ICF International, their Coal “White Paper” and the Tongue River Railroad

ICF International, the third party contractor who is completing the environmental impact statement (EIS) for the Tongue River Railroad is also the third party contractor hired to complete the EIS for the Longview coal port terminal in Longview, Washington. Arch Coal, who is proposing to develop a large coal mine in the Otter Creek Valley of southeastern Montana, is invested in both projects. (ICF is also involved in the Keystone XL project and had financial ties to TransCanada)

On February 27, 2014, ICF International released a white paper optimistically stating that both the global and domestic markets for coal will rebound. They call it a white paper, I call it seven pages of statements based on unsubstantiated assumptions. Maybe it’s just a regional difference. 

Never once do they mention the limited rail capacity in the northwest or southern rail lines, the massive public opposition to proposed coal ports or new coal mines, the changing market conditions in southeast Asia or the thick air pollution in China which is causing the country to retool their energy portfolio. Not only do they fail to provide a good argument for their conclusions, one has to wonder if the authors even did a cursory google search about the topic before they began. 

The conclusions of the authors are counter to almost every other recent analysis done by investment firms and market experts. When reading through the document, I was expecting to find some new information or at least a compelling argument for the rebound of the coal market. But I found nothing but vague statements and simple tables and graphs. One of my favorite report features was the header photo they used on every page of wind turbines in front of a farm house.  A coal report with the only photos used being of wind turbines. So weird.

Banks, investment firms and market experts recognize coal is a risky business and is beginning an inevitable decline because of cheap natural gas, an oversupply of thermal coal from Australia and Indonesia, and new policies by China to cut coal demand.

Thanks to the great work of the Sightline Institute and Clark Williams-Derry, we have a great list of recent reports and statements by banks and investment firms about coal markets.

• November 2012, Bank of America Merrill Lynch, 2013 Energy Outlook. “We see a downward path for global coal prices…Seaborne thermal coal continues to battle with heavy physical oversupply as producers still export too much into a weak seaborne market …Inventories are bloated as demand just cannot keep up.”
• February 2013. IHS CERA, Coal Rush: The Future of China’s Coal Market. “[I]nternational suppliers may find themselves in a much tougher market as they face competitors that previously did not exist. The major Indonesian suppliers will always compete effectively in southern China…but mines elsewhere in the world will struggle to find a competitive edge.”
• May 2013. Deutsche Bank, Commodities Special Report, Thermal Coal: Coal At A Crossroads. (No URL, but summarized here.) “[N]ew demand preferences in the largest consuming nations will result in much lower demand growth going forward, pushing prices lower in real terms through 2020.”
• June 2013. BernsteinResearch, Asian Coal & Power: Less, Less, Less…The Beginning of the End of Coal. (No URL, but summarized here.) “Regional miners will see almost zero demand in China from 2015…Once Chinese coal demand starts to fall, there is no robust growth market for seaborne thermal coal anywhere.”
• July 2013. Goldman Sachs Rocks & Ores, The window for thermal coal investment is closing. ”Earning a return on incremental investment in thermal coal mining and infrastructure capacity is becoming increasingly difficult…[T]hermal coal is a geologically abundant resource in an industry with relatively low barriers to entry. As coal demand becomes increasingly constrained, the competition among suppliers is likely to intensify.”
• September 2013. Citi, The Unimaginable: Peak Coal in China. ”[S]ignificant shifts in China’s economy and power sector are now under way that demand a reassessment of Chinese coal’s perpetual climb…The same macro forces that are driving the economic transition and lowering power demand should also sharply decelerate coal’s use.”
• April 2014. Morningstar, Inc. Morningstar predicts a halt in China’s growth in coal use. Analysts say growth in China will come from less energy-intensive arenas. The air pollution in China is a huge problem and the report predicts that they will  shift their energy supply to nuclear, wind and hydroelectric. Although coal will be an important part of their energy portfolio, Morningstar believes that domestic minion will increase and they will increasingly be tapping their own natural gas reserves. “In our analysis, coal-fired generation peaks by 2014, then declines through 2020. Neither an economic rebalancing nor a political shift alone is sufficient to halt China’s runaway coal demand growth. But together, they herald its end.” Morningstar analyst Daniel Rohr said U.S. coal producers wanting to export more fuel abroad should be “very worried.”

How this relates to the Tongue River Railroad

ICF is a very large corporation who makes a lot of money consulting for government and industry and developing EISs for energy and infrastructure projects, among other things.

ICF is responsible for developing a market analysis for coal in the EIS for the Tongue River Railroad and the Longview coal port terminal. They will making a recommendation to the government agency about whether or not the project is economically feasible.

So, ICF has a couple of options. The first one is that ICF could state in the EIS what most banking and investment firms agree on, that there is oversupply of coal in many regions, that China is moving on to different energy sources and that investing in new coal ports and coal mines is risky business. They could come to the logical conclusion that there is no public need or demand for a new coal railroad or new coal ports.

However, ICF will most likely not write that because if they did they would lose business. How would they lose business? Well, the applicant, in this case the Tongue River Railroad Company, gets to pick which contractor is chosen to complete the EIS from a list of approved contractors provided by the government. Here is the description of the process directly from the Surface Transportation Board.

Once an applicant decides to use a third-party contractor to assist in the preparation of the environmental document, the next step in the process is to select a third-party contractor. SEA maintains a list of approved third-party contractors, comprised of individuals and firms with expertise and experience in environmental review of rail or transportation projects. ⁽¹⁰⁾ When an applicant expresses an interest in using a third-party contractor, SEA furnishes the applicant a copy of the third-party contractor list. The applicant indicates which contractor from the list it would prefer to use by formally requesting in writing SEA’s approval of that contractor. ^{(11) (SEA means Section of Environmental Analysis)}

So, in the first scenario, ICF writes something that Arch Coal and Burlington Northern Santa Fe (BNSF) don’t like. Then, the next time Arch Coal and BNSF see ICF International on the list of potential contractors to pick for the development of the EIS for an energy project, they will probably pick a different one.

End of story. ICF would lose large industry contracts.

The second scenario is that ICF International will say exactly what they state in their white paper. They will say that the global and domestic market for coal is rebounding and will be strong in the future and so the building of the coal ports and the Tongue River Railroad makes sense from a market standpoint.

At that point, our agency staff will have to decide if they agree with that analysis. But, as we all know, agencies are underfunded, understaffed and definitely are not experts on global coal markets.

So, they will most likely accept the conclusions of ICF.

My hope is that the really nice and thoughtful people that I have met from ICF International who are working on the EIS for the Tongue River Railroad take the time and do their research on coal and coal markets and not rely on this 7-page white paper completed by their colleagues.

Because if this is the level of analysis that we can expect to get in our EIS, we’re all screwed.