Coal mining is also a highly dangerous occupation in certain countries. In the US, more than 100,000 coal miners were killed in accidents during the 20th century, while many others suffered from long-term illnesses as a result of breathing coal dust. The fatality rate in the US has fallen dramatically in recent years as a result of improvements in technology and stricter safety standards, but globally the number of annual fatalities remains high. In China, for example, thousands of miners are killed on the job each year.

Coal mining also scars the landscape. In recent years, the practice of mountaintop removal has come under criticism. This practice sometimes involves dumping the mountaintop overlying a coal seam into neighboring valleys, which can bury streams and change the hydrology of the area. Studies have documented that this practice can lead to increased flooding of downstream areas and a degradation of downstream water quality.

China dominates global coal production, producing 47% of the world’s coal in 2013 and consuming just over 50%. Even so, Chinese coal companies have not managed to escape the market carnage experienced by major US coal producers like Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI), which have seen their share prices decline by 80% and 90% respectively since early 2011. For instance, the stock of major Chinese coal producer Yanzhou Coal Mining (NYSE: YZC), has also dropped nearly 80% since 2011.

Natural Gas

Natural gas is the cleanest of fossil fuels when burned, because it contains a much higher percentage of hydrogen than coal or oil. The hydrogen portion of the molecule ends up as water when it is burned. As a result, natural gas produces only about half as much carbon dioxide as coal per unit of electricity produced.

Natural gas is used for power production, heating homes, cooking and water heating, as transportation fuel, and as a feedstock for the petrochemical industry. Most of the hydrogen produced in the world is made from natural gas, which is also the main input in the production of fertilizer.

But even though the emissions from burning natural gas are lower than those for oil or coal, it is still a fossil fuel and does produce carbon dioxide when burned. Further, methane — the predominant component of natural gas — is a much stronger greenhouse gas than is carbon dioxide. This means that natural gas that leaks to the atmosphere during production or in transit to customers worsens the greenhouse gas impact. In fact, some studies have suggested that natural gas is actually worse overall than coal because of these leaks. (Most studies conclude that the leaks are relatively small, and therefore there is in fact a net greenhouse gas benefit in switching from coal to natural gas.)

The practice of hydraulic fracturing (fracking) has also raised questions about the effect of natural gas production on its immediate environment. Fracking involves pumping water, chemicals, and a proppant (typically sand) down an oil or gas well under high pressure to break open channels in the reservoir rock.

The 2010 documentary Gasland fanned the flames of fear regarding the risk from fracking to water supplies. However, fracking has been applied more than 1 million times in the US, and is carried out on some 60% of all oil and gas wells drilled in the world. The thousands of layers of solid rock that generally separate aquifers from production zones where fracking takes place present a formidable barrier against migration of fracking fluids. The US Environmental Protection Agency (EPA) administrator has testified that the agency is unaware of any incidents of water contamination caused by fracking.

There have been some cases of water contamination in which fracking had been suspected as the cause, but last week a two-year federal study concluded that fracking was not responsible for the water contamination. Instead, defects in well integrity were in some cases to blame. Nevertheless, whether contamination was caused by the actual act of fracking or by leakage from a well passing through an aquifer, the study acknowledges that natural gas production poses some risk to water supplies.

There are also strong indications that the reinjection of wastewater into the ground following the fracking process can cause earthquakes. Several studies have pointed to a direct link between an increase in fracking in an area and the rise in the prevalence of earthquakes. Prior to the fracking boom, Oklahoma averaged one earthquake a year with a magnitude of at least 3 on the Richter scale. During the first half of 2014, Oklahoma had 258 earthquakes in that range, nearly twice as many as California.

In any case, the fracking boom has vaulted the US into the position of the largest natural gas producer in the world. As of the second quarter of 2014, the top five natural gas producers in the US were ExxonMobil, Chesapeake Energy (NYSE: CHK), Anadarko Petroleum (NYSE: APC), Southwestern Energy (NYSE: SWN) and Devon Energy (NYSE: DVN)    

Conclusions

Fossil fuels continue to dominate the global energy trade, but their convenience comes at a cost that isn’t always reflected in the price consumers pay. But this is true even for renewable energy. There are always trade-offs between price, convenience and external costs. Next week I will examine the benefits and drawbacks of nuclear power and renewable energy.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Munich Calling

Is it really possible that less than six months ago Dresser-Rand (NYSE: DRC) investors were preoccupied the possible effect of retroactive tariff cuts for Spanish waste treatment plants on annual earnings?

Yes, and as we wrote at the time, to focus on the company’s problem with pig waste was to miss the point. As a maker of large compressors for the energy sector, Dresser-Rand was always an attractive late cycle play, with demand for its products likely to keep rising well after the domestic drilling peak and with half of its revenue derived from after-market service.

A year earlier, during another after-earnings dip we noted the company’s attractiveness to potential acquirers, notably Germany’s Siemens (OTC: SIEGY), which has been kicking Dresser-Rand’s tires for years.

Siemens finally concluded its methodical pursuit Sunday, winning a bidding war for Dresser-Rand by agreeing to acquire it for $83 a share, all in cash. Siemens will also pay an additional $0.55 per share per month if the deal does not close before March 1.

That will bump the Growth Portfolio’s return on a recommendation made not quite five years ago to approximately 165%, not bad even in the context of this bull market and well above the typical energy stock’s return.

My personal contribution to this success was limited to recommending over the last 18 months that readers overlook the company’s frequently disappointing results relative to forecasts.

This was one of those cases where the long-term value of the assets outweighed short-term fluctuations in performance or the share price, in the end.

Since Siemens is as reliable a buyer as they come, there’s no harm in waiting a week or two on the off chance of a higher bid, however unlikely. We’re changing our recommendation on Dresser-Rand to Hold, and will likely change it again to a Sell next month.

There’s been a lot of news on portfolio companies of late, along with some interesting industry developments. This week’s issue of The Energy Strategist will have updates on Seadrill (NYSE: SDRL), Continental Resources (NYSE: CLR) and Gastar Exploration (NYSE: GST).
      
                                                                                                                                — Igor Greenwald