Ethane Recovery Outlook in 2020

For much of the late 2000’s and 2010’s, shale gas has transformed the US power market, in many cases at the expense of coal. Additionally, as we highlighted earlier this year, natural gas pricing remains low due to record production levels, leaving coal to gas switching a likely pressure on coal. This continued pressured on coal came to a head in October as Murray Energy, once the largest privately held coal company in the US, joined seven other US coal companies throughout 2019 with plans to file for bankruptcy. With Christmas fast approaching, the coal industry may be hoping for a much-needed miracle. Have no fear, because this year’s Christmas-themed Energy Market Commentary will focus on one little-known boost to the coal industry every year: the uptick in demand from all the bad children who receive coal on Christmas morning. But, how much demand for coal does this actually add, and how many bad kids would it actually take to replace the US coal demand lost over the past decade?

***Caution: using the term ‘analysis’ to describe the commentary below is generous. It’s all for fun***

In order to understand the need that the US coal industry has for all the bad kids on Christmas morning, it’s important to understand how the industry has developed over the last several years. The chart below highlights the effective switching of coal-powered generation to natural gas-powered generation since 2010, as well as US coal production over that time. While natural gas-powered generation has increased by 63% since 2010 driven by the shale revolution, coal-powered generation has decreased by nearly 50%. While coal exports to developing countries like China have backstopped some of those declines, coal production as a whole has still declined by 36% since 2010.

Now, in order to figure out how these declines may be reversed on Christmas morning, we need to make a few assumptions around our group of young coal recipients. First, if we assume that approximately 31% of the world celebrates Christmas, and that there are approximately 2.2 Billion children on Earth, that leaves us with 686 Million children who could potentially see a lump of coal under the Christmas Tree later this week. We can also assume that each bad child will receive one pound of coal to remind them of their misdeeds throughout 2019. As the chart below highlights, an aggressive assumption that 20% of kids are bad enough to receive coal Christmas morning translates to nearly 70 thousand short tons of coal. Assuming that all of that is sourced from the US, which doesn’t make much sense logistically for Santa, that bad kid coal represents just 0.01% of coal production in 2019.

However, in today’s tech-forward society, Santa may be using a new technology to figure out which kids are naughty and which kids are nice. In the new Disney+ movie, Noelle starring Bill Hader and Anna Kendrick, Santa (played by Bill Hader) goes missing and a new Santa (played by Billy Eichner) takes his place. The new Santa incorporates a new facial recognition technology to decide the Christmas Morning fate of the world’s children. His new technology reasons that there are only 2,837 nice children in the world. This doomsday scenario, where nearly all children fall in the naughty category, would only represent 0.05% of US coal production in 2019. Still not enough to make a dent.

Each year, the energy industry is full of surprises. After new twists and turns every month, you may be thinking, “If I woke up tomorrow with my head sewn to the carpet, I wouldn’t be more surprised than I am now.” That’s where BTU Analytics comes in handy. While this commentary is purely for fun, we have a number of subscription products to fill your energy analysis needs. And from all of us, have the hap hap happiest holidays.

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Hamilton (Hamp) Smith is an Energy Analyst at BTU Analytics, focusing on the publication of BTU’s E&P Positioning Report and Economics View. He also oversees oil and gas production forecasting for the Rockies. Prior to joining BTU Analytics, he was a hydraulic fracturing field engineer at BJ Services. Hamp holds a B.S. in Petroleum Engineering and M.B.A. in Energy Management, both from the University of Wyoming.

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