Coal Power

A special information supplement

Coal Power
Anthony Mang, Globe and Mail, 15-Sep-2006

Coalbed Methane – the new alternative fuel
Lori Banger, Globe and Mail, 15-Sep-2006

Consider coal power with an open mind
Don MacKinnon, Power Workers Union, Globe and Mail, 15-Sep-2006

Q&A
Kevin Bambrough, Sprott Asset Management, Globe and Mail, 15-Sep-2006

In demand – Canadian coal suppliers seize opportunity
Ted Davis, Globe and Mail, 15-Sep-2006

Coal Facts
Coal Association of Canada, Globe and Mail, 15-Sep-2006

Advertisers
Globe and Mail, 15-Sep-2006

COMMENT Gotta wonder how much of the content here is just paid for, and how much is the work of well-trained reporters working at the top of their profession.

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Coal is Canada’s most abundant and lowest-cost fuel, not to mention a critical input in the manufacture of steel. Including the energy resident in coalbed methane, Canada’s 6 billion tonnes of proven coal reserves store more energy than all of our oil, natural gas and oil sands combined. Coal contributes in other ways to Canada’s economy as well. More than half of all coal mined in Canada is exported, making Canada one of the world’s leading coal exporters. ANY WAY YOU ADD IT UP, COAL HAS A POWERFUL PLACE IN CANADA.

Once considered the dark horse of power generation, coal-fired electricity is taking on a new green aura thanks to clean coal technologies (CCTs) that now enable this abundant fuel to be used more cleanly than ever before, in some cases causing near-zero emissions.

For Canada, CCTs spell opportunity. Not only may CCTs enable Canada to use its plentiful coal reserves to meet energy demand in environmentally and socially acceptable ways, they may also add to Canada’s export capacity.

“There is certainly potential for Canada to prosper internationally from clean coal,” says Bob Stobbs, executive director of the Canadian Clean Power Coalition (CCPC). “The operating know-how and lessons learned of companies that put these technologies together will have value. The best credibility will come from real projects, not just studies and research.”

Much of Canada’s emerging CCT prowess was spurred by the CCPC, a group of coal producers and energy companies formed in 2002 to research, develop and demonstrate commercially viable CCTs. A major CCPC goal is now approaching realization: the building by 2012 of a full-scale clean coal plant that would include carbon dioxide (CO2) sequestration.

While announcements of new CCT plants for Alberta are expected soon, Saskatchewan utility SaskPower is well on its way to having the world’s first near-zero-emission CCT plant to include CO2 capture and storage.

SaskPower Clean Coal project manager Max Ball says the proposed co-generation facility will produce and sell both electricity and CO2, a byproduct of the plant’s operations.

New Brunswick-based engineering firm Neill and Gunter Limited is helping SaskPower evaluate its CCT options. Having worked with the CCPC and other utilities, the firm has examined an exhaustive list of pollution abatement technologies. SaskPower is considering two technology pathways.

The first option, based on a modified conventional coal power station, involves CO2 removal through a post-combustion solvent process. In addition to systems that remove pollutants such as particulates, NOx and SOx, the plant would incorporate an amine solvent process to strip away the CO2. The gas would then be converted into liquid CO2 ready for geological sequestration, says Neill and Gunter president and CEO Donald Belliveau.

SaskPower’s other option is an Oxyfuel power plant. Its technology removes nitrogen from the air prior to combustion, resulting in an oxygen- fired combustion process. Its main byproducts are CO2 and water. Once the water is stripped, the remaining flue gas is compressed and liquefied.

Mr. Belliveau says while the majority of the equipment required for clean coal applications is commercially available, SaskPower would be the first to assemble it in a full-scale plant.

Not only is SaskPower doing “the right thing,” says Mr. Ball, the project is premised on a viable business case.

Whichever technology option SaskPower chooses, nearby oil patch operators are expected to be ready customers for the plant’s CO2. Practically next door to the proposed plant, the Weyburn Enhanced Oil Recovery project is injecting 2.5 million tonnes of imported CO2 annually into a depleted oil well. The long-term project is proving that CO2 can be used to push more oil to the surface while safely and securely trapping the greenhouse gas underground.

“We’re confident that we can sell the CO2 for enhanced oil recovery operations with certainty that the CO2 will remain sequestered – an astounding opportunity to reduce the environmental footprint of power generation. And the combined revenues should add up to an appealing investment for Saskatchewan,” says Mr. Ball.

SaskPower expects to make a decision as to whether to proceed with the $1.5-billion, 300-megawatt project by June 2007. The plan calls for the plant to be in service by 2011.

A recently announced coal-fired power generation facility in B.C. will also employ innovative methods to reduce its environmental impact.

The 184-megawatt AESWapiti Energy Corporation facility, a collaboration involving U.S.-based power company AES and B.C. coal miner Hillsborough Resources, is based on a combined coal-biomass concept, using circulating fluidized bed boiler technology.

AES project director Tom Kunde says, for starters, the plant will utilize low-sulphur thermal coal mined from Hillsborough’s Wapiti property near Tumbler Ridge.

“This plant will burn coal in a fluidized bed, removing in excess of 95 per cent of sulphur in the combustion process,” he says, “beating the provincial standards for sulphur emissions,” while avoiding the use of water-intensive, post-combustion scrubbers.

He says an ammonia injection system will reduce NOx emissions and a “bag house” will capture virtually all of the plant’s particulates. A mercury scrubber will remove more than 85 per cent of mercury from exhaust – meeting the provincial standard.

To help address CO2 emissions, 20 per cent of the plant’s fuel will be wood waste – a carbon neutral fuel.

Like other coal projects, AESWapiti brings significant economic benefits. Hillsborough Resources president and CEO David Slater says, “This project brings significant value to shareholders and the community. Between the plant and the mine, 100 stable, longterm jobs will be created.”

The future of clean coal in Canada? “We’re looking at what can be done to improve the economics of gasifying lower grade coal,” says Bob Stobbs. “This is important because once you’ve got synthetic gas (from coal), you have the building block for a wide variety of applications including liquid fuels and natural gas that can be shipped via pipeline.”

Mr. Belliveau says, “It’s important that policymakers take a longterm view, considering the needs of today and the future. Yes, it may be a little more expensive to build clean coal plants now, but this early adoption will place Canada on the map as a leader in clean coal solutions among nations around the globe.”

This report was produced by Randall Anthony Mang (www.randallanthony.com) in conjunction with the advertising department of The Globe and Mail, Richard Deacon, project manager • e-mail: rdeacon@globeandmail.com

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Kelowna-based company explores opportunity in China

Employees of Pacific Asia China Energy and Mitchell Drilling Contractors review coal samples from PACE drilling operations in Guizhou, China. PACE’s assets in China are estimated to hold as much as 11.2 trillion cubic feet of coalbed methane.

While researchers have been working since 1945 to find new ways to recover energy from Alberta’s most abundant energy resource – coal – it’s only been in the last couple of decades that the focus has turned to the natural gas trapped in the coal beds that lay under most of the province’s geography.

Now, as domestic efforts to increase coalbed methane (CBM) production in Western Canada escalate, a B.C. company has bucked the local trend by tapping into a massive CBM opportunity in energy hungry China.

Coalbed methane is the cleanest- burning fossil fuel, generally consisting of more than 90 per cent methane, but it was once tough to recover. According to the Canadian Society for Unconventional Gas (CSUG), technical advances in drilling and production turned the tide.

In China, Kelowna-based Pacific Asia China Energy Inc. (PACE) is at work. Its Guizhou Project in southern China includes a 970- square-kilometre concession that a recent independent technical report by Sproule International of Calgary suggests may hold as much as 11.2 trillion cubic feet of gas. The company is partnering with an Australian developer, Mitchell Drilling Contractors to apply new horizontal drilling techniques originally developed to economically recover natural gas.

Part of PACE’s advantage, says CEO Devinder Randhawa, is due to China’s concession award process, an effort by China to encourage energy production that makes CBM development vastly less costly than Canada’s. “We would have paid roughly $150 million for an equivalent resource here,” says Mr. Randhawa, “and we paid a fraction of that.”

In addition to the company’s low resource development costs, “There are 240 million people in an 800-square-kilometre range of our operation,” says Mr. Randhawa, “and they need energy.”

In a recent interview with Stockwatch.com, Sprott Asset Management research analyst Eric Nuttall said, “We are quite excited about the prospects for companies with coalbed methane assets so long as natural gas prices remain above $6 per Mcf (thousand cubic feet).” Among its picks, Sprott has invested in Pacific Asia China that China will become a hotbed for natural gas exploration, and would encourage investors to seek companies that have already signed production sharing agreements,” said Mr. Nuttall.

Closer to home, in Alberta, commercial production of 10 to 15 million cubic feet per day of CBM was established between 2000 and 2002; drilling of more than 3,000 CBM wells was planned within the province in 2005.

British Columbia also has vast CBM resources: According to the B.C.Ministry of Energy andMines, the Peace River and Fernie-Elk Valley areas, Vancouver Island and several interior coalfields all have high potential. On Vancouver Island, Hillsborough Resources has 23,000 acres with coalbed methane drilling rights, a resource that may prove a tremendous asset in meeting the island’s growing power generation requirements.

According to Michael Gatens, past chair of CSUG and chair of Quicksilver Resources Canada, coalbed methane production in the western United States now accounts for up to a third of natural gas production there, and similar production is possible in the western provinces of Canada.

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Europeans among those putting clean coal to work

Today’s energy debate is polarized by simplistic views about global warming and inherently “good” renewable energy technologies. To suggest that matters are not that simple – that there may yet be a place for coal – puts one in the company of “Neanderthals” who remain buried in the industrial age when “dirty” old coal was king.

But some key facts cannot be ignored by even by the most anti-coal advocate.

Among the G8 nations, Canada is the largest, per capita, electricity consumer for some very compelling reasons: a large geographic area and low population density; a climate with cold winters and hot summers; a relatively high standard of living; and an economy heavily weighted toward resource extraction and energy-intensive primary industries.

In that context, coal-fuelled generation of electricity should be part of this country’s energy mix. It has a proven track record, providing affordable and reliable electricity in Alberta, Saskatchewan, Ontario, Nova Scotia and New Brunswick. Canada’s 8 billion tonnes of proven coal reserves – more than our oil, natural gas and oil sands combined – offer low-cost fuel security.

Naysayers believe that coal cannot be cleaned up. The exact opposite is true. Technologies, in use today, have achieved significant reductions in smog and mercury emissions – quickly and affordably. European experiences demonstrate that greenhouse gas emissions can be reduced through equipment upgrades and by utilizing waste energy for residential heating; plus, mixing biomass – such as woodwaste and straw – with coal can reduce CO2 emissions by 30 per cent.

Canada should not ignore coal’s resurgence on the world stage as an acceptable form of electricity generation. This has been driven by the vast reserves of coal that exist around the world, as well as coal’s versatility. New technologies offer innovative ways of using coal to produce electricity, both in its current form and when “gasified.” In addition, coal can be converted to liquid products such as synthetic crude oil, or used to create steam for ethanol production. CO2 emissions can be used to enhance oil recovery.

These opportunities are encouraging utilities and governments in Europe, the U.S., India and China to invest billions of dollars in research and development on the next generation of “zero emission” coal-generation technologies. Here at home, our federal government and some provinces and utilities are supporting similar research through the Canada’s Clean Coal Technology Roadmap.

In addition to the energy security coal offers, there are other potential economic benefits in using coal in new and innovative ways. Meeting more of our energy needs with coal could have a positive impact on rail and Great Lakes shipping rates. Benefits could accrue to Canadian manufacturers of clean coal technology. New ancillary industries, related to biomass and district heating, could be created for our forestry and agricultural sectors. Experiences in other jurisdictions with marketbased mechanisms, such as tax incentives and emission trading, need to be looked at as well.

An April 2006 report, “Coal: America’s Energy Future,” produced by the National Coal Council, at the request of the U.S. Secretary of Energy, suggests the economic benefits could be substantial. That report suggests that, were its recommendations accepted, “more than one million new, high-paying energy manufacturing jobs will be created, U.S energy costs would be reduced by 33 per cent and an aggregate gain of more than $3 trillion in Gross Domestic Product could be achieved.”

Canada is blessed with significant hydroelectric resources, wind power potential and a world-class nuclear technology. However, to continue to have secure, affordable and reliable electricity, coal must remain an integral part of the energy mix. We have extraordinary reserves of coal and the capability to use them in a sustainable manner.

It’s time to thoughtfully analyze how this country can benefit from coal rather than aggressively ignore it, as is happening now in Ontario, the nation's industrial heartland.

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What economic drivers are influencing demand for coal?

Global crude oil production is plateauing and is now near its ultimate peak production rate. Emerging market energy demand is surging and has been driving not just energy prices, but also many other commodity prices higher in the last few years. Next to oil, coal provides the lion’s share of our energy needs. Because of its low relative cost, coal consumption has been rising the fastest over the last couple of years compared to oil, gas, hydro or nuclear.

What technological advances are influencing coal’s potential as a clean energy source?

Gasification with CO2 sequestration is moving to the forefront as the future of harnessing energy from coal. If you take the process a step further, you can turn the coalgenerated syngas into liquid fuels such as cleaner burning diesel. The technologies are not new and have been worked on for decades. For example, Sasol Ltd. in South Africa has been producing oil from coal for over half a century. In addition, Arch Coal has recently taken steps to become a big player in coal to liquids.

Will coal’s abundant reserves keep its commodity price down?

It’s our belief that the future demand for coal will be strong enough to allow for healthy margins to be realized by many coal producers the world over. As global crude oil production begins its merciless decline down the back side of Hubbert’s peak, coal demand will remain well ahead of production growth for years. As well, we expect that the global energy shortage will become so acute that countries will attempt to better manage their dwindling resources, thereby adding a further constraint to supply.

Also, coal, like most resources, is not nearly as abundant as it once was. In many parts of the world, the best reserves are depleted. Miners are now extracting lower quality coals with higher strip ratios, and are forced to ship product further to market.

Where are the best investment opportunities for coal?

We have made coal investments on almost every continent over the last few years. Our goal has been to acquire large resources at a reasonable price. Basically, we’ve been buying BTUs, energy in the ground. In terms of energy equivalent reserves, the market currently values oil companies more than coal companies by a factor of 30 to 40 times. When we invest in large coal deposits, we are betting that this spread will narrow over time.

What attributes should an investor look for in a coal equity?

Given that the company has good resources, other factors to consider include operating and capital costs, management’s competency and expected return to shareholders.

What are the advantages of investing in an energy fund?

By investing in an energy fund, you'll own a ‘basket’ of energy equities lowering your company specific risk. A dedicated investment team, on your behalf, builds an investment portfolio of what they believe to be the best ideas in the energy sector. The team continually evaluates the portfolio and adjusts it as market conditions change or opportunities arise. The Sprott Energy Fund tends to invest in coal and uranium equities to a greater extent than most other energy funds.

Among Sprott Energy Fund’s major coal holdings are Arch Coal, Macarthur Coal, Western Canadian Coal, Cash Minerals, Fortune Minerals, and West Hawk Development Corp.

Sprott Funds hold or may hold any of the above-mentioned securities.

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An ever-increasing demand for electricity and steel by countries around the world is good news for the coal producers of Canada.

The different types of coal that serve these industries are the most abundant fossil fuels on earth. “The National Energy Board estimates that there is about 240 years’ worth of coal left in Canada alone at current consumption rates,” says Allen Wright, the executive director of the Coal Association of Canada. Of the total fossil fuel reserves in this country, about 66 per cent are coal, 24 per cent are oil sands and the remainder are oil and gas, says the association.

Canada’s participation in the coal markets, both domestic and international, is largely determined by the type of coal mined. Thermal coal is used to generate electricity and in the manufacture of cement. Metallurgical coal is used in the making of steel.

What is driving the demand for metallurgical coal is the considerable growth in steel production in China, India, Russia and Brazil. “Blessed with vast reserves of coking coal, Canada is a significant player in the international metallurgical coal market,” says Mr.Wright. “Our traditional steel customer base is in Europe, North and South America and Asia – primarily Japan and Korea.” Canada supplies about 26 million tonnes of metallurgical coal to the world export market – or “seaborne hard coking coal” market – which totals about 140 million tonnes. About 70 per cent of the world’s steel production uses coal in the manufacturing process.

One major Canadian provider to this industry is Elk Valley Coal of Calgary. This company has, for instance, struck a 10-year sales agreement with Nippon Steel Corp. and POSCO (signed in 2005) to provide 6.25 million tonnes of metallurgical coal per year.

While Canada consumes most of its thermal coal production domestically, our place in the world export market for thermal coal is “barely on the radar screen,” says Mr. Wright. But then this is a much bigger market. Canada contributes about 5 million tonnes of thermal coal to the total world export market of 450 million tonnes. About 39 per cent of the world demand for electricity is supplied by coal-fired generators.

There is an estimated 20 times more thermal coal than metallurgical coal in the ground.

China’s oft-cited economic emergence is playing an increasing role in Canada’s coal industry, says one company. “There is a huge demand by China,” says David Slater, president of Hillsborough Resources Ltd. of Vancouver, pointing to China’s usage of 1.2 billion tonnes of thermal coal per year. With its many hydro electricity resources, the usage of coal for electricity generation in Canada is not as high as in some countries. Over 50 per cent of electricity in the U.S. is generated by coal, versus about 18 per cent in Canada.

To ensure that coal demands – both domestic and international – are being met, coal explorations and mine openings in Canada continue at a steady pace. Some 12 new coal companies, primarily in Western Canada, are now in various stages of development, says the coal association.

Among these are the continuing developments at the Quinsam mine near Campbell River, owned by Hillsborough Resources. Newly discovered seams of this thermal coal mine stand to be “significant in volume,” says company president David Slater – and the company is “90 per cent sure” that the new seams are connected to the existing, underground mine.

But it is cement, not power generation, that largely drives the demand for this coal on the west coast. Two-thirds of the coal mined at Quinsam is used for generating steam in the process of forming cement. “There’s not one building on the west coast from Portland to Alaska that has been built without cement formulated with coal-fired steam,” said Mr. Slater.

“Thermal coal has the greatest potential for the demands of the future,” says Mr. Slater. “And it is the coal that is in the greatest supply.”

In agreement is Michael Minnes of Sherritt International of Toronto. Says Mr. Minnes, “Seaborne thermal coal demand is increasing because the demand for electricity is growing internationally at close to three per cent per year. New seaborne supply is now being brought online worldwide to meet the demands and prices have stabilized somewhat as supply and demand are balanced.”

And Mr. Minnes anticipates continuing demand for both thermal and metallurgical coal, given the robust growth of the Asian economies.

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Canadian coal is exported to 21 countries on 5 continents with an annual value
of approximately $2 billion.

• The international trade in coal has expanded faster over the last decade than
trade in any other commodity.

• Coal is our single largest export to Japan, our second largest trading
partner.

• Coal is the single largest commodity carried by Canadian railways.

• Electricity generation from coal is now 8 times more efficient than at the
turn of the last century.

Source: Coal Association of Canada

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Advertisers in the Globe and Mail's coal power supplement are:

Never say never
The world's first near-zero emissions pluverized coal power plant
Sask Power's "Clean Coal Project

A breath of fresh air
Expertise in clean energy solutions, including clean coal conversions
Neill and Gunter

PACE - Pacific Asia China Energy
COALBED METHANE
Stake your claim in China's energy future

Hillsborough Resources
An energy company poised for growth

Clean Coal. It's time to clear the air
Power Worker's Union

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This report was produced by Randall Anthony Mang (www.randallanthony.com) in conjunction with the advertising department of The Globe and Mail, Richard Deacon, project manager • e-mail: rdeacon@globeandmail.com

http://www.theglobeandmail.com/partners/free/sr/coal/coal_report.pdf

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