Why the shale gas revolution has affected the coal industry

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Sep. 8 2014, Published 1:38 p.m. ET

The shale gas revolution

Over the past decade, companies have invested heavily in extracting gas trapped in shale rock formations thousands of meters below the Earth’s surface. The process wasn’t viable economically until the start of the 21st century. Technological developments in drilling and fracturing made shale gas extraction an attractive investment proposition for these companies. This led to a boom in shale gas production starting mid-2000s, which in turn led to a sharp decline in gas prices in the U.S. Shale gas is now the biggest contributor to the overall natural gas production in the U.S.

According to projections from the U.S. Energy Information Administration (or EIA), shale gas production is expected to continue to grow in the coming years. As a result, the use of natural gas for electricity generation will grow as older coal-fired power plants are retired and replaced.

How does this affect the U.S. thermal coal industry?

With the shale gas boom, natural gas prices dropped. To take advantage of this drop in gas prices, electricity producers added new gas-fired capacity. Plus, existing coal-fired capacity was converted into gas-fired capacity.

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As a result, coal lost its market share in electricity generation from over 50% a decade ago to 39% in June 2014. Lower demand for coal has affected major coal producers (XME) like Alpha natural Resources (ANR), Peabody Energy (BTU), Arch Coal (ACI), and Cloud Peak Energy (CLD). The SPDR S&P Metals & Mining ETF (XME) invests in metal and mining companies and has invested in major coal producers.

Along with the shale gas boom, regulatory and environmental issues are also affecting coal producers. Read on to the next part of this series to learn more.

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