New York (Platts)--13Sep2007

The conventional wisdom in the coal industry is that Central Appalachia is
running out of coal reserves, that production must decline in the coming years
and that everyone will install scrubbers to burn higher-sulfur coal, further
aggravating CAPP's problems.

But at Wednesday's 91st seminar of the Southern Coals Conference in
Cincinnati, Greenmont Energy Consulting President Lloyd Kelly reminded
attendees from 46 coal-related companies that how "recoverable reserves" are
calculated determines CAPP coal's future.

Using a model he developed, Kelly, who also has done coal-related work for the
US government's Department of Homeland Security, said that much of CAPP coal's
future depends on how affordable and effective halogenated active carbon
injection becomes by the time Phase II of the Clean Air Interstate Rule kicks
in toward the end of the next decade, as well as the effect of anticipated
carbon dioxide limitations.

Still, Kelly said, "There is some justification for predicting long-term
steady Central Appalachian declines" ? on the order of 80 million short
tons/year ? to about 140 million st/year 20 years from now.

In Kelly's forecast model, CAPP's recoverable reserves numbers depend on the
coal's relative market value when blended with a total of 104 coal choices,
which can be further broken down as to individual coal-fired units.

As examples, Kelly noted that at $35/st, there figures to be only about 3
billion st of recoverable eastern Kentucky coal, but the total jumps to 5
billion st at $50/st, to about 10 billion st at $60/st and to 20 billion st at
$80/st.

"We are not running out of CAPP coal. We are running out of $26/st
near-compliance coal and we are running out of $30/st compliance coal," he
said. But low-sulfur coal can still find a market, he said, pointing out that
currently about 30% of US coal is scrubbed; by his figuring, that amount
should increase to 50% in 2010 (Phase I) and to 60% in Phase II. "There [will
be] plenty of room for the low-sulfur coals [to be marketed to] people who
don't put on a scrubber."

The real driving force regarding CAPP's future is Powder River Basin coal
production, which, he said, is now about 400 million st/year, with projections
of up to 575 million st/year by 2026. But those levels are "highly dependant"
on Kelly's assumption that there's affordable and efficient HACI technology in
place by 2018.

"I would watch closely the economics and performance of HACI, since PRB's
future post-2018 literally depends on it," he said.

--Steve Thomas, steve_thomas@platts.com