Industry Insiders

Professionals representing the coal, natural gas and manufacturing industries in West Virginia share their thoughts on the current market, exporting, legislation and the challenges their companies are facing.

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By Jennifer Jett Prezkop

When it comes to coal, natural gas and manufacturing in West Virginia, the boundaries that differentiate each of these industries from the other can become blurred because of their interdependent needs. The manufacturing industry requires cheap energy and lots of it, and the coal and natural gas industries have access to substantial supplies of product. A thriving coal economy drives the need for manufacturing equipment and technology, and the state’s sizeable natural gas supply has been attracting new manufacturers to the area. These three industries represent an ideal relationship based on strong supply and high demand, and manufacturing being located in the backyard of the suppliers would seem to be the prime driver of success.

Why, then, are all three industries facing sluggish conditions? What is driving this slowdown, and what does the future hold?

For answers to these questions, we sought out three industry leaders: Kevin Crutchfield, chairman and CEO of Alpha Natural Resources; Kyle Mork, president of Energy Corporation of America (ECA), and Neil Stanton, vice president of Refining at Ergon-West Virginia, Inc.

 

Kevin Crutchfield 
Chairman and CEO
Alpha Natural Resources

WVE: Give us an overview of the current state of the coal industry.

KC: We are facing disruptive and, in many cases, structural long-term changes in the coal industry. Some of those changes are market-driven, particularly with regard to global coal markets, but changes are also occurring due to an unprecedented regulatory burden being enacted by the U.S. Environmental Protection Agency (EPA). Regulatory decisions have created turmoil within the U.S. utility fleet and, according to the American Coalition for Clean Coal Electricity, have been a significant factor in almost 400 coal-fired, electricity-generating units being shut down or converting to other fuel sources. That is roughly one in every five existing U.S. coal-fired units. When the government takes away roughly 20 percent of the domestic thermal coal market, those actions also translate into mine closures and a loss of high-paying jobs in coal country. Subsequently, the loss of coal jobs affects our local economies in other ways as well. It affects grocery stores and car dealers and other businesses in the community where those coal miners and their families live, work and shop.

At Alpha specifically, our affiliates have idled 70 mines, reduced the work force by more than 5,000 and cut 35 million tons of coal production in just three years. These steps are painful but necessary in order to remain competitive by matching our business to current coal markets.

There’s no question the coal industry is currently challenged, and those impacts are, unfortunately, being felt more directly in Central Appalachia than any other U.S. coal basin. That said, I remain confident that in the long term, coal will continue to supply a significant portion of our growing energy needs, both here in the U.S. and around the world. Coal is the world’s leading source of electricity—40 percent of all the power currently comes from coal. The International Energy Agency projects that coal will still be a third of the global energy mix in 20 years and emerging economies will account for 90 percent of the growth in energy demand. Coal is essential for them. And for us.

WVE: In addition to EPA regulations, what other coal-related challenges is Alpha facing?

KC: Current production levels exceed demand, meaning global coal markets are oversupplied with both metallurgical (met) and thermal coal. There is also stiff competition from other fuel sources—particularly natural gas, which has seen prices fall to historic levels—as well as heavily subsidized boutique fuels such as wind and solar. Fair competition is just a part of doing business in an unfettered market. When you overlay the hyperactive regulatory burden facing coal use in the U.S. on top of that, however, it is much more difficult to compete fairly.

WVE: How is Alpha’s business plan for coal evolving in response to the EPA’s regulations?

KC: It’s first important to understand the regulatory pressures our industry is currently facing. The Clean Power Plan (CPP), an EPA proposal intended to reduce carbon from both new and existing power plants, is arguably the most overreaching regulation ever proposed by the EPA. Within this top-down proposal, expected to be finalized this summer, the EPA dictates a set of guidelines to states regarding how they should generate and use electricity within their borders. These guidelines—or building blocks, as the EPA calls them—would effectively force states to shut down additional baseload coal plants, re-engineer their electricity systems, force energy rationing upon consumers and consider regional cap-and-trade programs. National Economic Research Associates’ Economic Consulting estimates that the cost to comply with the EPA’s climate regulations as proposed would force double-digit electricity price increases in 43 states and cost consumers and businesses $41 billion a year, all for negligible environmental benefit.

West Virginia is among a number of states that have taken or are considering steps to challenge the CPP because they know the proposal will have a detrimental impact on electricity reliability and energy costs. As electricity rates increase, those impacts will be disproportionately felt by the elderly, low-income families and others on fixed incomes who can least afford to pay more.

These are just a few reasons for the growing concern being expressed across the U.S. toward these policies, and I have hope that reason will prevail. In the interim, we must continue to match our business to market demand here in the U.S. while also working to develop stronger footholds in those growing global markets where emerging economies are increasingly looking to coal to light the path to prosperity.

WVE: Tell us about the world market for coal and how Alpha is using exporting as a growth tool.

KC: Despite the near-term challenges that come with an oversupplied market, overseas demand for coal continues to have long-term potential. In fact, the two fastest growing major economies in the world, China and India, have electric systems that depend on coal—70 percent in China and 90 percent in India. And coal is the only viable option for baseload power in many other emerging economies.

Outside of the thermal coal market, Alpha is the largest supplier of met coal in the U.S. and the fourth-largest in the world. Almost 70 percent of total global steel production depends on met coal, and few U.S. companies have the scale and capabilities on the operations side that Alpha can offer to international met markets.

In total, we supply an international customer base around the globe, and have more than 150 customers in 26 countries on five continents. Alpha also has one of the strongest reserve positions in the industry, with approximately 3.9 billion tons, including 1.2 billion tons of met coal.

WVE: Tell us about the passing of the Coal Jobs and Safety Act in this year’s legislative session and what it means for coal.

KC: First, it is important to note that the Coal Jobs and Safety Act passed the Legislature by a large majority and in bipartisan fashion. I think such a foundation of support shows pretty clearly that these were not radical reforms as some have dubbed them but carefully crafted provisions and, frankly, many of which have been in discussion for a number of years.

The Coal Jobs and Safety Act essentially did three things. First, it updated a handful of regulations, some of which had remained unchanged since the early 1970s, to match modern mine design and technology. Second, the coal bill added several safety enhancements to mining laws. Finally, the bill made changes to specific environmental regulations that exceeded federal regulations or were out of line with today’s science.

It’s unfortunate that some groups have described the bill as a rollback of safety regulations. I don’t think three-fourths of the House and Senate, Democrats and Republicans, would have voted for a bill that rolled back safety, nor would I have supported it. After you get past the rhetoric and actually read what is in the bill, you will find that these are important safety upgrades that will protect coal miners.

WVE: What kind of impact, if any, is the resurgence of the manufacturing industry having on the coal industry in West Virginia?

KC: While increasing West Virginia’s manufacturing base is an important and beneficial development for the state economy, I’m not aware of any evidence that this recent resurgence has provided any direct relief to the state’s coal industry, at least not yet.

In more general terms, coal and manufacturing have enjoyed a mutually beneficial relationship for more than a century. On one hand, when the coal market is stable or growing, we have demands for equipment and technology that spark growth in the manufacturing sector.

Conversely, coal generally benefits from manufacturing growth. One of the keys to manufacturing is access to affordable and reliable energy. Coal provides both. That is one reason I believe West Virginia is well-suited for manufacturing growth. It has one of the lowest energy costs in the world. Further, coal is used for more than just generating electricity. Met coal is used to make steel. Alpha has more met coal reserves than any of our competitors in the U.S., and Central Appalachia has the best-quality met coal in the world, bar none.

WVE: How is technology playing a role in the growth and development of the coal industry?

KC: We are using technology to make mining safer. As just one example for Alpha, we partnered with Matrix Design Group to create an award-winning underground atmosphere monitoring system, and sensors are now installed in all underground working sections of our affiliated operations. In addition, we have added proximity detectors to more than 70 continuous miners to help prevent operator injuries.

We are also using technology to mine more efficiently. We partnered with Plum Energy to convert our largest haul trucks in Wyoming from diesel to liquefied natural gas (LNG). An LNG plant is being built on-site at the Eagle Butte Mine, and it will have the ability to produce 25,000 gallons of liquefied natural gas a day. At our two affiliated mines in Wyoming, trucks can haul 240 tons of coal per load and will use roughly 6,800 gallons of LNG a day.

Coal usage is increasingly cleaner because of technology. Through shared public-private investments, emissions of sulfur dioxide, nitrogen oxides and particulate matter from coal-fueled electricity generation have been reduced by almost 90 percent over the last four decades. By 2016, investments by the electric utility sector to reduce emissions are expected to reach $145 billion.

 

Kyle Mork 
President
Energy Corporation of America

WVE: Give us an overview of the current state of the natural gas industry.

KM: The natural gas industry is in a state of flux in both West Virginia and more broadly. We have been blessed with an enormous resource right here in Appalachia and across the country, with the Marcellus and Utica truly proving to be the best of the gas shales. However, with this abundant gas, we have increased supply so drastically that the price has dropped to a level that makes further drilling tough to economically justify. Fortunately, solutions are in the works. On a national level, new demand is coming online every day, from new power plants to large industrial users. On a regional scale, many pipelines are being built right now that will transport much of the gas not needed in the region to other demand centers. Both of these dynamics will help bring prices back to a balanced level.

WVE: What do you see as the biggest challenge facing the oil and natural gas industry in West Virginia?

KM:  The Marcellus Shale has presented both tremendous opportunities and tremendous challenges for West Virginia. The abundance of natural gas has helped keep prices down for consumers and attract new manufacturers to the area, but it has also made it difficult for producers to remain competitive in the low-price environment. ECA has been particularly successful because we are adept at adapting and are able to remain flexible to the ever-changing environment. Much of our advantage is derived from our core value of being the low-cost producer.

Simply put, the best way to stabilize the price environment for natural gas would be to increase demand for the product.

WVE: What types of new regulations are you seeing for natural gas, and how are they impacting the industry?

KM:  In contrast to a number of other industries, we are primarily regulated at the state level. This is an important distinction because geology must drive regulation in order for it to be effective, and geology varies greatly state to state. Therefore, individual states are the most appropriate and effective agencies to regulate the industry. What is most important to our industry is consistency in the regulatory environment. As long as regulations are consistent, we typically find it reasonable to comply with them.

WVE: How is ECA’s drilling plan adapting to an abundance of natural gas?

KM:  We believe ECA has a huge advantage by being a private company. We are able to take a long-term view, which can be more difficult for our publicly traded peers. That’s not to say we aren’t impacted by low prices, but we are able to take the long view. In general, we are excited by this abundant resource; we believe our best days are ahead of us. We look forward to tremendous development of our existing acreage, as well as taking advantage of opportunities to acquire more wells and properties.

WVE: What impact is this abundance of natural gas having on West Virginia’s economy, both on a statewide scale and in terms of customer pricing?

KM:  The abundance of natural gas has helped keep prices down for consumers and also attract new manufacturers to the area. Manufacturers offer good-paying jobs, contribute significantly to the state’s economy each year and provide an important tax base for the state. The natural gas industry supports the manufacturing industry by offering a reliable resource for low-cost energy and access to the raw materials they need for their manufacturing processes.

WVE: There have been concerns raised with regard to hydraulic fracturing causing water contamination. Tell us about the measures ECA is taking to ensure their drilling methods are environmentally safe.

KM:  ECA strives to be environmentally conscious. We employ industry best practices to maximize safety for our employees and communities and minimize impacts to the environment. Our well designs include multiple layers of steel casing and cement to isolate our operations from water supplies and surrounding geology. Our sites are outfitted with secondary containment to avoid discharges to the environment. We utilize the latest technologies, like horizontal drilling, to minimize impacts at the surface. We have also done extensive work with research institutions, such as the Department of Energy’s NETL group, to help demonstrate that hydraulic fracturing initiated in the Marcellus stays within the formation and doesn’t migrate anywhere near aquifers.

Keep in mind that our industry can work very well with environmental advocates. Thanks in large part to the growth of natural gas, U.S. carbon dioxide emissions have fallen to levels not seen since the early 1990s, and that is a tremendous decrease. Natural gas is a critical support to the development of renewable energies. This is because both wind and solar sources of power fluctuate. So, natural gas becomes an ideal back-up fuel when the winds die down and the sun sets.

WVE: What kind of impact did the 2015 session of the West Virginia Legislature have on the natural gas industry in the Mountain State?

KM:  There were two key pieces of legislation important to our industry during the 2015 West Virginia legislative session: the Aboveground Storage Tank Act and the lease integration bill. We were very pleased to see the changes made to the Aboveground Storage Tank Act because it is good legislation. It narrows the scope of the regulation to focus on those tanks that pose the most risk to water sources and ensures they are well-inspected and maintained.

While the lease integration bill did not pass the Legislature this session, many legislators became well-educated about the issue. It is slated to be studied during this year’s interim meetings, which indicates it will be taken up again during next year’s session. This bill would make West Virginia competitive with other producing states and greatly increase the investment in natural gas development by ECA and others in the state.

WVE:How is the resurgence of the manufacturing industry playing a role in the growth of the natural gas industry in West Virginia?

KM:  Manufacturing and the natural gas industry have a symbiotic relationship. Manufacturers not only require access to cheap energy but also natural gas liquids, which are an important feedstock for petrochemicals and plastics. Therefore, the abundance of natural gas in West Virginia is absolutely critical to attracting new manufacturing opportunities to the Mountain State.

 

Neil Stanton
Vice President of Refining
Ergon-West Virginia, Inc.

WVE: Give us an overview of the current state of the manufacturing industry.

NS: The current states of manufacturing in the U.S. and West Virginia likely parallel each other. After two years of strong growth in 2012 and 2013, demand slackened in 2014, and sluggishness continues in early 2015. Exploration and production of gas and oil in the shale formations had a compound effect on the economy. Manufacturing of materials to supply the oil and gas industry and related goods saw exceptional growth. The resulting supply of lower-cost natural gas and oil then spurred growth for those manufacturers that depend on them as sources of energy or feedstock to their operations.

Beginning in the second half of 2014, the decline of crude oil’s price from $100 per barrel (BBL) to less than $50 per BBL and natural gas from $4 per mmbtu, or 1 million British thermal units, to less than $3 per mmbtu slowed that growth. The low-cost energy was still available, but inventory values plummeted, the demand for products softened and margins tightened. I believe our immediate area has not been impacted as severely as others. We hope for improvement in 2015 if the market stabilizes and prices of raw materials and products become more predictable. In general, the abundance of low-cost energy supplies favors manufacturers in the U.S., particularly in our area, positioning us well for future growth.

WVE: What do you see as the biggest challenge facing the manufacturing industry in West Virginia?

NS: The biggest challenge is uncertainty, which probably doesn’t come as a surprise. Volatile markets add risks that cause reluctance to invest and grow. Sudden, drastic changes in raw material or product prices can change decisions overnight. In recent years, regulatory uncertainty has been a major challenge for manufacturing and energy. New or revised regulations present significant risk in the ability to get permits for expansion projects, the time required to get those permits and the ongoing cost of compliance once that expansion is on stream.

Government policy promoted through administrative rules and laws can add or remove uncertainties for manufacturers. In general, we should maintain a level playing field for competition within the U.S., strengthen the U.S.’ position in the global market, sustain infrastructure necessary to support growth and expansion, ensure regulations are scrutinized for cost versus benefit and resist initiatives that add bureaucracy and complicate processes to start and grow businesses. Specifically, tax policy should promote investment in manufacturing and not disadvantage us versus foreign competition. Energy policy should promote an all-of-the-above strategy and not attempt to manipulate markets or pick winners and losers to promote some other agenda.

WVE: Is the manufacturing industry facing any new EPA regulations?

NS: Yes, the fuels and petrochemical industry specifically and manufacturing in general face new regulations and tightening of existing regulations that will have significant effects. Just in the 15-plus years I have been at Ergon-West Virginia, Inc., we have seen regulatory requirements increase by orders of magnitude. The number of parameters we must meet in all air and water emissions, the amount of reporting and recordkeeping and the volumes of data can be mind-boggling.

Specific to our industry, which is highly regulated, there are several current and developing regulations that have significant impact. The Renewable Fuels Standard currently in place forces us to pay more than $1 million per year in credits because we cannot purchase and blend the renewable or biofuels required by the rule. We are already blending all the ethanol possible in our gasoline without exceeding quality specifications. Other biofuels and biodiesels are not readily available in the market and don’t meet the quality requirements. The problem is the EPA rule from eight years ago projected fuels demand growth and increased production of biofuels, neither of which materialized. Blend requirements by the EPA based on those faulty projections have not been revised.

Other examples include New Source Performance Standards, Tier 3 fuels regulations and National Ambient Air Quality Standards. Further reductions in emissions of pollutants such as sulfur and ground-level ozone are being required. The challenge is that these pollutants have already been reduced drastically over the last two decades with Clean Air Act regulations.

WVE: How has the availability of natural gas in West Virginia impacted Ergon’s growth and planning?

NS: Energy development in the Appalachian region has been a game changer for Ergon, like other industries in our area. First, the availability of a long-term supply of economical natural gas is beneficial as we are a consumer. Natural gas is a major input used to provide heat for our processes that turn crude oil into clean finished products.

More importantly, though, oil produced from the Marcellus and Utica shales is becoming a major feedstock to our plant. Ergon, with its trucking, terminal and marine operations in the area, as well as the refinery, was well-positioned to participate in and facilitate this growth.

WVE: How is technology playing a role in the growth and development of the manufacturing industry?

NS: The use of new technology is vital for successful growth in manufacturing. It affects all phases of our operation, from cellular data and communication in our trucking and marine operations to sophisticated computer control technology used in refinery processes. Technology is applied in selecting the processes used in the refinery to convert this unique shale oil into the highest value products. It is then applied within those processes to ensure safe handling in equipment by personnel and to minimize emissions and environmental impact. Finally, it is critical in planning, scheduling and moving finished product out to customers. Ergon has invested more than $20 million in upgrading computing and control systems in the last 10 years in our Appalachian region.

WVE: What is the key to having a qualified, knowledgeable work force for your industry,

and how is Ergon achieving this in West Virginia?

NS: A qualified and knowledgeable work force is integral to our operations. When Ergon’s ownership, Leslie Lampton and his sons, visited West Virginia for the first time to explore purchasing the facility, they were impressed with West Virginia and all its beauty. They were equally impressed with the people. They learned very quickly the people had a great work ethic and cared about the facility and its future. The Lamptons realized they would be buying a facility that needed investment to grow and compete, but they would have a work force that was willing to do the heavy lifting and implement the changes with initiative and dedication.

WVE: What kind of impact did the 2015 session of the West Virginia Legislature have on the manufacturing industry in the Mountain State?

NS: The 2015 session was helpful mostly because of the Legislature’s willingness to revisit 2014’s Senate Bill 373, also known as the Aboveground Storage Tank Act. The chemical discharge that occurred in Charleston during the 2014 session was very unfortunate, and we understand why the Legislature was obligated to pass legislation that restored public trust. They wanted to ensure the waterways of the state were protected and companies were being responsible and accountable for their tanks.

During the 2015 session, the Legislature took a fresh look at the Aboveground Water Tank Act and the issues many businesses from across the state identified. This year’s amendment to the act, known as SB 423, was signed into law. We commend the Legislature for providing all the stakeholders a seat at the table to discuss those issues. We felt the Legislature’s willingness to revisit and the governor’s willingness to sign the revised legislation was the right thing to do. They took into account other regulatory and industry framework that was already in place that addressed many of the concerns from all sides without weakening the legislative objective. In turn, we ended up with a more fair and balanced piece of legislation.

WVE: How is the manufacturing industry in West Virginia making strides in improving its energy efficiency?

NS: At Ergon, energy is the largest of all operating cost components. Gas and electricity combined comprise 25-30 percent of all operating costs. Our efforts to improve energy efficiency have involved reducing wasted energy. Approximately $30 million has been invested in the last 10 years for energy improvements. This included reducing waste gas flaring, adding heat exchangers to recover waste heat back into the process instead of using water or air for cooling and using technology to tighten process control. A dual benefit is that energy improvements usually also result in emissions reductions. Even capacity increases can improve efficiency because as much as 40 percent of energy usage may be fixed, so increased production lowers cost per unit output.

I expect the manufacturing industry follows similar trends as our plant. At the lower natural gas prices, energy savings may not be a sole justification for investment but can be a significant component. Energy savings are usually reliable and predictable relative to other incentives. Use of advanced instrumentation, controls, monitoring and communications can result in substantial net energy savings. Note also that with the ample supply and low cost of natural gas, means to shift energy sources, or fuel switching, can yield energy cost savings, though not necessarily real efficiency gains.