US EIA on the Economics of Coal: No Comment

At the end of 2013, the US Energy Information Administration (EIA) acknowledged that it does not know whether the vast majority of US coal can be mined profitably.  If coal mining isn’t profitable, then barring some grand socialist enterprise the black stuff is probably going to stay in the ground where it belongs.

You might think this kind of revision would have warranted a press release, but the EIA’s change of heart was buried in a fine-print footnote to Table 15 of their 2012 Annual Coal Report, which tallies up all the coal resources and reserves in the US, state by state.  The new footnote says:

EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions, and after applying assumed mining recovery rates. This estimate does not include any specific economic feasibility criteria. [emphasis added]

This stands in contrast to the footnotes for the same table in their 2011 Annual Coal Report, and many prior years:

EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions or currently economically unattractive for mining, and after applying assumed mining recovery rates. [emphasis added]

This may seem like a minor quibble, but it’s significant.  In the world of mining and finance, stuff you might want to dig out of the ground is generally classified as either reserves or resources. They differ in two ways: the confidence you have in the stuff actually being down there, and whether or not the stuff is accessible both technically and economically.

The Rocky Mountain Institute has a good short explanation of how reserve and resource classification works.  The official US Geologic Survey (USGS) definitions as applied to coal can be found in USGS Circular 891.  There’s a swarm of subtly differing terms in the various taxonomies used by other countries and agencies, but in their simplest form:

• Reserves are mineral deposits we’re very confident exist, and that are both technically and economically accessible at current prices, using current technologies.
• Resources are mineral deposits whose quantities and locations we may be less confident in, or which are not necessarily economically and technically extractable at current prices using current technology.

So the EIA’s revision may in effect have changed a very large quantity of what used to be classified as coal reserves into resources, since they are no longer assuring us that this coal can be accessed economically.

Why is this distinction important?

If you’re thinking about investing in fossil fuel production, knowing what reserves a company has on their books is important.  The high confidence and accessibility of reserves make them valuable bankable assets, which can be used to raise capital from the debt and equity markets.  Reserves end up accounting for a big chunk of the value of most fossil fuel companies, so in the US, the Securities and Exchange Commission (SEC) requires companies to report their  reserves in public financial statements.

If you’re making energy policy or planning future energy systems for your city/state/nation/civilization, then this distinction is also important. Reserves are the stuff you can count on. Resource numbers are a lot bigger, but a lot more uncertain. Behaving as if all resources will be magically transformed into reserves someday wouldn’t be prudent, even if burning those fuels wasn’t irreversibly changing Earth’s climate.

Mixed Messaging

There are a few reasons to be concerned by the change the EIA just made:

First, the wording from prior years implied that some kind of economic evaluation had been done to determine the Estimated Recoverable Reserves (ERR).  In the most recent annual coal report the wording has been changed, but the quantity of ERR has not, which suggests that no economic evaluation was actually done in prior years.  This means that the ERR numbers reported in prior years are likely wrong — as at least some of what was previously reported as reserves is likely to actually be resources — technically recoverable, but economically unattractive.

Second, now that the EIA has admitted they don’t know whether the coal is economic to extract, why are they still describing it as Estimated Recoverable Reserves?  Reserves are by definition economically recoverable.  The USGS even goes so far as to call out this kind of qualification of reserves as redundant in the glossary for Circular 891:

Reserves include only recoverable coal; thus, terms such as “extractable reserves” and “recoverable reserves” are redundant and are not a part of this classification system.

So shouldn’t the EIA be calling these Estimated Recoverable Resources instead?

Third, instead of burying this change in a footnote written in 6 point font, shouldn’t they be shouting about it from the rooftops to anyone who might actually be using their numbers?  Legislators?  State regulators?  Utility executives?  International energy agencies?

A Long Time Coming

CEA has been highlighting this scenario for years, most recently in our October 2013 report Warning: Faulty Reporting of US Coal Reserves.  There have been other indications that it might be in the works for the last decade, which I’ll highlight in my next post.

1. US EIA on the Economics of Coal: No Comment
2. A Long Time Coming: Revising US Coal Reserves
3. In Good Company: A Brief History of Global Coal Reserve Revisions
4. Coal Geology vs. Coal Economics & Politics

West Virginia coal train image CC-BY via Doug Wertman on Flickr.