Exercise ­ WebCOM™ 2.0

Stony Brook University Water, Climate & Energy
Stidham

COAL PROPERTY ACTIVITY
Introduction: Your friend Madison Huguenot has a farm in Pennsylvania. The farm is about 50 acres, but hasn’t been used agriculturally for many years –
Madison uses it mostly to have a quiet place to get away to. Her neighbors have mentioned that there are coal seams underground in the area, and driving
around she has seen coal seams in the roadcuts and so forth, but she never thought much about it until she was approached recently by the Acme Coal Mining
Company. The Acme Coal Mining Company has been contracted by the Acme Electric Company to provide coal to their coal­burning power plant, and they are
looking for mineable coal close to the power plant. Since Madison’s farm is only ten miles from the power plant, her coal is in a prime location. Acme made her
an offer for the coal under her property – she would still own the land, but she would give Acme the right to mine the coal. In return, Acme would pay her
$1,500,000 for the coal.

Obviously Madison needs to take a lot of things into consideration in deciding whether or not to sell her coal to Acme. She is not sure whether she wants to
allow her land and the farm to be disturbed by mining, but as with a great many such decisions, if the price offered was high enough ­­­ ? She knows that you are
a geologist, and she needs someone to advise her as to the value of the coal under her property. Did Acme offer her enough? Or should she ask for more? Your
job is to evaluate the value of the coal.

HOW MUCH COAL IS DOWN THERE?

The first information to acquire is the amount of coal under Madison’s farm. It may at first seem very difficult to estimate how much of anything exists
underground. A first step is to drill some test holes, to give at least a sampling of the rocks at a few locations. You and Madison arrange for an independent
company to drill four test boreholes near the corners of her farm, to get an estimate of how much coal is underground. The logs (records of rock type
encountered) for the four boreholes are shown here:

* From these logs, it is clear that there are two coal seams, and it appears likely that both seams are present under the entire farm. We will refer to the
seam closer to the surface as seam A, and the deeper seam as seam B. Your calculations should begin with records of the approximate thicknesses
(from the logs above) of the two seams.

Thickness of seam A, in feet:

* Thickness of seam B, in feet:

* Knowing the thicknesses of the seams is not the same as knowing the entire amount of coal. Coal abundance is typically expressed in tons, which
is a unit of weight, so it will take a few calculations to figure out the tonnage of coal. The first step is to calculate the volume of coal, and that is
typically expressed in acre­feet. An acre­foot is a somewhat old­fashioned unit, but easily understood and easily calculated – one acre­foot is a
volume which covers an area of one acre with the thickness of one foot.

Coal volume = acres x thickness in feet

Volume of seam A, in acre­feet:

* Volume of seam B, in acre­feet:

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* The next bit of information we want is the tonnage of coal. In order to convert acre­feet of coal to tons of coal, we should use the approximation that
one acre­foot of coal weighs about 1800 tons.

Coal weight = volume in acre­feet x 1800 tons/acre­foot

Tons of coal in seam A:

* Tons of coal in seam B:

* The number of tons of coal that we calculated above represents the number of tons present within the ground. When estimating the value of a coal
property, the number of tons that are recoverable is a more relevant number. Surface mines typically recover 90% of the coal, while underground
mines typically recover only 50% of the coal. Since surface mining is safer and less expensive than underground mining, it can safely be assumed
that surface mining will be used wherever possible. The decision as to whether or not surface mining will be used typically depends on the thickness
of the coal seam and its depth, using the following rule: about ten feet of overburden can be removed for each foot of coal in the seam. Since
the overburden is simply all the rock and soil above the coal, another way of saying this is that a two­foot­thick coal seam can be mined with surface
mining as long as it is not more than twenty feet below the surface.

Type of mining (surface or underground) for seam A:

* Type of mining (surface or underground) for seam B:

* Taking into consideration only the type of mining you specified above, we can now calculate the number of tons that can be recovered for each
seam, 90% if surface mining would be used or 50% if underground mining would be used.

Recoverable tonnage = total tonnage x (0.5 or 0.9)

Recoverable tons of coal in seam A:

* Recoverable tons of coal in seam B:

* HOW MUCH IS THE COAL WORTH?

Week
Ended
26­Sep­14

Average weekly coal commodity spot prices
(dollars per short ton)

Central
Northern
Powder
Illinois Basin
Appalachia
Appalachia
River Basin
11,800 BTU
12,500 BTU
13,000 BTU
8,800 BTU
5.0% SO2
1.2% SO2
<3.0% SO2
0.8% SO2
$54.59

$63.30
$43.40
$11.45
http://www.eia.gov/coal/news_markets/

Uinta Basin
11,700 BTU
0.8% SO2
$37.00

The value of coal on the ground is easy to assess; the most recent market prices for coal from different coal­producing regions of the country are
shown above. These prices are simply determined by how much buyers are willing to pay, and the expenses incurred by the seller to produce and
deliver it. However, the value of coal in the ground is a much trickier thing to determine. The price of coal in the ground depends upon two basic
factors: 1) quality of the coal, and 2) location of the deposit. The highest­priced coals (in the ground) are low in sulfur (less than 1% SO2) and high in
heating value (higher than about 12,000 Btu). The lowest­priced coals (in the ground) are high in sulfur and have lower heating values. Since
transportation of coal adds considerably to the cost of obtaining it, coal that is located closest to the user (power plant, etc.) generally demands a
higher price than coal farther away.

In addition to recording the logs shown above, you and Madison have also requested analyses of the quality of the coal extracted from the test
boreholes which were drilled at her farm. The analyses give the following results:

SO2 Content

Heating Value
Well 1, seam A
0.66%
13,965 BTU/pound
Well 1, seam B
1.23%
12,014 BTU/pound
Well 2, seam A
0.75%
13,883 BTU/pound
Well 2, seam B
1.31%
11,898 BTU/pound
Well 3, seam A
0.62%
14,021 BTU/pound
Well 3, seam B
1.44%
11,770 BTU/pound
Well 4, seam A
0.53%
13,937 BTU/pound
Well 4, seam B
1.43%
11,937 BTU/pound

Calculate average SO2 and average BTU/pound for each seam:

Seam A SO2:

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* Seam A BTU/pound:

* Seam B SO2:

* Seam B BTU/pound:

* Given that Madison’s farm is in the region of central Appalachia, and considering the prices in the chart above, what would be a reasonable,
approximate price for the coal in each seam? (Take a guess, based on the prices shown.)

Seam A: _______________ $/ton

* Seam B: _______________ $/ton

* From your previous calculations, you know how many tons of coal are in each seam. Use that information to calculate the total value of the coal in
seam A and seam B.

Price per ton x recoverable tons = total value

Seam A: $_________________

* Seam B: $_________________

* HOW MUCH DOES THE LANDOWNER GET?

If Madison could mine the coal herself, she could sell it for the amount you estimated above. The question here though is whether Acme Coal Mining
Company has offered her a reasonable amount for the right to mine the coal and sell it themselves. The standard practice in these situations is for
the coal mining company to pay royalties to the landowner for the coal they mine and sell. A royalty is an amount of money that is paid to the owner
of something important by another party who will develop and sell that important item. The amount of royalty paid for coal is generally 12.5% of
the gross value of the coal.

Royalties = total value x 0.125

Royalties for seam A: $________________

* Royalties for seam B: $________________

* Should Madison sell her coal to the Acme Coal Mining Company for their offer?

Submit

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