Coal exports are a growth industry for Australia. A lot is being invested in infrastructure for coal production and transport to keep this growth going. But how long will this bonanza last? After all, there is only a finite amount of the stuff in the ground.
Earlier this year, the Australian Bureau of Agricultural and Resource Economics (ABARE) released an extensive report on Australia’s energy resources. The chapter on coal included the following observation about black coal:
At the 2008 rate of production of around 490 Mt [mega-tonnes] per year the EDR are adequate to support about 90 years of production.
For those unfamiliar with the jargon of the industry, “EDR” stands for “Economic Demonstrated Resources” which means an estimate of the total amount of coal in the ground that we could feasibly dig up.
Now some of you may already be thinking that 90 years does not sound all that long, but there’s a problem. The authors of the report do not understand exponential growth! The catch is hidden in the apparently innocuous phrase “at the 2008 rate of production”. In other words, to come up with the 90 year figure they are assuming that production levels do not grow at all for the next 90 years. Is that reasonable?
A quick look at coal production over almost 50 years would indicate that it is far from a reasonable assumption.
Australian Coal Production 1961-2008
Even to the untrained eye, a growth trend is evident in this chart, a fact which is confirmed by looking at year-on-year growth, which has averaged around 5% and has only been negative three times over the whole period.
Annual Growth in Australian Coal Production 1961-2008
So, where does the 90 year figure come from? According to the ABARE report, Economic Demonstrated Resources are 39.2 giga-tonnes (Gt). Add to this another 8.3 Gt of “Sub-economic Demonstrated Resources”, or SDR, (i.e. reserves that are really hard to get) gives an estimate total of 47.5 Gt for Australia’s coal reserves. Now 90 × 490 Mt (the 2008 production rate) gives 44.1 Gt, which is somewhere between EDR and the combined total of EDR and SDR. Presumably the ABARE authors are allowing for the possibility that over time it will become economically feasible to mine some of the coal that is currently classified as sub-economic.
But there is no way that 2008 production rates will be kept steady for the next 90 years. Apart from anything else, there are plenty of stakeholders in the coal industry doing their best right now to see their export business grow.
To come up with a better estimate of how long the coal might last, rather than assuming zero production growth, I will assume a constant growth rate. While the annual growth rate from 1961 to 2008 averaged 5% per annum, growth has been a little slower more recently. The last 5 years have seen growth average only 3.1% (presumably the global financial crisis did not help). Working with the ABARE estimate that viable coal reserves are 90 times 2008 production levels and assuming 3.1% annual growth in production, the reserves will in fact only last for 43 years! That is less than half the 90 year figure in the ABARE report and it starts to seem like an awfully short period of time. Since the working life of coal-fired power stations is typically around 40 years, this means any new power stations built today would still work out their useful life, but they could be the last ones we build and extract the full value of their potential productivity.
Of course, if the growth rate is higher, the time to deplete the reserves will be lower, as is illustrated in the table below. In fact, if production growth returns a long run average of 5%, then reserves would only last 34 years.
| Growth Rate | Years Left |
|---|---|
|
5%
|
34 |
|
4%
|
38 |
|
3%
|
44 |
|
2%
|
51 |
|
1%
|
64 |
|
0%
|
90 |
Reserves 90 times 2008 production
Optimists may counter that the ABARE estimates of the available reserves might be far too conservative. Perhaps there are coal fields out there just waiting to be discovered. Surely that would give us room to have coal export growth go gangbusters, wouldn’t it? Let’s see. I’ll be generous and assume that coal reserves are in fact twice as big (EDR has not changed much over the last 30 years). Running the figures again assuming reserves total 180 times 2008 production levels still means that with 3.1% annual production growth, the coal will all be gone in 60 years and if growth is 5%, it will only last 46 years.
| Growth Rate | Years Left |
|---|---|
|
5%
|
46 |
|
4%
|
53 |
|
3%
|
62 |
|
2%
|
76 |
|
1%
|
103 |
|
0%
|
180 |
Reserves 180 times 2008 production
Now it may be the case that climate change will trigger disasters on such as scale that in 40 years time we are not too worried about coal production, nevertheless, these basic calculations mean that some or all of the following must be true.
- Australian coal is going to run out in around 40 years
- The coal industry cannot continue to grow at the rate it has done over the last 50 years
- Australian energy will be turning to coal alternatives sooner that we may expect (with or without a carbon price)
- There is a significant expansion in EDR in the future (much greater than we’ve seen over the last 30 years)
If we are going to stretch coal supplies beyond 40 years, what can slow down the need for production? With a price on carbon not looking likely to slow Australian energy consumption in the near future, one possibility would be to reduce the share of coal production that is exported and keep more of it for our own energy needs. After all, the export share has been growing quite rapidly.
Share of Australian coal production exported (1961-2008)
With around 66% going offshore, there is quite a bit that could be clawed back there. But who would dare suggest slowing export growth? Maybe we will just wake up one morning and discover, with a shock, that the coal is all gone and, since it is estimated that Australia has about 6% of the world’s coal reserves, the rest of the world may face the same realisation even sooner.
Data source: ABARE (note that the 2007-08 production figures in this data set look a little lower than the 490 Mt figure quoted in the report, this is because the chart shows saleable coal which is lower than total coal extracted).
UPDATE: there was initially an error on the export share chart. Thanks to @paulwallbank for pointing it out!
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Great points, I’m just wondering what was the event in 1969-71 that dramatically dropped the percentage of coal for export?
Was it new coal fired power stations or were some mines decommissioned? A quick Google finds Lidell in the Hunter Valley and Hazelwood in the Latrobe came online at that time but surely they didn’t account for the change in ratios in themselves?
The explanation is more mundane: the first version of the chart picked up the wrong column from the spreadsheet! All fixed now. Thanks for bringing that to my attention. Fortunately, the primary argument is not affected.
Nice Mule.
Any thoughts on undiscovered resources?
@Paddy: there are bound to be some undiscovered coal reserves, and I don’t know the confidence level attributed to current estimates. Still, assuming that new finds will double current reserve estimates seems generous to me, but a 3.1% growth rate leads to a doubling in production every 22 years, so even a quadrupling of the reserve estimates would only buy an extra 22 years and we’d still run out in under 90 years. If the growth rate was 5%, the doubling occurs every 14 years, so finding more reserves may not help as much as might be thought.
Excellent – sounds like we should be worrying about peak coal almost as much as peak oil.
The bright side of consuming all the fossil fuels and over the next 30 years or so and returning to the atmosphere all that carbon that has been locked up for millions of years is that we will not need to debate for much longer if there are flaws in the climate models. We can see for ourselves!
Reduce coal exports ! What a shocking suggestion, surely exporting carbon is our reward for using energy saving light bulbs and lots of pink batts.
I recall hearing on fairly regular basis the claim that Australia has several hundred years worth of coal. I wonder if that figure was some division of known resources by current domestic consumption.
If there really is only 40 odd years supply then we might have to go back to trying to be a clever country (an idea that last went out of fashion about 8 years ago)
Clever country? Glenn Stevens thinks we shouldn’t need trouble our pretty little minds with issues like that.
I had rant about the Governor’s speech to the AIG on my Smart Company blog today;
http://www.smartcompany.com.au/business-tech-talk/why-glenn-stevens-is-smarter-than-me.html
We better hope we have 40 years of coal and iron ore and that the China boom lasts that long as we don’t seem to have any alternative ideas.
By the way, thanks for the interesting diversion, mule. I spent a pleasant hour reading up on the 1960 and 70s travails of the NSW power system and an abbreviated history of the SECV while trying to figure out what happened in 1970.
I enjoyed your rant – I had similar thoughts when reading that RBA speech.
As far as I know there is no law of nature that requires a country to dig up its natural resources at the rate desired by resource mining companies.
All the talk about mining and how that requires XYZ policy response (retraining the work force with hard hats and big trucks, skilled migration increases, massive investment in mining related infrastructure etc) assumes that it not legitimate to manage the size of the mining industry both to increase its longevity and to limit the distortions on the overall economy.
How does it help Australia (as opposed to mining companies) if we turn the economy into a massive digging machine that exhausts our ‘quarry’ in a relatively short time.
Isn’t that what happened to Nauru?
If mining companies want to boom – fine they should pursue their interests – that doesn’t mean that we should distort the balance and long term sustainability of the economy to enable them.
Nothing like an early morning rant!
Good comments above so let me add three perhaps related items:
1. In about 1985 (+-2yrs) I heard Barry Jones on the radio saying the worst thing that could happen to Australia at that point would be if we went into another minerals boom as all the work to develop alternative industries would be forgotten. Which is what happened. It’s what always happens.
2. Turkey considers itself blessed not to have “the curse of oil”. Extreme mineral wealth makes countries intellectually lazy and politically torpid. It discourages investment in intellectual resources and encourages cultural conservatism.
3. At this rate the only two things Australia will soon be exporting are minerals and bright, young people.
Stubborn
Very, very interesting post. And the same applies to aNonZebra (well, not so sure about the bright-young-people bit :D ).
Have a look at this Dutch disease entry at Wikipedia:
http://en.wikipedia.org/wiki/Dutch_disease
Just out or curiosity: have you guys ever traveled around Latin America? Say, countries like Venezuela or Ecuador? Or places like Argentina, that lived on a single export product (a renewable one, in this case)?
Although, to be honest, I don’t need to worry much about this: chances are I’ll be comfortably dead by then!
Read your rant Paul W…very good. Marco, you should read it too, it even has a reference to the Dutch disease! To me it’s all like the guy who wins the lottery saying “see, there was no need for me to go to school or learn a trade, I’m rich anyway!”.
Marco, I’ve never been to South America. Maybe when the kids are older!
Resources never “run out”. The crust of the earth has effectively unlimited amounts of coal, iron ore etc for our purposes. “Reserves” are defined under the JORC code as those that are economic to extract at a given price. As the price of the commodity rises, other deposits will become economic to extract and will be added to reserves (ie reserve life is a function of the prevailing market price). A higher price will also stimulate further exploration and discovery of new deposits.
If the price of coal rises enough, then nuclear or even wind/solar plants will become the rational choice. A higher coal price will also increase the incentive to discover new sources of power.
Mule dude, have faith in the markets to solve the problem… surely better than trusting 3 random independent politicians to solve all Australia’s “problems”.
The following article in this week’s economist is on a related issue
I have included a short sample.
Engine trouble
A rise in the cost of extracting energy will hit productivity
http://www.economist.com/node/17314626?story_id=17314626
“The key ratio is “energy return on energy invested”. Analysis by Tim Morgan at Tullett Prebon, a broker, estimates that oil discovered in the 1970s delivered around 30 units of energy for every unit invested. By itself this was well down on the returns from oil discovered in the 1930s, which were nearer 100-to-1. Current oil and gas finds, such as undersea reserves, may offer a return between 16-to-1 and 20-to-1. The return on sources such as tar sands and biofuels like ethanol are in the single digits.
Nice thoughts Stubby! Maybe the coal will run out before we stuff the planet with greenhouse gases, and possibly before Mista Rabbott even figures out what climate change is…..
Meanwhile where’s the debate about the really nasty greenhouse gases, including the halogens, SOx and NOx, which are reputed to be far nastier than the oxides of carbon, on a weight for weight basis?
And why are we happy to sell yellowcake all over the world, but not to have a nuclear power plant in Oz? It’s a very economic, and green, solution to the energy dilemma when tidal, wind and photovoltaic solutions don’t stack up financially. What thinks the Mule?
@Plunko: I seem to recall an article a few years ago (I think it was in Nature) which had back of the envelope estimates for the energy production capacity of a wide range of alternatives to fossil fuels. For example, for solar they estimated the total radiant solar energy hitting the earth and assumed that in an ideal world we could catch a certain fraction of it. Likewise, they estimated total nuclear reserves and so for for geothermal, etc. Their conclusion was that no one or two alternatives would be enough to replace fossil fuels: we’d have to use all of them!
> I’ll be generous and assume that coal reserves are in fact twice as big.
This is a rather more slip-shod approach than your usual, Mule. Are not the historical figures for EDR estimates available somewhere? Surely then you could plot that time-series and use it to estimate how quickly additional coal reserves are discovered. Or would you have us believe that the EDR estimate has been unchanged since 1961?
Cheers,
Mark L
Fair point Mark. If known reserves grow at 2% per annum then they’ll double in about 35 years, which would buy more time. Time to hunt for some more data to get a better idea one way or the other…
One point that is missed in your estimate for demand for Aussie coal is how much is left in the rest of the world. If the ROW’s coal runs out before Oz then then one of two things could happen:
1. there will be a massive increase in demand for Oz coal, and coal price, causing it to run out much sooner than expected.
2. alternative energy sources will be widely implemented before Aussie coal runs out, leading to a decreased demand for Oz coal and fall in price.
Looks like an argument to buy a long-dated straddle on Aussie coal price!
I don’t know how our consumption compares, but i think the ABARE report estimated Australia’s reserves to be 6% of world reserves.
Stubborn,
Heed a good advice: don’t you ever set foot on Latin American soil. And I mean from the Rio Grande river all the way down to Tierra del Fuego.
At least, don’t take the kids or wife. And don’t go alone: take some male friends who are street smart and can fight.
A shame really, as most people are friendly enough and some places are rather nice. But it’s way too dangerous, the services are shitty, you risk getting all sorts of diseases. Aghh!!!
@Mark: there is ABARE chart going back almost 30 years showing the coal EDR going nowhere (unlike gas and uranium which have been going up), so it would seem like a long shot betting on coal EDR more than doubling over the next 40 years.
By the way, I also agree with Paul Wallbank. That post in Business Tech Talk was pretty good.
I wonder if people have some idea what such a shift in the economic base of a country implies. It’s not just that a group will get richer; but most will get poorer. As the Aussie dollar goes up, we’ll have less incoming tourism and our exports will get dearer. Will each and everyone of us get a job driving a humongous truck?
And when businesses go belly up, will they pay wages? And when their employees go unemployed, who will pay taxes?
For what I’ve seen in the media, the idea sold is that now everyone is gonna get rich. OMG! Oh boy, oh boy! Gimme, gimme.
What people don’t seem to understand is that in places like Venezuela, Ecuador or Mexico (which export oil) normal people don’t have an oil well in their backyards. That’s why I asked whether you had ever been to those places.
In those places, only a minority actually work in the oil industry. The remaining are lucky if they somehow get something directly related to the oil industry. Otherwise, there is little else to do.
And the oil industry don’t go around throwing handfuls of notes to the wind, either. Whatever people get from oil extraction/refining comes from taxes, that the Government redistributes at its whim.
So, you find people obscenely rich who made each and every cent of that fortune out of government handouts.
On top, oil prices go up, there is some money (a lot for some, a little for most); but if oil prices go down, then there’s no money whatsoever for most and very little for some.
And then people wonder why those countries totally suck.
Great article and analysis.
Do you follow the Energy Watch Group’s work?
Their whole remit is to decode reserve hype: http://www.crikey.com.au/2008/07/09/peak-oil-schmoil-why-is-no-one-talking-about-peak-coal/
Great article, thanks for posting. It all boils down to China doesn’t it!
How much longer can this growth industry invest in infrastructure before the black stuff runs out?
@Dan: thanks for the link. I hadn’t come across EWG before.
Just to back up Marco’s point about employment in the extractive industries, Stevens’ speech on Monday referred to an RBA paper “Structural Change in the Australian Economy”
http://www.rba.gov.au/publications/bulletin/2010/sep/1.html
The first graph there shows employment by broad sector and mining, albeit with a slight recent uptick, shows the industry is a minor employer.
http://www.rba.gov.au/publications/bulletin/2010/sep/images/graph-0910-1-1.gif
Like Marco, I’m bemused that most Australians, or the media, don’t really understand the obvious ramifications of the nation relying only on commodities.
A good starting point may be to stop referring to it as the mining boom as that tends to imply that it is unquestioningly a good thing.
Who wants to oppose to a boom?
Some alternatives;
Mining bubble
Mining tsunami
Mining growth-shock
Mining time bomb
How are the Iron Ore reserves holding up? Like coal I assumed that there was more than we could poke a stick at and as with monsters in the south seas it is correct to say of Western Australia north of Perth “Beyond here is Iron”. Or is that another misconception?
Paul,
Those are striking numbers. But the problem with numbers is that they don’t really touch where it counts.
Here’s my requiem to a town called Gary, Indiana: a description of what happens to a town when its economic base shifts:
http://aussiemagpie.blogspot.com/2010/10/dust-in-wind.html
I found Paul Mason’s report (also linked from there) extremely moving.
Good post Marco, but I’d take issue with you that Gary, Indiana’s experience is alien to Australians as there’s no shortage of mining ghost towns here: Valhalla in Victoria and Hill End in NSW are two that immediately spring to mind.
@pfh007: I haven’t found a good data set yet, but the discussion here indicates that iron EDR grew by 8.9% in 2007 and production grew by 1.4% in 2008, so the prognosis there may be more benign at the moment.
Point taken, Paul!
Stubborn – a few belated observations:
1. as a budding power plant engineer in the early 1970s, I was led to believe that NSW had 400years “proven reserves” of coal at our then projected consumption rate.
2. It was the “proven reserves” and cost advantage or Coal that led to the canning of our politically inspired Nuclear Power Plant at Jervis Bay in c 1973!
3. Nuclear has not been econimically viable since – hence our penchant for exporting yellow-cake rather than using it. . . not to mention Labor Party philosophical objectionnnn – only easing recently.
4. The discussion so far does not qualify EDR as being based on economic viability only or whether it is affected by “green” opposition by farmers (under their farms/dams) OR Greenies under any ground, especially ground under national parks a or any other ground!
5. I’ve just returned from Vietnam where their installed capacity now exceeds Australia (I think), they are planning their Russian-developed Nuclear Power Plant for operation in 2020 and they are running out of their coal in a very few years, want to buy Aus coal, but cant get long term supply contracts on which to build their business cases for new thermal plants. Vietnam has quadrupled its installed generating capacity in the past decade!
6. Back to the EDR, it may not include coal energy available from “In Ground Coal Gassification” – now a proven technology but not yet widely commercially adopted – still more exxy than conventional thermal plants…… This may allow effective increase in EDR if not already counted.
7. The growing odium re coal burning will probably mean 40 years is plenty of time for Aus to “take the money and run!”
8. Yesterdays effective canning of the NWS Solar Panel industry has revealed the political tokenism of this scheme in the first place! – was always capped at 50MW in NSW – cf. installed capacity of about !4,000MW (my number may be a little out of date)
@OldFuzz: very interesting. I looked at the historical production data for 1973 compared to 2008 and 2008 and 2008 production was 5.14 times 1973 production. That means the EDR figure in the ABARE report is 462 times 1973 production, so all looks pretty consistent! It just reinforces the problem of quoting reserves as “so many years of current production” without taking production growth into account.
> @Mark: there is ABARE chart going back almost 30 years showing
> the coal EDR going nowhere
This is makes your argument far more convincing. In fact, it reinforces your argument by suggesting there have been only marginal additions to EDR over the 25 years.
But I still think there should be a fourth bullet point in your list of alternative truths, namely that identified coal deposits could grow. Between 1985 and 2003, coal prices fell quite steadily in real terms (see http://www.indexmundi.com/commodities/?commodity=coal-australian&months=300 for example). The more recent price rises since would not have had time to stimulate exploration that might elevate the 2007 EDR numbers. If prices continue to rise, it would be surprising indeed if EDR remained as flat as it has while prices fell. That is, unless you believe that all of the coal in Australia had already been discovered in 1985.
In any case, we need to get away from coal whether the stuff runs out or not.
Cheers,
Mark L
Mark: good point and I’ve put in an extra bullet point.
As many have noted – both the numerator and the denominator depend on economic incentives…there’s not a lot of return to putting resources towards identifying further coal reserves at the moment.
An interesting data point is that for the last 20 years, Australia’s consumption to EDR measure for oil has been 10 years! – it fluctuate a bit around that number, but the mean is around 10. You can calculate it from the ABARE dataset, though I haven’t done it for a few years.
That is, at any point in time for the past 20+ years, a naive reading of the ratio suggests there is only ’10 years of Australia oil remaining’.
Resources are limited but I’m not sure the adjective of ‘significant’ in your new 4th bullet point is required.
cheers,
Christopher
@Chris: by “significant” I mean more than doubling over the next 40 years. Some would see doubling to be a significant increase, but the inexorable logic of exponential growth shows that if production grows at 3.1% per annum, a doubling of resources only buys an extra 22 years. At 5%, a doubling only buys another 14 years.
As for oil, the estimated Australian resources have grown significantly in recent years. If you have a look at these ABARE charts the difference in the EDR trajectory is striking. Of course, it is possible that the coal resources will show a similar upward spike if price pressure stimulates enough exploration (and I would consider that “significant”). While I am no expert on minerals, I can’t help suspecting that we have a fairly good handle on the strip down the country where our coal is to be found. Oil and uranium may be a little more erratic in their distribution. If that is the case (and I certainly could be wrong here), it would be reasonable to see less volatility in EDR for coal than for other resources. So far, history is consistent with that thesis, but that could of course be an artifact that will change in the future. Time will tell!
Lastly, your oil example in fact illustrates my chief concern very well. My main concern is not whether or not we are going to run out of coal in 45 years, but that the standard practice of quoting reserves in terms of “so many years left (at current production rates)” without further qualification is misleading. If the reserves grow more slowly than production, that figure will be overstated, if they grow faster it will be understated.
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Mr Mule – It seems that you were paddling just ahead of the wave on this issue.
This article covers similar terrain and has links to the International Energy Agency’s outlook with forecasts through to 2035 and also a Nature article about the end of cheap coal.
http://www.climatespectator.com.au/commentary/coal-industry-energy-market-crash-world-energy-outlook-IEA-coal-demand
Looks like running out of stuff to dig up might be the least of the coal industry’s concerns.
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Coal reserves will grow, only doubling the current reserves is very conservative, there are many coal fields yet to be discovered and many reserve increases at current fields yet to be done.
Also you could easily double the price of coal and have 3 times as much coal become available that is other wise uneconomical.
Anyway, we will move past coal long before production peaks from supply problems.
new nuclear techs will mean infinate supply of energy, type “bill gates terra power” into you tube.
@cain there is no doubt that the growth of coal reserves (EDR) is very relevant to this discussion. While you say it would be easy to increase the coal reserves through new discoveries, the chart in this paper (about a third of the way down) showing the history of black coal EDR and after increasing from 1976 to 1986, the estimated reserves have in fact been falling since then.
@cain there’s a bit more discussion on this topic here.
Gday,
This report is more recent http://www.ret.gov.au/energy/Documents/facts-stats-pubs/Energy-in-Australia-2011.pdf
The ratio of economic demonstrated reserves (EDR) to current production is estimated at 539 years for brown coal, 111 years for black coal.
What are your thoughts on the useful life of coal today Stubborn?
@Jason: one of the possible scenarios I suggested in the post was: “There is a significant expansion in EDR in the future (much greater than we’ve seen over the last 30 years)”. Certainly there’s been a big tick up in EDR from 2008 to 2009. I can’t see the raw data in the report, but a sneaky bit of digitizing of the picture on page 6 suggests that the increase in EDR for 2009 is ranks fifth over the period in the chart (the top years of EDR expansion were, in order, 1987, 1979, 1977, 1984). It’s the biggest increase in 25 years! There’s no doubt that EDR growth at that rate will buy many more coal-burning years. It will be interesting to see if that growth rate is sustained. Thanks for the link!
Mark L – you say “we need to get away from coal whether the stuff runs out or not”. Why on Earth would we want to get away from coal? We have well-established coal-fired power stations with good pollution controls (that can in any case be improved further if necessary). These deliver large quantities of relatively cheap energy to Australian households and businesses. With Australia’s very large reserves of coal, and with other forms of energy still much more expensive, surely we should be expanding our use of coal, just like China, Germany, etc. When technology advances enough to make other forms of energy competitive, that’s when coal usage will naturally decline.
Global warming? The global climate has not warmed for 16 years, in spite of ever-increasing atmospheric CO2, and has now reached the point where the computer climate models have been invalidated (as per NOAA State of the Climate report 2008), so there is no climate-related reason for not using coal.
Superconductor electricity generation will extend the coal reserves by at least two hundred years.
We are still using primitive electricity generation methods
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Do you have any resent information around the year 2016 on how much coal is left?