.1 Alaska Coal Will Move Into Electric Power Sector ••39 3.1.2 Market Study Focus on Net Imports.••••39 3.2 Pacific Rim Domestic Coal Production • • • • •42 3.2.1 Philippines.• • • • •••••••44 3.2.2 Thailand • • • • • • •••••46 3.2.3 Malaysia • • • • • •• • • • • • •46 3.2.4 Japan.• • • • • • • • • • • • • • •47 3.2.5 Korea.• • • • • • • • • • • ••47 3.2.6 Taiwan . • . ...•••.•.........47 3.3 Competing Suppliers for the Pacific Rim Import Market •48 3.3.1 Estimating Costs of Coal Supply •••••••••••48 3.3.2 Production Cost Estimates of Competing Suppliers 51 3.3.2.1 Australia • • • • • • • • • •••52 3.3.2.2 China • ••••59 3•3•2•3 Canada.• • • • • • •• •62 3.3.2.4 Colorado.• • • • • • ••••67 3.3.2.5 Coal Supply:Powder River Basin.•••69 3.3.3 Factor Cost Increases For Supply Cost •74 3.3.3.1 Australia and Canada.• • • • • •75 3.3.3.2 Colorado and Wyoming.• •• •80 3.3.4 Ocean Freight Costs •••••••••••••••••80 Compilation of Aggregate Solution Curve by Year •84 Supply/Demand Analysis and Price Forecast •••••••••91 3.5.1 Market Demand • • • • • • • • • • • • • • • • • • • •92 3.5.2 Supply/Demand Comparison and Prices Without Alaska Exports • • • • • • • • • • • • • •• • •94 3.5.3 Market Penetration of Alaska Coal ••••••••••105 LIST OF TABLES PAGE TABLE 2-1 TABLE 2-2 HISTORICAL TRENDS OF COAL PRICES •••••••••••••••••••••••••• HISTORICAL TRENDS OF REAL HOURLY WAGES IN THE BITUMINOUS COAL INDUSTRY AND IN ALL MANUFACTURING 7 INDUSTRIES •••••••••••••••••••••••••••••••••••••••••••••.e • ••14 TABLE 2-3 FUEL AND ELECTRICITY PRICE PROJECTIONS •••••••••••••••••••••21 TABLE 2-4 TABLE 2-5 SUMMARY OF PRICE ESCALATION EF~ECTS ON BELUGA COAL PRICES.........................................25 SUMMARY OF PRICE ESCALATION EFFECTS ON NENANA COAL PRICES.........................................25 TABLE 2-6 TABLE 2-7 TABLE 2-8 TABLE 2-9 TABLE 2-10 PRODUCTION COST ESCALATION -BELUGA MINE 1 MMTPY ••••••••••• PRODUCTION COST ESCALATION -BELUGA MINE 3 MMTPY ••••••••••• PRODUCTION COST ESCALATION -BELUGA MINE 8 MMTPY ••••••••••• PRODUCTION COST ESCALATION -BELUGA MINE 12 MMTPy •••••••••• PRODUCTION COST ESCALATION -NENANA MINE INCREMENTAL 2 MMTPY ••••••••••• 27 28 29 30 31 TABLE 2-11 PRODUCTION COST ESCALATION -NENANA MINE NEW 3 MMTPY...................32 TABLE 2-12 TABLE 2-13 TABLE 2-14 TABLE 3-1 TABLE 3-2 TABLE 3-3 TABLE 3-4 TABLE 3-5 ALASKA RAILROAD TARIFFS FOR COAL SHIPMENTS ••••••••••••••••• u.S.AVERAGE RAILROAD COST AND ESCALATION RATES •••••••••••• RAIL PRICE ESCALATION . ESTIMATED COAL CONSUMPTION ••••••••••••••••••••••••••••••••• COAL CONSlJMl"TION ••••••••••••••••••••••••••••••-••••••••••••• CURRENT AND FUTURE AUSTRALIAN PORT CAPACITy •••••••••••••••• REPRESENTATIVE COSTS AND FOR/FOBT PRICES ••••••••••••••••••• PROJECTIONS OF POTENTIAL CHINESE STEAM COAL EXPORTS •••••••• 33 35 36 41 43 55 57 61 LIST OF TABLES (Continued) PAGE TABLE 3-6 STEAM COAL RESERVES OF WESTERN CANADA ••••••••••••••••••••••65 ,.... TABLE 3-7 TABLE 3-8 TABLE 3-9 TABLE 3-10 CALCULATION OF COMPOSITE ESCALATION RATE FOR FOBT COST OF COAL -AUSTRALIA...................................79 CALCULATION OF COMPOSITE ESC~TION RATE FOR FOBT COST OF COAL -CANADA......................................79 CALCULATION OF COMPOSITE ESCALATION RATE FOR FOBT COST OF COAL -COLORADO....................................81 CALCULATION OF COMPOSITE ESCALATION RATE FOR FOBT COST OF COAL -WYOMING.....................................81 TABLE 3-11 TABLE 3-12 TABLE 3-13 PACIFIC RIM SHIPPING DISTANCES ••••••••••••••••••••••••••••• RESERVE COMMITMENTS FOR PACIFIC RIM EXPORT ••••••••••••••••• ESTIMATED PACIFIC MARKET PRICES BY YEAR WITHOUT 83 93 TABLE 3-14 TABLE 3-15 TABLE 3-16 TABLE 3-17 ALASKA EXPORTS.............................................100 RESERVE COMMITMENTS BY YEAR AND SOURCE.....................102 PROJECTED EXPORTS OF MAJOR PACIFIC RIM STEAM...............103 PACIFIC RIM MARKET PRICES ALASKA NET BACK PRICES AND ALASKA PRODUCTION COSTS................................106 PROJECTED EXPORTS OF MAJOR PACIFIC RIM STEAM COAL EXPORTERS 2000-2040...................................109 -, - TABLE 3-18 TABLE 3-19 REVISED RESERVE COMMITMENTS OF CPMPETING SUPPLIERS ACCOUNTING FOR ALASKA COAL EXPORTS ••••••••••••••••••••••••• EXPORTS AND RESERVE COMMITMENTS OF ALASKA COAL ••••••••••••• 110 112 FIGURE 1-1 FIGURE 2-1 FIGURE 2-2 FIGURE 2-3 FIGURE 2-4 FIGURE 2-5 FIGURE 2-6 FIGURE 2-7 FIGURE 3-1 FIGURE 3-2 FIGURE 3-3 FIGURE 3-4 FIGURE 3-5 FIGURE 3-6 FIGURE 3-7 FIGURE 3-8 LIST OF FIGURES PAGE RAILBELT STUDY AREA.........................................2 SUSITNA HYDROELECTRIC PROJECT REAL COAL PRICES..............5 PRODUCTIVITY TRENDS BY METHOD OF MINING,1948-1982..........9 REAL HOURLY WAGE RATES -BITUMINOUS VS ALL INDUSTRIES.......13 REAL HOURLY WAGE RATES -ALL INDUSTRIES.....................16 REAL HOURLY WAGE RATES -BITUMINOUS COAL WORKERS............17 PROJECTIONS OF ENERGY PRICES FOR ELECTRICITY AND DIESEL FUEL,1984-2050......................................20 COST ESCALATION -BELUGA 8 MMTPY MINE.......................26 AUSTRALIAN THERMAL COAL.....................................58 COAL REGIONS OF CANADA......................................64 SUPPLY CURVE FOR WESTERN CANADIAN COAL......................68 MAP OF THE DENVER &RIO GRANDE WESTERN RAILROAD AND CONNECTIONS.............................................70 SUPPLY CURVE OF COLORADO COAL...............................71 PRODUCTIVITY TRENDS BY METHOD OF MINING,1948-1978..........76 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,1990............................85 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2000............................86 FIGURE 3-9 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2010............................87 FIGURE 3-10 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2020............................88 FIGURE 3-11 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2030............................89 FIGURE 3-12 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2040............................90 LIST OF FIGURES (continued) PAGE FIGURE 3-13 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2000...........................9S FIGURE 3-14 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2010...........................96 FIGURE 3-15 STEAM COAL CUMULATIVE SOLUTION-CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2020 ••..••.••.••.•.......•..... FIGURE 3-16 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2030 •••••....••••........•.•..• 97 98 FIGURE 3-17 STEAM COAL CUMULATIVE SOLUTION CURVE AUSTRALIA, CANADA,COLORADO &WYOMING,2040...........................99 1.0 INTRODUCTION:ALASKA RAILBELT COAL 1.1 PURPOSE OF THIS REPORT The Railbelt area encompasses seven maj or coal fields t as illustrated on Figure 1-1.Two of these fields t Beluga and Nenana t have the greatest economic potential.Coal from these fields could provide supplies for electrical generation in both the Railbelt and the Pacific Rim nations. Surface minable coal resources in both these fields are sufficient to main- tain a very large annual production. Because of the abundance of Railbelt coal resources and because of their apparent commercial viabilitYt coal is the major component of the thermal alternative scenarios in the economic analysis of the Susitna hydroelectric project proposed by the Alaska Power Authority. 1 .2 ORGANIZATION OF THIS REPORT The price of Railbelt coal supplies to electric utilities over the eco-· nomic life of the proposed Susitna project (1993-2050)can be estimated in a number of ways.The cost of production and transportation is an irredu- cible lower bound on price.No one will supply coal on a long-term basis for less than the full cost of production.Section 2.0 of this report documents Dames &Moore's projections of future production costs.These projections begin with 1985 production cost estimates for hypothetical railbelt area mines developed by the Paul Weir Company.Based on histori- cal price trends and future projections of the cost of factors of produc- tion,Dames &Moore developed real price escalation factors.Dames &Moore applied those escalation factors to Paul Weir Company's present production cost estimates in order to forecast future production costs.Railroad transportation costs for transporting Nenana coal to a suitable generating site are also projected.The analysis does not include the production cost increases over time which would result from resource depletion. The Pacific Rim supply/demand balance and resulting price structure are also relevant for Railbelt coal.Section 3.0,which develops the analysis 1 i 4 ~'" "'... ,-' FIGURE 1-1 COAL RESOURCES _FIELDS HAVING SUPERIOR POTENTIAL ~OTHER FIELOS I' RAILBELT STUDY AREA 2 •.--- of Railbelt coal in the context of future Pacific Rim demand ~concludes that Beluga coal will be competitive in this market.Because Railbelt coal producers would have the option of selling coal on the world"·market at a higher netback price than their production costs there is good reason to believe that netback price rather than production cost will govern the domestic coal price faced by Railbelt utilities.Section 3.0,therefore, carefully documents supply,demand,and price conditions expected to pre- vail in the Pacific Rim for 1990-2040. This report has several appendices.These appendices contain the docu- mentation of analysis provided in Sections 2~0 and 3.0 as well as copies of the sourc~documents from which much of the data contained in this report were obtained. 3 ~~~-------------=r,..,.,..---_"',.....-_-----~- ...... i~' 2.0 COAL PRODUCTION AND TRANSPORTATION COST ESCALATION Production costs for hypothetical Beluga and Nenana coal mines were estimated by Paul Weir Company.The Weir estimates are only the starting point for projecting future production costs,inasmuch as they yield the levelized cost per ton stated in January "instant build"1983 dollars. These figures must be escalated to take into account the projected real changes in the cost of operating a mine over the 1993 to 2050 period of analysis."Real"price changes are increases over and above the general inflation rate. Dames &Moore has performed an analysis of the factors of production and other operating costs in order to project their real escalation rates. Labor,fuel and lubricants,and electricity costs are all expected to rise faster than the general inflation rate.Royalties are a fixed percentage of selling price.As other production costs escalate,royalty payments then escalate as well,amplifying the effects of escalation of other fac- tors.Production cost factors which are not projected to rise include capital costs,normal profits,income taxes,production taxes,and parts and supplies. 2.1 HISTORICAL COAL PRICE TRENDS IN THE TWENTIETH CENTURY Historical data support the fact that real coal prices have trended upward throughout the Twentieth Century.Figure 2-1 illustrates this esca- lation.Data for real coal prices were obtained from a time series of bi- tuminous coal prices compiled by the U.S.Department of Commerce.1 ,2 This series,which extends back to the beginning of the century,expresses bitu- minous coal prices in nominal dollar terms.These nominal costs were corrected to eliminate the effects of changes in the value of the dollar using the Wholesale Price Index.3 ,4 The data in Figure 2-1 reflect this 1.u.s.Department of Commerce,1971,Historical Statistics of the U.S. Colonial Times to 1970,Part I (For 1910-1970)Series M96. 2.Ibid.,1983 Statistical Abstract of the U.S.1982-83,p.715,Table ~(for 1970-81). 3.~.cit.Note 1,Series E23,p.199 (For 1910-70). 4.~.cit.Note 2,Table 751,p.456 (For 1971-82). 4 -J -]1 )-"~)]J t II ~-1i.jiJ•w .1 1 -~1.¥ 1.4 1.3 1.2 1.1 1.0 ::) t- eD 0.9:E :E....... U1 .,. 0.'N•en-0.7 0.8 0.5 0.4 f\ ~ ., j, r A I -.------->-.-------I ~/ v -\ ~ ~-rJ vv -- """v -_. t-rj H G) C ~ I\J I I-' 0.3 1900 1910 1920 1930 1940 YEARS 1950 1960 1910 1980 Source:See Table 2-1 SUSITNA HYDROELECTRIC PROJECT REAL COAL PRICES correction. 2-1. Table 2-1 documents the calculations used to -derive Figure rfI'IVll Overall t between 1900 and 1980 real coal prices have escalated at an a verage compound annual rate of 1.2 percent.Even prior eo the dramatic price rise in 1973,coal prices from 1900-1973 escalated at a real annual rate of 0.8 percent. Historically,the factors driving the real price escalation of coal include real labor cost escalation.price escalation of substitute energy sources and resource depletion effects.Countering the trend toward increasing coal prices are increases in p-roductivity which occurred as large,;,.scale mechanized surface mining techniques replaced labor-intensive underground mining.Despite these cost-saving productivity increases,real coal prices have risen steadily.There is good reason to expect this trend to continue into the next century because the forces causing the escalation will likely continue t while the productivity increases (which tend to lower prices)have probably peaked out. 2.1.1 A Note on Productivity Labor costs represent a large part of production costs.Increases in wages can be offset by increases in labor productivity.Productivity increases can occur due to improved mining methods and equipment.Figure 2-25 represents productivity between 1948-1983 in the U.S.coal mining industry.Surface mining productivity increased at an average rate of 3.2 percent per annum through 1973.This increase was due to a shift to better mechanized production and larger and more powerful equipment in surface mines.However t such trends are not without limit and may even be reversed.Starting in 1966 t United States surface mine productivity began to level off and then to decline;this was well before the imposition of stringent reclamation regulations.The effects of more stringent safety and environmental regulations,along with labor force changes and other 5.Energy Information Administration,Annual Report to Congress,Vol.II, 1982. 6 -~~---------------""'----r"'~------------------------- NOTES TO TABLE 2-1: a.U.S.D.O.C.,1975,Historical Statistics of the U.S.,Series E,p.99 (1900-1970). b.Ibid.,Statistical Abstracts of the U.S.1982-3,Table 1281,p.717. c.Column (1)reindexed from 1967 base to 1982 base. d..2.£.cit.Note (a),Series M96,p.589. e..2.£.cit.Note (b),Table 1278,p.715 • f.Column (3)indexed to 1982 W.P.I. g.Column (4)divided by 24 (average BTU content of bituminous coal equals 24 MMBTU per ton). ~I 8 -----------, ~~I<fl FIGURE 2-2 (llill'h, i-, \- !fI'lIlr.ll\. ,:I,-,;, d:1io'"'1Io \-\ I I ""',"(-~!i ,J.. ~~ ,.- ! ,i,..•• •/"..= 0 .. Z - -Z (I-I ~~s /- ~ 0 I '~ Q 'i a "I • - % 4 \ ~ \i Jiii\ 2 ... ,~l'i! \ >\ =\~ ~ Q \t!z \ :.u:\ to-\ P"'">\ l-- , L:> , -\g \ \- a 0 \ ~~,f ,I\ \ \~,J: '-' ,,1 I ,...- ~ ,- i~I II- ~4 I 21 I'.oW. ~£•• ____,~9 ~ ~, factors,led to a 1.8 percent per-annum decline in U.S.surface mining productivity -from 1973 to 1983.Though reclamation requirements are already fairly strong,increased regulation is possible and -may tend to offset further productivity gains achieved through better technology. Figure 2-2 suggests,on balance,that productivity in surface mining was flat during the 1960's,declined in response to regulations and is flat now at a lower level of productivity. To translate labor rate increases into coal mining unit cost increases net of productivity gains recognizes explicitly that other factors beyond labor utilization and wages act on mining costs.Increased regulation, taxation,and depletion are important considerations.These three factors act to raise unit costs,while only productivity gains act to lower cost. Clearly,as Figure 2-1 shows,real coal prices rose from 1900 to 1973 (at 0.8 percent annually)despite large technological improvements in mining. Thus,we estimate that the trend in unit labor costs will continue to raise the real cost of coal mining.Productivity increases,if any,are not expected to overcome the effects of increased regulation,taxation and depletion.At best overall labor productivity will remain flat,allowing any real wage escalation to affect unit production costs. 2.2 FACTOR COST ESCALATION RATE ESTIMATES Coal contracts negotiated between coal producers and utilities attempt to strike a balance between price stability and recognition of potentially destabilizing economic forces. Agreements between coal suppliers and electric utilities for the sale/purchase of coal are usually long-term contracts,which include a base price for the coal and a method of escalation to cover cost of mining increases in future years.The base price provides for recovery of the capital investment,profit,and operating and maintenance costs at the level in existence when the contract is executed.The intent of the esca- lation mechanism is to recover actual increases in labor and material costs f rom operation and maintenance of the mine.Typically the escalation 10 - ~- mechanism consists of an index or combination of indices such as the pro- ducer price index,various commodity and labor indices,and consumer price index applied to operating and maintenance expenses,and/or regulation related indices.These characteristics are exhibited by the Usibelli contracts with FMUS and GVEA (FMUS,1976;Rufman,1981). In addition to price escalators,long-term coal contracts typically include "price reopener"clauses.These clauses allow renegotiation of the base price if some agreed-upon measure of coal market prices falls above or below a predetermined level.These clauses protect both utilities and coal producers against major fluctuations in mark~t prices resulting from forces beyond either party's control,such as major supply disruptions or unusual- ly severe swings in the business cycle.As illustrated in the discussion in How to Negotiate and Administer a Coal Supply Agreement (McGraw-Hill, 1981,pp 350)price reopeners are becoming more common because coal prices have been somewhat unstable over the last decade and because mining com- p anies do not want to be "locked in"to current market prices that may not reflect longer run prices. The following analysis attempts to forecast future coal prices, assuming that those prices will be based on the cost of production,as reflected in a long-term utility coal supply contract.From the above discussion it is clear that the coal supply contract would reflect changes in operating costs including labor costs and energy supply costs and royalties.Other factors which would not escalate in real terms include capital costs,parts and supplies,profit,and production taxes.Each of these categories is discussed below. Resource depletion would,over time,cause additional escalation of coal prices.Depletion caused price escalation,although potentially significant,is not considered in this analysis.Omission of this con- s ideration creates a conservative bias in the cost escalation factor esti- mates reported in this study. 2.2.1 Labor Rates Long-range historical data indicate that for the past seventy years real U.S.wage rates have risen both in the bituminous coal industry and in 11 all U.S.industries.There is good reason to believe that the trend will continue for the next seventy years.This is because the basis macroecon~ mic projections on which the energy balances and the other economic analyses of the Susitna project depend indicate a long-term continuing growth in the U.S.GNP and GNP per capita.Rising wages are a basic reflection of improving prosperi ty. Figure 2-3 (documented by Table 2-2)shows the real wage rates for bituminous coal workers and all industries from 1910 through 1981.The nominal dollar wages for annual statistics (compiled by the U.S.Department of Commerce Bureau of Labor Statistics)were corrected for changing prices using the Consumer Price Index.The hourly wages shown on Figure 2-3 are thus real (constant dollar)1985 equivalents.There is a very defini te upward tend in both wa:ge series al though bI tuminous workers consistently receive higher wages than the all-industry average.6 A statistical procedure fas used to establish rigorously the historic trend in wage rates.First a log transportation was performed on both wage series to yield the annual rates of change.These transformed series then were regressed against time using an ordinary least squares (OLS)linear regression.The coefficient of these regression lines indicates the best fitting linear (in logs)estimate of this annual rate of change. Both the bituminous and all-industry series yielded a regression co- efficient of 0.022 on the wage variable,i.e.,a 2.2 percent average annual rate of change.Figures 2-4 and 2-5 illustrate how the fitted trend line corresponds to the observed real annual wage rates.An R square test was 6.The U.S.wage data for the bitumious coal industry and all manufacturing a re used as proxy for Alaska coal (which is subbi tumious)because of the lack of Alaska coal industry wage data.Information on coal wages in Alaska 1s not publicly available according to the Alaska Division of Labor.The only available series for Alaska is ca lled Other Mining, which includes all non-petroleum mining activities.Even this series is only available after 1971.Long term publicly available data on sub- bituminous coal or lignite mining wages for the U.S.as whole are also lacking,since such coal has not been mined in significant quantities in the U.S.Therefore wage series for the U.S.bituminous coal industry and for all industries are used as proxies for Alaska coal industry wages throughout this analysis. 12 J tTj H G)c: ~ tv I W c. } 1980 )f 1970 1::,. f 1960 1 1940 1950 YEARS 1 1930 ) 1920 'f~ 1\ ___BITUMINOUS WORKERS ,-\.".11 \ --ALL INDUSTRIES I, /',...,J Ir'''......J I Ir .",/ / // ~"",-./ / I "..I,.,.,I',II"'W''\J....J 3 2 i'T"11 I I , I I I'I , I I 1I , I l I , ,j I I I I ,I I , I I I I I I I I'I I I I I I I I I I I I I I I I I I I I I I I I I I I I ri 1910 '".}l 15 14 13 12 0 11 C? CO 10 0),... t-9 Z c(8 t-en Z 7 0 0 6 5 4 1 .-. w Source:See Table 2-2 BITUMINOUS VS ALL INDUSTRIES REAL HOURLY WAGE RATES 1\l"";'" TA8LE 2-2,HIS70R:CA ...""RNO O~REA~HO ..,;(_V WAGES "Tf-o::,.. 81 T:.lM!NOUS COAL.I~O~S-R'A'"rr..AL_M~G !ND~S-R!ES----------------------------------------------------------------------------------------------------",OURL:'HOURLY C~I CPl HOU R~y HCUR_v w"'Ol..ESAl-E W,",C_~3A_E WAGES WAGES (d ,e)~967=1 oJg,h),985='00 WAGES WAGES PRICE Q~:c:.'*""~VEAR S!T:.IM (a,b)ALL INO SI-UM (1)ALL IND(llI)-INDEX (n,e):"CEX (q) NO~.$NO ...$(It)1985 $1985 $1967=~00 lSe5='C:----------------------------------------------------------------------------------------------------'9101 0.32 1 0.19 1 28.0 8.8 3.53 2.15 36.,..:; 1 9 ~11 0.33 1 0.19 1 28.0 8.8 3.74 2.15 33.5 '0.4-.19121 0.34 1 0.20 1 29.0 9.1 3.7:2 2.19 35.6 I,.... '9131 0.34 1 0.21 1 29.7 9.4 3.63 2.24 36.0 ''.219140.35 0.22 30.1 9.5 3.69 2.32 35.2 10.9 19151 0.43 1 0.27 1 30.4 9.6 4.44 2.82 35.3 19'61 0.5G 1 0.32 1 32.7 10.3 4.87 3.10 44.,13.7~-'''!19171 0.58 1 0.37 1 38.4 12 . 1 4.77 3.06 60.5 '6.6 1918 0.65 0.42 1 45.1 14.2 4.60 2.95 67.6 21.a 19'9 0.73 0.47 51.8 16.3 4.47 2.88 71 .4 22.2 19201 0.75 1 0.55 50.0 18.9 3.97 2 .9'79.6 24.7 19211 0.77 1 0.51 53.6 16.9 4.56 3.C2 50.3 '5 .5 p1-'"'9221 0.79 1 0.48 50.2 15.8 4.99 3.03 49.9 '5.5 1923 0.82 0.52 51.1 16.1 5.09 3.23 51 .9 16.'1924 0.79 0.54 51.2 16.,4.89 3.35 50.5 15.7 1925 0.77 0.54 52.5 16..6 4.55 3.26 53.3 'L5 1925 0.76 0.54 53.0 16.7 4.55 3.23 51.S 1 S a 1927 0.73 0.54 52.0 15.4 .1:.45 3.29 49.3 ' 5 . 3,928 0.69 0.56 51.3 16.2 4.27 3.46 50.0 '5.5 1929 0.56 0.56 51.3 16.2 4.08 3.46 49.1 15.2 ,930 0.56 0.55 50.0 15.8 4.19 3.49 44.6 13.8 ,93'0.53 0.5'45.5 14 .4 4.38 '3.55 37.5 ',.7 '932 0.50 0.44 40.9 12.9 3.88 3.41 33.6 10.4 1933 0.49 0.44 38.8 12.2 4.01 3.60 34.0 10.6 '93'0.65 0.53 40.,12.6 5.14 4.19 38.6 12.C 1935 0.72 0.54 4'.1 13.0 5.56 4.17 41.3 12.8 1936 0.77 0.55 41.5 13.1 5.89 4.20 '1.7 ,2.9 1937 0.83 0.62 43.0 13.5 6.,2 4.57 44.5 ,3.8 '938 0.85 0.62 42.2 13.3 6.39 4.65 40.5 12.6 '939 0.86 0.63 41 .6 ,3 . 1 6.56 4.80 39.8 -::.4 ,940 0.85 0.66 42.0 13.2 6.42 4.98 40.5 12 . 6 1 94 ~0.96 0.73 44.1 13.9 6.if 1 5 ..25 45.~'4.0 1942 1.03 0.85 '8.8 15.4 6.70 5.53 50.9 15.8 ,if4 3 1.10 0.96 51.8 16.3 6.74 5.88 53.3 ,5.5 ,944 1 .15 1.01 52.7 16.6 6.92 6.08 53.6 15.5 1945 1 .20 1.02 53.if '7.0 7.06 5.00 54.6 '5.9 1946 1.36 1.08 58.5 18.4 7.3~5.86 62.3 :9.:; 1947 1.58 1.22 66.9 21.1 7.49 5.78 76.5 23.7 1948 1.84 1.33 72.1 22.7 8.09 5.85 82.8 25.7 1949 1.88 1.38 71.4 22.5 8.35 6.13 7e.7 24.4 1950 1 .94 1.44 72.1 22.7 8.53 6.34 81.8 25 ..1: 195 '2.14 1.56 77.8 24.5 8.73 6.36 9 '1.1 2&.'3 lif52 2.22 1.65 79.5 25.1 8.86 6.58 88.6 27.5 ",."1if53 2.40 ,.74 80.1 25.3 9.50 5.89 87.4 27.' 1954 2.40 1.78 80.5 25.4 9.46 7.01 87.6 2'.2 '955 2.47 1.86 8C.2 25.3 9.77 7.35 87.8 27.3 1955 2.72 1.95 81.4 25.7 10.60 7.60 9C.7 28.2 195'2.92 2.05 84 .3 26.6 10.99 7."93.3 29.0 1958 2.93 2.11 B6.S 27.3 10.73 7.73 94.5 254 1959 3.1 1 2.19 87.3 27.5 11.30 7.96 94.8 29.4 1960 3.14 2.26 as.7 28.0 11.23 8.08 94.9 29.5 1951 3.12 2.32 89.5 28.2 11 .05 8.21 94.5 29.3 1962 3.12 2.39 90.6 28.6 ,0.92 8.37 94.8 2S ..!.-1953 3.15 2.46 91 .7 2B.9 10,90 8.51 94.5 29.3 1964 3.30 2.53 92.9 29.3 11 .27 8.64 94.7 29., 1955 3.'9 2.61 94.5 29.8 11 .71 8.76 if6.6 3C.O 1965 3.6S 2.72 97.2 30.S 11.94 B.B8 99.8 31.0 1967 3.75 2.83 100.0 31.5 ,1.90 8.98 ,00.0 3'.0 1968 3.85 3.30 10.!..2 32.8 11.75 10.05 102.5 3'.6""',1959 4.24 3.19 109.8 34.6 12.25 9.22 106.5 33.1 1570 &.58 3.23 116.3 36.7 12.49 8.81 ,10 . 4 34.3 19'1 5.11 1 3.461 121.3 38.2 13.36 9.05 '14.0 35.4 1972 5.64 1 3.71 1 125.3 39.5 ,'.27 9.&0 119.,37.0 1973 5.16 1 3.981 133.1 .2.0 14.57 9.48 134.7 41.8 1974 6.B2 1 4.271 147.7 46.6 14.55 9., 6 160.1 49.7 19'5 7.22 '.53 161.2 50.8 14.21 8.9'174.9 54.3 19~6 7.75 '.85 170.5 53.8 14.42 9.03 183.0 55.8 1977 8.24 5.26 1B1 .5 57.2 14.40 9.20 194.2 60.3 1978 9.49 5.70 195.'61.5 15.4 1 9.25 209.3 65.0-1979 10.26 6.16 217.4 68.5'.14.97 B.99 235.6 73.1 1980 10.86 6.65 246.8 77.8 13.96 8.55 258.8 83.4 1981 ".89 7.25 272.4 85.9 13.85 8.44 293.4 91 ., 19B2 7.63 f 289.1 9,. 1 299.4 92.9 '983 298.4j 94.1 303.1 P 94., ~,1984 307.7 97.0 312.5 9'"'I"" ass 3'7.2 100.0 322.2 100.0 ----------------------------------------------------------------------------------------------------SOU,.c.:Dames &Moo,..c,elcu1et:ions.Jl.01,...1985 ---------------------------------------------------------------------------------------------------- Notes:See next page 14 1-""-r"" -- NOTES TO TABLE 2-2: a.u.s.n.o.c.,1975,Historical Statistics of the U.S.Colonial Times to 1970,Series 0813 (For 1910-1970). b.Ibid.,1983,Statistical Abstracts of the U.S.1982-83,Table 1281,p. ~(For 1970-1981). c.Ibid.,1984,Statistical Abstracts of the U.S.1984,Table 1272,p. Tf.'T: d.~.~.Note (a),p.170-71,Series 0802 (For 1910-1969). e.~.cit.Note (b),p.401. f.~.~.Note (c),p.401,Table 665. g.~.cit.Note (a),Series E135,p.211 (For 1910-1970). h.~.cit.Note (b),Table 757,p.461 (For 1970-82). i.Interpolated or extrapolated data point. j.U.S.Department of Commerce,1981,Survey of Current Business,V.64, No.2,p.55. k.Column (3)reindexed to 1985 •100. 1.Column (l)indexed to 1985 using CPI from Column (3). m.Column (2)indexed to 1985 using CPI from Column (3). n..QE..ci t.Note (a),Series E23,p.199 (For 1910-1970). o.~.cit.Note (b),Table 751,p.456 (For 1971-82). p..QE..~.Note (j),p.55. q.Column (7)reindexed to 1985 •100. 15 L-J (\I I h)I '''..(''\"1\i l\(-.r=- I I .......J '-"I "',L.-I Y Y I\.....:?4- )1 R)E·A.L.~'. l 1 .~1 1 l R-AT~c::7 "•\ I J-,.-=.oJ )')} 11 ALL INDUSTRIES 19801940195019601970 YEARS REGRESSION LINE 1920 1930 ACTUAL WAGESo 2 ~I 111111111111111 1111111 r 111111111111111111111111111 II r 1111I1I1I 11.1 1910 10 I 9~ a *8 .~ If) rP DcPd=h a) rfPa#C (JJo.-7 I- rfD ...- 0 -et 6·aP cP /l- t/) >rj -....- H 111 0 @ f,)5 Dc~D/ ~ !'J [] I .0 o!'o 4-1 rP: ~. 3 I -J'/"' mO:+,.....--.[] l -j 1 )--1 ---.-...}J 1 ,, R E.l\L H ()l.1 R L'~·'('V\i p\GE R~/L1\T ES BITUMINOUS COAL 'WORKERS 'TJ H 2 ~ IV I U1 198019701960 c ottJ ~Q:JCJ 1950 YEARS -REGRESSION LINE 1940 15 14 13 12 *11.., 0)100)-I-9:: ~: I-8I-'en -..,J -.- 0 7u 6 5 4 3 ",,"""""""",, 1910 1920 1930 0 ACTUAL 'WAGES ,.... ,..., -, _. - used to determine how well the derived trend line fits the observed data. For both wage series a 95 percent correlation was obtained,indicating a very close fit (a perfect fit is 100 percent).Thus the historical real wage rate has increased 2.2 percent per year for the past 70 years,whether a 11 indus try or bi tuminous indus try wages are considered.This rate of increase is projected to continue through 2050. 2.2.2 Energy Price Escalation The price of energy inputs used in coal mining has a small but signif- icant effect on production costs.Two energy sources predominate--diesel fuel and electricity.Both of these source-s are projected to escalate in real terms from 1985 to 2050,thus inducing a real escalation of coal mining costs. According to a H-E Composite Oil Price Projection the 1985 constant dollar price of diesel fuel delivered in the Railbelt area is projected to rise from $7.18 to $19.62 per MMBTU (million British thermal units)from 1985 to 2023,then level off due to competition from synfuels.This results in a real average annual price escalation of 2.23 per cent. Lubricant prices are assumed to follow this same price trend. The future cost for electricity in the railbelt is dependent on the method of electrical generation.Because coal price affects the forecast price of electricity in non-Susitna electrical generation,a degree of cir- cularity is implicit in forecasting the electrical price componente of coal mining costs.This circularity,though unavoidable,has a minuscule effect on the coal price escalation rate. According to Harza-Basco Joint Venture proJections,S real electricity prices in the Fairbanks area are expected to remain flat at about 0.096 per 8.Harza-Basco Joint Venture,Bruno Trouille.Personal communication to Marvin Feldman,7/19/84. 18 _. ,..., KWH (or about $28.B6/MMBTU).The prices during this period will be stabi- lized by the intertie to the lower priced Anchorage area grid.From 2010 to 2050 electricity prices are expected to rise at 1.9 percent per year. The average annual real escalation from 1985 to 2050 is projected to be 1.3 percent. The Anchorage area electricity price isO.0479 per KWH ($14.03 per .9MMBTU)in 1985.This price is projected to rise at a real average annual rate of 1.9 percent per year from 1985 through 2050.By 2050 the real (constant 1985 $)price of electricity is projected to be $0.163 per KWH ($47.66 per MMBTU). The energy price projections for diesel oil and electricity are illustrated in Figure 2-6 and documented in Table 2-3. 2.2.3 Royalties Royalty payments are presently set at 12.5 percent of the realization (selling price).As the labor and energy prices escalate in real terms, the royalty payments will also escalate in proportion. 2.2.4 Non-Escalating Production Costs The remaining production costs include depreciation of capital invest- ments,parts and supplies,explosives,normal profits,income and produc- t ion taxes.All of these costs are assumed to remain constant (in real terms)over the 1985 to 2050 assessment period. Capital depreciation,parts and supplies and explosives are assumed to escalate at the same rate as general inflation,thus exhibiting zero real escalation.This is a conservative assumption insofar as the costs for items are driven in part by energy and labor costs which can be expected to escalate. 9.Ibid. 19 )1 'J 1 )1 )-1 1 1 "~ J .'!< j .~)}]1 PROJECTIONS OF ENERGY PRICES FOR ELECTRICITY AND DEISEL FUEL.1984-2050 60 I I ::t 1--en ~ ~ tx: W ll. *N t4) 0 0) 0") .- 50 40 30 20 10 "tIl:lf ~/ /~ ../,-r.. ./.vi"".,//~~.-'~/~~~~-~.~~;,'.•....-.~""",,,~-~~~~"'N~""~/~~~~JEjf383~IB8~~~~~~ -t++++' "1 H 8 ~ IV I (J'I 205020402030202020102000 0"i 1111 111111 11111/11/11/1 1111111111/111/1111111111/11111111111111111 1984 1990 I I IJ DEISEl + YEARS ANCH ElEC o FBNKS ElEC f:;~ItI- TA8LE 2-3:FUEL AND ELECTRICITY PRICE PROJECTIONS ( 1)( 2 )( 3 )(4 )( 5 ) """"l,~---------------------------------------------------------------------- ANCH AREA ANCH AREA F8NK A~EA FBNK A.-:EA OEISEL FUEL ELEC COST ELEC COST ELEC COST ELEC COST YEAR 1985 $/MM8TU 1985 C/KWH 1985 $/MMBTU 1985 C/KWH 1985$/r-"M8TU ---------------------------------------------------------------------- 1985 7.18 4.79 14.03 9.57 28.06 1986 7.18 4.87 14.27 9.51 27.87 1987 7.18 4.95 14.52 9.44 27.68fl'l1I'ilo"1988 7 . 18 5.04 14.77 9.38 27.49 1989 7.39 5.13 15.02 9.32 27.30 1990 7.62 5.21 15.28 9.26 27.13 1991 7.85 5.33 15.63 9.30 27.25,....1992 8.08 5.46 16.00 9.34 27.38 1993 8.34 5.59 16.38 9.38 27.50 1994 8.61 5.72 16.76 9.43 27.63 1995 8.87 5.85 17.15 9.47 27.75 ~1996 9.26 5.99 17.56 9.49 27.81 1997 9.65 6.14 17.99 9.51 27.87 1998 10.05 6.29 18.42 9.53 27.93 1999 10.48 6.44 18.87 9.55 27.99 2000 10.93 6.60 19.33 9.57 28.06,,~\111'"2001 11.41 6.70 19.63 9.57 28.06 2002 11 .95 6.80 19.94 9.57 28.06 2003 12.50 6.91 20.25 9.57 28.06 2004 13.05 7.02 20.57 9.57 28.06 -~2005 13.65 7.13 20.89 9.57 28.06 2006 14.17 7.23 21.19 9.57 28.06 2007 14.68 7.34 21.50 9.57 28.06 2008 15.22 7.44 21.81 9.57 28.06 F'"2·J09 15.79 7.55 22.13 9.57 28.06 20:0 16.38 7.66 22.45 9.57 28.06 2011 16.86 7.80 22.87 9.76 28.59 2012 17.35 7.95 23.31 9.94 29.14 2013 17.86 8.10 23.75 10.13 29.69~lt 2014 18.38 8.26 24.20 10.32 30.25 2015 18.92 8.42 24.66 10.52 30.S3 2016 19.47 8.58 2S.13 10.72 31 .42 2017 20.04 8.74 25.61 10.92 32.01 1"""2018 20.62 8.90 26.10 11.13 32.62 2019 21.23 9.07 26.59 11 .34 33.24 2020 21 .85 9.25 27.10 11 .56 33.87 2021 22 . 11 9.42 27.61 11 .78 34.52 1"'"2022 22.37 9.60 28.14 12.00 35.17 2023 22.64 9.78 28.67 12.23 35.84 2024 22.91 9.97 29.22 12.46 36.52 2025 23.18 10.16 29.77 12.70 37.21 2026 23.46 10.35 30.34 12.94 37.92~, 2027 23.74 10.55 30.91 13.18 38.64 2028 24.02 i 0 .75 31 .50 13.44 39.38 2029 24.31 10.95 32.10 13.69 40.12 2030 24.58 11.16 32.71 13.95 40.89 2031 24.85 11 .37 33.33 14.22 41 .66 2032 25.11 11.59 33.96 14.49 42.45 2033 25.37 11.81 34.6 1 ,4.76 43.26 2034 25.64 12.03 35.27 15.04 44.08,-.2035 25.92 12.26 35.94 15.33 44.92 2036 26.19 12.49 36.62 15.62 45.77 2037 26.47 12.73 37.32 15.91 46.64 2038 26.75 12.97 38.02 16.22 47.53-,2039 27.03 13.22 38.75 16.53 48.43 2040 27.32 13.47 39.48 16.84 49.35 2041 27.58 13.73 40.23 17.16 50.29 2042 27.85 13.99 41.CO 17.49 51 .25 2043 28.11 14.25 41.78 17.82 52.22 2044 28.38 14.52 42.57 18.16 53.21 2045 28.66 14.80 43.38 18.50 54.22 2046 28.93 15.08 44.20 18.85 55.25 2047 29.21 15.37 45.04 19.21 56.30.....2048 29.49 15.56 45.90 19.58 57.37 2049 29.77 15.96 46.77 19.95 58.4.5 2050 30.05 16.25 4.7.66 20.33 59.57 ---------------------------------------------------------------------- Soul"'ce:O~mes &MOOl"'9 cl!l'cul~t;ons.July,1985 ---------------------------------------------------------------------- 21 - - "... - _. NOTES TO TABLE 2-3: Column (l )Delivered diesel fuel proj ections by Sherman H.Clark Associates in a letter dated 23 April 1984 from SHCA to Pillsbury,Madison &Sutro,counsel to APA.Values from 2011-2019,2021-2029,2031-2039 and 2041-2049 interpolated logarithmetrically. Columns (2)and (4)Based on Harza-Basco Joint Venture,Bruno Trouille, personal communication to M.Feldman,July 1984. Columns (3)and (5)Calculated by Dames &Moore based on 3412 BTU per KWH. 22 .... I'''''' Income taxes and profits are assumed to remain constant in real terms because normal profits are based on a return on capital investments,which are assumed not to escalate.Because profits will not escalate,income taxes,which are based on profits,will not escalate. Production taxes include the Alaska License Tax and the federal Black Lung Tax.Production taxes total $0.85 per ton in 1983.They are expected to increase at the general inflation rate over the period of analysis, hence a zero real escalation rate. 2.3 ESCALATED PRODUCTION COSTS FOR BELUGA AND NENANA MINES 1983-2050 The Paul Weir Company has developed mining cost data for several alter- native hypothetical coal mines in the Beluga and Nenana coal fields.The cost data developed by Weir,although levelized over a 38-year mine life, are expressed in "instant-build"January 1983 dollars.That is to say that a 11 years'mining activities are cos ted as if they took place at January 1983 prices • As discussed in Section 2.1 and 2.2 certain cost factors are projected to escalate over time.Using the Weir Company's factor breakdown of levelized costs,Dames &Moore applied the cost escalation factors deve- loped in Section 2.2.The relevant Weir Company data are reproduced in Appendix G. In applying the escalation factors to the Weir Company production cost data,only selected operating cost factors were escalated.Labor costs plus general and administrative costs were escalated at the labor cost escalation factor of 2.2 percent per year.Fuel and lube,and electrical power were escalated at their appropriate rates.Royalties were escalated to reflect the escalation of the above mentioned factors.All other cost factors included in the realization (selling price)were held constant at the 1985 instant-build level;but expressed in 1985$. 23 - ,.... Tables 2-4,2-5 and Figure 2-7 illustrate the effects of factor escala- tion on the production cost of coal at a hypothetical 8 MMTPY (million ton per year)mine at Beluga.Tables 2-6 through 2-11 present the calculations used to estimate the .escalated production costs from 1985 to 2050 for 1,3, 8 and 12 MMTPY mines at Beluga and for an incremental 2 MMTPY mine and a new 3 MMTPY mine at Nenana. 2.4 RAIL TRANSPORTATION COST ESCALATION Nenana field coal from Healy is likely to be transported by rail for Railbelt electrical generation.This coal would almost certainly be burned outside of the Healy area which is in a restrictive Class I airshed due to its proximity to Denali National Park.The thermal alternative scenario assumes that the two new Nenana coalfield-fired generating plants would be located in Nenana,which is the lowest-cost rail haul from the existing Usibelli mine at Healy. 2.4.1 Current Alaska Rail Tariffs Table 2-12 shows the 1985 published Alaska Railroad (ARR)rail tariffs for carload shipments of coal from Healy to alternative destinations. Usibelli Mining Company (UMC)owns and operates a loading facility at Healy.This facility has a capacity for up to about five million tons per year.The cost for loading is included in the price quotes for Usibelli Coal. According to John Gray,Alaska Railroad,(personal communication to Marvin Feldman,Dames &Moore,7/85),unit train operations could reduce rail costs by 15 to 25 percent.However,because the haul distance from Healy to a presumed powerplant site in Nenana is so short (about 60 miles), it would be difficult to have a sufficient rate of utilization to justify the high capital investment necessary for unit train equipment.Thus the $0.39 per MMBTU cost for rail transportation to Nenana might reasonably apply even to large volumes. 24 TABLE 2-4:SUMMARY OF FACTOR PRICE ESCALATION EFFECTS ON BELUGA COAL PRICES -----------------.----------------------------------------~----------------------------------------------------------------- REAL ESCALATION FACTOR RATE PCT 1985 COST 1 MMTPY 1985 $/TON 2050 COST 1 MMTPY 1985 $/TON 1985 COST 3 MMTPY 1985 $/TON 2050 COST 3 MMTPY 1985 $/TON 1985 COST 8 MMTPY 1985 $/TON 2050 COST 8 MMTPY 1985 $/TON 1985 COST 12 MMTPY 1985 $/TON 2050 COST 12 MMTPY 1985 $/TON LABOR 2.20 1 1 .59 47.68 10.17 41 .83 7.28 29.95 7.41 30.13 FUEL &LUBE 1 .58 1 .49 4.13 1.34 3.11 0.90 2.49 I .00 2.77 ELECTRICITY I .90 O.OB 0.26 0.3&1 .24 0.66 2.24 2.42 8.23 CAPITAL+TAX 0.00 20.13 20.13 13.62 13.62 8.51 8.51 8.89 8.89 ROYALTY VAR.4.75 10.31 3.64 8.63 2.48 6.17 2.83 1.23 TOTAL VAR.3B.04 92.51 29.13 69.02 19.83 49.31 22.60 57.85 --~-----------------------------------------~----------------------------------------------------------------------------- SLlurC8:Ddlmes &Moore calculations,July,1985 -------------~----------------------------------------------------------~----------------------------------------------- If) N TABLE 2-5:SUMMARY OF FACTOR PRICE ESCALATION EFFECTS ON NENANA COAL PRICES Source:Dames &Moore calculations,July,1985 t 1 a {i «l t l l f,-(l l J 1 I "l t 11 1 J 1 "'1 )'J ,..~ ...-.....('C'·l-f-S''''''f'!\I 1\-1·-1 ()I\J(j J __")t~,.....~-J f-\...J\I " 1.31 LUG/\B MM IPY MNf 1990 2000 40.00 - 50.()O ----~".-,'.-..-.-..-.._-._'.,-..,_'-_.--'·0 ••••-....••••••••----.-._•••-•••••-. z 30.00 - 0 ~.. IY ldo_ N 0\W 20.00 CAP +TAX 1~~~\1 I-A E3 ()f< YFf\F~S 1 ~.7/)1 r'ur··l//.//I ,...R·'<·~'I Flr'C~",>:2-..J ...[KXJ f\OYAI.1 ,{ Figure 2-7 -------------------------------------------------------------------------------------- I~ CAPITAL+TAX PROFIT+PARTS Ye~r'0%ESC. 1985 $Per'Tol"l LABOR 2.2%ESC. 1985 $Per'Ton FU EL +l.US E VAR.ESC. 1985 $Per'Ton ELECTRICTY 1.9 %ESC. 1985 $Per Ton ROYALTY ~12.5%OF REALIZATION 1985 $Per Tol"l TOTAL ESCAl.ATED COST 1985 $Per Ton $ TOTAL ESCALATED COST 1985 Per MMBTU ---------------------------------------------------------------------------------------~-------- .- - 1983 1984 1985 1985 1987 19a8 1989 1990 1991 1992 '993 1994 1995 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20'0 20 '1 2012 2013 2014 2015 20~6 2017 20,8 2019 2020 2021 2J22 2023 2024 2 ':125 2':12 6 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 20.13 20.13 20., 3 20.13 20.13 20.13 2 O., 3 20.13 20.13 20.13 2 O.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.,3 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 2 a .13 20.13 20.13 20.13 20.13 20.13 2 0.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.i 3 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20., 3 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 20.13 2a .13 2 O.13 20.i 3 11.10 11.34 11.59 1 1 .84 12.10 12.37 12.64 12.92 13.21 13.50 13.79 14 .10 14 .41 14.72 15.05 15.38' 15.72 16.05 15.42 15.78 17.15 17.52 17.91 18.30 18.71 '9.12 19.54 19.97 20.41 20.86 21 .31 27.78 22.26 22.75 23.25 23.76 24.29 24.82 25.37 25.93 26.50 27.08 27.67 28.28 28.91 29.54 30.19 30.85 31 .53 32.23 32.94 33.66 34.40 35.16 35.93 36.72 37.53 38.35 39.20 40.06 40.94 41 .85 42.77 43.71 44.67 45.65 46.65 47.68 1 .49 ,.49 1.49 1 .48 1 .48 1 .47 1 .46 1 .46 1 •5 1 1.57 1 .52 1.68 ,.75 1 .81 1 .88 1 .95 2.02 2.09 2.16 2.22 2.29 2.35 2.43 2.50 2.58 2.65 2.73 2.81 2.90 2.99 3.08 3.17 3.26 3.36 3.46 3.56 3.-67 3.78 3.90 4.a 1 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.13 4.'3 4.13 4.13 4.13 0.07 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.09 0.09 0.09 0.09 0.09 O.10 0.10 0.10 O.10 0.10- 0.10 0.11 o.11 a.11 a.1 1 O.1 1 O.12 0.12 O.12 0.12 0.13 0.13 0.13 0.13 0.14 0.14 0.14 0.14 0.15 O.15 0.15 O.,6 O.16 0.16 0.16 0.17 0.17 0.17 O.18 O.18 O.18 O.19 O.19 O.19 0.20 0.20 0.21 0.21 0.21 0.22 0.22 0.23 0.23 0.23 0.24 0.24 0.25 0.25 0.26 0.26 4.68 4.72 4.75 4.79 4.83 4.86 4.90 4.94 4.99 5.04 5.09 5.14 5.20 5.25 5.31 5.36 5.42 5.48 5.54 5.60 5.67 5.73 5.80 5.86 5.93 6.00 6.07 5.15 6.22 6.30 6.38 6.45 6.54 6.63 6.71 5.80 6.89 6.98 7.08 7.17 7.27 7.36 7.44 7.53 7.62 7.71 7.80 7.90 8.00 8.10 8.20 8.30 8.41 8.52 8.63 8.74 8.86 8.98 9.10 9.22 9.35 9.48 9.51 9.74 9.8a 10.02 10.17 10.31 37.47 37.75 38.04 38.32 38.62 38.91 39.22 39.53 39.92 40.32 40.73 41.14 41 .57 42.01 42.46 42.92 43.39 43.87 44.35 44.84 45.34 45.85 45.37 46.91 47.46 48.02 48.59 49.18 49.78 50.40 51 .03 5 i .67 52.33 53.00 53.59 54.40 55.12 55.86 56.62 57.39 58.19 58.85 59.54 60.24 60.96 61 .69 62.43 63.20 63.98 64.77 65.59 66.42 67.27 68.14 69.03 59.93 70.86 71 . a 1 72.78 73.77 74.78 75.82 76.87 77.95 79.05 8a .19 81 .34 82.52 2.50 2.52 2.54 2.55 2.57 2.59 2.61 2.54 2.66 2.59 2.72 2.74 2.77 2.80 2.83 2.86 2.89 2.92 2.96 2.99 3.02 3.06 3.09 3.13 3.16 3.20 3.24 3.28 3.32 3.36 3.40 3.44 3.49 3.53 3.58 3.63 3.67 3.7 2 3.77 3.83 3.88 3.92 3.97 4.02 4.C6 4 . 1 1 4.16 4.21 4.27 4.32 4.37 4.43 4.48 4.54 4.60 4.55 4.72 4.79 4.85 4.92 4.99 5.05 5.12 5.2C 5.27 5.35 5.42 5.5: Sour'ce:D~mes &Moore calcul~t:ions.Uuly.1985 ~.--------------------------~--------------------------------------------------------------------- I 27 TABLE 2-7 :PRODUCTION COST ESCA~ATION--3 MILLION TPY BELUGA ~lN. --------------------_._-------------------------------------------------------------------------- CAPITAL+TAX PROFIT+PA,RTS Ye~1'"0%ESC. 1 985,$ Pel'"·Ton LASOR 2.2%ESC. 1985 $ Per-Ton FUEL+LU8E liAR.ESC. 1985 $ Pel'"Ton EL.ECTRICTV 1.9 %ESC. 1985 $ Pel'Ton ROYALTV ~12.5%OF REALIZATION 1985 $ Pel'Ton TOTAl.. ESCALATED COST '985 $ Pel'Ton TOTAL ESCAL.ATED COST '985 $ Pel'MMBTU --------------------_._-------------------------------------------------------------------------- ~, ",... 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ~994 1995 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20'8 2019 2020 2021 2022 2023 2n4 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 13.62 13.62. 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.52 13.52 13.62 13.62 13.62 13.62 13.62 13.62 13.52 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13"62 13 ..62 13.62 13.62 1 3.62 13 ..62 13.62 13.62 13.62 13.52 13.52 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.62 13.52 13.62 13.62 13.62 13.62 13.52 13.62 13.52 13.62 13.62 13.52 9.73 9.95 10.17 10.39 10.52 10.85 11 .09 11 .34 11 .58 11.84 12 .10 12.37 12.64 12.92 13.20 13.49 13.79 14.09 14.40 14.72 15.04 15.37 15.71 16.05 16.41 16.77 17.14 17.52 17.90 18.30 18.70 1 9 • 1 1 19.53 19.95 20.40 20.85 21 .31 21 .78 22.25 22.74 23.24 23.76 24.28 24.81 25.36 25.92 26.49 27.07 27.66 28.27 28.90 29.53 30.18 30.84 31 .52 32.22 32.93 33.65 34.39 35.15 35.92 35.71 37.52 38.34 39.19 40.05 40.93 41.83 1.34 1 .34 1.34 1 .33 1 .33 1.32 1 .32 1 .31 1.35 1 .41 1.46 1 .52 1 .57 1 .63 1 .69 1 .75 1 .82 1 .88 1 .94 2.00 2.06 2.12 2.18 2.25 2.32 2.39 2.46 2.53 2.51 2.69 2.77 2.85 2.93 3.02 3 • 1 1 3.21 3.30 3.40 3.50 3.61 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 3.72 0.35 0.36 0.36 0.37 0.38 0.39 0.39 0.40 0.41 0.42 0.42 0.43 0.44 0.45 .0.46 0.47 0.47 0.48 0.49 0.50 0.51 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.61 0.62 0.63 0.64 0.65 0.67 0.58 0.59 0.70 0.72 0.73 0.75 0.75 0.77 0.79 0.80 0.82 0.83 0.85 0.87 0.88 0.90 0.92 0.93 0.95 0.97 0.99 1 •a 1 1 .03 1 .05 1 .07 1.09 1 . 1 1 1 .13 1 .15 1.17 1 .19 1.22 1 .24 3.58 3.51 3.64 3.67 3.71 3.74 3.77 3.81 3.85 3.90 3.94 3.99 4.04 4.09 4.14 4.19 4.24 4.30 4.35 4.40 4.46 4.52 4.58 4.64 4.70 4.76 4.83 4.89 4.96 5.03 5.10 5.17 5.25 5.32 5.40 5.48 5.55 5.64 5.73 5.81 5.90 5.98 6.06 5.13 6.21 6.30 6.38 6.46 6.55 6.54 6.73 6.83 6.92 7.02 7.12 7.22 7.32 7.43 7.54 7.55 7.76 7,88 8.00 8.12 8.24 8.37 8.50 8.63 28.62 28.87 29.13 29.39 29.65 29.92 30.19 30.47 30.82 31.18 31.54 31 .92 32.30 32.70 33.10 33.51 33.94 34.37 34.80 35.24 35.69 36.15 36.62 37.10 37.59 38.10 38.61 39.14 39.68 40.23 40.80 41 .38 41.97 42.5 7 43.19 43.83 44.48 45.14 45.82 46.51 47.23 47.83 48.44 49.07 49.71 50.36 51.03 51 .72 52.42 53.13 53.86 54.61 55.37 56.15 56.94 57.76 58.59 59.44 60.31 61 .20 62.10 63.03 53.98 64.94 65.93 66.94 67.98 59.03 1 .9, 1.92 1 .94 1.96 1 .98 1 .99 2.0 i 2.03 2.05 2.08 2.10 2.13 2.15 2 .•8 2.2~ 2.23 2.26 2.29 2.32 2.35 2.38 2.41 2.44 2.47 2.51 2.54 2.57 2.61 2.55 2.66 2.72 2.75 2.60 2.84 2.88 2.92 2.97 3.01 3.C5 3.10 3.15 3.' 9 3.23 3.27 3 . 3 ~ 3.35 3.40 3.45 3.49 3.54 3.59 3.54 3.69 3.74 3.80 3.85 3.91 3.96 4.02 4.08 4.i 4 <l.2Q 4.27 4.33 4 ..:10 4.46 4.53 4.60 ~~I _ 30ul"'ce:Go!lmes &~oo,.e c<!!l1cu'a"!:;ons,July,1985 28 _. ! rA8LE 2-8:PQOOUCT~ON COST ESCALATION--8 MILLION TPY MINE ~------------------------------------------------------------------------------------------------ CAPITAL+TAX LABOR FUEL+LU8E ELECTRICTY ROYAL~Y TOTA~TCTA~ PROFIT.PARTS ~12.5%OF ESCALATED ESCALATEJ 0%ESC.2.2%ESC.VAR.ESC.1.9 %ESC.REALIZATION COST COST 1985 $1985 $1985 $1985 $1985 $1985 $1985 $ Per-Ton Pe,.Ton Per"Ton Per-Ton Per'Ton Per--Ton Per""''''S-i.J ------------------------_._---------------------------------------------------------------------- ~' ....' 1983 1984 1985 19S6 1987 1988 1989 1990 1991 '992 '993 '994 1995 1996 1997 1998 ~999 20CO 200' 20n 2003 2004 2005 2006 2007 2008 2009 2010 2C11 2012 2013 2014 20'5 2015 20 i 7 2018 20"9 2020 202 1 2022 2:23 2S24 2025 2026 2027 2028 2029 2031 2032 2033 2C34 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.5' 9.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 8.51 6.97 7.12 7.28 7.44 7.60 7.77 7.94 8.11 8.29 8.48 8.66 8.85 9.05 9.25 9.45 9.56 ~.87 10.09 10 .31 10.54 10.77 11.00 11 .25 11.49 1 1 .75 12.01 12.27 12.54 12.82 13 .1 a 13.39 13.58 13.98 14.29 14.60 14.92 15.25 15.59 15.93 16.28 16.64 17.01 17.38 17.76 18.15 18.55 18.96 19.38 19.80 20.24 20.68 21 .14 21 .60 22.08 22.57 23.06 .23.57 24.09 24.62 25.16 25.71 26.28 26.85 27.45 28.05 28.67 29.30 29.94 0.90 0.90 0.90 0.90 0.89 0.89 0.88 0.88 o .91 0.95 0.98 1.02 1 .06 1 .09 1 .13 1 .18 1 .22 1 .25 1 .30 1 .34 1 .38 1 .42 1.47 1 .5 1 1.56 1.50 1 .55 1 .70 1 .75 1 .80 1.86 1 .91 1 .97 2.03 2.09 2.15 2.22 2.28 2.35 2.42 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 0.64 0.55 0.66 0.68 0.69 0.70 o .71 0.73 0.74 0.76 0.77 0.79 0.80 0.82 0.83 0.85 0.86 0.88 0.90 0.91 0.93 0.95 0.97 0.96 1 .00 1.02 1 .04 1 .06 1.08 1 •10 1 •12 1.14 1 •17 1 . 19 1 . 2 1 1 .23 1.26 1 .28 1 •31 1 .33 1 .35 1.38 1 . 4 1 1 .43 1 .46 1 .49 1 .52 1 .55 1 .58 1 .61 1.64 1 .67 1.70 1.73 1 .76 1.80 1 .83 1 .87 1 .90 1.94 1 .97 2.01 2.05 2.09 2.13 2., 7 2.21 2.25 2.43 2.45 2.48 2.50 2.53 2.55 2.58 2.60 2.64 2.67 2.70 2.74 2.77 2.81 2.85 2.88 2.92 2.96 3.00 3.04 3.06 3.13 3.17 3.21 3.25 3.31 3.35 3.40 3.45 3.50 3.55 3.51 3.66 3.72 3.77 3.83 3.89 3.95 4.01 4.08 4.14 4.20 4.26 4.31 4.37 4.44 4.50 4.56 4.63 4.69 4.76 4.83 4.90 4.97 5.05 5.12 5.20 5.28 5.36 5.44 5.53 5.61 5.70 5.79 5.86 5.98 5.07 6.17 19.45 19.54 19.83 20.02 20.22 2C.42 20.53 20.84 21.10 21 .36 21.63 21 .90 22.19 22.48 22.77 23.08 23.39 23.70 24.02 24.34 24.67 25.01 25.36 2S.71 25.C8 26.45 26.82 27.21 27.51 28.01 28.43 28.85 29.29 29.73 30.'9 30.65 31.13 31 .62 32.11 32.62 33.14 33.59 34.05 34.52 34.99 35.48 35.98 36.49 37.01 37.54 38.09 38.64 39.21 39.79 40.38 40.99 41 .61 42.24 42.89 43.55 44.22 44.91 45.62 45.34 47.07 47.82 48.59 49.38 1 .30 1 . 3 1 1.32 1 .33 ,.35 1 .36 1 .38 1 .39 1.41 ~.42 1 .~4 :.46 1.4S 1.50 1 .52 1.54 i .55 1 .58 1 .60 1 .62 1.54 1 .67 1 .69 , .'71 1.74 1 .76 1 .79 1 .81 1.84 1 .87 1.90 1 .92 1 .95 1 .98 2.C 1 2.04 2.08 2 . 11 2.14 2.17 2.21 2.24 2.27 2.30 2.33 2.37 2.40 2.43 2.47 2.50 2.54 2.58 2.61 2.55 2.69 2.73 2.77 2.82 2.86 2.90 2.95 2.99 3.04 3.09 3 ..~ 3.19 3.24 3 29 29 ._~4BL'=2-9:PRODUCTION CCST ESCALATIO"--'2 MILLION Tpy !3~'_UGA M:'*E ------------------------------------------------------------------------------------------------ CAP!"'A,_...TAX PROF IT+PARTS 0%ESC. 1985 $ Per Ton LABOR 2.2%ESC. 1985 $ Per Ton FUEL"'LUBE VAR.ESC. 1985 $ Per Ton 1.9 %ESC. 1985 $ Pel'"Ton ROYALTY ~12.5%OF REALIZATrON 1985 $ Pel"'Ton TOTAL ESCALATED COST 1985 $ Pel'"Ton -:-0-,1,_ ESCALATED 1985 $ Pel'""''''BTU------------------------------------------------------------------------------------------------ ,~ 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 '995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2e05 2CC7 2008 2009 20iO 2011 20 1 2 2013 20'4 20'5 20"6 2017 2018 20'3 2020 2021 2022 2:i23 2J24 2:J25 2026 2:J2 7 2:29 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 :043 2C44 2045 2046 2047 2048 2049 2050 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.89 8.a9 8.a9 a.89 8.89 •.89 8.89 8.a9 8.a9 a.89 8.89 8.89 8.89 8.89 8.89 a.89 8.89 8.89 8.89 8.89 8.89 8.89 1.15 7.31 7.47 7.63 7.80 7.97 8.15 8.33 8.51 8.70 8.89 9.08 9.28 9.49 9.69 9.91 10.13 10.35 10.58 10 .81 11 .OS 11 .29 11 .54 1 1 .79 12.05 12.32 12.59 12.86 13.15 13.44 13.73 14.03 14.34 14.66 14.98 15.31 15.55 15.99 16.34 16.70 17.07 17.45 17.83 18.22 18.62 19.03 19.45 19.88 20.32 20.76 21.22 21.69 22.17 22.65 23.15 23.66 24.18 24.71 25.26 25.81 26.38 26.96 27.55 28.15 28.78 29.41 30.06 30.72 1.00 1.00 1 .00 1 .00 0.99 0.99 0.98 0.98 1 .01 1 •OS 1.09 1 •13 1 . 17 1.22 1 .26 1 .31 1.36 1 .41 1 .45 1.49 1 .54 1 .58 1 .53 1.68 1 .73 1.78 1 .83 1 .89 1 .95 2.00 2.06 2.13 2.19 2.26 2.32 2.39 2.46 2.54 2.61 2.69 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2.77 2 ..77 2.77 2.77 2.77 2.33 2.37 2.42 2.47 2.51 2.56 2.61 2.66 2.71 2.76 2.81 2.87 2.92 2.98 3.03 3.0S 3.15 3.21 3.27 3.33 3.39 3.46 3.52 '3.59 3.66 3.73 3.80 3.87 3.95 4.02 4.10 4.18 4.25 4.34 4.42 4.50 4.59 4.67 4.76 4.85 4.95 5.04 5.14 5.23 5.33 5.43 5.54 5.64 5.75 5.86 5:97 6.08 6.20 6.32 6.44 6.56 6.68 6.81 6.94 7.07 7.21 7.34 7.48 7.63 7.77 7.92 8.07 8.22 2.77 2.80 2.83 2.86 2.89 2.92 2.95 2.98 3.02 3.06 3.10 3.14 3.18 3.22 3.27 '3.31 3.36 3.41 3.46 3.50 3.55 3.60 3.66 '3.71 3.76 3.82 3.87 3.93 3.99 4.05 4 . 1 1 4.18 4.24 4.31 4.37 4.44 4.51 4.59 4.66 4.73 4.81 4.86 4.95 5.02 5.09 5.16 5.24 5.31 5.39 5.47 5.55 5.6'3 5.72 5.81 5.89 5.9a 6.08 6.17 5.27 6.36 6.46 6.57 6.67 6.78 6.89 7.00 7 . 1 1 7.23 2"2.14 22.37 22.60 22.84 23.08 23.33 23.58 23.83 24.i 4 24.46 24.78 25.11 25.45 25.80 26.15 26.51 26.88 27.26 27.64 28.03 28.42 28.83 29.24 29.66 30.10 30.54 30.99 31.45 31 .92 32.41 32.gO 33.41 33.92 34.45 34.99 35.54 36 .11 36.68 37.27 37.88 38.50 39.03 39.58 40.14 40.71 41 .3 C 41 .89 42.50 43.13 A3.76 44.41 45.07 45.75 46.44 47.15 47.67 48.61 49.36 50.13 50.92 51 .72 52.54 53.38 54.23 55.11 56.00 55.91 57.84 1 .4 a 1 .49 1 .51 1.52 1 .54 1 .55 '.57 1.59 1 .6 1 1.63 1 .65 1 .67 1 .70 1 .72 1.7A 1 .77 1 .79 1 .82 1 .84 1.e 7 1 .89 1 .92 1 .95 1.9a 2.0' 2.04 2.07 2.10 2.13 2.16 2.19 2.23 2.26 2.30 2.33 2.37 2.41 2.45 2.48 2.53 2.57 2.60 2.5.1 2.68 2.71 2.75 2.79 2.83 2.88 2.92 2.95 3.0C 3.05 3.1 C 3.14 3.' 9 3.24 3.29 3.34 3.39 3.45 3.50 3.55 3.62 3.67· 3.73 3.79 3.96 Source:D~mes &Moore c~lculations,July,1985 30 TABLE 2-10:PRODUCT ION COST ESCAI-~IT ION--IIoICRE"'ENTAL 2"''''TPY NENANA "'INE ~I --------------------------_._-----------------~---_ ..... 11183 UU IUS U86 U81 U88 19a9 IUO lUI lU2 lU3 U94 IUS IU6 1U7 un 1999 2000 2001 2002 2003 200. 2005 2005 2007 2008 2001 2010 2011 2012 2013 2014 2015 2016 2017 2018 2011 2020 2021 2022 2023 20a 2025 2026 2027 2028 2021 2030 2031 2032 2033 20U 2035 20311 2037 2038 2031 20.0 20.I 20.2 20U 20U 20.5 20U 20n 20n 20U 2050 CAPITAL+TAX PROFlT+PARTS 0'ESC. 11185 • P.I"TOM 11.18 11 .'8 11.18 11.18 11.18 11.18 11.18 11.18 \1.18 1\.18 11.18 11.11 11.18 1 1.11 11.11 11.18 11.18 11.11 11.11 11.11 11.1' 11.18 I I •18 11.11 11.18 11.18 11.18 11.11 11.18 11.111 11.18 11.18 11.18 I I .18 11.18 11.111 11.18 11.18 11.18 11.18 11.111 11.18 11.1' 11.18 1 1.18 11.18 11.18 11.18 11.18 11.111 11.18 11.18 11.111 11.18 ,1.II 11 •II 11.18 11.18 11.18 11.18 11 .18 '1.18 11.18 11.18 11.111 ,1.18 1 1.18 11.18 I-ABOR 2.2'ESC:. IUS • P...Tel" 8.32 l.liO 8.111 8.111 I.Q8 I.:28 1.<\8 I.U l.liO 10.12 10.:U 10.57 10.180 l'.C. 1 I .28 I I .53 11.78 12.0. 12.31 12.18 12.81 13.14 13 .•3 13.72 14.02 14.33 ".55 ,..17 15.30 15.U IS." 111.33 16.111 17.05 17 .•3 17.82 18.21 18 .111 U.02 II." 11.17 20.30 20.75 21.21 21.117 22.15 22.U 23.13 23.11. 2•.I II 2'.70 25.2' 25.71 211.36 26.'- 27.53 28." 21.711 21.31 30.0. 30.70 31.37 32.011 n.n 33 .•1 U.23 U.U 35.75 FUEL+I-U8E VAR.ESC. IllS • P.,.Tan 1.05 1.05 1.05 1.05 1.O. 1.O. 1.03 1.03 1.07 1 .10 1.15 l.U 1.23 1.28 1.32 1.37 l.U 1.'8 1.52 1.57 1.1 I 1.11 1.71 1.71 1." 1." 1.93 I.U 2.0' 2.10 2.17 2.23 2.30 2.37 2." 2.51 2.5' 2.87 2.75 2.83 2.11 2.11 2." 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2 ••' 2.11 2." 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 2.11 EI-ECTRICTY 1.3 ,ESC. IUS IP...TaM 0.81 0.70 0.71 0.72 0.73 0.7& 0.75 0.711 0.77 0.78 0.71 0.80 0.81 0.82 0.83 O.U 0.85 0.85 0.87 0.88 0.81 0.10 0.12 0.93 0.94 0.15 0.17 0." O.!19 1.00 1.02 1.03 1.O' 1.011 1.07 1.01 1.10 1.11 1.13 1.,. 1.111 1.17 1.11 1.20 1.22 1.23 1.25 1.27 1.21 1.30 1.32 1.33 1.35 1.37 1.39 1..0 1 ••2 1 ••• 1.'6 1..8 1.50 1.52 1.5. 1.56 1.58 1.60 1.112 I.U ROYALTY '12.5'OF REALIZATION IUS' P...TOM 3.03 3.06 3.01 3.1' 3.15 3.I 8 3.21 3.a 3.27 3.31 3.35 3.31 3 ••3 3 .•7 3.52 3.56 3.61 3.115 3.70 3." 3.71 3.U 3.19 3.U 3.U •.05 '.10 •.16 •.22 •.27 '.33 •••0 •.•& •.52 '.59 •.1111 •.73 •.'0 •.87••••5.02 5.08 5.15 5.21 5.21 5.35 5.U 5.50 5.57 5.15 5.73 5." 5.18 5.17 1I.0S S.15 6.2. 6.33 6 .•2 6.52 8.111 11.71 II."S.12 7.02 7.13 7.2. 7.35 TOTAl- ESCALATED COST IUS I P.r TaM 2'.27 2'." 2'.72 2'.U 25.17 2S .•0 2S.U 25." 2&.18 28." 211.80 27.12 27.'5 27 .19 28.13 28.n 28.U 21.21 2 ••51 21.15 30.n 30.n ".13 31.5& 31.16 32.38 32.82 33.27 33.73 U.20 U.lI8 35.17 35.87 36.I I 36.71 37.25 37.80 38.36 38." 31.53 .0.13 .0.lIS .1.18 .1.72 .2.27 &2.13 U"O .3.11 •••51 .5.21 .5.13 U .., .7.13 n.80..... '1.18 ".19 50.62 51.311 52.12 52.10 53.70 5 •.51 55.31 56.18 57 .05 57.'3 51." TOTAL ESCALATED COST IUS •P.,.",~eTU 1.&0 1.&1 1.153 l.U 1.86 1.67 1.6ll 1.70 1.72 1.7. 1.76 1.78 I .81 1.83 1.85 1.87 1.SO 1.12 1..5 1.17 2.00 2.02 2.05 Z.07 2.10 2.13 2.III 2.l' 2.22 2.25 2.28 2.31 2.35 2.38 2.'2 2,'5 2 .•1 2.52 2.5& 2.60 2.U 2.87 2.71 2.7. 2.78 2.82 2.8lI 2.11 2.13 2.17 3.02 3.011 3.10 3.,. 3.11 3.2' 3.28 3.33 3.38 3.U 3.'8 3.53 3.5S 3.U 3.70 3.75 3.81 3.87 RAIL TRANS HEALY TO NENANA 1.8"ESC. I P...TOM 5.U 5.U 5.12 6.03 5.,. 6.25 &.36&." 1l.51 6.71 &.83 &.15 7.08 7.20 7.33 7.'7 7.&0 7.7& 7." '.02 '.11 8.31 •••& 1.81 8.77 8.12 S.08 1.25..., '.51 1.711 '.13 10." 10.21 10.n 10.157 10.8lI I 1.05 11.25 1 1.&5 1 I .6& I 1.87 12.0' 12.30 12.52 12.75 12.18 13.21 13 .•5 t3.lIll 13.1. ".11,.... ".70 1•.17 15.2. 15.51 15.71 16.08 16.37 15.&& 111.18 17.27 17.51 17.II 18.22 ".U 11.81 TOTAL ESCALATED COST FOe NENAN'" •P...TOM 21.11 30.13 30.U 30.117 31.30 31.65 32.00 32.36 32.17 33.20 33.83 3&.07 3&.53 3&.111 35.&5 35.115n.u 36.115 37.&5 31.17 ".50 31.03 3ll .58 .0.15 .0.72 ".31 .1.11 U.52.3.,. U.78•••••.5.10 .5.78 U." n.19 .,.'2 ...86 ".&2 50.t9 50.98 51.79 52.52 53.26 5'.02 5 •.7t 55.58 58.38 57.20 58.0' 58.110 51.77 50.11!i 61.57 82.S0 153.&5 U.'% &5.'0 56.'1 157 .•• &8.&9 n.5& 70.&6 71.77 72.91 7A.08 75.211 76." 77.71 TOT"'1- ESCALATED COST FDa NEN"'''A s P ..."!I'IBru \.117 1.18 2.0% 2.04- 2.06 2.08 2 . I I 2.13 2.I 5 2.18 2.21 2.24 2.27 2.30 2.33 2.35 2.'0 2 .•3 2.'5 2.50 J.5~ 2.S7 2.&0 2.U 2.&8 2.72 2.75 2.80 2." 2.18 2.12 2.17 3.01 3.06 3.to 3.15 3.20 3.25 3.30 3.35 3 .•1 3.'6 3.50 3.55 3.50 3.&6 3.71 3.76 3.82 3.B7 3.13 3.19 '.OS '.11 •.17; •.2" '.30 '.37••••'.51 '.58 •.65 '.72 •.80 •.&7 •.15 5.03 5.I I SO".....:De_••1Iloo,.....1 .."1.1:10....Jul)'.1185- 31 ABLE 2-11:o~OOUCTI~N COST ESCALA~:CN--N=W 3 ~ILLrON TON PER YEAR MINe -------------------------_._--------------------------------------------------------------------- CAPITAL+TAX PROFIT+PARTS Year'0%ESC. 1985 $ Per'Ton LABOR 2.2%ESC. 1985 $ Per'Ton ~u EL+LUB E VAR.ESC. 1985 $ Per'Ton ELECTRICTY 1 .3 %ESC. 1985 $ Per'Ton ROYALTY lD12.5%OF REALIZATION 1985 $ Per'Ton TOTAL ESCALATED COST 1985 $ Per'Ton TO'T"ol..L ESCALA:ED CCST 1995 $ Pel'"""~8TU ._------------------------------------------------------------~-----~--------------------------- '983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ,997 1998 '999 2000 2001 2002 2,::0 3 2004 2J:l5 2::6 2007 20C8 2009 2010 2011 2012 2013 20 '4 20'5 2016 2:l17 2 C18 2019 2020 2021 2J22 2024 2025 2025 2027 2:28 2029 2030 203' 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 20.:6 2047 2048 2049 2050 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 ,5.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 i5.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 '5.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.37 15.3 7 15.37 15.37 15.37 15.37 8.87 9.07 9.27 9.47 9.68 9.89 10 . 11 10.33 10.56 10.79 1 1 .03 1 1 •27 1 1 .52 1 1 .77 12.03 12.)0 12.57 12.84 13.13 13.42 13 .71 14.01 14.32 14.64 14.96 15.29 15.62 15.97 '6.32 16.68 17.04 17.42 17.80 '8.19 18.59 19.00 19.42 19.85 20.28 20.73 21 .19 21 .65 22.13 22.62 23.1 1 23.62 24.14 24.67 25.22 25.77 26.34 26.92 27.51 28.1 1 28.73 29.36 30.01 30.67 31.35 32.04 32.74 33.46 34.20 34.95 35.72 36.50 37.31 38.13 1 .04 1.04 1 .04 1 .04 1 •03 .1 .03 1 •02 1 .02 1.OS 1 •09 1 • 13 1 . 18 1.22 1 .26 1 .31 1 .36 1 .41 1 .46 1 • 5 1 1 .55 1.60 1.65 1 .69 1.75 1 .80 1 .85 i .9 1 1.96 2.02 2.08 2.15 2.21 2.28 2.35 2.42 2.49 2.56 2.64 2.72 2.80 2.88 2.88 2.88 2.88 2.88 • 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.98 2.88 0.76 0.77 0.18 0.79 0.80 o .81 0.82 0.83 0.84 0.85 0.86 0.87 0.88 0.89. 0.91 0.92 0.93 0.94 0.95 0.97 0.98 0.99 1 .00 1 .02 1.03 1 .04 1 .06 1.07 1 .08 1 • 10 1 • 1 1 1 • 1 3 1 •14 1 . 1 6 1 . 1 7 1 •19 1 .20 1 .22 1 .23 1 .25 1.27 1 .28 1 .30 1 .32 1 .33 1 .35 1.37 1 .39 1 .40 1 .42 1.44 1 .46 1 .48 1 .50 1 .52 1 .54 1 .56 1 .58 1 .60 1 .62 1 .64 1.66 1 .68 1 .70 1 .73 i .75 1 .77 1 .79 3.72 3.75 3.7~ 3.81 3.84 3.87 3.90 3.94 3.97 4.02 4.06 4.10 4.14 4.19 4.23 4.28 4.33 4.37 4.42 4.47 4.52 4.57 4.63 4.68 4.74 4.19 4.85 4.91 4.97 5.03 5.10 5.16 5.23 5.30 5.36 5.44 5.51 5.58 5.66 5.74 5.82 5.88 5.95 6.03 6.10 6.18 6.25 6.33 6.41 6.49 6.58 6.66 6.75 6.84 6.93 7.02 7.12 7.21 7.31 7.42 7.52 7.63 7.73 7.84 7.96 8.07 8.19 8.31 29.75 29.99 30.23 30.41 30.72 30.97 31 .22 31 .48 31 .80 32.12 32.45 32.79 33.13 33.49 33.85 34.22 34.60 34.99 35.38 35.77 36.18 36.59 37.02 37.45 37.89 38.35 38.81 39.28 39.77 40.26 40.77 41 .29 41 .82 t.2.36 42.92 43.49 44.01 44.66 45.21 45.89 45.52 47.08 47.64 48.22 48.80 49.40 50.02 50.65 51.29 51 .94 52.61 53.29 53.99 54.71 55.44 56.18 56.94 57.72 58.51 59.33 60.16 61 .00 61 .87 62.75 53.55 64.58 65.53 66.49 ,.95 1 .97 1 .99 2.00 2.02 2.0t. 2.05 2.07 2.09 2.1 1 2.13 2.'5 2.18 2.20 2.23 2.25 2.28 2.30 2.33 2.35 2.38 2.41 2.44 2.46 2.t.9 2.52 2.55 2.58 2.62 2.55 2.58 2.72 2.75 2.79 2.82 2.S5 2.90 2.94 2.98 3.J2 3.06 3.1C 3.13 3.17 3.21 3.25 3.29 3.33 3.37 3.42 3.46 3.51 3.55 3.60 3.65 3.70 3.7 5 3.80 3.85 3.90 3.96 4.01 4.07 4.13 4 . 1 3 4.25 4.3' 4.37 Soul"'ce:Dames &Moor's calculations.July,1985 ~XWL ._ •__.J..2 ''''1 Notes:a.Source: Railroad, personal communication with Dennis Smith,Alaska 7/85. ..... I I ,.,.. I I - b •Cost per million BTU assuming 7600 BTU per pound coal. 33 -. 2.4.2 Rail Cost Escalation ARR personnel refused to reveal factor cost data which __would have sup- ported an analysis similar to that developed for mining production cost escalation.Instead,rail cost escalation was estimated using two approaches:factor cost escalation based on u.s.average rail costs and U.S.historic rate trends. u.s.Average Rail Cost Escalation U.S.rail cost data disaggregated by individual cost factors were obtained from an American Association of -Railroads publication.Using a factor escalation approach and correcting for inflation,an average annual rail cost escalation of 2.0 percent was obtained,as shown in Table 2-13. u.s.Historic Rail Cost Trends To buttress the reliability of the American Associat"ion of Railroads' data,a second estimation approach was based on the producer price index f or coal traolsport.The real compound escalation of rail rates computed by this method for the period 1970 to 1981 is 1.8%as shown on Table 2-14. This lower value has been adapted for this analysis. The statistical basis for the coal transportation PPI shown in Table 2-13 is a Bureau of Labor Statistics "Price Index for Railroad Freight of 5 TCCll-Coal...This index was initiated in 1969.According to the Association of American Railroads,10 this index is"•the only indepen- dent,comprehensive index of railroad rates available,"although it overstates costs somewhat since it does not take into account the nego- tiated contract rates (as opposed to published rates)made possible by the 1980 Staggers Rail Act. 10.Association of American Railroads,1984,Railroad Coal Rates Since the Staggers Act:The Statistical Record,Washington,August 1984. 34 =- TABLE 2-13 u.s.AVERAGE RAILROAD COST AND ESCALATION RATES "Factor Labor Fuel Materials &Supplies Equipment Rents Purchased Services Depreciation Interest Taxes (other than income and payroll) All other operating expenses Total Annual Escalation Implicit Price Deflator(c) Real Rail Cost Escalation Rate Notes: Proportion of Total Costs (a)(Percent) 47.2 12.2 12.2 6.7 6.2 4.3 3.8 1.4 5.9 (%)(d) Average Annual Escalation Rate (b)(Percent) 11.1 10.5 4.7 13.2 10.0 4.2 4.8 0.6 6.5 Factor Weighted Escalation (Percent) 5.2 1.3 0.6 0.9 0.6 0.2 0.2 0.055 0.455 9.4 7.3 2.0 - a.Personal communication,Carol Lutz,AAR,5/84. b.AAR Railroad Cost Recovery Index,3/84 (1979-1983 u.s.average). c.DR!Review of U.S.Economy,9/83 (1979-1983 U.S.GNP deflator). d.Real escalation is calculated as follows: 1.094 1.073 a (1.0196-1)X 100 •1.96% There being no basis for believing that the ARR has characteristics dif- ferent from the average U.S.railroad,these data support a positive rail escalation ra,te. 35 -----------------------_.......--'-~---_......_------------ - TABLE 2-14 RAIL PRICE ESCALATION 1970 Producer Price Index (PPI): 1981 Average Annual Pet.Change - ..... Rail Freight, Coal Transport a Producer Price Index: .b All Commodities Real Escalation Rate: Based on PPI a 1.8% 108.6 110.4 305.7 293.4 11.25 9.29 -[ Source:U.S.Statistical Abstracts,1982-1983. Notes: a.Page 628,Table 1093. b.Page 456,Table 751. 36 _. - 2.4.3 Conclusions Regarding the Railroad Transportation Cost Escalation There are three reasons why rail rates for coal transpo~tation have increased in real terms,as measured by the statistics reported above. First,certain components of the railroads'cost of operation,notably diesel fuel and railroad labor costs,have increased faster than inflation. Second,the railroads specifically have been allowed,in certain cases,to raise rail rates in order to earn a return on invested capital to allow the railroad to be financially self-sustaining.Third,in many cases the railroads have had sufficient market power due to lack of competition for shipment of coal over specific routes,to allow them to raise rates and earn a better profit. The same factors are relevant in the case of the Alaska Railroad. According to the H-E Composi te Oi 1 Price projections,diesel fuel prices will increase in real terms over the study period at a rate of 1.6 percent per year.Furthermore the Alaska Railroad has been consistently unprofit- able and,therefore,presumably must raise rates above their current level to be financially sound.The only competi Hon that the railroad would face for coal movements is trucking,at costs significantly higher than the current rates.There is,therefore,every reason to expect ARR to follow the same course as has been taken by other U.S.railroads.Given this close analogy to the situation of other U.S.railroads,it is reason- able to assume that ARR rates will escalate at the historical rate established above for other U.S.railroads --1.8 percent. 37 - 3.0 EXPORTS OF.ALASKA COAL TO THE PACIFIC RIM MARKET AND PROJECTED NETBACK PRICES Dames &Moore has completed research for the Alaska Power_Authority to examine:(1)whether coal from the Beluga coalfield (and possibly the Nenana coa lfield)in Alaska could move into the Pacific Rim energy marke t during the period of the economic life of the Susitna.hydroelectric project; and (2)what would be the likely price at which Alaska coal could sell in the market (the Itnetback price").This section reports on export coal market conditions for Alaska coal during the project economic life,which extends from the mid 1990's to 2040. 3.1 INTRODUCTION TO PACIFIC RIM MARKETS FOR ALASKA COAL Analysis shows that there will be a large coal export market for shi~ ment to consur.ters in the Pacific,including Japan,Korea,Taiwan,Hong Kong, Singapore,and other countries.Compared to competing producers,Alaska coal should be highly cost competitve in this market,even considering its low calorific value.Due to the increasing quantities of coal demanded,par- ticularly after the year 2000,there will be an upward movement of coal prices in the Pacific market.These demand increases wi 11 bring into development coal sources with increasingly difficult mining conditions and higher transportation costs.Steam coal will be exported from Australia and Canada and eventually high cost coal will be brought into production from Colorado and Wyoming. Section 3.1 introduces the Pacific Rim Market for Alaska Coal. Section 3.2 consists ofa country-by-country estimate of coal production for each of the major Pacific Rim coal producers.The comparative production costs for each coal exporting nation in the Pacific Rim is discussed in Section 3.3.Section 3.4 consists of a compilation of the supply curve for each of the coal exporting nations in order to produce an aggregate supply curve for the region.Finally,Section 3.5 analyzes the supply/demand balance for Pacific Rim through year 2040 and estimates the netback price to Alaska. 38 3.1.1 Alaska Coal Will Move Into Electric Power Sector The presence of a large Pacific Rim Market will ensure the use of ALaska coal by Pacific nations.Export marke ts for Alaska coa 1 will depend on the coal requirements of energy consumers and their ability to obtain coal locally.Some countries that are or will be major coal con- sumers,such as Indonesia,will be self-sufficient in coal.This market analysis has therefore estimated coal consumption and domestic production for each country and the~examined competing suppliers to determine how Alaska coal fits into the net import requirements. Alaska coal has a low calorific value compared to that supplied by competitors such as Australia.Because of its low quality,Alaska coal is totally unsuitable for use in steel making.Alaska coal will be used only in the tlsteamtl coal market,which includes coal used for cement kilns and minor industrial non-boiler applications.Primarily,Alaska coal will be used by the electric power sector,in which boiler modifications necessary to use this lower quality coal are more economical-than in the industrial sector.Therefore,it is important to identify what portion of each market will use coal for electric power generation and in what part of this market Alaska coal will be competitive. 3.1.2 Market Study Focus on Net Imports The coal consumption estimates used in this study were prepared by the HE Joint Venture based on a composite of price forecasts from Yharton, DRI,DOE,CER and SHCA*.Dames &Moore prepared the estimates of domestic production in each coal consuming nation in the Pacific basin to determine the net import requirements.In some eases,such as the Philippines and Thailand,domestic production will be sufficient to cover requirements for some time,but eventually imports will be required. Aus tra 1 ia is inc luded as a consumer in this study even though it will be a major net exporter.Because the supply-demand analysis must include the ·demand of all consumers in the market,domestic consumption of Australian coal must be considered.On ly the demand estima ted for New *Hereafter referred to as "the APA composite forecast". 39 ....... - - - South Wales and Queensland is included;these two states produce all of Australia's coal exports and also supply their own internal requirements (Australian Dept.of Trade,1983b).Other Australian states are self- sufficient in coal but not exporters. Estimates of steam coal consumption for all consuming sectors and estimates of domestic production for all Pacific region net coal importers are shown in Table 3-1.This table shows the demand,domestic production and net import estimates in Metric Tonne of Coal Equivalent (MTCE),lO a unit of energy content that provides a common basis for comparing coals of varying quality.This unit is really a more familiar shorthand for the fundamental energy unit of calorific value,usually expressed in British Thermal Units (Btu's).The MTCE is based on 12,600 Btu per pound coal and is a more interpretable measure than estimates expressed in billions or trillions of Btu. Table 3-1 shows that imports of coal consumers in the Pacific market will rise rapidly,particulary after the year 2000.Beginning at 63 million MTCE in 1990,imports (plus Australian demand)rise over fourfold to 278 million MTCE in 2010,and in 2040 reach a level of 569 million MTCE annually.This tremendous growth in net imports will be mainly the result of increasing consumption,though depletion of domestic producton in Korea, Japan,the Philippines,and Thailand will contribute to increased imports in the later years.Japan and Korea are currently the largest importers - - .- and will continue as such,taking 77 percent of all imports in 2010.Even in 2040,despite increases in newly industrialized countries such as Malaysia,Japan and Korea will still require 71 percent of imports in the Pacific. 10.The MTCE 15 the energy content of a metric ton (tonne)of coal that contains 12,600 Btu per pound.There are 27.8 million Btu per MTCE calculated as 12,600 Btu per pound multiplied by 2204 pounds per tonne or 27,700,440 rounded to 27.8.The consumption in each country was expressed in actual tonnes.The average Btu contents for coal used in each country were converted into MTCE.The conversion requires multiplying the actual tonnes by the ratio of the actual calorific value,say 24 million Btu per tonne,to the calorific value of the MTCE,i.e.,27.8 million Btu.A similar conversion was carried out for the estimated domestic production in each country considered. (Wilson,1980a) 40 ."'BLE 3-,:~"'CIFIC I'll'"COAL DEM"'ND '9S5 TO 2050 "1l~LlON METRIC TON COAL EQUIVALENT NOTE 'll85 ,1190 2000 20~0 2020 2030 2040 2050 4USTRALI'" "'''~GROWT~"'''101 ,2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 p!1"":.ECTRIC TOTA~:.45.8 48.~5e.6 53.,55.8 58.7 &,.7 64 .8 OIEW COAL .,b 36.4 37.6 38.8 40.,4'.5 42.9 44.4 46.0 ",EPLACE W COAL .,k 0.0 0.0 0.0 0.0 0.0 0.0 0.0 CEMENT a.m '.0 ,.0 1.0 ,.0 1.0 ,.0 ,.0 ,.0 SYNFUEL a.c 2.7 5.4 8.,8.,8.1 ,~:NDUST.STEAM ••1 4.7 '.9 5.4 6.0 6.6 7.3 8.,8.9 :OAL DEM"'ND '2.1 '3.5 '5.3 49.&54.5 59.3 6,.6 64.0 ~XPORT DEMAND ..2,.1 2,.8 22.6 2'.11 27.2 29.6 30.8 32.0 JAP...N_. :3NP GROlolTH ANN ,'.0 '.0 '.0 '.0 '.0 '.0 '.0 '.0 ELECTRIC TOTAL:d 2,&",2'0.8 265.9 293.&32'.,357.9 395.~'36.2 "lEW COAL b.d ,8.,29.5 42.0 55.8 7,.1 88.0 ,06.6 127.2 ::1EPLACE W COA~+.d 35.2 70.3 t05.5 105.5 105.5 105.5 CEMENT d.m 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5_. SYNFUEL c.d 25.0 50.0 75.0 75.0 75.0 .:NOUST.STEAM d.l 3.1 3.3 3.6 •.0 '.4 '.9 5.4 6.0 COAL OEIIfIANO 28.7 '0.2 88.2 162.6 238.'280.8 299.9 32'.0 '\OREA 3NP GROWTH ANN III 7.0 7.0 7.0 4.0 '.0 2.0 2.0 2.0 :LECTRIC TOTAL:.,9 2'.2 29.7 58.5 86.6 128.2 156.2 190.'232., NEIoI COAL b ••6.6 '0.8 25.2 39.3 60.1 74.,91.2 1,2.0 'lEPLACE W COAL +,.2.,£,1 6.2 6.2 6.2 6.2 CEMENT .....3.4 4.&9.4 9.'9.4 9.4 9.'9.4 .'SYNFUEL c,J 3.'IL7 10 . ,10.,10", INDUST.STEAM ..1 2.1 2.5 3.5 4.3 5.2 5.8 6.'7.0 COAL DEMAND 12.1 18.1 40.2 60.4 87.&105.5 123.2 144.7 -"'I1olAN 1NO GROwn~ANN III 5.0 5.0 5.0 4.0 4.0 '.0 '.0 '.0 ELECTRIC TO''''I.:1:.;.;18·1 23.,37.6 5S.6 82.4 121.9 1&0.5 267., NEw COAL b,t 3.0 5.S 12.8 21.8 35.2 54.9 84 .2 127.6 REPLACE !oj COAL f.t 3.11 7.7 1,.6 1'.6 11 .6 11.6 CEMENT .,1"1 2.,2.7 •••4.4 4.4 4.4 4.4 4.4 INDUST.STEAM ..~2.1 2.4 2.7 3.0 3.4 3.7 4.1 4.5 f'~COAL DEMAND 7.2 '0.6 23.7 36.9 54.5 74.6 ,0'.3 148.0 SING .•"'ALAY. 3NP GROWTH ANN III 7.0 7.0 7.0 5.0 5.0 4.0 '.0 4.0 COAL DEMAND n.o.p 4.0 5.5 7.&9.5 11.6 12.&14.2 ,5.e f N ,; ·OT"'L DelilAND 73.0 96.2 1&2.5 294 .•419.3 5.D·3 •3 572.3 661.4 TOTAL P/tODuCTION 33.0 33.0 32.0 16.0 16.0 .16.0 3.0 3.0 EXCLUDING AUSTRALIA r-iIIET IMPORTS 40.0 63.2 150.5 27&.•403.3 '&7.3 5U.3 &5a.4 CUIlIULATIVE IMPORTS Cl 0.0 5 Hi.1 1584.7 3729.2 7137.6 ,,590.9 1687•.1 230'2.6 --------------------------------------------------------------------------------------------¥"'"'.SOURCE:DAMES •MOORE CALCU LA TI ONS -"'OTES: ,,--OECO,1985.ENERGY BALANCES 11183/'9a3.~.29.El.ct,.1c.l ;..owt ....t ....H tn.GNP ;..owt ...,..t •. o--.....um••1:hat 50\0+tl"l••1.c~,.1c d.mand ;..ow1:'"1 ••uppl1.d by co.l-+1,..d plants. e--A••um••that coal 1:0 .Vnfu.'p"oJ.ct.p"ov1~.up to ,0 ,of ~~.cu ..,..nt oil and ;••con.umD~1o~. d--OECO.1885.E~ERGY 8ALANCES li&3/19&3.P.77.El.c1:..1c.l ;..owt ....t ....1f the GNP g ..ow~h ...t •. •--~ESTPO.'1l8'.W..t ...n Co.1E~po ..t ••Final .R.oo..t.P.22.El.ct ..1c.l ;..ow~h .t GNP ;,.owt'",..t •. +--....sum••th.~.'1 11185 oil .nd ;••f1 ...d g.n....t10n 1 ...epl.ced by co.l du ..1n;1:1'1.p.,.'0d 2000-2020. ;--El.ct",c.l d.mand '••••um.d to ;..ow at tl"l.GNP ;"OW1:h ...t •. ~--Co.l dem.nd +0"C.M.nt p ..oduct1on g ..ow.at ~....GNP "at.tl"l ..oug'"2000 t ....n 1.fl.1:. '--A••um ••1ndu.~..1.1 .t••m co.l d.m.nd g ..ow••~t ....GNP g ..owth ...t.:....1f of 1:1'1.g ..owt ...1.fu.'.d by coa'. J--WESTPO.li&l.W••t ...n St.am Co.l E~po..~.to the Pac1f1c a••1n.D.m.nd T••k G..ouP.P.'•. ~--A••um••no ...pl.c.men~of 011 .nd g ••f1 ...d c.pac1Cy w1Ch co.l in Au.~...11a. ~--Co.l d.m.nd •••um.d to ;..ow at 25 ,of 1:1"1.GNP g"ow1:h ..ac •. ~--A••um ••+1.~d.m.nd fo ..co.l in c.m.nt p ..oduct10n. ~--~al.y.'.n co.l d.mand in 'llaS-lIO ba ••o on M.nn .1:.l,l1183.ASEAN CO"'~.T.bl.'.',~.2. ~--S1n;aDo".Co.,d.mAnd in '9&5-90 b •••d on WOCOL fo ...ca.1:.in ICF,19aO.Tabl.S-3.P.,-"5. ~--D.mand +,.om 11190 to 2050 is •••um.d to g ..ow a1:l"Ial+t ....GNP g"owt~"at •. ~--C.lcul.ted ••the ar11:"'m.t1c .v.,..;s of ••cl"I column and t ....~...v1ous column tim••t.n,~lus t~s D~Sv~OU~eo'~' ---A••um.s ~"'.t h.lf t ...."'ust,..l1.n co.'d.m.nd ~.in oo~.n1:1.'ly .xport.b'.locations. ~--ea••d on 198'd.ta o ..ov1dsd Dy ~.Cheung,KE~CO B.C.to M.Fe'dm"n.O&M.8/85.. :--Ta~w.n Pow....S.o~.mb."'984.Unpubl~."'.d g.n ....t1on pla~ 41 "".. - _. ..... The last line of Table 3-1 shows the cumulative imports for each year.This figure is the sum of annual imports from 1990 to that date (estimated by 10 times the arithmetic average of the starting and ending year annual imports).This figure is important because each year's coal production leaves a little less to be mined,and the effect is cumulative. As noted above,coal from Alaska will be used primarily for electric power generation.Net imports for use in this demand sector are estimated in Table 3-2.The estimates for net imports for use in the electric power sector are also keyed to the consumption estimates. The estimates of imports for use in electric power generation shown in Table 3-2 provide a more direct indication of the potential market for Alaska coal.From 60 to 65 percent of the total imports will be for electric power use,depending on the year.The size of this potential market for Alaska coal exports is truly impressive.For example,in 2000, an estimated 117 million MTCE of coal will be imported for power genera- tion.Considering the difference in calorific value,this is equivalent to 218 million tons of coal of.the quality found in the Beluga coal field. In later years (for example 2020),the total rises to 257 million MTCE of coal imports per year.The largest importers are Japan,Korea,and Taiwan. 3.2 PACIFIC RIM DOMESTIC COAL PRODUCTION This section describes the basis for the estimates of domestic pro- duction.Two major coal consuming countries,China and India,are not men- tioned as importers,though ,there is some chance that they might be.Each has tremendous geologic reserves;but they are large countries with poor transportation networks,and consequently may import a small portion of 42 ,.,.. TABLE 3-2 Coal Consumption (1)Domestic Production (2) and Net Imports For Use in the Electric Power Sector for Pacific Market Importers 1990-2040 (million HTCE) f~~1990 2000 2010 2020 2030 2040 MALAYSIA &SINGAPORE Demand 6 8 10 12 13 14 Domestic Prod.0 1 1 1 1 0 Ne t Imports 6 7 9 11 12 14 JAPAN Demand 29 77 126 177 193 212 Domestic Prod.10 8 5 5 5 Net Imports 19 69 121 134 188 212 KOREA Demand 11 27 43 66 80 97 ~Domestic Prod.2 2, Net Imports 9 25 43 66 80 97 TAIYAN Demand 6 17 30 47 67 96 I""'"Domestic Prod.1 1 1 1 1 1 Net Imports 5 16 29 46 66 95 TOTAL IMPORTS 39 117 202 257 346 418 f'M ft (1)Dames &Moore estimates. (2)Dames &Moore estimates.See Section 3.2--(3)No domestic production. -43 their requirements if this proves more economical than transportation from inland sources.ll In order to give the most conservative treatment to the import levels projected in this study,we have assumed the maximum feasible exploitation "... of known coal resources for each country examined.We also have assumed ..... ,- i I these resources are developed speedily so that they are exhausted before imports begin.Since very little coal mining now takes place in the Philippines,Malaysia,and Thailand,there is little to be said about current production costs and trends or the difficulties likely to be encountered by bringing coa 1 reserves into production in isola ted areas such as Sarawak in East Malaysia.Therefore,while the estimates presented below may seem simple-minded in development,they are purposefully so--to yield an outside estimate of the potential domesti~production. 3.2.1 Philippines The Philippine Bureau of Energy Development estimates coal resources to be 1.7 billion tons,with proven reserves of 283 million tons of coal (Mann,et a.,1983).Coal reserves,as opposed to resources,are deposi ts that have been sufficiently explored to be accurately measured,and are identified as being generally of minable characteristics.For example, very thin seams are usually excluded for estimated reserves (for example, see USDOI,1974b).The coal resource,on the other hand,is the total coal thought to be in the ground,including estimates for seams that may be only s ke tchi ly known. Only a fraction of the resource base is likely to be economically recoverable since some coal cannot be mined at all due to adverse geology. Even where reserves are mined,not all the coal in place can be recovered. In underground mining,pillars of coal are left to support the mine roof. In room-and-pillar mining,which dominates underground production in the 11.nTechnically and,economically recoverable reserves"are estimated at 33.7 billion MTeE (World Bank,1979).Production in 1977 was 33.8 million MTCE,or one thousandth of reserves (World Bank,1979).Dames &Moore estimates consumption in the year 2010 at 292 million tons,or 210 million MTCE.This implies a compound rate of increase in produc- tion of 4.7 percent per annum over this 33-year period.It will be difficult,in the author's opinion,for India's coal industry to sustain this growth rate and also produce an exportable surplus. 44 ..... '-" United States and Australia today,as much as 55 percent o£t1'le coal in p lace is left for roof support.In longwa1l mining,which is becoming increasingly important,recovery can be as high as 80 percent,because most of the mine roof is allowed to collapse.High recovery wi th longwall mining is possible today only where geologic conditions are very favorable, including consistent seams with thicknesses from 40 to 12 feet (l to 4 meters).In surface mining a small fraction of reserves is left in the pit floor to avoid picking up the underlying rock;a portion is spilled or accidentally covered with rock.(U.S.Department of the Interior,Bureau of Mines,1974).Therefore,assuming a fairly high recovery of the resource base probably results in an estimate on the high side. Our objective was to determine the maximum likely production;thus, production of a goodly fraction of the resource base was adopted as a suitable estimating basis.In the case of the Philippines,we assumed 50 percent recovery of estimated coal resources.Recovery during mining underground is usually about 50 percent;it is from 70 to 90 percent in surface mines.(For mining recovery in the United States,see U.S. Department of Energy,Interagency Coal Task Force,1981.)Naturally some deposits cannot be mined at all because of land use conflicts,adverse geology (e.g.,excessive water inflow),or other factors.Hence,if we assume a balance between surface and underground mining (I.e.,half of each,with a resulting average recovery of 65 percent,and assume 25 per- cent of those resources are unminable)then the total recoverable coal will be 936 million tons.Using an average calorific value of 8,200 Btu/lb (Dames &Moore estimate based on data in Mann,1983),Philippine coal resources equal 552 million MTC!. 12Demandestimatesshowthatcumulativeconsumption will equal 632 million tons in 2020,exhausting the resources.Hence,all requirements after 2020 will be met by imported coal.We therefore assume no imports from 1990 to 2030.13 Starting with our 2030 estimate all coal will be imported.However for a conservative estimate these imports are ignored in Table 3-1. 12.That is,the sum of consumption over time. 13.While some imports will actually occur,where there is any doubt our a ssumption will tend to unders ta te the size of the marke t available to Alaska producers. 45 -- 3.2.2 Thailand Coal resources 1n Thailand consist of low quality lignite coals in several locations,with the bulk of the resources located in northern Thailand near Chiang Mal.These reserves are a lready being mine.d for the Mae Moh mine mouth powerplant which will be expanded over the next decade. Thailand's "probable reserves"of lignite are 1.3 billion tons with average calorific value estimated at 5,000 Btu/lb (Mann,et al.,1983). Potential production is estimated to be approximately 70 percent of the probable reserves,or 330 million MTCE.These reserves will probably be developed to support mine mouth power generation over a 50-year period (1985-2035),implying a 6.6 MTCE per year production rate.Estimates of consumption exceed this production level starting around 2010.Therefore, domestic production is estimated 6.6 million MTCE per year until exhaustion in 2035.As a result,no imports are necessary until after 2010.To be conservative,these imports are not included on Table 3-1. 3.2.3 Malaysia Coal reserves located in Sarawak and Sabah total approximately 385 million tons (Mann,et al.,1983),with an average calorific value of about 6,000 Btu/lb.Potential production is estimated by Dames &Moore at 50 percent of this total,or 115 MTCE,assuming (as discussed above for the Philippines,)a mix of surface and underground mining and typical limita- tions on recovery. The consumption estimates show that only a modest 3 million MTCE per year is required until 2010,when consumption rises to 9 million MTCE per year.Given that there is now no production,it is reasonable that produc- tion will phase in slowly,beginning some time in the 1990's and rising and a level of about 4 million MTCE per year.This production could be sustained until 2030,after which the reserves will be gone. 46 - - ."""" 3.2.4 Japan Minable reserves (The Tex Report,Ltd.1984)are 1,100 million tons (including metallurgical coal).The 1982 production was about-15.2 million tons of steam coal plus 4.9 million tons of metallurgical coal (20.1_ total),down from 27.6 million tons total in 1970 (The Tex Report,Ltd., 1984).Curre.nt plans are to sustain the present rate until at least 1995 (The Tex Report,Ltd.,1984),albeit at uneconomical levels of production cost.Since reserves will sustain the current level of steam and metallurgical coal production until exhaustion in 2035 (Le.,1,000 tons reserves divided by 20.1 million tons per year equals 55 years from 1982 or 2037),we assume this current production level will continue until then. Because of the high calorific value of Japanese production,this equates to 18.2 million MTCE per year. 3.2.5 Korea Korean minable reserves are approxima tely 310 mi 1 lion tons.The 10th World Engineering Conference estimate (World Bank,1979)of 1977 reserves was 425 million tons,less depletion of about 20 million tons per year (mmtpy),over 1977-1983 (World Bank,1979;Gordon,1984).This will sup- port current production of 20 mmtpy (of anthracite)only until 2000 (Le., 310 million tons divided by 20 million tons per year equals 15 years from 1983,or 1997).Korea already imports anthracite,an indication of the cost and difficulty of increasing production from current levels.Korea will become a strong market for import coal. 3.2.6 Taiwan While data are sparse,current domestic production is 2.7 million tons per year (Gordon,1984),equivalent to about 3 million MTCE per year. We assume production at this level can continue indefinitely.This projec- tion is probably optimistic given the recent mine disasters in Taiwan, which will focus attention on the poor conditions in existing mines.The reserves are very deep (over 7,000 feet in some cases)and the seams dip 8 teeply (Gordon,1984). 47 ,"""3.3 COMPETING SUPPLIERS FOR THE PACIFIC RIM IMPORT MARKET 3.3.1 Estimating Costs of Coal Supply Having established what coal imports of Pacific market consumers will be.the next step in this analysis is to determine which supplies are available.excluding coal from Alaska.to satisfy this coal demand.To do so.we must make a number of theoretical and practical assumptions and simplifications. The ideal approach to determining supplies would be to develop a supply curve.Due to data limitations we had to utilize a solution curve instead. The solution curve is a good approximation to the supply curve if input quantities can be accurately specified.The following paragraphs expand on this theoretical distinction. To develop formally what economists call a supply curve.we must be able to specify the optimum combination of coal reserves and mining deple- tion rate.capital investment.labor.and materials to maximize the produ- cers t profits.The range of possible combinations is referred to as a production function.If we then specify a normal rate of return on in- vested capital.a relationship can be developed between the required sell- ing price and the characteristics of a particular seam.Since some deposits cost more to mine than others.a curve can be plotted that relates the price to quantity of reserves that can be mined (Henderson and Quandt. 1980).Two assumptions necessary in such an analysis are perfect com- petition between suppliers and the absence of externalities. Developing a true supply curve for years to come is too difficult because we cannot readily quantify possible tradeoffs of inputs (capital. labor.materials)for mining a given seam.To do so.we would have to eva- luate numerous technical alternatives for mining each seam.Instead.it is only possible to determine.within limits.the efficient method of mining a 48 ~' particular deposit given current mining technology and relative input costs.Technology will change,but it is impossible to say how.14 Because the relative costs of labor and other inputs change,as well as production constraints and technology,supply curves would have to be esti- mated for each year.This would impose a burden both in calculation and in the necessity to make numerous assumptions. A production function on which to build a supply curve would specify an optimal depletion rate of reserves.This rate is a function of market pri- ces which in turn are a function of marginal cost and the interest rate (Peterson and Fisher,1977;Herfindahl,Mason Gaffney,ed.).For this a"nalysis,we assume that production capacity and reserves are unbounded. An optimum depletion rate is therefore nebulous t and we instead assume a mine lifetime and production rate based on a technical judgment.For this study a mine life of 20 years is assumed.(For similar analysis see USDI, Bureau of Mines,1974;USDOE,Energy Information Administration,1978.) Due to these limitations J the analysis presented below must be con- sidered a technical analysis and the result must be classified as a solu- tion curve rather than a supply curve.A solution curve shows the price-quantity relationships given the quantity of coal produced with quan- tity an exogenous variable.In contrast,a supply curve shows the price- quantity relationship where quantity produced is endogenous to the calculation of price.For example,given a production function that rela- tes quantity produced as a function of the level of inputs and a cost func- tion that relates costs as a function of input prices,we would calculate price and quantity as functions of varying levels of inputs and input pri- ces.In a true supply curve optimum levels of inputs are determined from profit (or quantity)maximization,whereas in a solution curve the optimum 14.Due to the great uncertainties inherent in technology,we make the simplifying assumption that present mining technologies will similarily be the optimum technology of the future.Any attempts to define a t.futuristic"technology would simply be a guess.Therefore,technology is assumed to be essentially fixed. 49 ---...........--.....--_,,----------------""'I""--~-~------------------- - combination of inputs is an assumption.A solution curve may slightly overstate the required prices compared with a true supply curve. The estimated coal solution curve consists of an arrange-ment of the potentially available coal supplies in increasing order of delivered cost to the consumer.Because the demand projection indicates a fairly steady growth in consumption,coal producers will almost constantly be building new mines (except perhaps during recessionary periods).Therefore,the market price must be at least at a level sufficient to attract capital for opening new mines.Because this analytic convention postulates a perfectly competitive industry,producers opening new mines are assumed to earn only the market rate of return on investment.This provides a base price trend projection keyed to the marginal cost of the last increment of production, the incremental mine.Of course,market fluctuation can cause prices to oscillate around this price level.For this study we used the cost of capital to United S~ates coal producers (as determined by the Harza-Ebasco Joint Venture)of 11 percent (real dollars,after taxes).The cost of pro- duction used to develop the solution curves includes market return on capi- tal as well as operating costs,taxes,and royalties.Taxes and royalties are assumed to remain constant at existing levels.Doubtless,these could increase as producing countries move to capture more of the rent of the resource.We anticipate this to happen,but we haven't estimated the magnitude or timing. Mine production and transportation costs (including inland freight, port charges,and ocean freight)affect the costs of each supplier.The position of each increment of supply is a function of the sum of these costs.The solution curves for each producing region discussed below assume current mining methods and productivity.A continuation of current taxation and rail pricing is also assumed.Fortunately,coal reserves are fairly well known and characterized and it is possible to estimate with reasonable accuracy the amounts and costs of coal that can be mined in each area.Coal reserves are relatively easy to discover because minable coals are found at shallow depths (from 0 to 2,000 feet),because the seams often 50 ..,,, ,"""' outcrop and such seams or coal bearing formations tend to be continuous over large are~as,up to hundreds of square miles in some cases.Coal re- serves are explored in detail only when they may soon become ~~onomical to develop.In areas where transportation,coal quality,and mining con- ditions are favorable for exploitation today or in the near future,reser- ves are usually fairly well known.Given the ease of exploration,it is unlikely that significant low-mining-cost reserves remain to be discovered and measured.The unknown reserves are those clearly unknown from lack of markets and/or because they are so difficult to develop that they cannot be p roducedcompeti tively • Therefore,it is unlikely that discoveries of reserves can result in unanticipated low-cost supplies.Even though the coal supply potential discussed in this chapter is based on current reserve estimates,it does not understate the amount of economical reserves. The solution curves discussed below represent the total reserves avail- a ble for miniIl:g plotted against cost of production.No annual production capacity constraints are assumed because the analysis focuses on the period beginning in the mid-1990's.Since mine planning and construction times are usually less than 10 years even for the most complex projects,produc- tion capacity should always be sufficient.This is of course subject to the assumption that producers are able to forsee demand. 3.3.2 Production Cost Estimates of Competing Suppliers Alaska coal must compete in the Pacific market against coal from Australia,Canada,China,Colorado,Wyoming,and South Africa.The major supplier of steam coal to the Pacific market is now Australia.In order to compete in the market,production and transportation costs for Alaska coal must match the delivered price of coal from these competing sources.In f act,as will be discussed in more detail later,Alaska coal can be de- livered to Pacific consumers more inexpensively than most competing coals. The maximum price at which Alaska coal can sell,which is one of the key findings of this study,is the price delivered to the consumer (and SI - adjusted for any differences in costs of utilizing the coal)that equates with the price of coal from the marginal competitors. Therefore in this section we will discuss the production costs and potential production for each of the major competing suppliers;only two possible suppliers are not included.South Africa now supplies a few million tons per year to Japan.Europe will become the best market for South African coal,considering transportation costs (i.e.,11,700 kilome- ters from Richards Bay Terminal (east coast of South Africa)to Rotterdam versus 13,300 kilometers from Richards Bay to Yokohama).The world market analysis shows that coal requirements in Europe wit be very large,and could absorb everything the Sou th Africans could produce.We therefore believe that little South African coal will find its way into the Pacific. By eliminating consideration of these "cross-flows"between the Pacific and Atlantic markets,the net effect is to understate demand for Pacific market supplies.Hence,we can exclude South Africa,making the parallel of exclusion of Australia for the European market. A small amount of coal from Siberia mostly of metallurgical quality,is a lao shipped to Japan.There are no plans to increase s team coal supplies from this source and the development of the metallurgical coal mines, financed by the Japanese,has been very difficult. The basis for the estimates presented below is that the Pacific market for coal will contine to be competitive and that prices will be set by the production cost,including a market return on invested capital,of the marginal coal supplier.No increases in the government "taken (in the form of taxes,infrastructure funding requirements,or padding in rates of government owned railroads)are included. 3.3.2.1 Australia Profile of Industry.The industry consists of private firms dominated by a few large companies:Broken Hill Proprietary (BHP),eSR,Ltd., British Petroleum Australia,Ltd.(BP),CRA (subsidiary of Rio Tinto),Utah 52 ..... - - _. Development,and Royal Dutch Shell.Japanese companies are minority par- ticipants in many projects,especially the metallurgical mines (e.g., Mitsui,Mitsubishi,Sumitomo).Current law requires a minimum of 51 per- cent Australian ownership.Exports account for half of bituminous produc- tion. The coal industry has grown rapidly,primarily for metallurgical coal export to Japan.The potential for highly profitable operations has attracted major mining and oil companies from around the world to invest in Australia.Production is a mix of surface and underground mining.At 32 billion tons (about 26 billion MTCE demonstrated economic recoverable resources)reserves are extensive and not a limiting factor,though surface reserves are not large enough to displace underground mining in the long run (Australian Department of Trade,1983a).Most near-term,new steam coal projects are surface mines with some expansion of existing deep mines. Reserves are mostly within 250 rail miles of the coast.Leasing of re- serves is controlled by the State governments. The political situation is reasonably stable,though government is heavily involved in the coal industry--for example,the limitation on foreign ownership,an export levy,coal royalties,requirements for private contributions to town site infrastructure,and an argumentative rela- tionship with mining companies over taxation.Regulation is fairly stringent.The 'labor situation is somewhat unfavorable with militant unions organized along craft lines (a number of unions at each mine).As mines are opened in more remote areas (western areas of New South Wales coal fields and in Queensland generally),substantial rail and town site infrastructure must be built,largely paid for by the coal producers. Coal Quality.Australia exports both steam and metallurgical coals. Most metallu,rgical exports are of high volatile coals.Generally, Australian metallurgical coals are higher in ash (averaging about 9.5 per- cent)than U.S.(6 to 7 percent)and Canadian (7 to 8 percent)metallurgi- cal exports.The boundary line between the better steam coals and the metallurgical coals is unclear and a number of proj ects that do or will produce metallurgical coal will also sell a "middling"steam product.The 53 f"""'l!" ·range of steam coal quality (clean basis)is as follows:caloric value 11,500 to 12,200 Btu/lb;ash 12 to 18 percent;sulfur 0.2 to 1.5 percent. A typical product would be 11 ,800 Btu/lb,15 percent ash,_0.6 percent sulfur.Ash fusion temperature is generally over 2700°F.Hardgrove grindability of 50 is usual (Australian Department of Trade,1983a). Port Facility.Current port capacitylY is 77 million tons per year (Tex Report,1984),with planned expansion to 176 million tons per year in 1985.Current and future capacity and water depth are summarized in Table 3-3. There are no significant obstacles to long-run development of deepwater ports and railroads to serve them.Railroads are financed by coal produ- cers and built and run by the government.Producers are repaid with credit for tonnes shipped.Port costs have been financed by the government and funds are tight.As a result,producers will have to finance more,as is now being done in Queensland and for the Kooragong Island loader recently built at Newcastle in New South Wales. Reserves &Production Costs.The potential supply of steam coal from Australia includes production from existing mines,expanded mines,and new mines.The problem of estimating production and transportation costs is obviously easier in the case of existing mines than for new mines,par- t icularly for possible new mines beyond the proposed mining projects on which significant engineering and planning work have been done.The approach taken by BXG,Inc.,.to the development of the cost estimates pre- sented in this section was to draw on the extensive published sources of statistical and descriptive information on existing mines and proposed pro- j ects.These include government sources such as annual reports of the Joint Coal Board (NSW)and the Queensland Coal Board;company sources such as annual reports;environmental impact statements (often containing details on proposed mining plans);and reports in the trade and daily 15.Theoretical capacity;practical capacity is 65 to 70 percent of stated figures. •BXG is a mining engineering and coal exploration firm located in Boulder,Colorado.Their analysis of the Australian coal industry is the basis for the production and transportation presented in this sec- t ion. 54 """r TABLE 3-3 Current and Future Australian Port Capacity (*) Port Name New South Wales Current Capacity (Million tons) Current Planned Depth Capacity (feet)(million tons) Planned Depth (Feet) Newcastle Balmain Balls Head Port Kembla Queensland 30 3.6 .5 8 50 36 36 38 55** 5 LO 26 50 36 54 TOTAL 70.9 Gladstone Hay Point 111 Hay Point 112 Abbot Point Bowen Brisbane 25 22 .5 .3 37 36 55 27 55 11 55 11 55 30 1 33 1 160.0 *Source:Tex Report.1984.and Appendix C. **Probably not complete until 1987-88. 55 ,.,.. press.The sources are used to assemble the necessary mine specific data on production,productivity,mining method,equipment used,and sometimes provide info~tion on geologic conditions.These mine speci~ic data are then combined with certain industry-wide relationships and factors such as the wage rates,required labor overheads (social costs),per-mile transpor- tation costs,and tax and royalty rates.This information is then synthe- sized into a cost estimate for each existing or proposed mine,and in some cases was extended to estimate costs of developing adjacent deposits for which no specific mine plan exists,but where geologic information is available.The details of this approach are documented fully in Appendix C. The mines that comprise the resulting supply curve include both under- g round and surface mines and production from both New South Wales and Queensland.The mix of labor,capital,and rail freight charges among these various supply source varies significantly.For example,rail freight from mines in New South Wales varies from $3 per ton for some South Coast mines to $17 per ton for mines at the western end of the Hunter Valley.(See Table 3-4.)The direct operating cost shown in Table 3-4 includes labor costs as well as materials and supplies.The labor cost is highest for underground mines in Queensland.For example,costs are about $20 per ton in the West Moreton district,compared to only $3.00 per ton in the most efficient Bowen Basin open cut (surface)mines.These variations account for the wide range in the total FORT cost of coal from Australian mines.As summarized in the cumulative solution curve shown in Figure 3-1, the FOBT costs range from $15 per metric tonne up to $80 per tonne (in Australian dollars,currently equivalent to U8$0.90).*The bulk of the potential production has FOBT costs between $50 and $73 per MTCE (converting from Australian to U.S.dollars,and adjusting for the calori- fic value of Australian coal,assuming an average calorific value of 11,400 Btu per pound). The total cumulative reserves covered by this solution curve are 7.3 b 1llion MTCE (8.9 billion tons)•This amounts to 30 percent of the ..... *Metric tonnes are used here since the material is reproduced 'as is' from the original source. 56 -----............_--------------~----~----------------' '"1 1 i 1 l 1 t,)1 1 1 1 ~.1 J ,,{"~,'# TABLE 3-4 Representative Costs and FOR/FOBT Prices * (1983 Australian dollars per ton) Representative Labor as Gov't FOR FOBT Mines %of DOC DOC Capital Charges Price Freight Port Price ------------------------------------------------- New South Wales I~Singleton,NW Dist.53-63%$18-23 $5-14 $2 $24-$38 $9-11 $5 $38-54 New Castle,NW Dist.55-56%$16-23 $5-14 $2 $3-5 $5 South Coast,NW Dist.60-70%$25-29 $4-5 $2 $3-7 $5 West,NW Dist.55-60%$11-16 $7-11 $2 $13-15 $4-5 Burragorang Valley 65%$23-27 $3-5 $2 $15 $5 Queensland Underground Mines West Moreton 58-68%$25-29 $3-5 $2 $5-6 $6 Bowen Basin 50-70%$25-29 $5-9 $2-5 $6-10 $3-4 Open Cut Mines West Moreton 35-40%$24-31 $3-5 $2 $5-7 $6 Bowen Basin 32-42%$7-18 $9-23 $2-5 $6-10 $3-4 *Source:BXG,Inc.(See Appendix C) FIGURE 3-1 AUSTRALIAN THERMAL COAL PRODUCTION CAPACITY VS rOBT PRICE9-r----------------------------------, ~loo,-u.I Z ::E LI- 0 LrJ LI- ~~-J "-' til W Z Z"..,0.... LI- 0 ..PtI'1o'(f) Z 0 ::::i -J ,~"-m - 8 7 6 5 z O+---,~-__r_--r__-__r--_r_-~--..,__-___r--_r_--r_-__r-----j 15-20 20-25.25-30 30-35 35-40 40-45 45-50 50-55 55-eo e0-85 .85-70 10-75 75-80 PRICE RANGE:(FOBT -AUS $) .- ,..., FOST PRICE RANGE (IN 1983 AUS $) 15-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 CUMULATIVE TOTAL PRODUCTIVE CAPACITY (OVER LIFE OF MINE) BILLIONS OF TONNES 0.107 0.645 0.695 0.76 0.988 1.4646 2.7006 3.75()1 6.0193 7.707.3 7.7873 7.9973 8.0873 Sou Source:BXG,Inc.See Appendix C. 58 _. reserves (economically recoverable reserves)and 17 percent of the coal resources (in situ demonstrated economic resources)estimated for New South Wales and Queensland combined (reserves as given in Australian Department of Trade,1983a).Therefore it does not cover all the coal that might eventually be produced.However,the results of the supply-demand analysis presented below show-that not all the coal included in this solution curve can be competitively produced for the Pacific market,even through 2040. Therefore the coverage of the supply curve is more than adequate. 3.3.2.2 China16 Profile of Industry.The coal industry in China is completely controlled by the government.The Coal Ministry,one of 40 ministries in the central government,is responsible for 60 percent of China's coal pro- duction;local and communal governments control the rest.Industry organi- zation (under the Coal Ministry)is as follows: Coal Ministry Provincial Coal Mining Associations Coal Mining Bureaus Individual Mines Total production in 1978 was 681 million tons,95 percent of which came f rom underground mines.Seams mined are currently in excess of 4.5 feet and 50 percent are thicker than 11 feet.Slopes are commonly less than 25 degrees but mining has also been accomplished in seams with dips up to 90 degrees.In mines controlled by the ministry,70 percent of production comes from nonmechanized (i.e.,hand loading)faces,25 percent from con- ventionally mechanized faces,and 5 percent from fully mechanized faces. Surface mining technology includes standard rotary drills,30-ton trucks,4 cubic yard shovels,and relatively small earthmoving equipment.The trend, however,is toward large-scale draglines and bucket wheel excavators (China Consultants International (Hong Kong)Ltd.,1981). 16.This section is based primarily on PN Consultants,1982. 59 ---_.....__......._--------~----------'""'!'""-"'-~-~--- The coal industry's b Ulion tons by 1987, t onnes.To expand the following: modernization plan anticipates production of over 1 requiring annual increases of 30 to 40 million coal industry,Chinese authorities have begun the ,..., o o Expanding and renovating existing mines; Constructing eight new coal bases each with 45-55 million tons of production capacity; /""'" ~.... o Developing small mines with capacities ranging from 10,000 to several hundred thousand tonnes each; o Increasing the use of sapropetic coal,coal pebble,lignite,and peat to conserve higher grades;- o Turning to the West for machinery and technology to accelerate development. Coal Quality.Chinese coal ranges from lignite to anthracite.About 220 billion tons of reserves are thought to be coking quality containing 14 to 35 percent volatile matter.Most of China's coking coals are located in the Provinces of Shanzi and Rupei. Chinese steam coal shows considerable quality variation but much of the reserve base has sulfur contents of 1 percent or below;high ash may be a problem. Infrastructure.China currently has the potential to produce an ex- portable surplus of coal.However,necessary export infrastructure is lacking (Ref.Wilson,C.L.,1980b).Rail lines are old,rolling stock out- dated (e.g.,50-ton wooden cars),and the rail system is designed to sup- port internal distribution.Until now development has been aimed at building new lines in remote areas.Emphasis is,however,shifting to com- mercial interests,and freight and passenger demand will receive greater priority in the future. China's ports are also inadequate to support increases in coal exports. China currently has two major coal ports,neither of which can handle Pana- max vessels: 60 ------------.",,--..._---~---«:_----,."....-- .... o o Qinhuangdao Lianyungang 1725,000 DWT .maximum 18,000 DWT maximum As with the railroads,however,expansion plans have already been an- nounced. Production Costs.Production costs are impossible to estimate,but ..- labor cost per hour is extremely low. Pricing Position and Strategy.Pricing of exports will be tied to negotiation of "soft"financing of projects and is likely to be at levels below competing coals (Wilson,1980). Potential Steam Coal Exports.China's production capability could expand to serve a large export market.This market is,however, constrained in the near-to mid-term by inadequate infrastructure.Table 3-5 summarizes existing estimates of potential Chinese exports of steam coal. TABLE 3-5 Projections of Potential Chinese Steam Coal Exports (million tons) 1985 1990 2000 WOCOL (1) (includes metallurgical coal)N.A.N.A.35 lEA (2)3 5 7 ICE Task Force (3)3-5 8-12 25-35 (1)Wilson,C.L.1980. (2)International Energy Agency,1978. (3)USDOE,Jan.1981. China is already becoming a significant exporter,and has the advan- tages of low production costs and favorable location.However,the 17.Dead weight ton (DWT)is a measure of ship capacity;it is the total weight of maximum cargo plus fuel and stores.A 65,000 OWT vessel draws around 40 feet of water,fully laden,although there is some variation with ship design. 61 - .... -- - - transportation network for coal exports is very poor (as is the transpor- tation network generally)and the internal requirements for coal are likely to be enormous.The Chinese have a strong incentive to export--to earn hard currency--and they are making efforts to improve their rail and port facilities.Under the current Chinese economic system pricing is centrally directed and coal exports can be priced as low or high as the government f eels the market can sustain.If they choose coal explorts as a source of foreign exchange,they can provide resources and pricing to encourage exports.Given the cross-cutting nature of these factors and the very s parse data available on coal in China,we have allocated a 15 percent share of the total export market to China,as a best guess. 3.3.2.3 Canada Profile of Industry.Western Canadian (British Columbia and Alberta) coal mines have been a major source of metallurgical coal for export to Japan and Korea.Beginning in the early 1970's a series of mines (mostly surface)have been developed which yield high quality,low volatile coal. Even with the sharpened interest in steam coal exports,the most serious attention has been on development of new metallurgical coal mines in north- eastern British Columbia. Coal reserves are government-owned and provincial governments have a very heavy hand in decisions about financing of necessary infrastructure improvements (rail lines and townsite development),taxation of mining and. exports,environmental issues,and even coal pricing.The overall economic benefit of infrastructure improvements to increase exports has been hotly debated (British Columbia,Ministry of Industry and Small Business Development,1982). Political climates for coal development in the two provinces mentioned have swung markedly over the last decade.A major national debate is now taking place about the implications of "Canadization"policies for the eco- nomy (Robinson Dames &Moore,1980).Therefore the security of foreign investments must be considered less than optimum. 62 -, - - Reserves are very large,but at relatively long distances from the coast,and rail transportation costs are substantial. The industry can draw on strong engineering and operational skill pools,and labor problems are not particularly great.However,new mines are often in very remote locations,necessitating extensive town site de- velopment.(For example,see British Columbia,Ministry of Industry and Small Business Development,1982.) Coal Quality.Western Canadian steam coals are generally very low in sulfur and have variable calorific value and ash content.Some steam coal will be produced from the exposed outcrop -portions of metallurgical coal mines (primarily in British Columbia).Coal near the surface that is exposed to weathering suffers a sharp loss of desirable coking properties and hence must be considered steam coal,though the calorific value may be in excess of 12,500 Btu/lb,with ash of less than 10 percent.Steam coal produced in Alberta is similar in quality to bituminous coal from Utah and Colorado,ranging from 11,000 to 12,000 Btu/lb (Alberta Economic Develop- ment,Energy,and Natural Resources,1981). Port Facilities.Canada has excellent deepwater port facilities near Vancouver,including the Pacific Coast Bulk Terminals (65,000 DWT berth capacity),Neptune Terminals (125,000 DWT berth capacity),and the Roberts Bank Terminal (125,000 DWT berth capacity)operated by Westar Resources (formerly Kaiser)(Sato,1983).A new facility just completed at Ridley Island near Prince Rupert is handling coal from northeast British Columbia. Reserves and Production Costs.The primary reserves of high volatile bituminous steam coal that could be exported from Canada are in the Foothill region of Alberta (Figure 3-2),with scattered deposits of higher rank (medium to low volatile)in the Mountain region in Alberta and British Columbia.Recoverable reserves are estimated to be about 3.05 billion MTCE assuming an average 11,000 Btu per pound (Dames &Moore,1978;Mann,1983). Of this total,surface minable reserves amount to 365 million MICE as shown in Table 3-6.In addition,163 million tonnes of surface minable bitumi- nous reserves exist in the East Kootenay Field in British Columbia.Hence, 63 'f " .., ,., '.-"',"'-- " •..~~:.t-• I •.' - - - -, Source: ".... •~••~.,t" :..,'',.. ~..~:"..-~~. COAL 1980 'OOTW1~~$IlI€GION q --.--.-...:..~~._ ..-.-,....aIL.",........,.'"..1I.""..... •..'.... 0-..........~~_......_.,................__•••__ ~-..··-.0_,~~..~, ~................_..... COAL REGIONS OF ALBERTA,CANADA FIGURE 3-2 Alberta,1981. 64 '., - I I ~~1 1 1 TABLE 3-6 1 ,1 1 )j )I ~i Steam Coal Reserves of Western Canada (millions MTCE)(1) Producing Region Surface Underground Total Alberta Foothills 365 (2)2,680 (3)'3,046 Bri tish Columbia (Kootenay)163 (4)163 Other 220 (5)220 0\ Vl 3,428 (1)Assuming average calorific value of 11,000 Btu/lb. (Jeremic,1981,page 44),indicates 24.2 to 24.4 megaJoule(mJ)/kg D'10,410 Btu for Foothills high volatile bituminous and 24.8 to 31 mJ/kg a 10,664 to 13,330 for Southeastern British Columbia medium volatile bituminous.In order not to understate reserves we use 11,000 Btu/lb as an estimated average value. (2)Recoverable surface reserves (Dames &Moore,1978). (3)Total recoverable less surface (Dames &Moore,1978,Page 66). (4)Robinson Dames &Moore,1980 (5)Production potential of existing mines and projects times 20 years,possibly a low estimate since some mines may have. more than 20 years reserves (Dames &Moore,1983). - - the bulk of the reserves are underground minable in mostly flat-lying seams from 6 to 20 feet thick. Production costs for Alberta-Foothills production and the East Kootenay deposit can be estimated for coal from the proposed Obed-Marsh mines,which are representative of the stripping ratios (i.e.,the ratio of overburden to coal thickness)associated with the surface minable reserves.These stripping ratios are estimated to be around 15:1 maximum.Total required FOBT prices as estimated in a recent report to the World Bank (Dames &: Moore.1983-1984)(in 1985 US$per MTCE)are $55 for Obed-Marsh &$56.38 for Mercoal at full production levels of 5 and 3.5 million tonnes per year, respectively.(Appendix A presents detailed cost estimates for these two mines and a summary of data sources.) Costs for future underground steam coal mining in the Foothills coal province of Alberta are difficult to estimate because there are not operating underground steam coal mines today.We must estimate costs based on experience in other regions.Mining conditions are similar to those in the Rocky Mountain coal province of the United States (comparing the seam thickness,depths,and geology (British Columbia Ministry of Industry and Small Business Development,1982;Canmet,1983)for Alberta to the geology of Colorado coals as described Keystone,1984),where total mine prices are in the range of $24 to $29 per ton (Dames &Hoore,1983).FOBT costs will therefore be in the range of $53 to $60 per MTCE (1985 $). In addition to these sources,coal from a few other existing and planned mines in British Columbia can be produced at FOBT prices in the range of $42.55 to $53.l9/MTCE (1985 $),including the Harmer,HcCleod, Line Creek,and Quinsam mines (Dames &Hoore,1978).Total reserves produ- cible in this cost range are about 220 million MTCE.The potentially available coal from Canada therefore includes the following increments of supply: 1.First,and least expensive,the steam coal from existing mines in British Columbia,with reserves of 220 million MTCE and costs of less than $53 per HTCE (1985 $),FOBT Pacific coast ports. 66 - ..... 1'.... 2.Surface minable coal,primarly in the Foothills region of Alberta, wi-th reserves of 528 million MICE (including Kootenay)and costs o f $56 pe r MICE. 3.2,680 million MTCE of underground minable reserves in Alberta, with FOBT costs ranging from $53 to $60 per MTCE (1985 $). These supply components are arranged into a solution curve in order of FOBT cost,shown as Figure 3-3,and contain a total reserve of 3,428 million HTCE;production and transportation costs range from $43 to $60 per HTCE (1985 $). 3.3.2.4 Colorado 18 Reserves.Demonstrated reserves of coal potentially minable by under-ground mines in Colorado (USDOE,Energy Information Administration, 1983 Table A4)are 8,408 million tons.Based on estimates prepared for the World Bank (World Bank,1983-1984),these reserves can be produced at prices (in 1985 dollars)from $23 to $30 per ton,FOB mine ($29 to $37 MTCE 1985 $).This range in costs reflects differences among mines in geologic conditions and mining methods,as well as management.We believe tha t a uniform distribution of cost versus reserve tonnage over this range is a reasonable estimate.Of the 7,644 million tonnes of demonstrated reserves,recoverable reserves will be no more than 45 percent,assuming that one-third of the reserves are unminable for environmental and geologic reasons (a similar assumption is made by the U.S.Department of Energy, see USDOE,Energy Information Administration,1983)and that recovery of the remainder by a combination of longwall and room-and-pillar methods would average 70 percent.In 1982 the United States'average recovery percentage for underground mines was 63.48 percent (USDOE,Energy Information Administration,1983).Total recoverable reserves are there- fore estimated to be about 3,750 million tons.The average quality of these reserves is about 11,200 Btu/lb (Western Coal Export Task Force, 1981,Vol.3).Hence,the reserve base expressed in HTCE is 2,750 million MTCE. 18.While significant coal reserves in Utah might be developed for export, it is likely that over the long run these limited reserves will be devoted to domestic power generation.This assumption may slightly understate the available western United States export coal. 67 ,.. 1 ~l 1 1 1 I 1 1 -1 ,~1 ~I }))~ J f ~ 60 1 I I -900 900 :900 530 -220 . . 45 55 50 40 .. .~a: g en...-~ ~ 8c..>()\...00 ttl 0u. UJ U... ~-. ~ ;:) 500 1000 1500 2000 2500 3000 3500 Cumulative Total Saleable Production Million MTCE SUPPL V CURVE FOR WESTERN CANADIAN COAL FIGURE 3-3 (See Section 3.3.2.3)Dame.&Moore - ...,. Transporta tion Cos ts.Current rail rates for export of Co lorado coal are $27 per tonne (plus or minus $1.50)or $34 per MTCE (1985 $) (Denver &Rio Grande Western Railroad Company,1982).The Denver &Rio Grande Western (DRGW)railroad (Fig.3-4)has exclusive control of Colorado coal origins,though alternative routes (Union ~cific or Southern Pacific)exist for movements from Ogden,Utah,to the Pacific Coast (assuming a new port facili ty in San Francisco).Current port charges of $4.00 per ton ($5 per MTCE)are high enough to support long term capacity expansion. The supply curve shown in Figure 3-5 shows 2,750 million MTCE of reserves ranging in FOBT cost from $68 per MTCE to $77 per MTCE (1985 $). The lower range is the sum of the low range of mine production costs,$29 per MTCE plus $34.04/MTCE per MTCE rail freight and port charges of $5 per MTCE.The reserves are distributed uniformly up to the highest mine cost of $37 per MTCE (1985 $). 3.3.2.5 Coal Supply:Powder River Basin Coal Reserves.In 1983 105 million tons of coal were produced from the Powder River Basin in Wyoming and Montana (Ref.USDOE,Energy Information Administration,1983).The average production per mine was about 4.4 million tons and the average productivity was about 90 tons per man-shift. This tremendo,us production and productivity resulted from exploitation of coal seams that are sometimes over 100 feet thick and required the removal of only 0.5 to 2 cubic yards of overburden per ton of coal (Western Coal Export Task Force,1981).Current (end of 1983)selling prices are $6.35 per ton for long term contracts (Murdoch,1983).The EPRI Technical Assessment Guide (Electric Power Research Institute,1982)estimated long run selling prices at $9.60 per ton in December 1980.Coal producers esti- mate that replacement cost for existing mines and capital recovery to earn 10 percent real after tax DCF would be around $9 to $ID/ton.(For example, see USDOI,Bureau of Mines,1974.)While there is currently considerable excess production capacity it will eventually be absorbed.For example, ICF,Inc.,(EPRI,May 1983)estimates 1983 production capacity in the Powder River Basin (which ICF refers to as western Northern Great Plains) 69 -----="---~~=:-:=:==-"""='-=-:::..-===r=-::=;::::==""",...,.,.- M"'~Of THE D£NVER &RIO GR~HDE W£STERN RAILROAO AND CONNECTIONS Map of the Denver &Rio Grande Western Railroad and Connections FIGURE 3-4 Source:Denver &Rio Grande Western Railroad ..-70 1 1 1 l "g I I 1 )]1 1 1 l J J , I I -..•u";: 4. M CI:) 0'1...- 1J .! DI C 0............•"ic«..-...j 0.......... I-m 0 LL ILl U I- ~..... tit (I) :l 75 10 65 60 - 500 1000 1500 2000 2500 3000 Cumulative Saleable Production Million MTCE SUPPL Y CURVE OF COLORADO COAL FIGURE 3-5 (See Section 3.3.2.4) Dame.&Mo0f"8 at 198 to 220 million tons per day while they estimate year 2000 produc- tion in this·region to be 330 million tons.Therefore,we estimate the long term pdce to be about $9.57 ton ($17.02!MTCE (1985 $),adjusted for moisture as per Beluga;see Appendix A).As demonstrated reserves of sub- mituminous coal in Wyoming exceed 65 billion tonnes (USDOE,Energy Information Administration,1983),they can be considered as infinite for this analysis.The reserves included in the solution curve are 20 billion HTCE. Transportation Costs.Rail transportation alternatives for Powder River Basin coal are Burlington Northern (BN)to Portland t Oregon t or Seattle t Washington,and the Union Pacific (UP)in San Francisco.Existing port.facilities are in Los Angeles and Long Beach.A half finished faci- 1 ity also exists at Portlan.d.We assume that new facilities could be built,probably at Seattle to take advantage of the availability of deep d raft sites. Rail distances in miles from Gillette,Wyoming (Rand McNally t 1973) are: o o o To Portland,Oregon,via BN •1,226 To Seattle,Washington,via BN -1,156 To San Francisco,California,via UP -1 t 500 ....' There remains the question of competition versus cooperation.There is a long history of rate-making collaboration between railroads prior to the passage of the 1980 Staggers I Rail Act (rail deregulation).Also t in a similar situation in the eastern United States since the passage of the Staggers'Act,two potentially competitive export railroads (CSX and Norfolk-Southern)have avoided competition.Based on this evidence,com- petition in these circumstances is unlikely.Without it,rates will rise a t least within the broad limits of the Staggers'Act guidelines t the market permitting. 72 If rates were established on a competitive basis,19 the rate would be set by the -la.oger UP movement,because the BN would set a rate that just undercuts the minimum rate the UP could charge and still cover costs.We estimate the variable cost (Le.,the directly attributable and variable costs such as car ownership and train crews)for a long distance unit train movement to be 1.3 cents per ton mile.(Dames &Moore estimate based on White &Haynes,1979;also,similar estimate by J.Heller,1984.)In addi- t ion to the costs directly attributable to movement of coal over a single route,the railroad must also pay other certain costs that are at least partly variable with overall traffic levels.For example,the railroad operates an extensive switching,signalling,communication,and central control system to schedule movement of trains through the rail system.The railroad must pay for some overhead expenses,such as marketing,that are partly variable with traffic. The ICC has developed various formulas that attempt to represent,based on extensive econometric analysis of railroad cost data,the extent to which these indirect costs are variable with traffic.Recently,James Heller of Fieldston Company estimated variable costs,including the non- t rain cost elements for a representative western coal export movement (Mann,1984).This analysis indicates that the ratio of total variable ""'" costs to "pure"variable costs is around 135 percent.This is a realistic measure of the true long run cost to the railroad of a coal unit train shipment.Therefore,we estimate that rates would initially be set at 135 percent of the $0.013 per ton-mile variable cos t mentioned above.A 19.Several different economic mechanisms could determine the rail rates for export of Wyoming coal,two major factors being the degree of com- petition between the rail carriers (BN and UP)and the elasticity of demand.Four combinations are possible.First,if demand is inelastic and competition occurs,then the rate is set,as described in this sec- tion,by the cost of the longer of the two carrier routes.Second,if demand were elastic,the BN,the shorter route,might charge a rate as low as its variable cost (including the 35 percent "margin")to gain volume.Third,if the railroads cooperate in oligopolistic pricing (easy enough with only two competing firms)and the demand is in- elastic,then they will raise rates to the point where Wyoming coal just keeps its market compared to the next most expensive source. Fourth,if the two railroads cooperate and demand is elastic,both will be forced to charge rates that are close to costs.We will show later that the demand is inelastic. 73 I~ .- minimum rate equal to 135 percent of variable cost would be $25.85 per ton ($46.81 per MTCE)in 1985 dollars. After--~wder River Basin coal begins to enter the market in signifi- cant quantities and forces less severe competition from othe..r suppliers, the railroads will be able to raise their "markup"from the very minimal 35 percent above variable costs projected for the initial rate.We assume rates will increase to 150 percent of variable cost in 2030 and 180 percent in 2040.The current legislative "trigger"for possible ICC jurisdic tion over rail rates now starts at 160 percent of variable cost and will rise to 180 percent over the next few years (Heller,1983).Therfore,the rail rates,without escalation,would be $49 per MTCE in 2030 and $59 per MTCE in 2040.Depending on market conditions,higher rates are possible.The validity of these rail pricing assumptions is examined later in this sec- tion after the competitive position of Wyoming coal is determined. Port costs would be about $3.00 per ton (Western coal Export Task Force,1981,Vol.5)or $4.79 per MTCE (1985 dollars).Host likely,a new deep water port would be built,either in San Francisco or Seattle.Should this prove to be impossible due to environmental constraints,the Port of Portland,Oregon,is another option.Unfortunately,Portland can accom- moda te ships of only up to 50,000 tonnes DWT,which would raise ocean freight costs by $4 to $5 per ton or about $7 per MTCE.Total FOBT cost would be $68.62 per MTCE (1985 dollars),for the entire 20 billion MTCE available supply.The FOBT cost,before escalation would be $73.93 in 2030 and $84.57 in 2040 (1985 dollars). 3.3.3 Factor Cost Increases For Supply Cost. The principal components of the cost of mining coal are labor (including payroll overhead),costs of owning machinery,supplies such as if equipment parts,explosives,tires,fuel,and power.To the extent that the constant dollar costs (i.e.,after adjustment for inflation)of any of these items increases,the cost of coal production must rise.As is discussed in detail below,wages in many countries have risen over recent decades at a rate fas ter than price.Indeed,this is the basic measure of economic betterment.Therefore we must give consideration to increases in coal miners'wages,oil,and oil products (such as lubricants,tires 74 -,-------------_._-------------.....-~---------------------...,..--- ..... , , , (consisting of rubber derived primarily from oi1),and ammonium nitrate fuel oil,20 an explosive made from natural gas).The APA composite oil and gas price projections show that oil and gas prices will be rising through year 2020,at which time they level off.Hence,the effec t of rising energy prices is included in the supply cost estimates.Prices of machi- nery and parts exhibit no long term trend of increase .and should therefore be held constant. In the remainder of this section we discuss the factors affecting labor costs and the significance of energy prices in the cost of mining in each of the areas competing in the Pacific Rim coal market.In addition, the effects of increases in diesel fuel costs on the rail haulage of coal for export is discussed,since rail costs _are a substantial part of the total cost of coal exported from these countries. 3.3.3.1 Australia and Canada The long term trend in Australia and Canada,as in the United States, has been for increasing (constant dollar)wages.Wages and diesel fuel costs are two readily identifiable factor costs that can be expected to increase in price.Increases in wages can be offset by increases in labor productivi ty.Produc tivi ty increase can occur due to improved mining methods and equipment.Figure 3-6,for example,represents productivity between 1948 and 1978 in the U.S.coal mining industry when it increased at an average rate of 2.8 percent per annum (Robinson-Dames &:Moore,1980). This increase was due to a shift from hand loading in underground mines to mechanized production and use of larger and more powerful equipment in sur- face mines.However,such trends are not without limit and may even be reversed.The effects of more stringent safety and environmental regula- tions,along with labor force changes and other factors,led to a 4.1 per- cent per annum decline in U.S.coal mining productivity from 1969 to 1979. Starting in 1966,United States surface mine productivity began to level off and then to decline;this was well before the imposi tion of stringent reclamation regulations.Aggregate measures such as the average 20.A mixture of 95 to 96 percent ammonium nitrate and 4 to 5 percent Number 2 fuel oil. 75 "j;i }''11 j )-"1 '~l l )1 1( PRODUCTIVITY TRENDS BY METHOD OF MINING.1948-1978 FIGURE 3-6 AVERAGE "'"".----......,--..................-.....-/----,-, ,.,.~--~~.. UNDERGROUND AVERAGE SHORT TONS PER MAN-DAY 40 35 30 25 20 15 -.J 0'1 10 5 ~------- o . 1941 I'm 1951 1m 1m 1951 1959 1961 1963 1965 1961 1'fi9 1911 1m 1915 1911 1m YEAR 1948-1978 Annual increase rate of (+)2.8% 1960-1978 Annual increase rate of (+)0.9% Since 1969 Productivity decreasing at annual rate of (-)4.1% Source:Energy Information Administration,Annual Rerrt to Congress, Vol.IT,1978.President's Commission on Loa (190Ul. ..... minlng productivity figures just cited.as well as examination of par- t icu.lar medleti and equipment changes.suggest that only minor technical improvements in surface mine productivity are possible.Underg~ound mining probably still offers considerable latitude for improved methods. The primary sources of production of steam coal for export from Australia and Canada are surface mines.Regulation of these mines could certainly be more vigorous than it is.though reclamation requirements are alre!ady fairly strong.Increased regulation will tend to offset produc- tivity gains achieved through technology. In all countries.governments are zealous in their search for "economic rents"earned by mining companies and are eager to tax them away.In d oing-so.they may increase the production costs of all mines.including t he marginal mine (which earns no economic rent).Some examples include the 30 percent severance tax imposed by the State of Montana on out-of- s tate coal shipments and the export rail rates in Queensland and New South Wale~s.Australia,which are 2.5 to 5 times variable costs (Mann,1984). Similarly.severance taxes on oil and "windfall profits"taxes have been raised to capture prospective rents. One positive factor--technology--acts on productivi ty;three negative ones are also significant:depletion,regulation,and taxation.Depletion of less costly reserves is explicitly quantified in the supply curve de- velc)pment.Without any ready method for quantifying these other effects. we l~egard them as cancelling out.That is.increased regulation and taxes will counteract the effect of improved technology.Therefore.the trend of unit labor costs (dollars per ton)will equal the constant dollar wage trend,with adjustments upward for depletion effects. Data were assembled on the average nominal increase in wages in Australia (Paxton,J.ed ••1980.pp.109.351)and Canada (Paxton,J.ed •• 1980,pp.249,275)for the period 1920 to 1980.and on the price index for the same period.In Canada the net of nominal wage escalation and infla- tion (as measured by the consumer price index equivalent)was 2.3 percent per annum compound growth (Bank of Canada,Ottawa,Personal Comm.to I. 77 -Storace,5/25/84);in Australia it was 3.0 percent (Australian Embassy, Ottawa,personal communication to 1.Storace,5/25/84).These increases in labor cos twill affec t the approximate ly 35 percent of the tota 1 mining cost that is .direct labor,and is thus susceptible to labor cost escalation. Rail costs account for 30 percent of the total FOB cost of coal from the two exporters.Diesel fuel accounts for 10 percent2l of the total rail tariff for Australian exports and 30 percent for Canadian.The dif- ference is due to the longer hauls in Canada and to the Australian rail rates which include large overhead and profit margins,that reduce the proportional importance of fuel costs.The forecast of oil prices shows a 2 p~!rcen t average escala tion over the period.In addi Hon,oil rela ted costs (diesel fuel,tires,ammonium nitrate,and lubricants)are 6 percent of the total cost.These will escala te wi th the same trend as this fore- cast,Le.,at 2 percent per annum. As shown in Tables 3-7 and 3-8,combining the projected weighted .esca,lation of mining and rail transportation costs yields an overall esca- lati,on rate of .85 percent per annum for Australia and .743 percent for Cana,da.2 2 21.Calculated on the basis of 250 ton-miles per gallon for coal unit trains and $1 per gallon as-burned cost of fuel (Heller,1984).The mileage for each movement (from Rand McNally,1983 and other sources) is divided by 250 and multiplied by $1 per gallon to determine the fuel cost.This is divided by the rail rate to determine fuel cost as a percentage of the total rate. 22.This method of calculation understates the true escalation because the escalated share of total cost is held constant.In fact,each year the portion subject to escalation becomes a larger part of the total since it increases in relation to the nonescalating costs.For example,suppose that the initial total cost is $10 per tonne,of which $5 escalates at 1 percent per annum.Using the weighting method presented above,escalation is calculated at $5 divided by $10 times 1 percent,or .5 percent per annum.After 20 years this equals $11.05. Alternatively,if $5 per tonne is escalated atl percent per annum for 20 years and added back with the nonescalated $5,the total is $11.10 because the basis for escalation grows each year. 78 TABLE 3-7 Calculation of Composite Escalation Rate for FOBT Cost of Coa1--Austra1ian Co l~t Componen t RaUroad Fuel Mine Labor Mine Fuel &Related 1.of FOBT Prices (1) 3.0 24.5 4.2 ****** TABLE 3-8 Escalation Rate CO (2) 1.6 3.0 1.6 Weighted Esea1a tion Ra te c~n (3) 0.0548 0.735 0.67 .85 Calculation of Composite Escalation Rate for FOBT Cost of Coa1--Canada Cos t Componen t Railroad Fuel Mine Labor Mi'ne Fuel &Related 1.of FOBT Prices (1) 9.0 24.5 4.2 Esca1a tion Rate (7.)(2) 1.6 2.3 1.6 Weighted Esca1a tion Rate (7.)(3) .144 .564 .0672 .743 - TI>Contribution of each cost component to 1983 dollar FOBT price. (2)Annual rate of increase in real (constant dollar)cost. For fuel prices reference APA Composite Oil Price Forecast. For Labor costs see Section 2.2 (3)Percent weight in FOBT price times escalation rate, expressed as a percentage of FOBT price (e.g.J .03 *.016 •.00048 •.048 percent). 79 ..... - 3.3.3.2 Colorado And Wyoming The U~&e long-term trend of increases in real wages (average for all !lndu:stries 1910-1981)is 2.2 percent per annum (see Section 2-2).As d iscl1ssed earlier,technica 1 changes may cause produc tivi ty increase s tha t offs~!t wage increases,but increased regulation may reduce productivity. As l)efore,we will treat these effects as balancing each other,and Jl nCr4!ase the labor portion of mining costs by the wage increase ra teo Thi s Ilffe~:::ts both labor operating costs and the labor portion of capital costs, which are about 25 percent of the total mine cost for mines in Colorado and Wyoming. Rail costs are a high percentage of the FOB price of coal from both Colorado (50 percent)and Wyoming (75 percent).Fuel costs are 10.5 percent of the rail costs for Colorado export coal and 23.3 percent for Wyoming coal. Hence,diesel fuel price increases averaging 1.6%per annum will cause .12 percent per annum and .34 percent per annum increases in the FOB price of Colorado and Wyoming coal,respectively. Combining the effects of the mine labor and rail fuel increases,·as shown in Tables 3-9 and 3-10,the weighted annual escalation rate for Colorado coal is .443 percent per annum and that for Wyoming coal is .51 percent. 3.3.4 Ocean Freight Costs The price of Alaska coal sold into the Pacific market will depend on the transportation costs of Alaska coal to the prime market areas.Most of the demand comes from consumers in Japan,Korea,and Taiwan.Since these buyers are located at similar distan.ces from the sources of supply and comp,rise most of the market,it is likely that prices will be closely rela,ted to the delivered costs to Japan.Small premiums or discounts could exiJlI t among the competing suppliers to account for transports tion differen- tials into the southeast Asia markets.For example,given the differences in trfnsportation costs,Canadian coal would need to sell at a lower cost 80 TABLE 3-9 Calculation of Composite Escalation Rate for FOBT Cost of Coa1--Colorado .....' Cost Component Rail.roal Fuel HinE:Labor Hine Fuel and Related %of FOBT Price (1) 7.5 12.5 3.0 ****** TABLE 3-10 Escalation Rate (%)(2) 1.6 2.2 1.6 Weighted Escalation Ra te (%)(3) .12 .275 .048 .443 Calculation of Composite Escalation Rate for FOBT Cost of Coal--Wyoming -, - - Cost:Component Railroad Fuel MinE!Labor MinE!Fuel and Related %of FOBT Price (1) 21.0 6.3 2.3 Escalation Rate (%)(2) 1.6 2.2 1.6 ~leighted Escala tion Rate (5)(3) .336 .139 .0367 .51 (1)Contribution of each cost component to 1983 dollar FOBT price. (2)Annual rate of increase in real (constant dollar)cost.For fuel prices reference APA Composite Oil Price Forecast.For labor costs see Sec t i on 2.2. (3)Percent weight in FOBT price times escalation rate,expressed as a per- centage of FOBT price (e.g.,.75 *.016 ::.0012 -.12 percent). 81 .- -- - - r"" i aboard ship than Australian coal for sales to the Philippines,while prices would be equal for sales to Japan. Estimates of ocean freight rates have been developed based on costs of c,wnership (including 10 percent return on capital)for new vessels and using current costs for bunkers (i.e.,ship's fuel).Since the import pro- j ec tions indica te a rapidly rising coal trade addi tiona 1 shipping capac!ty willL be required continuously.Ocean freight rates,at least over the long ternl,should therefore be related to costs for owning and operating new vesnels. Sources of data for these estimates are confidential estimates pro- vid~!d by the shipping departments of two major oil companies and new building costs reported in the Lloyds Shipping Economist (1982).Assumed for all the movements are 120,000 dwt vessels since this vessel size can a lrl!ady be loaded at the Australian and Canadian coal ports and is wi thin the water depth limits for a Puget Sound coal port when one will be needed in the 2020 period (Yestern Coal Export Task Force,1981).This is also the planning standard for the new coa 1 port proposed by the Port of Los Ang1eles.Some smaller receiving ports may continue to be limited to smaller vessels,and some ports make take larger vessels,but shipments in vessels of this dominant size will be the key to price setting (Yestern Coal Export Task Force,Vol.5). The estimated ocean freight rates in dollars per tonne and dollars per MTCE are summarized in Table 3-11.The shipping costs,at $10.64 to $11.70 per MTCE (1985 dollars),are nearly equal for each of the sources except Wyoming.The shortest movement is from Alaska to Japan,but the distance advantage is counteracted by the low calorific value of Alaska coal.Development of even larger colliers will therefore decrease the absolute cost of shipping but not the relative position of Alaska compared to the competing producers. Fuel oil is a major component of the cost of ocean shipping,amounting abo'ut 40 percent of ocean freight cost (Yestpo,1981).APA oil price pro- jec.tions show that fuel oil costs will be rising over the 2000 to 2050 period at about 1.6 percent per year.Therefore,the overall cost of ocean 82 _.--------------------r------------------------ - ,-, TABLE 3-11 PACIFIC RIM SHIPPING DISTANCES Coal Loading Ports to Yokohama (nautical mi1es)1 and Estimated 1985 Freight Rates Based on New Buildings Charter 120.000 dwt Vessels 1983 $1985 $ Miles $/TON /MTCE /MTCE(2 ) Beluga (Anchorage)3.200 7.00 11.00 11.70 Co1c)rado (Los Angeles)4.839 9.00 11.00 11.70 Wyoming (Seattle)4.245 8.-00 15.00 15.96 Australia (Newcastle)4.270 8.00 10.00 10.64 A1 bl!rta/Bri Ush Columbia (Vancouver)4.262 8.00 10.00 10.64 (1)Paxton.J ••Ed.The Statesman's Year-Book. Martin's Press (London)P.109.351. (2)Inflated to 1985 dollars by a 1.0638 factor. 83 1980-81.MacMillan St. ----~----------------------~------------------.......;.......;- - - - _. - freight will escalate at 0.64 percent per year. 3.4 COMPILATION OF AGGREGATE SOLUTION CURVE BY YEAR The solu tion curves for each of the competing producers are brough t together In this section with the cost escalation rates estimated for each region to produce an aggregate solu tion curve for each of the forecas t years. Fi rst,the aggregate solu tion curve combines the suppl ies avai 1ab1e from each region into a single graph.This is accomplished by adding up the supplies available at each price level from Australia,Canada, Colorado,and Wyoming.As noted previously,supplies from China are not included in the solution curve,but will be accounted for by assigning 15 percent of the consumption to China.This reduces the demand that other suppliers must satisfy. The costs of production for each supplying country,which escalate at differing rates,must be calculated for each forecast year from 1990 to 2040.The difference in escalation rates changes the relative position of the various supply areas over time.For example,Colorado coal prices e sC~L1a te more slowly than others,and as a resu1 t,in later years Co lorado coall will become more cost competitive compared to Australian coal. The solution curves are represented graphically in Figures 3-7 through 3-12.For each year the curve shows the total reserves that could be produced versus the required price,delivered to Japan.The escalation ra tl!S have the effect of shifting the curve upward wi th time.No te tha t the same reserve level (on the horizontal axis)corresponds to a higher pri1ce In each year.Since Wyoming coa 1 is the 1arges t single component of supply,the "flat"portion of the curve rises from one figure to the next at .about the Wyoming escalation rate of 0.56 percent per year. The least expensive supplies are some Australian reserves and produc- ti01n from Canada.Next highest In cost are the Colorado coal reserves. 84 ,.--~~.",---------------------------------------------- l-j -1 1 --l-~-1 ~~.J:1 J)j )-8 1 S1II~_AM C()AL PJ~Ol)ucrrION 1 g~}O AUSTUALIA.CANADA.COLORADO &WYOMING $115 l--·--r----T~--T------r----'------r----T -~r·-----I------I-~T----T---'-I--T-~--I--~--~I-l $110 -I-----+----+-----I----f----J---f-------r-----t---t-----t-~-----r_--t---t----~----t---;_>"--·- $90 -+--j-----l--------I I ~---l---+-+-I~- -------I 1 -1--1---I -I +--------..~--- (--. Zw ~<~ :;Jaw ~«ou $105 --1--1----1-- $100 -j-~-+-I I $95 --4-----1------1 I ----l-----1-----1------+---+------I------4--4----1---I--~ I I --1---1---'""----+--4-----1---+I t----f ----...--t----I--I I I -----I t I -<---- I -1-------1-,I I $75 -t---I----+_ r-I-~_t----+--;---l----4--~--..------f-----+ $85 -~--1--~J~--==~-I--+-~I -t I I ----I V'~I $70 -f---H---1-I +---+--+----1-------+--1---+---1---+I I------ $65 -1---+----+-----+---t------1---1 +---+---..---~----...-.--- zo (--. U H t:l:: (--.w ~ ....... ¥J co \Jl o 4 8 12 16 20 24 28 32 BIU.IONS MTCE ).)~'1 J )-1l•J )1 'J S11 !t;AM (~OAlj PI{Ol)U'CfriOr~2 n on U lJ AUSTnAl.lA.CANADA,COLORADO &WYOMiNG $130 -T--r--'---T--~-r~-r---,'-.-T ---T -----r--~._---r---·-r---r----r------r---r---r~-l $100 -t---I------I------t--------!---I----t _.I -4---1 . 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'-'""1 ,--..... '-",....,."--o- J-..... <."" '"r"'"C), I .,.."\ ......~ ~~'I ~~ "...<~...... ~~ ~~-:"'''''''! r'fi~~'CIJ. 0 0 0 -0 0 0 0 0-~M N -0 0)~l'---------......""-... ~x:3:'lV"AI~h:3:'lVQ:)~o~:)IH~:3:W/$ 87 ------------------------------------- I~ .- ,~\I I , I I , I 1 I !~I \I I II,i i I I I IIII •I I i I I I r-----.-----.,.....----,....------r-----,.------.-----.- i I I I L-- I ! 1- I i .~.-u:-:::s rn Zo ~--,I i I , I \\ I III l-I I I --~-------+_---i__--__t-":------;....---__l_CQ 1 i \I----:----+----~--__i-----'~I-----I------QIN I I '-~---+----;-.---+-------+-\-l'""l-----+----+-~ I I I !r-'----1-----+----+----t-------!------l--~---l, L __--+--I--+----...__::::...,.-+__+_ 1 "--,-----r-----+-----+------+-------!---~i__--~ 0 0 0 0 0 0 0 0 0 ~~M N -0 0):0-- - ---49 *~~...~~~ l.~:.a'1V AI[lb 3:'1V O::J NOl.::JIHl.::IW/$ 0 Z-:s 0 ;-->0-j ~ I ~L-I 0 Q -<....,-0 ..-0 U.r-<~,-, <:z<:i U i I I.I---I <!I ""'=I !i ,I-I <:I f'V--en I ;:>-!<, -, ~~ .., io-ooi <~ pl..... 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C.)_._. {fJ i::l r-eo ~< ~,«...-~I ~~~l , to""'"I I en i- ..- 0 I 1 ~.0 0 0 0 Q Q 0 0 0 l'--~~~M N -0 Q:I---- - - - -'*...~"*........."*... ~X::I'TV AInb 3:'TVO:::>NO~:::>DI~::IN/$ 90 ..... ..- The Wyoming coal is most expensive.Thus the curve flattens once it reaches the level of Wyoming delivered prices. The conspicuous flattening of each of these curves results from the very large amount of coal available from Wyoming,at a constant but high price.The "flat"curve indicates a large increment of supply with a small change in price.The available supply .from Wyoming is at least 20 billion MTCE (see Section 3.3.2.5),which is sufficient,combined with lower cost coal from some other sources,to provide all the coal necessary to meet the expected demand,as discussed in the next section • 3.5 SUPPLY/DEMAND ANALYSIS AND PRICE FORECAST The trend of the long term price of coal at any time is determined by the cost of production of the marginal (i.e.,highest cost)mine required to open to satisfy the demand.This basic economic concept follows from the fact that mines are logically developed in the order of cost of production, starting with the lowest cost mines.In a market with rising demand,the consumer must pay the producer enough to get him to open a mine.23 Each additional increment of demand must be matched with a steadily more expen- s ive increment of supply.Prices therefore can be determined by finding the cost of supplying a given level of demand (consumption). The solution curves relate coal price to coal reserves "used."The reserves used include those mined between today and the forecast year,plus reserves dedicated to future production at that time.This is true because mines are not opened for a single year's production of coal (see Section 3.3.1),but rather for a productive life of 10 to 30 years (even longer occasionally).Therefore,dedicated or committed reserves are the sum of depletion plus reserves dedicated to future production.Reserves dedicated to future production are estimated in this study to be 20 times current p rO'duction levels.As we have already established a solution curve that 23.This is somewhat of a simplification for purposes of exposition.What actually happens is that mines already in existence expand to meet 1'ising demand,but as they do so their variable costs start to rise. This forces prices up;when they reach a sufficiently attractive level producers invest in new mine capacity.In this sense,the long term supply curve is the sum of the short term curves for each mine. 91 ~I ~I relates production levels and costs.the next step is to compare these solution curves with demand. 3.5.1 Market Demand The figure that we must use for coal demand is not simply the current consumption level in a given year.It must also reflect depletion and reserve commitments.Depletion is the reduction in available reserves to account for past production.Therefore,as discussed in Section 3.3.1,the cumulative past demand by year was estimated. To determine future reserve commitments~coal production (which equals consumption)is multiplied by 20.For example,consumption in the year 2000 (from Table 3-1)is projected to be 183million MTCE.Reserve commit- ments are therefore 3660 million MICE,for future depletion,plus cumula- tive production of 1585 million MTCE. The balance of supply and demand,determined by the cost of opening the I ast new .mine to satisfy the increasing demand level,is related to the solution curves developed here by comparing the demand.represented by the reserve commitments,with the supply,which represents the cumulative reserves developed. Before making this supply/demand comparison,an allowance must be made for the participation of China in the market.As was described in Section 3.3.2.2,in this analysis we are allocating a 15 percent share of the market to China "off the top"before comparing the projected supply and demand.Each step of this calculation is shown in Table 3-12. First,Table 3-12 shows the total imports by year for the Pacific coal importers (from Table 3-1).These rise from 150 million MTCE in 2000 to 569 million MTCE in 2040.On the second line of the table,the cumulative imports are shown,the sum total production over time (also from Table 3-1).These rise from 1585 million MTCE in 2000 (the cumulative total from 1990 to 2000)to 16,874 in 2040. 92 -, ....' 1""" TABLE 3-12 Reserve Commitments for Pacific Rim Export S team Coal for 1990-2040 (Billion MTCE) 2000 2010 2020 2030 2040 To bILl Imports per Year (1)0.15 0.28 0.40 0.48 0.57 Cumulative Imports (2)1.6 3.7 7.1 11.1 16.9 Les~1 Chinese Share (3 )1.3 3.2 6.1 9.9 14.3 ResE!rve Commitments (4)3.9 7.9 12.9 18.1 24.0 ..... .... TIl (2) (3) (4) Source:Table 3-1. Total by year of 10 times the arithmetic average of column and previous column. Exports from China are assumed to account for 15 percent of cumulative imports. Sum of cumulative imports less Chinese share plus 20 times the imports in that year,also less 15 percent for Chinese share of exports. Reserve commitments are the measure of necessary deductions of the coal reserve base. 93 ._-----~-----------------.,.---------------------- _. _. -,( ..... Next,the Chinese 15 percent market share is counted for by reducing the cumu la tive produc tion by 15 percent (ca lcula ted by mul tiplying the ,cumulative ~lIIPorts by .85).For example the cumulative imports in 2000 are reduced from 1,585 million MTCE to 1,347 million.Reserve commitments are shown on the next line of the table.This line is the sum of.the cumula- tive imports,less the Chinese share,plus 20 times the production in that year,also less 15 percent for the Chinese share.For example,in 2000 the reserve commitment of 3,900 million MTCE is the sum of the cumulative imports less the Chinese share of 1,347 million MTCE,"lus 20 times 150 million MTCE of imports in 2000,times .85. 3.5.2 Supply/Demand Comparison and Prices Without Alaska Exports If we now compare the reserve commitments shown in Table 3-12 to the solution curves for each year (Figures 3-7 through 3-12)we can determine what price is needed to produce enough coal to satisfy the demand,assuming thaI:all coal from the non-Alaska sources is incorporated in the supply curves.The price determination is made simp ly be reducing across the horhontal axis of the solution curves to the appropriate tonnage of reserves and reading the price for that point on the supply curve.Implicitly,we assume that the demand is completely inelastic,that is,that coal prices do 1o.0t influence the consumption of coal.Figures 3-13 through 3-17 show the supply/demand comparison for the non-Alaska suppliers for 2000-2040. In 4!ach figure the demand,wi th and wi thou t export of Alaska coa 1,is shown as a vertical line.The price is shown where a horizontal line connects the intersec tion of the demand e stima te and the solu tion curve. The effect of exports of Alaska coal is,of course,to increase the sup1ply available to Pacific market consumers.Hence,to calculate the effect on prices,the solution curve should be shifted to the right,increasing the available supply a t a given price.For ease of mechanics of presen- tation,the demand is shown as shifted to the left by the amount of Alaska exports.This allows both states of the market (with and without Alaska exp,orts)to be shown on a single graph.The resul t of this comparison are sum:marized in Table 3-13 and show estima ted Pacific market prices (in 1985 $)by year wi thou t Alaska exports.The price estima ted for 2000 is $76 94 -, $'}--I 1 ~-)~-I 1 -11 ))t l -))} AUSTI~A].IA.CANADA.COLORADO &WYOMING $130 -'--T---....,----·r---'----1-"---I-----·-r-~---·r------·r-~-r---~__,-·-·------.---!-·--l--------r-----r---l 1 srl'l'~.AM COAL,:Pl~OD'ucrrION 200() $100 -I +--1--+----4 I +--~---__t__-l-I I --I I I I ~-I---I ----t----I------1 I -----I-I I -+ (-t Zw ~ ~ ~a ~ ~ou $120 -l--~I l-··----·l-~-I--1----_·--1---------1-----1--1---- $110 I I ~~--/----I-----1---1---------+----+--- ..-----1--t-----l--+-+----r/-I.II 322428 __I I ~11--_-+1.----'1/ $90 -l--t---t-·-~-~b1-t:--:I===r==I I I·I I I I $80 +-~----[----:-------1-I ---l I I I 1------+I 1·- I, $70 -t--4-J+--t----i-I -t---t-i--t-I I-------li I I 1--- o 4 8 12 .16 20 Bill-IONS MTCE zo (-t U H ~ E-t Jz.l ~ "-41) \0 lJ1 Figure 3-13 r- ';2'/11'" ~~....... !0 1--\ ~-!-U ~) "~r--..., ~""'"C) !"I",J !""""'-I """,........, .... -~<r-0r "\......",) ~ .-1?: ~.<~... ~~ /"""-1... CIJ. /~ 0 ~N U:.....;r::e .... I C""'l tn OJZl-I~0 ::l-~00 or-! ~--;Q N- o I I !I , J I I I .~\I I 1 1\)!1 I jI)I III i 1 I I I \ I I !; 1 I I !1 I 1 ! )I , I I I I , 1 ,I :I 1 I \'I 1I!!I I I \II", 1 :I i j i i :I I 1 1:~!I I ,I I I I II I I I \ I i 1 l 1,~I!I tI \ I I !\\f 1I i 1 1I I i i I ~.•I I ----i----- I 1 I j \I I I I ! 1 I I \I I I I 1 \\Ii1 i \ 1I I I i i I I I I i ~ ~ j I I I, r-- I Ir I I-I ia'zL-11 :2101I ~r ~.\ I ~r o!~I :<',~i0; '"':-,'--- R \I :~'---+----+-----I---+l---!-,---..:I-------~ o I I I ~Zr- ...e::i ~l ; •i.-.<I_.' " I -I<='......I :::1 U:li ;>~ ""!!I:! i ~ ......... -~ "1"""-1 o (\1 f""' ."",. 0 0 0 0 0 0 0 0 ~M N -0 ~ec l'------,.'"',. ~!J:,,.-~,.-I ""'~"~N~TvAln~:::r 'l'OVO:J NO~:JIH~~N/$ ....,96 ~-~~,----------------_._------------ )')J l t l 1 .~. ~:,t, "\• 2020CtrJ''1,1 A -1\It f1r\A '1'{)11 r"I"l T{....rl'll 0 'I\fU_Ijj\JVJ l,,\Jf\,_J 1 1\\.J IJJ \..,1 I\.1., AUSTUAJ.IA,CANADA,COLOI~ADO .&WYOMING $150 -r-.T----T---T--'T"----I"---T -_.T----r -'--,----I----T--'"1 .._.'--r----I ---··-r-'----r----l $140 -1-------1-------1 -----}-.,---.-,-1-·__·__1 1-__,.+1 ,·_1 ----+--~+--.-.~----1--'--1 --.---I----...'~-- $120 -t .,---f----,-l-----+~-.,+-----I----~l--·--l----·~-----·I··,--l----l--"-.---~------l---1---1------1-+- .$130 _~_,-+__.__~L,.1 --I-':-"--.,-__~.,_.-_-.-~~'-00__'-..+.,·•_ $110 ",\-----+,---,+-----+-----1-----I --+----f---,·t --~-.----\'----+.--t---f--=1J l[-- 32 I t----- 28 --_...---0-----1----- -~------·--~----l__l--~ 2420161284 t 100 __1_,++---.--._-1.-.,--.,-------...-.-..'--...----..~---- I I I $90 +y ----------r-·-----.-_. $80 -1-'---~-----_l-~-i.---.--!---1 L.._.~_._ o ~o ~ U H ~ ~ W ~ "¥) ~r.w ~« ? H ::J'a l;£l ~«ou\0...... BilLIONS M'1'C.~ Figure 3-15 1 )1 ))l II 1 )t S 'T'I!l A '1\1 ("l ()A T D D r,I)I f ("11111 ()N ---2'n')()J .J.11..1V.v v 1\.t J 1.1 \VLJ LJ '-'J '-..1 L '\J ...J .. AUSTnAI.IA~CANADA~COLonADO &WYOMING $160 -r--l----T ----,_.--r---or -"'-r--'--l-"--l---T --.-r-----r-·'-1----r----·-T----l-·-··-r----l f-4 Z ~ ~ ~ 1-4 :Jaw ~ <11ou $150 -t----I-~---l·---·+----~--·--I ----l--.-1----4-----1--·---4 ---+-.........----+-. -----,---_.•-~-.--- $140 -l----+-----~---I -l--.---l-----l-----1---I---I--I--·-+----~--·-- $130 -~---I---I~---··1--·-1---~-l----+----l--+---I--·---I----I--·--I---+---I-·--~---t~-- $120 -+---~---I·---·~I----·-I·----I I .----+---l---I----1--------!-----.·----~- ----~---._______{_.-.---~----_l-----_+.-.--l__-.-- --.----I-----~-.--+--_.•--I I----- -------t--t=j----..........-1-------. 3228 -J--_.._.....--"! 2420 J I $1 00 -+---~-+-'-~--_.~-- $90 -,-M JJ-------l--JL ---1------1 o '1 6 12 16 zo f-4 U 1-4 P:: f-4 W ~ ".,.; \D CX> IlIU.IONS M'l'CE Figure 3-16 S'1'E:,A~'~A C~al\Ii :P l{()-I)lJ C:rr 1.()N ~, I L "1 1-)t j l l· 201() l AUSTRAlIA,CANADA,COLORADO &WYOMING $170 -l----.T---.-T----r.--T--.--'-..--I .---r---r--··--r-··T----r-··--T--~·-r--l---·-r---r--,1 $160 ·-F---+,--I----I-.------!--.---.----.1--------.--.••--•.•_-.---.-----'.--._.-~_.-_.-.-----•..---.._~-.---. 20 ~'2202'1161284 $90 -r------ o I . I I .,__..._ y-1 $110 ---------.-.----1-;7 ---..-.------.-····0 ...--.··t l.--/I $100 -I /r-~-----.-----------1 I ---.•-•...-.-'.-.-'-.•--•..•.•-•.---+--.--...---1---..1··-1 $120 -~---'-1------1----1-----~-.--j..----+-.--+.-----I__---1·---1-----+--.---.-----~~--_.•------.. $130 -1--··--I-·-·-·-I~··--1------~----~-I--·_·--~----1----····-·1------1·------..1-----._.~---~---- $140 -I---~-·-I_-·-I-·--t·---·-I_-·_--.j..------'--.-.-••.----...---.-----....--.---.--_.•+---.•----.----~-.--- $150 --l~.•-._1_-----j..---_.J---.._-.J _...~-._-_..~----o----.•----.....---.....--_.~..----.------..-...-.---.-•.------~-.- f-4 Zw ~<~ ~ C1 W ~<au Za f-4 u H rt: f-4 W ~ "~ '0 '0 HIIJ.IONS MTCE Figure 3-17 ~.TABLE 3-13 Estimated Pacific Market Prices by Year Without Alaska Exports (1) (1985 $price ClF Japan) - ~I - No Wy(lming C()nstl~aint (2) $/MTCg $/MMBtu lH th Uyoming Const1~aint (3) $lMTC1~ $/MMBtu 2000 76 2.73 76 2.73 2010 93 3.35 93 3.35 2020 102 3.67 102 3.67 2030 109 3.92 119 4.28 2040 115 4.13 125 4.50 ,...--,------ (1)Derived from Dames &Moore supply/demand analysis.See text. (2)Prices as derived from comparison of demand with solution curves as indicated in Figures 3-13 to 3-17. (3)Price including added cost for Wyoming coal in 2030 and 2040 llf additional ocean freight from Portland,Oregon or other shallow port,as discussed in Section 3.5.2. 100 - per MTCE,or $2.73 per million Btu (calculated by dividing the per MTCE pri(~e by the 27.8 million Btu in an MTCE).The prices rises to $93 per MTC1~in 2010 and $115 per MTCE in 2040. I t is possible to infer from the source composi tion of the solu tion cur',e the relative annual production levels from each source.This is done by referring to tables of the supply and cost of each source and determining wha!t:fraction of the total reserve cOllllJlitments are supplied by each source, basl!d on reserves available from that source at the market price.Reserve comtnitments by source by year are summarized in Table 3-14.The result is not exact because those sources that come into production first (some Aus't:ralian coals and Canadian coals)are substantially depleted in later yea1L"s.None the less ,a good approxima tion of annual production by source can be made.The results are checked as shown in the table,by reca1cu- la t:Lng the reserve commi tments from these producers'estimates.Table 3-15 agrlaes with the required reserve commitment (Table 3-12)of 24.0 billion MTCJ~. If this is done for the years 2030 and 2040 it is apparent that exp40rts of Wyoming coal would be very large.The estima ted supply source mix for those years is given in Table 3-15.It shows Wyoming coal exports of 187 million MTCE in 2030 and 238 billion MTCE in 2040.From a purely the 1oretica1,logistical point of view there is little reason to doubt that such export levels could be mined,railed,and loaded aboard ships. How,ever,the two port locations where large (120,000 dwt)vessels could be loaded are Puget Sound (Seattle or vicinity)and San Francisco Bay.Both have been the scenes of great concern and controversy over the environmental effects of large scale industrial and coal port development.(For example, see Western Coal Export Task Force,1981).As a result,it is likely that a 1 imi t would be placed on how much coal could be moved through these areas • For example,if one major port facility were allowed a volume of around 30 million (20 million MTCE)per year,this could be attained.Such a limita- tion could be overcome in a number of ways. 101 -----_.....--------~~---------------~-----------------' TABLE 3-14 Reserve Commitments (1)by Year and Source (2) (Bi 11ion MTCE) 2000 2010 2020 2030 2040 - -----Aus'rRALIA 1.19 3.4 4.1 4.8 6.5 ,...,CANADA 2.0 3.5 3.5 3.5 3.5 COLORADO 0.00 1.0 2.7 2.7 2.7 WYOltiING 0.00 0.00 2.6 7.1 11.3 TOTAL 3.9 7.9 12.9 18.1 24.0 - TIT (2) From detailed supply tables,see Appendix D. Supply not including Alaska coal,but including Chinese coal. 102 ------------------ 1 ~}~}l 1 >1 J TABLE 3-15 '*J »»)1 )1 Projected Exports of Hajor Pacific Rim Steam Coal Exporters 2000-2040 Without Alaska Coal (1) (Hi Uion HTCE) Reserve Commitment in 2040 (3) 1990 (2)2000 2010 2020 2030 2040 (Billion HTCE) Australia 53 85 93 112 U3 120 6.5 Canada 10 43 55 55 60 60 3.5 Colorado 19 56 66 66 2.7 Wyoming 68 120 174 233 11.3 Subtotal:24.0 I-'a China (5)23 43 60 74 90w--------------- TOTAL 63 151 278 403 487 569 ==a =-==-=--III:=-==-a ::1== (1)Dames &Hoore estimates based on composited coal supply curve. See Table 3-14 and Appendix D (supply curves). (2)Actual 1990 supply will probably not resemble this mix because it reflects:1)longer ~s supply economics and 2)eliminates minor suppliers (i.e.,U.S.S.R.). (3)Calculated by arithmetic average of each ten year interval of exports plus production from 2040 to 2060. (4)Includes domestic production in New South Wales and Queensland, Australia. (5)Chinese exports estimated at 15 percent of total imports.,except 1990. Coal could be shipped via Portland,Oregon;as mentioned earlier th:ls would incur a higher ocean freight cost of $7.45 per MTCE (in 1985 doHan)(or $9.46 in 2030 and $9.96 in 2040 with escalation)due to the draft limitation in the Willamette River.Realistically there is probably a limi t on how much coal could move through Portland.There is a maj or highwa~,bridge that must be lifted each time a large ship moves up to the priuent terminal sites. Uyoming coal could be exported via a new port in an isola ted loca tion. Th:ls ",ould necessi ta te expensive upgrading of rai 1 lines and probably e xtens:lve breakwa ter cons truc tion since few shel tered si tes are avai lable. A1 ternl!tive1y ,more costly coal from Australia -could fill the gap • ..... 1rhe -least costly of these alternatives is the $10 per MTCE (1985 dollars in 2030)additional ocean freight.In 2030 a supply mix including even 75 million MTCE of Wyoming coal would require an additional 6 billion MTCE of reserve commi tments of Austra 1ian coal,raising the price from $109 ....'per MTGE to over $119 per MTCE as shown in Table 3-13.24 ~rherefore it is mostly likely that the supply cost of Wyoming coal will b,e about $10 per MTCE above the price indicated by the "unconstrained" so lu ti,on curve. This constraint on Wyoming coal exports also confirms the rail rate discussion in Section 3.3.2.5,since the railroads will in effect,be facing a totally inelastic demand for Wyoming coal,which will encourage them to raise the rates as indicated. lE:xports of Alaska coal and their effect on market prices are discussed in the next sec tion. 24.Total reserve commitment of 13.5 billion MTCE.The supply mix (expressed in terms of reserve commitments)summarized in Table 3-14 shows 11.0 billion MTCE of non-Wyoming supply and 7.1 billion MTCE from Wyoming.The total amount of supply of non-Wyoming coal included in the supply curve for 2030 (Figure 3-11)is only 13.5 billion MTCE. 104 -----_.,--_......._......_--------------~-----------'----------- -, r' 3.5.3 Market Penetration of Alaska Coal Alask~coal can be produced at a cost that is very competitive with th~!prices projected in Table 3-13,which does not reflect exports from Al~lska.To determine just how economically competitive exports for Alaska might be,the Pacific market price netted back to a mine in Alaska must be cOlllpared with production costs in Alaska.In Section 2.3 the projected prc)duction costs of coal from the Beluga coalfield were discussed.They are shc)wn on the last line of Table 3-16. The transportation costs from the mine to Japan include trucking CO!lts to a port on Cook Inlet,costs for port ownership,and operation and OCElan freight costs from Alaska to Japan.These costs are shown on the se(~ond and third lines of Table 3-16.A detailed discussion of the deriva- tic)n of the port and inland transportation costs is presented in Appendix E. ThEI port and inland transportation costs rise over time due to the increase in diesel fuel costs for truck hauling from the mine to the port.As dhcussed earlier,ocean freight costs also rise (at 0.7 percent per year) dUEl to increasing fuel costs.In 2000 the ocean freight plus inland tr2LOsportation and port costs are $23 per MTCE (1985 $);they rise to $30 per MTCE in 2040'. The price of coal from competing sources delivered to Japan less the t ransporta tion cos ts from the mine in Al a ska to Ja pan equa 1 the maximum prllce at which the Alaska coal producer is competitive.This price is shown on the line in Table 3-16 labeled,"FOB Mine."The term netback is used to expess the idea that this is the net price for the producer,worked ba(~kwards from the delivered market price.The netback price in 2000 is $5.3 per MICE,or $1.78 per million :Btu. In order to make a fair comparison between this netback price and the prclduction cost of Alaska coal,it is necessary to account for the dif- felt'ence in quaU ty between Alaska coal and the coal from the competing pro- du(~ers.Coals from Australia,Canada,and Colorado are of considerably higher calorific value than Alaska coal.To compensate for this and other qUlllity differences (see Appendix A for a complete discussion)we deduct 5 pe~t'cent from the apparent calorific value of Beluga coal.The represen- 105 ._--~~,,_.._---------------_......--......------------------------ ~\ TABLE 3-16,,-. Pacific Rim Market Prices Alaska Net Back Prices and-Alaska Production Costs (1985 $) 2000 2010 2020 2030 2040 -Pacific Delivered Pric:e ($/MTCE)(1)76 93 103 119 125 ,....,Oce~ln Freigh t Alalska-Japan ($/MTCE)(2)13 14 15 16 17 ~. Port &Inland Transport in Alaska ($/MTCE)(3 )10 11 12 12 13 Net FOB Mine ($/MTCE)53 68 76 91 95 1"""' Net FOB Mine ($/ton)(4)29 37 41 49 51 --Net Adjusted for Quali ty ($/MMBtu)(5)1.78 2.30 2.57 3.08 3.22 -Production Cost Beluga Field ($/MMBtu)(6)1.58 1.81 2.11 2.43 2.82 TIT Table 3-13 (2)Table 3-11 (3)Appendix E (4)Net FOB price per short ton for 7,500 Btu/lb Beluga coal (5)Net FOB mine price/MTCE divided by 27.8 million Btu/MTCE times 0.95;discounting for moisture.-(6)See Section 2.3 ..,... 106 -'-~~~------------------------------------------ tative Btuc_9.ntent of coal from the Beluga field used in this study is 7,500 Btu per pound.This must be reduced to 7,125 Btu per pound to adjust fot'the quality disadvantage of Beluga coal compared to competing suppliers.In addition to this 5 percent lIdiscount tl a further reduction in the~FOB mine price of $.43 per tonne must be made to further account for thE~quality differential (see Appendix A).Therefore the value to the con- SU1]~er of Alaska coal,and hence the netback price,must be reduced by 5 percent and $.74 per HTCE ($.032 per million Btu). The netback price adjusted for quality differences and expressed in dollars per million Btu is shown on the next line of Table 3-16.This net- back price begins at $1.78 per million Btu in 2000 and rises to $3.22 per million Btu in 2040.Finally,the netback price can be compared with the prc)duction cost of Alaska coal,shown on the last line of the table.In 2000 the netback price is $1.78 per million Btu,compared to the production co:st of $1.58 per million Btu.This indicates that,at least as early as 2000 that Alaska coal will be competitive in the market.By 2010 the cost advantage of Alaska coal increases significantly.The netback price in 2010 is $2.30 per million Btu,versus the production cost of $1.81 per million Btu. Having established that Alaska coal will be very cost-competitive in the Pacific market,we can now estimate the probable exports of Alaska coal and re-estimate the market price,taking account of the reduction in needs for coal from competing sources. Because the Beluga coal is much lower in quality then coal from the principal competing supplies (until 2030,when Wyoming coal begins to move into the market),boilers and other plant equipment must be specially adapted to burn this coal.Shifting between Alaska coal and coal from other sources will be difficult for the user.Therefore only the large coal fired boilers used in the electric power sector are a good market for Alaska coal.We therefore believe that the market penetration of Beluga coal will be confined to the electric power sector.Consumers also seek to ma,intain a diversity of coal sources,both to preserve security of supply an,d to maximize bargaining leverage. 107 - 1"'" Based 01J.an examination of other cases of constrained (e.g.,by security or quality considerations)market penetration,such as that of South Africa into the European steam coal market and Australian into the Pacific metalTurgical coal market,We estimate that Alaska coal producers can capture no more than 25 percent of the Pacific electric power coal import markel:.This market penetration estimate,combined with our assurance of the low production cost of Alaska producers,is the basis for the projected Alaska coal exports shown in Table 3-17. The expcnts for Alaska in 2000 are 16 million MTCE (30 million tons) r ising to 40 million MTCE in 2010,67 million MTCE (131 million tons)in 2020,and 116 million MTCE (211 million tons)in 2040.The market share of Alaska producers in relationship to the tot;al imports from all sources is 10 percent in 2000,rises to 17 percent in 2020,and reaches 20 percent in 2040.Considering the cost advantage of Alaska coal producers this market penetration is modest.It is sufficient,however,to affect the market p rice of coal in the Pacific. Table 3··18 shows the downward revision of reserve commi tments,compared to those in Table 3-12 to account for the exports of Alaska coal.These revised reset've commi tmen t figures are then used,by comparison wi th the supply curves,as before,to determine a new set of Pacific market prices and Alaska netback prices.The revised reserve commitment estimates are calculated si.mply by multiplying the original reserve comcitment figure by one minus the Alaska share of the total market.Therefore,they are from 10 to 18 percent lower than the original reserve commitment figures. The reyised reserve commi tment figures are shown in Figu res 3-13 through 3-17 as dotted lines.They are,of course,lower and resul t in s lightly lower prices than the demand excluding Alaska coal.Since the solution curv'e is fairly flat,this reduction in demand does not result in a significant change in the prices.The revised netback prices are iden- tical except for 2010,When the demand falls on a rising section of the solution cun'e.In that year the revised netback price is $2.19 for MMBTU compared wi th the $2.30 compu ted wi thou t consideration of Alaska supply impact on Pacific Rim Price. 108 TABLE 3-1 i Projected Exports of Major Pacific Rim Steam Coal Exporters 2000-2040 (1) (million HTCE) 2000 2010 2020 2030 2040 r- AUSTRALIA 80 88 100 100 85 CANADA 32 97 120 40 10 COLORADO 10 56 66 48 WYOMING 0 US 253 ALASKA (2)16 40 67 92 114 CHINA (3 )23 43 60 74 90 ~;'TOTAL 151 278 403 487 569 .======----====a ===- IMPORTS FOR ELECTRIC POWER (4)U7 202 257 346 418 ALASKA SHARE OF TOTAL EXPORTS (7.)(5 )11 14 17 19 20 ALASKA EXPORTS (million tons)(6 )31 78 131 179 222 (1)Dames &Moore estimates based on composited coal solution curve. See Table 3-14 and Appendix D (solution curves). (2)Alaska exports estimated at 15 to 25 percent of electric power marke t imports. !""~(3)Chinese exports estimated at 15 percent of total imports. (4)See Table 3-2. (5)Alaska exports divided by total imports. .-'(6)Converted from MTCE based on 7,500 Btu/lb for Be luga coal less 5 percent of Btu content to account for the higher moisture content of competing coals. ~ 109 TABLE 3-18 Revised Reserve Commitments of Competing Suppliers Accounting for Alaska Coal Exports - Original Reserve Commitment (billion MTCE)(1) Revised Reserve Commi tments (2) Revised Paci:Eic Market Price O/MTCE)(3) Revised Alaska Ne tback Pricl! ($/MMBtu quality adjusted)(4) 2000 3.9 3.4 76 1.78 2010 6.8 90 2.19 2020 12.9 11.8 103 2.57 2030 18.1 14.5 119 3.08 2040 24.0 18.8 125 3.22 (1)Table 3-12 (2)Reduced by reserve commitment of Alaska coal, calculated from Alaska exports in Table 3-17. (3)Derived from supply/demand analysis,see Figure 3-12 to 3-17. (4)Derived as shown in Table 3-16.(NOTE:ROUNDED TO THE NEAREST 5¢.) 110 ,ifiRP "'Ii ~I - -, As was done for the market balance without Alaska exports,the compo- sition of the s~lution curve can also be used to derive an overall supply/ demand balance for the Pacific market,in which Alaska coal exports may be seen in perspective.As shown in Table 3-17,the Chinese share is 15 per- cent.The Alaska share (based on 35 percent of imports for electric power generation)incl:'eases from 11 percent to 19 percent from 2000 to 2030. Exports of the other supplier,based on the proportion of reserves they contribute to the overall solution curve,are led by Australia with 48 per- cent in 2000,dropping to 13 percent of the market in 2040.Wyoming coal enters the market in 2030.Canadian producers reach maximum capacity in 2020,and Colorado producers reach maximum outp~t in 2030. Overall,this supply-demand analysis shows that there is plenty of "room"in the market for Alaska coal.It also shows that,due to the overlap of supply costs of various producers,the conclusion as to prices are likely to be insensitive to any small errors in the supply cost of any source.One might ask whether the large levels of exports projected for Alaska coal could be attained.The known resources in the Beluga field are large even in relationship to these export levels.The reserve commitment' of Alaska coal to sustain the projected export levels are summarized in Table 3-19.The calculation of reserve commitments of Alaska coal is similar to that described earlier,that is,the sum of depletion (past production) plus 20 times the export level in each year.The reserve commi tments rise from 0.75 billion tons (converted from MTCE,using the ratio of calorific values)to 10 billion tons in 2040.Es tima ted reserves under lease in the Be luga field are 2,930 million tons (D&M estima te based on sources listed in Appendix H and contact with leaseholders),but resources are in excess of 10 billion tons (Barnes,1966). 111 -,--_......---------------....,..."!"i-r'i-...,...------------------r---- - TABLE 3-19 ~I -Exports (1)And Reserve Commitments (2)of A1aska Coal 2000-2040 fillI!I'l'll 2000 2010 2020 2030 2040 Alaska Exports Million MTCE 16 40 67 92 114 Alaska Exports ~~Million Tons (3)31 78 131 179 222 Cumulative Exports Million MTCE 64 344 879 1674 2704 Reserve Commi tments Billion MTCE 0.4 1.1 2.1 3.6 5.2 Reserve Commi tmetll ts Billion Tons 0.75 2.2 4.3 7.2 10.0 (1)See Table 3-17 (2)Reserve commitments are the sum of cumulative production plus 20 timEls the production in that year. (3)Converted from MTCE based on 7,500 Btu/lb for Beluga coal,less 5 percent of Btu content to account for the higher moisture compared to competing coals. 112 -__......,-·-------------......,.rrr-"""""1"-'-"-----------------,.---- ~\ -. - - BIBLIOGRAPHY Alberta Economic Development,Energy and Natural Resources.1981.Alberta Coal:A New_Era of Development.(Government of Alberta,Canada) Australian Department of Trade.1983a.Australian Coal Export Projects. (Canberra:Australian Government Publishing Service.) Australian Department of Trade.1983b.Australian Mineral Exports Coal. (Canberra:Australian Government Publishing Service). British Columbia,Ministry of Industry and Small Business Development.July 1982.A Benefit-Cost Analysis of the North East Coal Development. 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