Coal mining policies need an overhaul

Coal mining sector needs structural overhaul to attract investments that can help the sector meet growing needs for raw material for power, steel, cement and other usages. The sector has been traditionally dominated by the government-owned companies and with limited participation from the private sector. In the current financial crisis this may have been a boon as the government-owned companies have healthier cash positions to keep their capital expenditure plans intact. But there is no denying that private sector participation is a must for augmenting coal production. The Government has indeed made strides in this direction by allowing captive mining for various approved end usages. However, there is a need for streamlining the allocation process as also a need to monitor the progress of project implementation more closely and facilitating the process.

Government may provide roadmap for amendment to MMDR Act to ascribe marketability to prospecting and mining licenses will help the sector reap risk capital and will make exploration a sustainable business for private investment. Government may also facilitate creation of alternate investment market that will provide much needed funds to support prospecting and exploration activities. For this the capital markets need to get prepared as well. Disinvestment through IPO routes and enhancing public floats in listed coal mining companies may enhance the market depth for mining sector investments. Traditionally, Indian mining sector has not been attractive for private equity (PE) firms due to challenges unique to the industry. In India, private sector companies that could potentially be targets for PE funds, have had restricted participation. The miners have traditionally been price takers till recently and have, even globally, underperformed the markets. There are talks of institutionalizing regulatory mechanisms for pricing coal. All these developments put together, financing coal mining projects may present unique challenges.

Political and social issues have become more prominent than ever, with cases of state governments asserting their rights over mineral properties and societies around mineral deposits resisting mining activities quite vociferously. A consequence of these is also the reputation risk, where a Machiavellian wisdom may lead to impairment of brand. Government may need to devise a policy for better settlement of land acquisition issues as much as the industry needs to consider sustainable coal mining with a clear view on social vale addition.

Incentive may be provided to encourage innovation and adoption of cutting edge technologies, more so in coal mining sector where the cut-off depth is likely to require capacity additions in underground mining. Underground mining can serve the purposes of environmental risk mitigation and quality consistency. However, the economics of underground mining are not so favorable when compared with the surface mining methods. The constraints are also from the productivity perspective. In India the productivity of underground mines traditionally has been fairly low. From the mineral conservation perspective, bord & pillar method of underground mining has been quite inefficient with coal recoveries as low as 35-40%. Longwall mining method, although more efficient and mechanized, has not been quite successful in India due to highly faulted geological conditions in Indian coalfields. Strata control has been difficult too in longwall mining. However, with environmental concerns being more and more important, it may be worthwhile to consider underground methods with mass production capacities. The underground mining methods are also expected to reduce procedural delays due to lower environmental damage and lower land requirements for waste dumping, and others. Also, government on its part may like to provide fiscal incentives, including but not limited to reduction in duties on capital equipment.

Competitive bidding for mining license allocations has its pros and cons. The method will enhance transparency and objectivity and may have inherent commercial mechanism to hasten project implementation. The current methods of allocation on point scale on a host of variables ranging from net-worth to extent of completion of the end use projects, and with recommendations from several stakeholders, have inherent subjectivities. This approach may not suffice the purposes of most efficient usages of coal, their conservation and earnings for the government. The point scale basis becomes ineffective when the number of applications is large. The 750 applications for 18 coal blocks identified for power sector in the last round of allocation is a case in the point, where the parameters chosen for development of scale resemble qualifying criteria and make it almost impossible to decide on allocation without a fair bit of subjectivity. Competitive bidding is likely to result in objectivity. Depending upon how these are structured (initial bullet payment, production sharing, revenue sharing or profit sharing) there may be cost implications. But looking at the bigger picture and the urgency to develop new mines, the pros certainly overweigh the cons. Government also needs to then de-risk the mining projects from delays due to approvals and clearances required to make the assets lucrative investment targets.

Proposed coal regulatory mechanism is unique to India which has its roots in the coal market structure and energy affordability. Pricing of coal by the government owned coal producing companies have thus far been opaque, even though prices have been lower than the international prices on energy-equivalence basis. The absence of a vibrant market with large number of buyers and sellers coupled with supply constraints have made fair pricing a difficult proposition in the Indian context. The policies framework should aim at a market driven pricing mechanism, however, till the time it is established, coal regulator may be required.

There are other technologies that can complement traditional coal mining activities and help India secure its energy needs. Underground coal gasification (UCG) is one of the key technologies which can also help tapping coal resources that can not be mined economically with the existing mining technologies. It has been assessed that coal that are deep seated, particularly so the tertiary reserves in Gujarat, are amenable to underground gasification. This method of energy extraction from coal reserves will not be competing with the coal available for other purposes and will only convert a potential into exploitable resource. UCG also will provide energy with minimum surface disturbance and no requirement of surface disposal of ash. There are, however, some unique application prerequisites for UCG like the coal seam being under water aquifer and impervious rock bed; and coal seams being relatively uniform and un-faulted. The applicability of the technology, therefore, needs to be assessed in greater details in light of the geological conditions in Indian coalfields.

Coal-to-liquids (CTL) and coal-to-gas (CTG) conversions are now included as approved end-usage for captive coal mine allocation, and recently, two coal blocks have been allocated for these purposes. The technologies have been commercially proved globally and can help India reduce oil imports. According to some media reports, coal conversion to petroleum products becomes economically viable if the crude prices are above a certain threshold for a barrel. In light of the recent peak prices and future expectations, the CTL technology appears viable. Production of petroleum products from coal will reduce country’s import dependence particularly so from the politically unstable locations. Production of intermediate syn-gas can be useful even for fertilizer production and replace usage of naphtha.

The other prominent ways of extracting value from coal are coal bed methane (CBM), coal mine methane (CMM) and abandoned mine methane (AMM). In India, CBM has been more successful than the others. Recently, first CBM based CNG gas station has been reported to be opened in West Bengal, which is likely to enhance investor confidence. Coal India Limited has also initiated the process of developing CMM and AMM resources through public-private-partnership. It, however, remains to be seen if the initial interest exhibited by the bidders culminates into commercial exploitation of methane, which also is good for carbon credits.

A comprehensive policy is required to be formulated for the purpose of effective and efficient utilization of nation’s coal resources. The abundance of coal promises to provide energy at affordable prices and can be substitute of expensive imports to significant extent. However, the technological and economic viability have to be established and the government-owned agencies as well as private and foreign participants need to be provided incentives to invest in the sector. Provision of energy is paramount to the continued growth of the economy and harnessing coal resources is undoubtedly one of the most important ways to secure India’s energy needs.