Alpha Natural Resources gives Rostraver coal reserve to Sierra Club and others for preservation.

How the Sierra Club Got Control of a Massive Coal Reserve

How the Sierra Club Got Control of a Massive Coal Reserve

Moneybox
Commentary about business and finance.
July 11 2016 4:27 PM

How the Sierra Club Got Control of a Massive Coal Reserve

Environmentalists have a new weapon to use against dirty energy: bankruptcy proceedings.

Coal mine.
Coal mines: If you can't beat ’em, buy ’em.

photosbyjim/Thinkstock

Leave it in the ground! That’s the cri de coeur of environmentalists when it comes to fossil fuels. We can fight global warming and save the environment, they argue, if companies don’t dig up or drill for the coal, oil, and natural gas they lease or own. The argument is kind of absurd: Commodities like coal, oil, and natural gas have market values. If money can be legally made mining and burning them, people will mine and burn them.

But as the saying goes, the Stone Age didn’t end because we ran out of stone. We just found other ways to build stuff, and people made economic decisions to leave stone in the ground. To a degree, that’s happening now, too. Under the trend I’ve dubbed coal nullification, America’s core users of the stuff—power plants and utilities—are simply deciding to use natural gas or renewables. With coal production off nearly 30 percent in the first half of 2016, a lot of coal is now staying in the ground longer.

Advertisement

But we may have just seen the first economic act that will lead to some 53 million tons of coal being left in the ground—permanently.

Here’s the story: In 2014, Alpha Natural Resources was the fourth-largest coal producer in the U.S., accounting for 80 million tons. But in 2012, the Sierra Club and two other nonprofits, the West Virginia Highlands Conservancy and the Ohio Valley Environmental Coalition, had sued the company on environmental grounds. Several of its evocatively named mines (like the Elk Run Coal Company’s White Castle No. 1 Surface Mine) were polluting West Virginia streams. In February 2015, Alpha signed a consent decree that would require it to spend about $150 million to clean things up by 2019.

Six months later, in August 2015, Alpha Natural Resources followed several other coal companies into bankruptcy. Once a company files for Chapter 11, lenders, creditors, and other parties to which the company has obligations make deals to convert liabilities into ownership, or to renegotiate terms. And it’s hard for a company to exit bankruptcy and get on with things unless it has resolved all the major issues.

Alpha developed a plan for a new lease in life. It sold off its natural gas assets in May for $340 million, and then effectively decided to split into two. A group of lenders would take ownership of its mines in Wyoming and Pennsylvania, plus assorted assets in other states. This new company would be dubbed Contura Energy. Alpha would hold onto its remaining assets in Appalachia, chiefly to pursue reclamation.

Advertisement

But here’s the thing: Under the consent decree with the Sierra Club and its allies, the reorganized companies, which had lots of resources but not much cash, were supposed to start doing work on the environmental cleanup immediately. “While their final deadline is August 2019, they have to take steps in advance of that to ensure they are doing the engineering, site design, and operation,” says Peter Morgan, a staff attorney with the Sierra Club. “And Alpha was very interested in getting some relief.”

“We gave them a three-year extension on the time to install all those water-treatment solutions and agreed not to oppose the confirmation of Alpha’s reorganization plan,” says Morgan. In exchange, Alpha would donate $7.5 million to groups engaged in reforestation and stream restoration in West Virginia. What’s more, it offered the Sierra Club and its allies something else: control of a 53 million–ton coal reserve in southwestern Pennsylvania.*

The deal offered the nonprofits ownership of the Rostraver reserve, a seam of coal in 35,000 acres of forest and farmland in Westmoreland and Fayette Counties, Pennsylvania, about 30 miles south of Pittsburgh. “The idea is that we will find a land trust that will take on that reserve, and they would have to agree not to mine it,” says Morgan.

The parties agreed. Last week, Alpha was allowed to exit bankruptcy. And those 53 million tons of coal will remain in the ground in perpetuity.

Advertisement

How much is 53 million tons of coal? It’s both a little and a lot.

The U.S. Energy Information Administration estimates that U.S. has 19.4 billion tons of coal reserves. So those 53 million tons represent about three-tenths of 1 percent of America’s total. Alpha Natural Resources in 2014 said it owns or leases 3.9 billion tons of reserves. So the Rostraver Reserve represents about 1.4 percent of the company’s pre-bankruptcy total. On the other hand, those 53 million tons represent about 63 percent of Alpha’s 2014 production, and about 6 percent of the country’s total 2015 production. At today’s prices, 53 million tons of Northern Appalachian coal are worth about $2.2 billion.

It may be difficult for environmentalists to repeat this maneuver. Coal is still a very valuable commodity (especially compared with other rocks). So it’s not possible for well-meaning people to simply buy large quantities of reserves with the intent of doing nothing with them. But the dislocation in the industry is providing well-connected groups with the ability to take control of reserves for very little in cash. “When groups like the Sierra Club first started participating in these coal-company bankruptcies, we all had the hope that we could use the bankruptcy process to do something like this,” says Peter Morgan.

Institutions and power plants are striking blows against coal by divesting—refusing to own shares in coal companies, refusing to burn coal in their power plants. But it turns out that taking ownership of coal may be the best way to ensure that it doesn’t get burned.

*Correction, July 11, 2016: This article and its headline originally misstated that the Sierra Club and two other nonprofits took ownership of a coal reserve. They will select the new owner. (Return.)