GILLETTE — Wednesday’s surprise announcement that coal giants Peabody Energy and Arch Coal are consolidating their Western operations has the potential to create a paradigm shift in the Powder River Basin, along with raising more questions about the future of newly bankrupt Cloud Peak Energy.
The joint venture, which involves seven thermal coal mines in the PRB and Colorado, calls for merging Peabody’s North Antelope Rochelle mine and Arch’s Black Thunder mine in southern Campbell County.
Individually, they’re the top two producing coal mines in the world. Together, the merger could provide more stability and cost efficiencies that could ultimately help stabilize a commodity that’s been in a four-year nosedive, said Rob Godby, director for the Center for Energy, Economics and Public Policy at the University of Wyoming.
“The reality is there’s overcapacity in the basin. What was surprising about the announcement is that Peabody and Arch have decided to band together rather than compete against one another,” he said.
There are a few ways for a market to deal with overcapacity, Godby said. One is to moderate production and another would be for marginal mines to shut down.
“But there’s this weird incentive created by the mediation costs that makes it even more expensive to (shut down a mine) than to continue mining,” he said.
A third option is consolidation, which is what Peabody and Arch are doing. Under their joint venture agreement, Peabody will own 66.5% of the new company and run its operations, while will own Arch 33.5%.
One thing that’s been revealed through Cloud Peak Energy Corp.’s ongoing Chapter 11 bankruptcy proceeding is that the company tried unsuccessfully to find consolidation partners before having to file for bankruptcy.
Without the joint venture, Peabody and Arch are the two heavyweights in the Powder River Basin having to compete with each other as demand for coal shrinks, Godby said.
“The big threat for both Peabody and Arch going forward was if they had to compete against one another,” he said. “They have so much production each, they could really affect each other (negatively), so that kind of competition doesn’t make much sense.
“By becoming one company, you manage it as a joint monopoly. Now the incentive is to maximize your profits.”
He also said it’s unlikely there will be any anti-trust concerns with consolidating two such large PRB entities into one giant.
“The threshold for anti-trust is if something’s not in the public interest because it raises costs and if the market share ends up being larger than had they not done this,” Godby said. “That’s not the case here.”
He said the joint venture won’t raise power rates for customers and won’t affect the market for thermal coal, which will likely continue to shrink.
“Long term, this is a better outcome for a healthier industry here,” he said.
Gov. Mark Gordon agrees, saying in a statement reacting to Wednesday’s announcement that “clearly, there are changes occurring in the coal industry.”
He said his office had some preliminary discussions about the joint venture with Peabody Energy and that he sees “this move to be a positive step. It combines two robust firms and better positions them to be more competitive in a changing market while providing solid employment going forward.”
Asked how the joint venture could affect employment at Peabody and Arch Coal mines in Wyoming, Peabody said hourly workers won’t see much change, while salaried and administrative positions could see some changes under the new organization.
Before and after Cloud Peak filed for Chapter 11 protection, speculation was that Peabody and Arch were the largest and most logical choices that could possibly be interested in acquiring Cloud Peak’s assets, Godby said. After Wednesday, he’s not so sure.
“We don’t know what’s going on behind the scenes, but it really could be anything at this point,” he said.
It could mean there’s no interest there because with the lower demands for PRB coal and now looking at already controlling about two-thirds of the basin’s entire annual production, Peabody and Arch don’t need more mines or coal, he said.
It also could mean that Cloud Peak’s largest and most desirable asset, the Antelope mine, could be more attractive because it borders North Antelope Rochelle mine and could be incorporated into the mega-coal complex already in the works with the merger of NARM and Black Thunder.
“I think a lot of us were watching Cloud Peak and wonder if that’s how the consolidation (in the PRB) would happen and either Peabody or Arch would acquire those assets to control the assets in the basin,” Godby said. “Instead, they just consolidated with each other, and in hindsight it makes perfect sense.”