On a bright blue morning on the high plains of eastern Wyoming, Bill Veal is doing what he’s done every working day for the last couple of decades: scraping energy out of the earth. A veteran miner, Veal operates a massive shovel that loads piles of coal ore into haul trucks at Peabody Energy’s North Antelope Rochelle Mine, known as NARM, an hour or so south of Gillette, Wyo. Veal is about halfway through his 12-hour shift and, at 61, nearing the end of his 40-odd years of working in the mines. The seven-story-tall shovel, equipped with a toothed bucket 21 feet across, carves the mine face as Veal, who has been operating a shovel for 19 years, controls the machine with deft manipulations of two joysticks and two foot pedals. The bucket, large enough to contain five compact cars, dumps into the giant trucks, each capable of carrying 400 tons of coal and rock, that queue alongside. “One Thing Leads to Another,” by the Fixx, blasts from the stereo in Veal’s cab.
One load every minute or so, three loads per truck, one truck every six or eight minutes, 24 hours a day, 365 days a year: Like choreographed pachyderms, the huge machines perform a ponderous yet intricate dance that never stops or slows, feeding the world’s insatiable thirst for cheap energy. Every day from NARM’s twin load-out facilities 20 trains are filled with coal and sent to points east, west, and south. At about 125 cars a train and 110 tons of coal per car, that’s close to 300,000 tons of coal a day, from this one mine. NARM is the biggest mine in the Powder River Basin, but the others are productive as well: In all, close to 70 trains a day leave the basin, carrying nearly 1 million tons of coal.
By most measures this is a bleak period for the coal industry. U.S. coal consumption fell in 2012 to its lowest level in a quarter-century. Shares in coal-mining companies have gotten hammered as Wall Street looks to more-sustainable forms of energy. Competition from abundant natural gas has eroded coal’s primary edge, its low cost, and new EPA rules on emissions from power plants threaten to bring to a close the century-and-a-half era of coal.
But anyone who thinks that the so-called war on coal is over and that the environmentalists and the federal regulators won should visit NARM, one of the dozen open-pit mines that pock the landscape of the basin. If the coal industry is expiring, it’s putting on a hell of a death scene here in eastern Wyoming.
Like other Big Coal companies, Peabody Energy, the owner of NARM and the largest private-sector coal company in the world, is enjoying a boomlet even as the U.S. weans itself off coal. Hunger for the world’s dirtiest fuel is growing, especially in the developing countries of Asia — particularly India and China, where coal consumption shows little sign of slowing, at least not yet. As gas prices have recovered, coal’s market share of U.S. electricity production has actually risen again, reaching 44% in January, about its historical level.
“New coal-fueled power plants and steel mills are rising along the coasts of India and China, where the populations are growing fastest, and those plants will take seaborne coal,” says Greg Boyce, Peabody’s chairman and CEO. And that means that Peabody needs new export routes from the Powder River Basin, specifically via the Pacific Northwest. Hauling coal by rail to the Upper Midwest, barging it down the Mississippi to the Gulf of Mexico, loading it onto freighters, and shipping it through the Panama Canal to Guangzhou or Kolkata is a great way to kill your margins.
Peabody needs new Asian markets, and to supply Asian markets, Peabody needs new export terminals on the West Coast. That has led to a very public struggle — “a fight to the death,” as Bruce Nilles, the senior director of the Sierra Club’s Beyond Coal campaign, puts it. Along with railways, other coal producers, and regional and state business-development organizations, Peabody is one of the primary backers of the Alliance for Northwest Jobs and Exports, formed to promote exports of coal to Asia.
A vocal and diverse coalition comprising Native American tribes, ranchers, environmentalists, and local officials has come together to block the construction of new export terminals on the West Coast. Three of the six proposed ports have already been shot down, and a series of contentious public hearings around the region in recent months has provided a highly visible stage for environmentalists and local officials to argue passionately against the economics and the ethics of shipping America’s coal to be burned in Asia. The U.S. has the largest coal reserves in the world, and the Powder River Basin has the largest reserves in the U.S. The question of whether we should ship that coal to developing countries to fuel their growing economies — and carbon emissions — is burning not only in Wyoming but in the cities of the coast and the halls of Congress.
“This is a line in the sand we cannot cross,” says Nilles. Do we really want to become the No. 1 carbon merchant in the world?”
Not since the spotted-owl controversy pitted loggers against urban dwellers in the 1980s has the environmental community of the Pacific Northwest been so galvanized. “People are getting involved from all sorts of perspectives and viewpoints,” Ross McFarlane, a senior adviser at Climate Solutions, based in Portland, Ore., says of the anti-coal movement. “One thing is just local congestion. You’re looking at doubling or more than doubling the rail traffic with these mile-and-a-half-long coal trains, on stretches of rail that are already at or above capacity.” Beyond that, he says, lies a moral question: “Many communities and individuals are then looking at it from a broader perspective and asking, ‘Is this a good thing for our state, our economy, the planet?’ And they’re concluding that the answer is no.”
When he took over as president and CEO of Peabody Energy in 2006, Greg Boyce must have thought he’d been put in charge of a cash machine. A worldwide commodities boom, centered on the Chinese mainland, was pushing energy consumption to record highs, and coal prices were climbing toward a historic peak of nearly $140 a ton in 2008. Production at Peabody’s domestic mines continued to grow steadily, and shippers were struggling to keep up with soaring demand for coal exports. At Lambert’s Point, in Norfolk, the largest coal export terminal in North America, empty ships anchored offshore, waiting to load, like impatient commuters at a bus stop. Boyce, a veteran mining engineer whose father worked for mining giant Newmont, had risen through the management ranks to become one of the most powerful and well-paid executives in the mining industry. He spent five years in the 1990s as CEO of Kennecott Energy, a rival coal producer and subsidiary of Rio Tinto, one of the world’s largest mining conglomerates, and later headed up Rio Tinto’s global energy operations.
In 2006, Boyce engineered the $1.5 billion acquisition of Excel Coal, one of Australia’s largest producers of metallurgical coal, opening a vital doorway to the booming Asia market. Five years later he followed that with an even larger takeover, the nearly $5 billion purchase of Brisbane-based Macarthur Coal, one of the last remaining independent mining operations in Australia.
The Australian acquisitions propelled Peabody, which began in the 1880s as a small Chicago operation that bought up supplies of coal from surrounding mines and sold it to homes and businesses in the city, to its position as America’s most powerful and profitable coal supplier. And they pushed the company’s share price to a peak of nearly $73, in March 2011 (it currently trades around $17). Today Peabody coal supplies about 10% of the electricity generated in the U.S. and 2% throughout the world. With 8,300 employees, the company sells coal to more than 260 electricity-generating and industrial plants in more than 25 countries, and estimates its “proven and probable” coal reserves at more than 8 billion tons.
The lingering effects of the 2008 financial crash finally caught up to the world’s commodity markets as the overheated Chinese economy started to cool. Expected to climb readily back to precrash levels, energy use worldwide stayed stubbornly low, and energy-sector executives like Boyce woke up to a remarkable and unpalatable fact: The steady rise in energy demand, at least in the developed economies, wasn’t inevitable after all. World primary energy consumption climbed only 1.8% in 2012 over 2011, according to BP, well below the historical range of 2.5% to 3%, and it actually fell in the OECD countries. Per-capita energy consumption, for the first time since pre-industrial days, has fallen in many countries.
In 2013, Peabody had revenues of $7.01 billion, down $1.7 billion from 2012, and Ebitda of $1.05 billion, down from $1.84 billion. Peabody has made it through the last few years of soft demand and falling prices by slashing costs and shifting production and sales overseas: It shipped record U.S. export volumes in 2011 and 2012, and Australian production rose by 30% in 2012 alone.
Meanwhile, the shale gas boom, unforeseen by most analysts, changed the dynamics of the world’s energy sector. Natural gas emits about half the amount of carbon per unit of energy that coal does; all things, including price, being equal, utilities started to shift to burning gas instead of coal. “Coal substitution” became an oft-heard term in power utility boardrooms.
At the same time, as the evidence for destructive climate change became incontrovertible, a subtle but powerful change in public opinion took hold: Coal, like tobacco before it, went from being an accepted and ubiquitous part of modern life to something to be avoided, even shunned. Led by the Sierra Club, environmentalists, emboldened by Barack Obama’s pledges to construct a new energy policy based on sustainable resources, began a well-financed public campaign against the demon rock.
Peabody was at the forefront of climate-change denial for many years. Fred Palmer, the company’s combative chief lobbyist, famously said in an interview in the late ’90s that burning fossil fuels and pumping carbon dioxide into the atmosphere is “doing God’s work.” Today Peabody has mostly abandoned the climate-change battlefield. Boyce has pivoted to a different position: Coal has provided light, heat, and power to millions of people, improving living standards for nearly two centuries, giving rise to the greatest increase in living standards in human history. Billions of people are still without access to affordable, reliable electricity.
In his office on the 14th floor of the Peabody tower in St. Louis, in the shadow of the Gateway Arch, Boyce tells me, “The greatest crisis we confront in the 21st century is not a future environmental crisis predicted by computer models, but a human crisis today that is fully within our power to solve. Only once we have a growing, vibrant, global economy providing energy access and an improved human condition for billions of the energy impoverished can we accelerate progress on environmental issues such as a reduction in greenhouse gases.”
It’s an audacious bit of rhetoric: allying the interests of one of the biggest extractive companies in the world with those of the downtrodden masses in Asia and Africa. But there’s no question that the developing world needs low-cost power. And the shale gas boom, the rapid fall of solar-power prices, and the long-delayed “nuclear renaissance” notwithstanding, coal remains the lowest-cost source of power in most regions, certainly in the booming economies of East and South Asia.
The Sightline Institute, a Seattle-based nonprofit, has estimated that if the coal industry gets its way and plans for expanded exports come to fruition, 145 million tons of coal would be shipped to Asia annually, producing 262 million tons of additional CO2 a year. To Boyce and his colleagues, that’s nonsense: If they don’t buy it from us, they say, they’ll just get it elsewhere — specifically, from mines in Indonesia that produce far dirtier coal.
“The question is not whether Asia will import more coal,” says Boyce. “It will. The question is whether the jobs and economic benefits will accrue to the United States or to other countries.”
Among the other countries where the benefits could accrue, of course, are Australia — where Peabody already makes nearly half of its revenues and one-third of its profits, mostly supplying coal to China’s steelmakers — and China itself, where Peabody has partnered with the government of Xinjiang, the politically restless region in the country’s far west, on a big coal-mine project that could supply 50 million tons a year to the booming cities of the coast. Peabody is also one of the leading Western companies working to develop the vast Tavan Tolgoi mine in Mongolia.
The exports from Australia, the in-country projects, the coal traded through Peabody’s in-house brokerage (known as the Coal Trading Group), and, of course, the expanded exports from the U.S. West Coast — all are part of “a holistic strategy of serving these growing markets,” says Vic Svec, Peabody’s senior vice president of investor relations. “We believe over time that exports from the Pacific Northwest will occur; we’re talking about a product that is legal to mine and use in the U.S. and other nations. There’s no legitimate reason to exclude its export from any place.”
The holistic strategy is dependent on one key trend: that coal use in China keeps rising, indefinitely. Not everyone believes that’s inevitable. Earlier this year the People’s Republic, which accounted for 46% of global coal demand in 2010, launched its first carbon emissions trading program. Last summer analysts at Goldman Sachs, foreseeing a “sharp deceleration in seaborne [coal] demand” (with annual growth declining from 7% in 2007-12 to 1% in 2013-17), stated that “the window for profitable investment in coal mining is closing.”
In September, Citi Research released a report titled “The Unimaginable: Peak Coal in China,” which argued that a combination of factors — including intensifying efforts to reduce China’s crisis-level air pollution, the slowing of economic growth, a reduction in energy intensity (the amount of energy used per unit of GDP), and efficiency improvements in existing power plants — may well lead to “the flattening or peaking of thermal coal demand for power generation in China by 2020.”
That could scupper the strategy of not only Peabody, but also the big coal-export industries of Australia and Indonesia. In October mining giant BHP Billiton, which unlike Peabody is a diversified conglomerate with aluminum, petroleum, and copper mines, canceled plans for a big new coal terminal in Queensland, on Australia’s northeast coast, as well as the rail lines to take the coal to the sea. Marcus Randolph, BHP Billiton’s head of the coal and iron division at the time, told the Australian Financial Review that the future of thermal coal was “very clouded.”
At the same time, support from international lending organizations for new coal-fired plants is quickly evaporating. Soon after President Obama announced last June that the U.S. Export-Import Bank would no longer finance overseas coal plants except in special circumstances, the World Bank and the European Investment Bank, which have poured billions into new coal plants over the past decade, followed suit.
Larger economic forces are gathering against coal as well. As modern economies grow more sophisticated, their energy intensity — and the environmental damage associated with expanding GDP — tends to fall. To economists, this trend is known as the environmental Kuznets curve. China shows signs of following that curve, as its industries mature and its power sector responds to the outcry over air pollution. It takes less coal to assemble an iPhone than it does to make airplane parts.
That transition could take decades to play out, though. In the short term China’s economic engine — even if it slows to, say, 7% annual GDP growth — will continue to run on coal. That’s why, despite the dismal buy-side research reports, some on Wall Street see opportunity in coal, at least in the short term. In November, citing the strength of Peabody’s Australian operations and a possible recovery in metallurgical coal prices, Goldman Sachs upgraded Peabody’s stock to Buy.
PRB coal’s journey to eager Asian markets will be long — and costly. First, there’s the 1,600-mile rail journey to the coast from the NARM load-out (Peabody’s other two mines in the Powder River Basin, Caballo and Rawhide, are both about 50 miles closer). Then the coal has to be loaded onto ships at the coal terminal. In February 2011, Peabody announced an agreement with the developers of the proposed Gateway Pacific Terminal, northwest of Bellingham, Wash., to export 26 million tons — roughly one-quarter of the annual output of NARM — a year to Asia. The largest of the proposed coal-shipping facilities, Gateway will cost about $665 million to build, according to developer SSA Marine, and will handle around 54 million tons a year. Peabody, in other words, is not just a supporter of the project — it’s the anchor tenant.
Peabody rival Arch Coal is a partner in the only slightly smaller Millennium Terminal, at Longview, Wash., on the Columbia River. In all, developers could spend a couple of billion dollars on new coal-export facilities in the Pacific Northwest. The question is whether Peabody and other coal exporters could actually make money shipping their coal across the Pacific. From the Gateway Terminal, huge cape-size cargo ships, each capable of carrying more than 165,000 tons of coal, will embark on the 4,500-mile journey across the Pacific. The full cost of mining, producing, and shipping NARM coal to Asian ports would reach upward of $65 a ton. As of early February, the average spot price for a ton of PRB coal was $12.35. Peabody can get much more than that selling coal to energy-hungry Asian markets, but it cannot necessarily match the prices of Australian and Indonesian exporters. An October 2013 report from the Sightline Institute concluded, “Peabody Energy stands to lose between $8 and $10 for every tonne [i.e., $7 to $9 for every short ton] of coal it exports.”
For a veteran coalman like Greg Boyce, that snapshot view ignores the industry’s age-old cycles: “We’re in a period of oversupply right now — there’s no question. But we’ve already seen massive amounts of new projects canceled. At some point this continuous demand will eat up excess supply. We’ll see another lag before new supply can be built, and another rise in prices.” When that happens, Boyce predicts, “you’ll see what our platform can deliver in a rising cycle.”
That’s if the terminals ever get built. Like most energy decisions, the issue of coal exports resonates far beyond the Pacific Northwest. “Shipping our coal overseas will do nothing to address the risks we face from climate change,” former New York City mayor Michael Bloomberg tells Fortune. Bloomberg, who is now chairman of the C40 Cities Climate Leadership Group and the UN special envoy for cities and climate change, adds: “In fact it will make those risks even greater by ensuring that developing economies remain dependent on coal for years to come, rather than working to integrate cleaner alternative fuels into their infrastructure as their economies grow.”
Back in the Powder River Basin, Scott Durgin, an 18-year Peabody employee who manages the company’s Powder River Basin mines, unfurls a large satellite-photo map that shows current and future operations at the huge surrounding pits. Peabody figures there are about 2.4 billion tons of recoverable coal from NARM, which would take about 25 years to mine at current production levels. Like Peabody employees from Greg Boyce down to the truck mechanics, Durgin dismisses talk of the end of coal.
“We hope there’s a market in Asia, but it depends on the ports getting built. Are we counting on it? No. If there’s a market there, we’ll be ready. But it’s not essential to the company’s future. NARM is running pretty much full-out right now, and I don’t see that changing. We’re in the right basins with the right opportunity. People are going to need Powder River coal for a long, long time.”
Later Durgin pulls his company SUV up by the twin load-out silos, where trains are loaded with coal. Something has gone wrong; the trains aren’t moving. For a moment the whole complex operation, from coal seam to rail car, grinds to a halt.
“That’s not good,” mutters Durgin. Already haul trucks are jamming up at the offloading spot.
But it’s just a momentary glitch. In an hour or so the chutes will open, the trains will clank to life and start loading, and the coal will move again. Across the basin the big floodlights that illuminate the mines after dark are warming up, and workers from Gillette and Douglas and Wright and the other coal towns are starting to arrive for the overnight shift. Night gathers across the plains, but coal’s day is not done. Not yet.
Richard Martin is the editorial director of Navigant Research. His book on the future of the coal industry will be published in early 2015.
This story is from the March 17, 2014 issue of Fortune.