Shale gas could help besieged U.S. coal miners

HOUSTON (Reuters) - U.S. coal miners, threatened by pressure to cut greenhouse gas emissions and end mountaintop mining, could improve their growth prospects by ramping up shale gas production.

Coal-mining companies face hurdles marshaling the finances and developing technical expertise to produce shale gas. But experts say the effort could be worth it, especially since gas burns cleaner than coal.

"With the advent of shale plays in gas, a lot of property these coal companies own could all of a sudden be potential sites for gas wells," said Matt Preston, coal analyst for Wood Mackenzie.

The hot new Marcellus shale play in West Virginia, Pennsylvania and New York spans the heart of historic coal country and is one target of coal company interest.

"We have had conversations with three significantly sized companies," said Bobby Tudor, CEO of energy investment bank Tudor, Pickering, Holt & Co., who broached the idea at a recent energy conference. He declined to say which companies he spoke with.

U.S. coal companies need to diversify after a boom in coal-fired power plant development early this decade fizzled amid growing concern about climate change, threatening demand for coal.

On the supply side, environmental advocates and the government are pushing to limit the practice of leveling mountains to recover thinning seams of coal in the U.S. coal heartland, Appalachia.

While a number of new coal plants are near completion, dozens of U.S. coal projects have been canceled. Some utilities are shutting older coal units and replacing them with plants fired by natural gas, which emits half as much greenhouse gas as coal when burned.

PRESSURE ON COAL INDUSTRY TO CLEAN UP GROWING

Replacement of coal plants with gas units should accelerate if the United States enacts carbon control legislation. Coal could regain market share if researchers can develop carbon capture and sequestration (CCS) technology to keep carbon emissions out of the atmosphere. But that could take years.

"We just don't know enough about how CCS scales up and how effective it will be," Preston said.

While coal companies await affordable carbon capture technology, they could supplement revenue by producing gas from coal properties, either shale gas or coal bed methane.

"I think there's an argument to be made for coal companies looking at natural gas as a way to broaden their risk profile," said Tom Hoffmann, retired spokesman for Consol Energy Inc, now an industry consultant.

The effort to develop natural gas will not be easy for coal companies. Most do not have the expertise to explore for, produce and sell gas.

"The skill set is very different," , said FBR Capital Markets analyst Dave Khani.

Most coal companies also need more financial heft to enter the capital-intensive gas business, and raising money could be difficult because Wall Street analysts see gas and coal as separate industries, Preston said.

"We'll see how power companies approach their fuel-buying in an age of carbon restrictions. I don't think we have a clear view of that yet," Hoffman said.

GAS HAS BEEN MORE PROBLEM THAN SOLUTION FOR COAL

Historically, miners have viewed natural gas oozing from coal seams as a problem. Coal companies ventilate it to the air or produce it from wells drilled into coal seams to cut the risk of in-mine explosions.

But unburned gas vented to the atmosphere is a greenhouse gas more potent than carbon dioxide, so the U.S. government encourages companies to drill and produce rather than vent it.

Walter Energy Inc joined the Chicago Climate Exchange to trade credits it gets for reducing its mines' methane emissions by producing and selling gas.

Consol Energy Inc has taken drilling for safety a step further, organizing a unit to find, produce and sell gas.

Consol unit CNX Gas Corp expected 2009 production to total 92 billion cubic feet. That is only a tenth of the biggest U.S. producers, but it's the second largest gas production in the Appalachian Mountain basin and growing, the company said.

Other coal companies view gas as a future asset, but not gas produced from wells. Peabody Energy, the biggest U.S. coal company, has invested in two high technology projects aimed at converting coal into gas.

"Coal to gas remains a long-term strategic focus," Peabody spokesman Vic Svec said.

Coal remains Peabody's main business. With new coal-fired power plants being built at a rapid pace outside the United States, coal will be important for years to come, he said.

Utility executives voiced skepticism about the long-term viability of gas as their main generator fuel. Aside from questioning the reliability of supply, they said ever-tighter environmental goals will require cleaning up gas, too.

"Gas is not the answer beyond 2030," said CEO Bill Johnson of Progress Energy, a big coal burner shutting old coal plants. "It won't get you to the goals we have for carbon."

(Additional reporting by Anna Driver; Editing by David Gregorio)