A minor amount of refined petroleum products, namely 3 percent, is consumed as a boiler fuel in the industrial market. While industrial boiler fuel consumption of coal had been a very significant market until the mid 1960's, it has been dwindling since then. Due to the relatively high cost of air emission control devices necessary to meet environmental regulations, many industrial firms, particularly the smaller ones, have found the continued use of coal to be uneconomical. By 1974, industrial use of coal had declined to less than 12 percent of total coal consumption compared to the mid 1960's level of around 25 percent. The only significant area of consumption served by both coal and petroleum products, specifically residual fuel, is the electrical utility market. By 1974, over 70 percent of the bituminous coal consumed in this country went to electrical utilities. Residual fuel sales represented 16 percent of U.S. petroleum product demand in 1974 and over 60 percent of this residual fuel was not produced here but was imported from overseas. That portion of residual fuel sales and the small amount of distillate fuel sales going to the electrical utilities in total represented 9 percent of refined petroleum product demand in 1974. Even in the utility market, competition between coal and residual fuel is limited by geography, technology, and method of sale. The residual fuel used by utilities is essentially limited to the New England states, the Mid-Atlantic states, and the West Coast. This had been the result of a growing reliance over the years prior to the Arab embargo upon low cost imports of residual fuel. Utility plants are very costly to construct. Therefore, the furnaces are typically designed to burn one type of fuel. In most cases, once a plant is constructed, it no longer acts as a market for fuel types other than that for which it was designed, unless extensive capital modifications are undertaken. Since residual fuel is the product of a manufacturing step, it can be produced from a variety of refineries and still meet the same specification. Therefore, those utilityy plants which burn residual fuel can enter into short or intermediate term contracts, with some assurance that when the contract terminates, suitable residuals can be obtained from another refiner, if necessary. This is not the case with coal. Each area of coal reserves has its own physical characteristics. Coal produced from one mine, while being perfectly suitable for use at one utility plant, may be completely unacceptable at another. Hence, the majority of coal sold to utilities moves under long term contracts which might last for the life of the mine. One of the objectives of the utility plants in doing this is to avoid costly equipment modifications which could be required every time a short or intermediate term fuel contract expires. Typically, a utility planning to construct a coal-fired plant will issue specifications on the volume and type of coal required and the plant location. In the case of Old Ben, if we have reserves of the type required within a reasonable geographic distance from the consuming plant, we would attempt to negotiate a supply contract. Our success in winning this contract would depend upon our ability to supply an acceptable specification product at a lower cost than our competition. This is a direct function of how efficiently we are able to mine coal. If we do enter a contract, then we would construct a mine and essentially dedicate its production to that particular customer. I would estimate that approximately 75 percent of the coal sold to electrical utilities is under long term contract. That coal which is not sold under long term contract moves in what is generally known as the spot market. Here competition among coal companies is very intense. Both the supply and demand for coal in the spot market are dependent upon general economic conditions. During recessions such as the current one, the amount of coal moving into the export market declines due to slackened demand. Therefore, more uncommitted or spot coal becomes available. However, demand for spot coal also is down. Recently, my sales department has been crying on my shoulder every day because they are finding it very difficult to sell uncommitted coal. When economic conditions improve, export volumes increase and less coal is available for the spot market, just at the same time as demand for that coal increases. That is why spot coal prices fluctuate so much, compared to contract prices which remain relatively stable over long periods of time. This can be seen on Exhibit IV. S. 489 The bill that this Subcommittee has under consideration, S. 489, would prevent companies within the petroleum industry from engaging in the development of 57-567-76-22 other forms of energy. In doing so, it would force petroleum companies to divest themselves of their coal interests. This would result in a major structural change for some coal companies. Structural change of a company or industry without proof of a need for change or a consideration of what will really result doesn't make a great deal of sense to me. I disagree with the thrust of S. 489 because it appears to be directed toward imaginary problems related to "potential" limits to competition between energy forms. I believe that these problems just do not exist. As I have indicated in my discussion of the relationship between Old Ben and Sohio, Old Ben's coal production has not been held down by Sohio to stimulate demand for petroleum products. In fact, our coal production has increased substantially. Nor has Sohio attempted to manipulate Old Ben's coal prices. I feel that enactment of S. 489 would not change the limited nature of comptition between coal and petroleum products. What it would do is disrupt the widely recognized efforts to increase all forms of domestic energy production, including coal, because it would eliminate the positive aspects of petroleum company ownership of coal operations. Look at what has taken place at Old Ben since its merger with Sohio. Since 1969, Old Ben as part of Sohio, has committed $155 million for development, coal reserves and surface land, and physical plant and equipment. During a similar time period immediately prior to the merger in 1968, Old Ben had made capital expenditures equal to about $30 million. During the five-year period from 1964 through 1968, Old Ben's annual coal production had averaged a little over 8 million tons. Since 1969, Old Ben's coal production has averaged over 11 million tons per year. The two new mining complexes we have under development will produce 7.5 million tons annually. The real question is whether coal production would expand faster if oil companies were ordered to divest their coal interests. I think just the opposite would be the case. There would be expansion but very likely it would be at a much slower rate. Let me speculate on what might happen if Old Ben were divested. With construction costs going up so rapidly, it is obvious that financing has become a critical factor in expanding coal production. Coal companies can normally offer lenders the security of known coal reserves and of a market for the coal by means of long term contracts. However, developing a mine is a risky business. Therefore, lenders normally require the additional assurance that the mine will, in fact, be completed and kept in operation until the loan is repaid. If a mine shaft fails, for example, another one must be sunk. In our case, Sohio provides this guarantee to the lenders. If we become a separate company, we could provide such guarantees to the limit of our financial ability. However, this would slow down our rate of expansion until we became larger as time passed. We would probably have to pay for mines by selling stock in the company, and this is an expensive way of financing such a development. In any case, in the near term, we could not expand at a pace which would allow us to contribute our share to the goal of doubling coal production in the next decade. Consequently, I feel that enactment of the legislation which you are considering would simply disrupt a well organized effort to increase coal production. I do not feel that restructure of the industry would accomplish anything in a positive sense. S. 489 simply does not address itself to the real problem of the coal industry. I would like to comment on several things that do cause a problem for this business. Our current environmental regulations are designed to limit the amount of pollution entering our aid and water. Obviously, there are a number of ways that this can be accomplished. Unfortunately, in regard to air emissions, the regulators have insisted upon artifically imposed restrictions which must be met at all times. In doing so, they have ignored the limited availability of technology to meet these restrictions, the costs involved, or whether intermittent controls which operate only when required by climatic conditions would be more appropriate. These artificial restrictions must be loosened in the short run if the coal industry is to provide a greater portion of this nation's energy supply. Congress must restore a proper balance between the needs of the economy and the needs of the environment. Similarly, the Coal Mine Health and Safety Act (CMHSA) has had a very adverse impact on coal production without a commensurate increase in safety. Since this law was passed in 1969, the productivity of underground mining has been reduced by as much as 45 percent. I wish that the coal industry and the people administering CMHSA could work cooperatively to improve safety without substantially decreasing productivity. However, the manner in which CMHSA is being interpreted and applied is inhibiting progress towards achieving the intent of the Act. One of the major steps necessary to increase coal production in this country is to engage in applied research on mining techniques which will improve coal productivity with increased safety. Yet the rigid interpretation of CMHSA that is being applied by the Interior Department has all but precluded such applied research. The coal industry-supported research organization, Bituminous Coal Research, is currently being reorganized to provide leadership in an effort to correct this situation. As I said earlier, I'm for measures which improve mine safety, but I'm against the current interpretation of CMHSA which is holding down the production and use of coal. Now Congress has had a say in enacting this law, and I believe it can have a say in how it should be interpreted. If you are interested in how to encourage greater coal production, I have the following suggestions to offer: 1. The coal industry must be allowed to attract the capital needed to expand coal production. Estimates of the amount of investment required to double coal production between now and 1985 have ranged from $15 billion to $20 billion. Generating that much capital is going to be quite a challenge to the industry, I don't feel that the coal industry should be assisted in attracting this capital through either federally guaranteed prices or federally guaranteed loans. At the same time, capital formation should not be hampered by barriers designed to keep specific segments of the economy out of the coal business. The more companies that enter this business, the more capital there will be. Coal production should increase accordingly. 2. Research and development in the coal industry should be strongly encouraged and federal funding should continue. I realize that a great deal of research is being done on the liquefaction and gasification of coal. Economically feasible synthetic fuel processes are important but will be of little value if the coal they need for feedstock is unavailable. The critical research required is on how to increase productivity in existing and future coal mines. New underground mining methods have to be developed to supply the feedstock for these synthetic proc esses. 3. A viable federal coal leasing program must be established which will allow a business-like development of western coal. In order to allow the smaller coal operator to participate in this development, bonus bidding for these leases should be replaced by royalty bidding. I personally feel that the Interior Department is headed in the wrong direction in some of its proposals with respect to the development of these coal lands. I am opposed to a program such as the IMARS program proposed by Interior which dictates what shall be leased and by whom. 4. A realistic means of complying with NEPA must be established so that the increased production and use of coal can proceed without undue delay or restraint. The amount of time involved preparing environmental impact statements and getting them approved, usually through judicial review, must be shortened. The current procedure delays both the opening of new mines and the siting of coal-fired plants. 5. The Clean Air Act amendments which have been proposed by the President should be enacted. 6. No federal reclamation legislation should be enacted which is so unreasonably stringent that it precludes the surface mining of western lands. Reclamation has become a well established practice by the responsible elements of the coal industry. Additionally, the individual states have developed reclamation policies designed for their own lands. A federal program which attempts to deal with wide variations in topography in a uniform manner would not only be redundant but would severely retard coal production. 7. Methods to improve and expand coal transportation facilities should be taken into consideration. Significant expansions of coal production will require a healthier transportation system than the one that exists today. 8. Oversight hearings should be conducted on the Coal Mine Health and Safety Act. In particular, the provisions pertaining to the assessment of fines and judicial review need attention. The time and effort presently involved by both Government and management on account of these provisions of the Act could better be devoted to actual efforts to achieve safety and productivity. A Final Word I would like to make one final point here today. I understand that various witnesses who have appeared before this Subcommittee have implied, without adequate factual justification, that there is little competition within the petroleum industry due to joint ownership of facilities, alleged interlocking directorates and the like. I came into this industry as a complete outsider seven years ago. I've been a member of Sohio's Board of Directors for the past six years, and I'm happy to say if Sohio's operations are typical, these allegations are simply not true. These unsubstantiated assertions do a disservice to the companies working to meet the energy needs of the nation. Thank you for the opportunity to appear before this Subcommittee. I shall be happy to respond to any questions you may have. |