A COST-BENEFIT ANALYSIS OF THE DEEP-DRAFT DREDGINGOF COAL PORTS ON THE EAST AND GULF COASTS OF THE

UNITED STATES

by

Stephen C. Graves*Mel Horwitch*

Edward H. Bowman**

October 20, 1983 1496-83

*The Sloan School of Management, Massachusetts Institute of Technology**The Wharton School, University of Pennsylvania

A COST-BENEFIT ANALYSIS OF THE DEEP-DRAFT DREDGING OF COAL PORTS

ON THE EAST AND GULF COASTS OF THE UNITED STATES

by

Stephen C. Graves, The Sloan School, MIT

Mel Horwitch, The Sloan School, MIT

Edward I. Bowman, The Wharton School, University of Pennsylvania

October 20, 1983

PLEASE DO NOT REPRODUCE WITHOUT PERMISSION OF THE AUTHORS

Executive Summary

This study deals with the question of whether U.S. society as a whole

should invest in large-scale coal port development. The analysis takes a

total system perspective with regard to costs and benefits. The analysis

does not try to attribute the costs or benefits of dredging to the various

parties involved in the coal trade. Rather, the analysis assumes that

society, as a whole, will both pay the costs and receive the benefits from

dredging.

The study focuses specifically on the question of whether U.S. society

should finance the deep-draft dredging of coal ports on the East and/or Gulf

Coasts so that newly dredged ports can accommodate fully loaded, large (over

100,000 deadweight tons) coal-carrying colliers in order to export coal to

Western Europe.

Although keeping in mind the great complexity of the coal-port issue,

involving economic, logistical, and political factors as well as others, the

core of this analysis is based on a large number of different simulations

--in effect, scenarios-- using a mathematical programming model to perform

the various analyses. For each simulation the model "optimizes" the United

States-to-Western Europe coal trade for a given demand level and ocean

transportation cost structure. Considering only the ocean transportation

costs and port dredging costs, the model finds the least-cost solution for

satisfying export demand. Although the analysis is based on a relatively

simple model, we argue that the strength of the model is that it clearly

focuses upon the key tradeoff in the coal-port issue, namely the cost of

dredging versus the potential reduction in ocean transportation costs.

The major set of simulations included the ports of Baltimore, Hampton

Roads, Mobile, and New Orleans. In addition, a special set of runs also

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included the Port of New York. For our various demand scenarios we

aggregated the demand centers into two major and representative clusters:

Northwest Europe (Rotterdam) and Mediterranean Europe (Taranto, Italy).

The most striking aspect of our conclusions is the robustness of two

solutions: no dredging (the status quo) or dredge only Hampton Roads to 55

feet. If one is somewhat conservative regarding demand projections and

requires a relatively high hurdle rate for a societal return-on-investment,

then a no-dredging option makes a great deal of sense for American society

as a whole. But if one believes that coal demand will ultimately increase

at a medium or high rate or that we can accept a relatively lower societal

return-on-investment, then dredging only Hampton Roads is the clear choice

for a wide range of alternatives. Moreover, if one assumes that the long-

term growth of U.S. coal exports will continue, then dredging Hampton Roads

may also make sense as an "insurance policy," since this solution is also

economically sound under a wide number of conditions. The United States has

no deep-water coal port at present. Even when we include the option of

dredging the Port of New York in our analysis, the solution of dredging

solely Hampton Roads to 55 feet emerges as optimal under a number of likely

conditions.

The study lends support to those recommending caution in approaching

coal-port development. There was no justification for dredging all deep-

draft options simultaneously. In fact, what is very clear is that the con-

current dredging of more than one port is unwise unless one supports the

most optimistic projections for coal-export demand or relatively low real

interest rates over the long run. Moreover, under no condition that we

examined does it make sense to dredge either of the Gulf ports --Mobile or

New Orleans-- before dredging Hampton Roads or Baltimore.

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l1

Acknowledgements

In the course of doing the initial field research and later data

collection, model building, and simulations for this report we were extremely

fortunate to have the cooperation and/or support of many organizations. We

must particularly thank several helpful officials, analysts, or managers in

the Illinois Central Gulf Railroad, the Norfolk and Western Railroad, A. T.

Massey Company, Ryan-Walsh Stevedoring Company, the Port of New Orleans

Authority, the U.S. Corps of Engineers in Washington and its District Offices

for Baltimore, Mobile, New Orleans, and Norfolk-Hampton Roads, the City of New

York, the New York Port Authority, Shell Coal International, R. S. Platou, IEA

Coal Research, the International Bulk Journal, and the Center for Energy

Policy Research at MIT. Of course, we take full and sole responsiblity for

our analysis and its conclusions.

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TABLE OF CONTENTS

Page

Executive Summary

Acknowledgements

Table of Contents

List of Tables

Section I. Introduction

Section II. The Model

A. Orientation of the Analysis

B. A General Discussion of the Model

C. Formulation of the Model

Section III. Data Used in the Analysis: Sources, Assumptions,and Discussion

A. Demand

B. Port Data: Cost of Capital, Capacity,and Dredging Costs

C. Ocean Transportation Cost Savings

Section IV. Model Runs with Hampton Roads, Baltimore, Mobile,and New Orleans

A. Overview of Model Runs

B. An Illustration

Section V. Model Runs that Include the Port of New York

Section VI. Conclusion

Tables

References

-iv-

i

iii

iv

V

1

7

7

8

13

17

17

18

20

25

25

25

29

31

36

77

LIST OF TABLES

Table

1. Trends in U.S. Coal Production and Exports

2. U.S. Bituminous Coal Exports, 1973-1981

3. U.S. Coal Exports: Comparison of EIA Projections With

Other Projections, 1985-2000

4. Survey of World Ports With Existing and Planned Operating

Channel Depths in Excess of 45 Feet

5. Cost Estimates: Deep-Draft Navigation Projects Over 45 Feet

6A. U.S. Metallurgical Coal Exports-Projections

6B. U.S. Metallurgical Coal Exports From Selected

U.S. Ports in 1981

7. Projected U.S. Steam Coal Exports From East Coast

and Gulf Ports: 1990

8. Projected U.S. Steam Coal Exports From East Coast

and Gulf Ports: 2000

9. U.S. Coal Export Demand Scenarios

10. Port Capacities

11. U.S. Coal Shipments

12. Dredging Depth Options and Costs

13. Ocean Transport Assumptions

14. General Relationships Between Port Draft and Ship Size

15. Assumptions Regarding the Relationships Between Port

Draft and Ship Size That Are Used in the Model

16. Assumptions for Transportation Costs of R.S. Platou

LIST OF TABLES(Continued)

Table

17. Ocean Transportation Cost:

"Low Cost Savings" Case

18. Ocean Transportation Cost:

Hampton Roads-Rotterdam Under

Hampton Roads-Rotterdam

Under "High Cost Savings" Case

19. Ocean Transportation Cost: Hampton Roads-Taranto,

Under "Low Cost Savings" Case

20. Ocean Transportation Cost: Hampton Roads-Taranto,

Under "High Cost Savings" Case

21. Ocean Transportation Cost: New Orleans-Rotterdam

"Low Cost Savings" Case

22. Ocean Transportation Cost: New Orleans-Rotterdam

Under "High Cost Savings" Case

23. Ocean Transportation Cost: New Orleans-Taranto, I

Under "Low Cost Savings" Case

24. Ocean Transportation Cost: New Orleans-Taranto, I

Under "High Cost Savings" Case

25. Ocean Transportation Costs

Italy

Italy

Under

taly

taly

26. Results of Model Runs

27. A Summary of Dredging Solutions in Tables 26A - 26G

28. Model Runs That Include the Port of New York

29. Dredging Solutions Under Various Transportation

Cost Savings for the Port of New York Over Hampton Roads

30. Cost Breakdown for Four Dredging Cases

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Section I

Introduction

The spectacular rise of the world's seaborne coal trade in the late

1970's and early 1980's is one of the most dramatic recent trends in the

whole field of energy. Signalling a new public awareness of this

development, the World Coal Study in mid-1980 called attention to the

emergence of a growing coal export market --describing coal as a "bridge to

the future"-- and predicted that world coal production would have to

increase 2.5 to 3 times between 1977 and 2000 to meet world energy

requirements. This overall growth, according to that report, would result

in a 15-fold rise in the world steam coal trade during that 23-year period.

(World Coal Study, 1980A and 1980B).

The prospect of the huge coal export market that the World Coal Study

identified has created a new set of challenges, opportunities, and threats

for the U.S. coal industry and for U.S. society as a whole. One major issue

that arose as a result of the surge in coal exports, and one that is still

with us today, is coal-port development. There are at least two related

major aspects of the coal-port expansion issue: (1) a possible lack of

capacity to meet near-term and long-term U.S. coal-export demand and (2) a

possible loss of world market share in the long-term. U.S. society now

faces the difficult and controversial tasks of evaluating the capability of

its present infrastructure for the export of coal and of determining the

societal cost-benefit of and strategy for investing in coal-port expansion.

This study focuses on an important part of the overall coal-port

societal-cost-benefit issue. The study deals with the specific question of

whether U.S. society, as a whole, should finance the deep-draft dredging of

coal ports on the East and/or Gulf Coasts so that newly-dredged ports can

accommodate fully-loaded, large* coal-carrying colliers for exporting U.S.

coal to Europe.** At present, no U.S. coal port can handle a fully-loaded,

large collier from berthside.

The coal-port issue is clearly a richly multifaceted one. The

complexity of the issue is due to several factors, including the apparent

suddenness of the growth of the world seaborne coal trade, the uncertainty

that now surrounds its future demand-growth pattern, the long-term nature of

important outcomes, and the wide array of nonmarket stakeholders who have

attempted, or may attempt in the future, to influence coal-port policy

making.

The abrupt surge in coal exports can be illustrated by a few

statistics. Worldwide, the total coal trade in 1960 was about 113.3 million

short-tons, in 1970 about 186.4 million short-tons, in 1979 about 252.4

million short-tons, and in 1980 about 282 million short-tons (ICE Report,

page 24; H. P. Drewry, page 11). In other words, between 1960 and 1970, the

world coal trade increased by practically two-thirds, and between 1970 and

1980 it grew again by over 50 percent. Indeed, from 1979 to 1980, the world

coal trade increased by about 11 percent. The cause of this spectacular

rise in the 1970's was the tremendous increase in the world steam coal

trade. In 1970, steam coal accounted for about 19 percent of the world

*"Large" is defined as over 100,000 DWT. DWT is a "deadweight ton" and isapproximately the volume of a metric ton; it is used to describe thecarrying capacity of colliers.

**In this study, we do not deal with the question of who should pay for thedeepening and maintenace of coal ports. Therefore, for example, we do notaddress the issue of devising an optimal user-fee policy. For a usefuldiscussion of that issue, see U.S. Department of Energy, May, 1983.

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seaborne coal trade; in 1980, this figure had grown to 38 percent (H. P.

Drewry, page 13).

A parallel pattern can be discerned for U.S. coal exports, as seen in

Table 1. Annual U.S. coal exports practically doubled between 1960 and

1970, and grew by over another 50 percent in the next 11 years. Although

the growth pattern is uneven, export coal's share of total U.S. production

has tended to increase: 8.7 percent in 1960, 11.8 percent in 1970, and 13

percent in 1982. As seen in Table 2, the proportion of metallurgical coal

has declined during the 1970's and early 1980's, as steam coa's share of

U.S. coal exports has risen. Note especially the dramatic increase from

1979 to 1980 of steam coal exports and its share of total experts, and an

even more spectacular increase from 1980 to 1981, when steam coal captured

about 40 percent of total U.S. coal exports.

This growth of both the world coal trade and of U.S. coal exports,

especially steam coal exports, in the long term is expected to continue.

One typical projection has the total world seaborne coal trade growing from

205.7 million short-tons in 1980, of which 78.1 million short-tons or 38.0

percent is steam coal, to 469.7 million short-tons in 1990, of which 282.7

or 60.2 percent is steam coal (H. P. Drewry, page 20). Similarly, dramatic

growth rates for U.S. coal exports have been projected, as seen in Table 3.

Forecasts for 1990 range from 99 million short-tons to 152 million short-

tons. (U.S. coal exports in 1982 were about 105 million short-tons and are

estimated at only 74 million short-tons for 1983.) (Evered, 1983; "For Coal

the Recovery is Heating Up Slowly," 1983.)

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The issue of U.S. coal-port capacity quickly emerged as a public

policy issue during 1979 and 1980, with the great rise of U.S. coal

exports. The rapid expansion of coal exports at that time appeared to

exceed the capacity of coal ports on the East Coast. Queues of ships, at

times as many as 90, waited to enter the ports, incurring demurrage charges

as highl as $15,000 per ship per day. However, by late 1981, more effective

scheduling procedures had essentially eliminated these lines. Still, due to

both this bottleneck experience and the growth projections of U.S.

coal-export demand, proposals emerged, and continue to emerge, for expanding

and dredging a number of U.S. coal ports.

The general argument usually put forth for dredging coal ports is that

in order for the United States to export coal to its full potential, it must

be able to accommodate large coal-carrying vessels and take advantage of the

resulting cost savings. As one study stated, "Whether the U.S. captures an

18 percent (at present) or a potential 38 percent share of this market will

depend upon how quickly it can develop its ports, thus demonstrating its

commitment to expand steam coal exports and enabling coal exporters to

negotiate long-term supply contracts with leading importing nations in

Western Europe and the Pacific Basin." (U.S. House, Port Development,

March, 1982, page 24.)

According to this report and others, large coal colliers are

accounting for a greater share of the coal seaborne trade due to the

economics of marine transportation. The transportation cost savings of

shipping coal in an 150,000 DWT ship instead of an 80,000 DWT vessel are

estimated by some to be as high as 40 percent, representing perhaps 6 to $8

per ton in the delivered cost of coal. Moreover, other coal-exporting

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nations are dredging ports or have deep-water ports, as do certain importing

countries. Table 4 provides a survey of deep-water ports. Table 5 provides

a listing of the proposed U.S. deep-draft navigation projects, estimated to

cost in total over 2 billion.

The coal-port question is also an intensely political and

controversial issue, with several ports competing for federal funds. A

major part of the debate is over the level and share of federal funding

(U.S. Department of Energy, May, 1983). Coal-port development seems to

involve public relations as much as economic analysis and has even become

intertwined with general issues related to economic recovery, international

trade, and national industrial policy. As one representative pro-dredging

argument states:

In light of these trends and conditions, the future of portdevelopment in the United States is at a crossroads. The U.S. has aunique opportunity to expand its steam coal exports with the potentialof emerging as the leading exporter of steam coal through the balanceof the century. Continued expansion of coal exports offers thepotential for an export-led domestic economic recovery, including theprospect of permanent equilibrium in our international trade balanceas early as 1995 through targeted trade pattern stabilization. Portdevelopment will generate thousands of new obs in the domesticeconomy and increase private income and governmental tax revenues atall levels. It will provide the needed impetus for revitalization ofour domestic transportation system by contributing to capitalinvestment in rail, port, and pipeline improvements.

However, in order to realize these national and regionaleconomic benefits, the U.S. must act expeditiously within the next 3to 5 years to develop deep-draft ports in response to work, coalmarket demand and international maritime operating requirements. Itmust do so in an era of Federal budgetary limits. The accomplishmentof this objective will require an unprecedented level of governmentaland private sector cooperation in port development. If the nationalsystem of deep-draft commercial ports is to meet the challenge ofincreased international trade and foreign waterborne commerce(particularly in dry-bulk commodities such as coal and grain), thenthe interrelated processes of deep-draft navigation improvement,project authorization and environmental assessment and regulatoryreview of new and existing deep-draft channels on both a port- andsystem-wide basis must be streamlined through meaningful proceduralreform. (U.S. House, Port Development, March, 1982, page 25.)

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In spite of the rhetoric, however, a careful assessment of the

coal-port issue from a societywide and total systems cost perspective still

remains to be done. Irrespective of who pays --government, users, or both--

U.S. society as a whole still should attempt to determine whether such an

investment or at what level such an investment makes sense. We aim to take

a societal cost-benefit perspective in beginning to provide at least partial

answers to these questions. We will try to use such a perspective in

focusing specifically on the coal-port dredging issue as it relates to the

East and Gulf Coasts.

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Section II

The Model

A. Orientation of the Analysis

To address the key issues of developing large deep-water coal

ports, which basically deals with the specific choice of dredging a

port or set of ports to some level of depth or not dredging at all, we

have used a mathematical programming model to perform a set of

analyses.

The examination takes a societal view and attempts to determine

which, if any, of the most likely dredging options can be economically

justified. The study is restricted to considering the export market

for coal from the East and/or Gulf Coasts to Western Europe. For this

export market, the model determines, under various demand and cost

scenarios, the most cost-effective solution, taking into account the

dredging options, for shipping coal to Europe from the East and/or

Gulf Coasts of United States.

The analysis takes a total system perspective with regard to

costs and benefits. Unlike several studies (e.g. U.S. Department of

Energy, May, 1983), the analysis does not try to attribute the costs

or benefits of dredging to the various parties involved in the coal

trade. Rather, the analysis assumes that society, as a whole, will

both pay the costs and receive the benefits from dredging.

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B. A General Discussion of the Model

To further describe the analysis, we need to introduce, at least

qualitatively, the model that underlies the analysis. A more formal

presentation of the model is given later.

The model addresses an optimization problem of the following

form:

Minimize "Total Annual Trans-Atlantic Shipping CostsPlus

Annualized Dredging and Maintenance Costs"

Subject to:

Satisfying a given Western European demand for U.S. coal - bothsteam and metallurgical.

Without exceeding given expected port throughput capacities atthe U.S. ports.

And ensuring that each U.S. port handles a given minimal amountof export coal.

The key inputs to the model are as follows:

(a) Per ton ocean shipping costs from each U.S. port to Europeandemand centers for each possible depth at the U.S. port.

(b) The dredging cost and annual maintenance cost for each dredgingoption at each port. The one-time dredging cost is annualizedby a capital cost rate that must also be an input.

(c) Expected annual demand for U.S. coal (steam and metallurgical)at each European demand center.

(d) Expected coal-handling capacity, measured in short-tons peryear, at each port that will be available for satisfyingEuropean demand.

(e) Expected minimum annual volume of export coal to Europe to behandled by each port.

The outputs from the model are:

(a) Specification for each port of the most cost-effective dredgingdecision (e.g., no dredging, dredge to 50 feet, or dredge to 55feet).

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(b) Specification of the most cost-effective flow of coal thatsatisfies the demand and capacity constraints of the model.That is, for each demand center the model specifies how muchwill be shipped to the demand center from each U.S. port.

While this model is reasonably straightforward, we are well

aware that there are more complex representations available. Yet,

after extensive discussions and consideration, we would contend that

such increasingly complex models are of little additional value in

considering the question of dredging. Moreover, our model has the

advantage of focusing on the most important aspects of coal port

development. In particular, with our model we can show under what

circumstances the transportation benefits from deeper ports ustify

the costs of dredging. This seems to us to be the key economic

tradeoff in the dredging controversy.

We offer the following observations with regard to the model,

its assumptions, and our use of the model:

(a) The model "optimizes" the U.S.-to-Europe coal trade for a given

demand and transportation cost structure. Consequently, the

analysis does not consist of one run of the model and one

solution. Rather, we use the model as an analytical tool for

looking at a wide range of possible scenarios. For instance, a

key input parameter that is varied is total European demand for

U.S. coal. We consider our various demand levels corresponding

to a series of forecasts that range from low-growth projections

for 1990 up to the most optimistic forecasts for 2000.

(b) The model itself is a static, single-period model that

"optimizes" over a one-year snapshot. Each model run, in

effect, represents one scenario. For instance, one run might

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represent the best forecasts for year 1995. Clearly, though,

the question of dredging is a dynamic, multi-year decision

problem. Indeed, some dredging proponents would say the

question is not whether to dredge, but when to dredge. We could

have formulated and developed a multi-period model rather than a

static, single-period model. However, we viewed such a task as

not being worth the substantial effort that would be required to

develop a dynamic model. Moreover, such an effort may even

unnecessarily complicate our main task. By running our static

model under a diverse array of possible scenarios we believe

that we accomplish, at least partially, a dynamic analysis and

sufficiently approximate such a more complex examination.

Indeed, as will be seen, the results of our various simulations

do suggest at what points in the near future and under what

circumstances various dredging options become economically

feasible. In fact, the likely set of options narrows

considerably and, as also will be seen, there actually seems to

be really only two "robust" solutions under a wide range of

conditions.

(c) With our model, we attempt to minimize the total cost of

dredging plus the total ocean transportation cost for moving

coal from the U.S. to Europe. No other costs are considered.

Consequently, in determining how the coal should optimally flow

to Europe, for cost reasons, we always prefer to ship from the

closer East Coast ports rather than the Gulf Coast ports, and

prefer to ship from a dredged East Coast port rather than a

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II

nondredged East Coast port. In essence, we assume that the

price of coal at the U.S. port, prior to shipment, is the same

for all ports under consideration. (This could easily be

changed to differentiate the price of coal according to port of

embarkation.) In addition, we do not distinguish between types

of coal, e.g., low-sulfur vs. high-sulfur. The model, though,

due to the port capacity restrictions* and due to the variety of

dredging options (i.e., a dredged Gulf Coast port might be

preferred to a nondredged East Coast port), does not allocate

all of the coal demand to the East Coast ports.

(d) In the model, we assume that the domestic U.S. logistical

infrastructure for moving coal from the mine to the port has

sufficient capacity and will not restrict the coal throughput at

any of the ports. Rather, the only constraint at each port is

the coal-handling capacity of that port's coal facilities.

(e) Similarly, we assume that both the European ports and the

European coal logistical infrastructure provide no constraints

to the movement of coal. Hence, if a U.S. port is dredged to 55

feet, then we assume that all coal that is shipped from that

port to Europe goes to European ports that are at least 55 feet

deep and can be transported efficiently to the ultimate user.

Consequently, we assume that we can fully exploit the potential

*The concept of port capacity is somewhat ambiguous, especially at a portlike New Orleans where extensive midstreaming is possible. Essentially,we use the general categories for capacity of "existing," "underway," and"planned," measured in tons per year, as given in the literature on coal-port development.

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benefits from dredging a U.S. port; that is, the dredged U.S.

port receives the largest ship possible and achieves the

greatest transportation savings for the coal that it ships. In

effect, we act as if Europe is fully-dredged and able to capture

the benefits of large vessels. We then ask what should the U.S.

dredging policy be. Therefore, if anything, there is an

implicit bias in favor of dredging, at least in the construction

of this model.

(f) We also assume no fleet constraints on the size and type of

ships for moviIg coal. All coal shipped from a U.S. port is

assumed to be shipped on the largest possible class of ship that

can enter the U.S. port (e.g., a Panamax vessel for a port with

a 40-foot draft), and hence goes at the lowest possible cost.

Again, it should be noted that this assumption also implicitly

is biased in favor of dredging.

(g) The analysis does not consider any non-coal benefits from

dredging, such as lower shipping costs for other commodities.

This is consistent with the view that the coal trade to Europe

is the primary ustification for dredging the ports of the East

Coast and Gulf Coast (Another recent study that takes a similar

position is U.S. Department of Energy, May, 1983).

(h) We assume that there are no benefits from dredging for U.S. coal

going to non-European destinations. However, we have reduced

the throughput capacity at each port by an amount corresponding

to the expected volume of coal going to non-European

destinations. We believe this assumption to be reasonable,

since the coal volume from the ports under consideration to

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11

non-European destinations, with the exception of Japan, is small

in nature and is unlikely to go in deep-draft ships due to port

and demand constraints on the receiving end.

The lack of benefits for the Japanese coal is less clear,

although we offer two comments. Firstly, from the East Coast

and Gulf Coast, any deep-draft ship could not go through the

Panama Canal and must make a much longer trip around Cape Horn.

Secondly, many experts expect that West Coast ports will handle

most of the projected growth in the Japanese steam coal trade.

In summary, we have taken a perspective that focuses on

what we believe to be the key tradeoff: the cost of dredging

versus the ocean transportation savings of moving coal from the

United States to Europe in large coal-carrying colliers. The

preceding observations and assumptions are made primarily to

highlight this tradeoff.

C. Formulation of the Model

In this section, we formulate the model in mathematical terms as

a mixed-integer linear program.

To formulate the model, we need to introduce the following

notation:

Indices:

i Will denote a port in United States;

k Will index the dredging options at a particular port, e.g.,

k = 1 : do nothing

k = 2 : dredge to 50'

k = 3 : dredge to 55';

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j Will denote a demand center, e.g., = 1 may index the demandfor coal in Spain;

I Is the number of U.S. ports under consideration;

Ki Is the number of dredging options at Port i;

J Is the number of demand centers.

Decision Variables

Yik = 0,1 Binary decision variable to denote whether Option k at Port iis chosen.

xijk - Continuous decision variable to denote the amount of coalgoing to Demand Center j from Port i, assuming that Option kis chosen for Port i (i.e., Yik = 1).

If Yik = O, then xijk = 0 for all j.

Parameters:

Dj Demand requirements (annual) for Demand Center j.

Sik Annual throughput capacity of coal at Port i under Option k;(this should reflect expected coal-handling facilities atPort i).

Li Minimum annual volume of coal that must be shipped from Port i.

Fik Annualized fixed cost for dredging Option k at Port i. Thiscost includes the annualization of the dredging cost plus the

annual maintenance cost. To annualize the dredging cost, wemultiply the one-time dredging cost by an assumedcost-of-capital percentage, which is parametrically varied.

Cijk Variable ocean-transportation cost (/ton) for shipping coalto Demand Center from Port i where dredging Option k is

chosen at Port i. This cost depends on the size of ship thatcan access Port i under Option k.

Now the model formulation is a mixed-integer linear program and can bestated as follows:

I K J

(1) Min Z EC ikYik C i jki jk)i=1 k=l j=l

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1l

subject to

I K(2) x DJ for J=1,2,...,J

il k=l1

(3) i Xijk - SikYik < 0 for i=l,2,...,I

J Kj=k i for i=1,2,...,I

Ki

(5) X Yik = for i=1,2,...,Ik=l

(6) Yik = 0, 1; xiJk 0 for all i, , k.

Explanation of formulation for each equation:

(1) Objective function is annualized fixed costs plus variable costs.

(2) This ensures that we satisfy demand requirements for all demandcenters.

(3) This ensures that we do not exceed capacity at a particularport. Also, it forces xijk to be zero, if Yik = 0.

(4) This ensures that each port ships a minimal amount of coal, asspecified by Li.

(5) This ensures that exactly one option is chosen for each port(including a "do nothing" option).

(6) Variable type specification. Yik are binary decisionvariables, while xijk are non-negative continuous variables.

The model is analogous to the standard model for a "capacitated

warehouse location problem" (CWLP) as treated in the management science

literature. (See, for example, Akinc and Khumawala, 1977 and Geoffrion and

McBride, 1978.) In a CWLP, the intent is to find the optimal warehouse

locations from a set of candidate warehouse locations, and then to determine

which customers are served by which warehouses. An optimal solution

-15-

minimizes the fixed cost of operating the warehouses, plus the variable cost

of satisfying customer demand from the various warehouses. Each warehouse

has a capacity limit on how much demand it can handle, and all customer

demand must be satisfied.

The model proposed here by (1) - (6) is very similar to a CWLP. At

each port, the dredging options correspond to the candidate warehouse

locations. The demand centers for coal are the warehouses' customers. The

allocation of coal demand to ports is made so that all demand is satisfied,

the capacity at each port is not exceeded, and the annual costs (fixed and

variable) are minimized.

We have implemented an adaptation of the solution procedure given by

Akinc and Khumawala, 1977 to solve the model (1) - (6). This solution

procedure is a branch-and-bound procedure in which bounds are generated by

solving a network-problem relaxation to the original problem (1) - (6).

-16-

Section III

Data Used in the Analysis: Sources, Assumptions, and Discussion

Our analysis uses various categories of data, including estimates and

assumptions of coal-export demand in Europe, estimates of U.S. coal-port

capacities, estimates of dredging costs at five ports (Hampton Roads,

Baltimore, Mobile, New Orleans, and, as a special case, the Port of New

York), ocean-transportation cost estimates, and cost-of-capital estimates.

What follows is a discussion of our data, the data sources, assumptions

concerning these data, and a description regarding the various data

scenarios used.

A. Demand

Tables 6 through 9 deal with our demand projections. Our

initial source for metallurgical demand projections are the actual

1981 metallurgical coal export figures broken down by destination of

shipment (International Coal Review, February 12, 1982). As seen in

Table 6A, for our base case we increased 1981 metallurgical coal

exports to Europe by ten percent. As seen in Tables 7 and 8, the

steam coal demand projections are based on the forecasts of the

Interim Interagency Coal Export (ICE) Task Force Report of January,

1981. Basically, the low, medium, and high projections were

calculated by taking the most likely steam coal import forecasts for

1990 and 2000 of each European coal-importing nation, and then

multiplying by the bottom, top, and mid-U.S. steam coal market share

projections for each country (ICE Report, January, 1981, pages 47, 48).

We then generate a set of demand scenarios by combining various

estimates of metallurgical and steam coal demand. For these demand

-17-

III

scenarios we aggregated the demand centers into two major and

representative demand clusters: Northwest Europe and Mediterranean

Europe. We use this aggregration because we are only concerned with

the Trans-Atlantic cost savings that result from dredging, and because

the geographic demand profile, as reflected broadly in terms of

transportation costs and coal-port location, appears to fit such a

two-region pattern.

Tables 9-A through 9-G list the various demand scenarios for

U.S. coal exports that are used in our analysis in order of increasing

magnitude. Generally, most coal-export forecasts generated by

responsible analysts are approximated in one or another of these

projections. Please note that we ignore Far East demand in most of

these projections. Currently, as much as 30 million short-tons per

year go to the Far East. However, we do take account of expected Far

East demand in our port capacity assumptions and demand projections.

B. Port Data: Cost of Capital, Capacity, and Dredging Costs

In characterizing the ports, we need to address the following

issues: the cost of capital, port capacity, forced throughput at each

port, dredging options, and investment and maintenance costs.

For the cost of capital, we used the following set of interest

rates: 7.5 percent (which corresponds to the Corps of Engineers'

interest rate), 10 percent (intermediate value), 12 percent (treasury

bond), and 15 percent (an approximate private sector investment hurdle

rate).

Table 10 provides the port capacity figures used in this

analysis. As noted before, the capacity figures are highly fluid;

-18-

and, as can be seen on Table 10, there can be a significant disparity

between the various reference sources. Much of this disparity is due

to differences in definition of the capacity categories. Also,

different sources accept different levels of credibility in listing

capacity-expansion plans. The three categories used in this study are

existing, underway, and planned. We generally use the categories

existing plus underway as a "base case". But other port capacity

projections are also used in some of our model simulations.

We also are aware that planned port capacity may actually be

very dependent on port dredging decisions. However, in our model

simulations, we ignore this possible relationship and assume that the

port capacity figures used in each of the various simulations will

occur regardless of dredging decisions. We make this assumption in

order to avoid generating results that choose dredging only because

the dredging option may be the only way to achieve the stipulated port

capacity for a simulation.

The model, if left totally unconstrained with regard to capacity

and throughput, would automatically allocate coal throughput to the

least costly port. Therefore, one or more ports could possibly ship

no coal at all under certain scenarios. For political, behavioral,

and practical reasons (and possibly economic ones would emerge as well

under more detailed case-by-case scrutiny), such a situation is

obviously unrealistic. In order to avoid such a circumstance, as seen

in Table 11, we have constrained our model by forcing a certain amount

of coal equal to European coal export shipments in 1981 as a minimum

bound through each of the four primary coal ports under consideration

-- IIampton Roads, Baltimore, Mobile, and New Orleans. Except for New

-19-

Orleans, which shipped only 3.8 million short-tons in 1980, the total

amount of coal shipped through each port in 1980 was about the same as

in 1981. The coal shipped from these four ports to non-European

destinations was primarily metallurgical coal for Japan. These

non-European shipments were subtracted from the capacity projections

at each port in order to give an effective capacity available for

European demand.

Table 12 provides the investment and annual maintenance cost

data for each dredging option (e.g. 45 feet, 50 feet, and 55 feet) for

each of the four ports*.

C. Ocean Transportation Cost Savings

To calculate ocean transportation cost savings resulting from

using a larger vessel, we need to know the distance traveled, the

speed of the ship or the number of days at sea, the relationship

between draft and ship size, and the various component cost factors

that make up total transportation costs.

We have used two representative European destinations, Rotterdam

in the northwest and Taranto, Italy in Mediterranean Europe. We

assign to each European country either the Rotterdam rate or the

Taranto rate as is indicated in Table 13. We assume that the

round-trip voyage period to Taranto is 5.5 days more than to

Rotterdam. (This additional time increment is based on a one-way

voyage length from Rotterdam to Taranto of about 990 nautical miles

and an average speed of 14.5 knots.) (H. P. Drewry, page 98.)

*Please note that Baltimore is authorized to be dredged only to a depth of50 feet.

-20-

In Table 14, we indicate the general relationship between draft

and ship size. In Table 15, we list the specific relationship that we

will assume in our model.

The derivation of ocean transportation costs is initially based

on the figures of the Norwegian shipping firm, R. S. Platou, and we

subsequently modified these figures using various assumptions. The

figures and derivations have also been compared to other published

figures, especially those of shipping consulting firm, H. P. Drewry.

A key aspect of the debate over ocean transportation cost savings,

from the use of large coal-carrying colliers involves determining the

size of benefits due to economies of scale that would result from

using big ships. High savings would mean full economies of scale,

both at sea and in loading and unloading in port. Analysts at Royal

Dutch Shell basically subscribe to this view. (Royal Dutch Shell

Telex of May 6, 1982, and discussions in London in June, 1982.) On

the other hand, both R. S. Platou and H. P. Drewry forecast lower cost

savings due primarily to an inability to obtain economies of scale in

port (R. S. Platou slides and discussions with R. S. Platou analysts

at MIT in 1982). H. P. Drewry also has identified alternate

cost-savings scenarios. (H. P. Drewry, pages 89-104.) In any event,

as will be seen, we can manipulate R. S. Platou's format so that, like

Shell's figures, high cost savings are generated.

Other aspects of our data base are worth noting. For example,

because R. S. Platou's construction and labor costs are based on

Norwegian industry figures, they are high relative to many other data

sources. Or, to take another example which has the opposite effect,

we may have overstated the savings from dredging since (as seen in the

-21-

Royal Dutch Shell costs) it may often have been cheaper to light load

a big ship (such as a 160,000-DWT collier), rather than fully load a

smaller, but still large, vessel (such as a 120,000 DWT collier) at a

particular draft (Royal Dutch Shell Telex of May 6, 1982 and

discussions in London). But we believe these and possibly other

specific or idiosyncratic aspects of our data base or data assumptions

will have little influence on our general findings because of the wide

range of simulations that were run.

R. S. Platou's original assumptions are given in Table 16. For

R. S. Platou, fuel and diesel oil costs depend primarily on days in

transit, the ship's speed, and size of ship; harbor fees depend only

on size of ship; operating and capital costs depend on total number of

voyage days, which is days in transit plus days in port, and on size

of ship. Therefore, the number of days in port affects only operating

and capital costs. In deriving our set of various ocean

transportation costs, we assume for a given size of ship that the

harbor fee is fixed, that operating and capital costs are directly

proportional to voyage days (which equal days at sea plus days in

port), and that fuel and diesel oil costs remain the same for

Rotterdam but will increase in proportion to total voyage days for

going to Taranto.

Table 17 is R. S. Platou's original calculation of the ocean

transportation costs for the voyage from Hampton Roads to Rotterdam.

It represents a "low cost savings" scenario.

To obtain a "high cost savings" scenario for the Hampton Roads-

Rotterdam route for, say, a 120,000 DWT vessel, as seen in Table 18,

we assume that there will be port-handling economies of scale for the

-22-

larger collier. In particular, we assume that the time to unload/load

a collier is independent of the collier's size. Accordingly, a ship

on the Hampton Roads-Rotterdam route spends 29 voyage days no matter

what the ship's size. We leave fuel oil, diesel oil, and harbor costs

unchanged. But we now reduce operating and capital costs by 29/32

since the number of voyage days is reduced from 32 to 29.

This contrasts with the assumptions of R. S. Platou, as

represented in the "low cost savings" scenario in Table 17, where the

assumption is.that the rate for load/unloading is constant for all

size ships so that a larger ship requires more days in port. In fact,

the whole issue of whether there are significant economies of scale

for days in port, which affects operating and capital costs figures,

is a key point of debate between those analysts, such as at R. S.

Platou, who tend to downplay the advantages of large coal-carrying

colliers and emphasize the lack of significant economies of scale for

load/unloading in port and those, such as at Royal Dutch Shell, who

tend to assume significant economies of scale for load/unloading in

port. (R. S. Platou slides and Telex from Royal Dutch Shell of

June 5, 1982.)

Let us now look at another example. In order to.decide the "low

cost savings" for the Hampton Roads-Taranto voyage for, say, a 120,000

DWT ship, we leave.harbor costs unchanged, but the voyage length is

now 37.5 days (5.5 days more days at sea than to Rotterdam).

Therefore, fuel oil, diesel oil, operating, and capital costs need to

include costs for the additional 5.5 days at sea over the costs for

the "low cost savings" Hampton Roads-Rotterdam voyage. The results

are seen on Table 19. Tables 17 through 24 provide the derivations

-23-

for "low" and "high cost savings" rates from both the East Coast

(Hampton Roads) and the Gulf (New Orleans) to either Northwest Europe

(Rotterdam) or Mediterranean Europe (Taranto). We assume that the

ocean transportation costs from Baltimore would be approximately the

same as from Hampton Roads and that the shipping costs from Mobile

would be approximately the same as from New Orleans. Table 25

summarizes the results of these derivations.

We note here that the critical input to our study is not the

absolute ocean transportation costs, but rather the relative savings

in ocean transportation costs due to the use of larger colliers.

These relative savings will dictate whether the costs of dredging can

be justified. Hence, in this light, the "low-savings" scenario

implies a $2.10 per short-ton savings from dredging a 40-foot draft to

a 55-foot draft for shipments from the East Coast to Northwest Europe

(Rotterdam); the "high-savings" scenario gives a $3.38 per short-ton

savings. A similar interpretation applies for the other cases.

-24-

Section IV

Model Runs With Hampton Roads, Baltimore, Mobile,

and New Orleans

A. Overview of Model Runs

We are now ready to run our model, but first let us offer some

comments. We will run the model under various scenarios and will

change assumptions concerning demand, cost of capital, port capacity,

and/or ocean transportation costs. The model will select the most

cost-effective route and will select the most cost-effective dredging

options where appropriate.

For each scenario, we also attempt to assess the sensitivity of

the solution to the cost parameters. First, for each simulation we

indicate the "Investment Range," that is, the percentage that all

investment and maintenance costs can be increased before the

no-dredging solution (i.e. the status quo) is preferred to the stated

optimal dredging policy. Second, we generate a "Breakeven Capital

Cost" percentage, which is the upper limit of the cost of capital for

the preferred dredging solution. Any cost of capital percentage

exceeding the breakeven implies that the no-dredging solution is

preferred. Tables 26-A through 26-G list the results of our model

runs.

B. An Illustration

In order to help understand our results, we offer an

illustration. Let us consider the first case in Table 26-B; here we-25-

take demand to be level B (from Table 9-B: 20 percent growth for

metallurgical coal; and midpoint projections for steam coal for 2000

from the ICE Report) and the ocean transportation costs to be the

"low-savings" case (from Table 25). Total European demand, therefore,

is 90.8 million short-tons per year. The port capacities (in million

short-tons per year) from Table 10 are:

Hampton Roads 126.8

Baltimore 53.6

Mobile 20.0

New Orleans 111.0

We also assume that a portion of this capacity must be used for

non-European coal demand, where the amount is set equal to the 1981

levels (from Table 11). This leaves an effective port capacity (in

million short-tons per year) for coal exports to Europe as follows:

Hampton Roads 105.7

Baltimore 48.5

Mobile 18.0

New Orleans 105.5

Clearly, there is more-than-adequate port capacity to meet the demand

level for this illustrative case.

Now, for each port we force a certain amount of the European

exports through that port, according to 1981 shipments (from Table

11). In total, 48.6 million short-tons are forced through the four

ports; the remaining demand of 42.2 million short-tons are allocated

-26-

to the ports by the model. If no dredging occurs, the model assigns

the demand as follows:

DestinationTo

Northwest MediterraneanFrom Europe Europe Total

Hampton Roads 39.8 33.3 73.1

Baltimore 7.8 0 7.8

Mobile 1.5 0 1.5

New Orleans 8.4 0 8.4

Total 57.5 33.3 90.8

The average cost is 10.02 per ton, assuming the "low-savings"

rates. We note that the demand assigned to Baltimore, Mobile, and New

Orleans occurs only due to the constraint that requires a minimal

level of throughput at these ports. If we did not have this

constraint, Hampton Roads will supply all demand.

When dredging is permitted, the model finds that the dredging of

HIampton Roads from 45 feet to 55 feet can be justified provided that

the hurdle rate (the capital cost) for the investment is less than

14.2 percent. Otherwise, no dredging is the best solution. When

Hampton Roads is dredged, the assignment of demand does not change

from the no-dredging case.

To see why we can justify the dredging of Hampton Roads,

consider the cost savings. There will be a savings of .88 per

short-ton (9.11 minus 8.23) for the 39.8 million short-tons that go to

-27-

Northwest Europe; similarly, there will be a savings of 1.19 per

short-ton (10.52 minus 9.33) for the 33.3 million short-tons that go

to Mediterranean Europe. In total, the transportation cost savings

are 74.7 million per year. The one-time cost to dredge Hampton Roads

is $480 million, with an annual maintenance cost of $6.7 million. At

an annual capital cost of 14.2 percent, the annualized cost of

dredging, including maintenance, is 74.7 million. Hence, below this

capital cost the benefits of dredging outweigh the costs, and

vice-versa for a higher capital cost.

We must emphasize that in this analysis we view the ocean

transportation cost savings as the only benefit from dredging. But

one can incorporate other quantifiable benefits from dredging into

this analysis in a relatively straightforward manner.

Table 27 summarizes these results. Note especially the

prevalence of the no-dredging solution for low demand conditions and

the choice of dredging Hampton Roads to 55 feet under a wide range of

conditions. In Section VI we will discuss the implications of these

results.

-28-

Section V

Model Runs that Include the Port of New York

We also ran a special set of simulations that included coal-port plans

for the Port of New York (i.e. the proposed coal port of New York City and

the proposed coal port of the New York Port Authority). We decided to

generate an entirely separate set of simulations that included the Port of

New York because, although the Port of New York options were emerging at the

time of our analysis and were generating interest, they also appeared much

more uncertain, incomplete, and speculative than the plans for the other

four ports that we studied.* From an overall perspective, moreover, it may

be useful to see how the inclusion of a fifth port with somewhat different

characteristics affects the solutions of our analysis.

Based on discussions with relevant officials in the New York Port

Authority and the City of New York, the following assumptions for the Port

of New York coal ports were made: the investment cost for dredging is 200

million; the annual maintenance cost is 5 million; and the annual capacity

of the two Port of New York coal ports for export coal is 30 million

short-tons.

We also assumed that if no dredging takes place, then no coal ports at

the Port of New York would be constructed, and, hence, no coal exports from

this port would occur. For transportation rates, we performed two sets of

analyses based on our assumptions for transportation rates -- the first set

assumed that if the New York harbor is dredged, then the cross-Atlantic

*Indeed, these proposed port plans for the Port of New York were laterabandoned. But these plans, or similar plans, for the Port of New York maysomeday reappear.

-29-

rates would be comparable to those from Hampton Roads dredged to 55 feet.

This set only considered the case of "medium" transportation savings.

Tables 28-A through 28-G list the results of this set of runs.

In the second set of model runs, the assumptions were the same as in

Table 28 except that now the Port of New York is assumed to have a

transportation cost savings over Hampton Roads at 55 feet of anywhere from

no cost savings per ton to a savings of $4.00 per ton. Table 29 lists the

results of this set of the model runs. Note especially the continued

strength of the no-dredging solution at the low demand levels, and the

solution of dredging solely Hampton Roads to 55 feet at the low savings

levels. The implications of these results are discussed in Section VI.

-30-

Section VI

Conclusion

Before discussing the implications of our results and our general

conclusions, we want to reiterate that our societal cost-benefit examination

of the coal-port dredging question did not use a complex analytical model.

Rather we explicitly chose to rely on a relatively simple model that would

clearly highlight what we believe to be the key tradeoff: the cost of

dredging versus the possible ocean transportation cost savings.

Our results lead to a number of implications and general conclusions.

Certainly, the analysis lends support to those recommending caution in

approaching the funding of coal-port development (recent examples of other

studies taking a similar position include Evered, 1983, U.S. Department of

Energy, May, 1983, and U.S. General Accounting Office, August, 1983). Above

all, we found that we could not justify dredging simultaneously all dredging

options. This is because of the interdependence of the various ports. They

must share demand or compete for demand. In fact, it is only when we reach

a relatively high demand projection, Demand D, that our model indicates that

the optimal course of action is to dredge more than one port. Moreover,

such a solution is only generated when capital costs are lowered to ten

percent and transportation cost savings are "medium."

Perhaps even more striking is the robustness of two solutions: no

dredging (the status quo) or dredge only Hampton Roads to 55 feet. As seen

on Table 27, if one is both somewhat conservative regarding demand

projections (thereby adhering to Demand A) and also requires a relatively

high hurdle rate for a societal return-on-investment, then a no-dredging

option for the European coal market makes a great deal of sense for American

society as a whole.

-31-

But if one believes that European demand for U.S. coal will ultimately

increase at least to Demand B or that we can accept a lower societal

return-on- investment, then dredging only Hampton Roads to 55 feet is the

clear choice for a wide range of alternatives. We should also note that

Hampton Roads is preferred over Baltimore because Hampton Roads has more

capacity and is a deeper port.

In order to gain some perspective on the robustness of the solutions

resulting from our analysis, let us look at our results from a total annual

cost and annual savings viewpoint, as seen in Table 30.

This table gives the cost consequences for the no-dredging case, and

three dredging options over the seven demand cases. The three dredging

options are to dredge Hampton Roads to 55 feet; dredge Hampton Roads to 55

feet and Baltimore to 50 feet; and dredge Hampton Roads to 55 feet and New

Orleans to 55 feet. The ocean transportation costs are derived assuming the

"medium savings" rates.

Using Table 30, we can make some observations on the robustness of the

various options. Dredging Hampton Roads yields a reduction in ocean

transportation costs of 66 million per year over the no-dredging option for

the lowest demand case (Demand A: 60.5 million short-tons per year).

Savings in ocean transportation costs increase to $170 million per year for

the highest demand case (Demand G: 207.5 million short-tons per year).

Dredging Baltimore in addition to Hampton Roads gives some additional

savings in ocean transportation costs: an additional $8 million per year

for the lowest demand case, increasing to an additional 44 million per year

for the highest demand case. Hence, the incremental investment ($302

million) in dredging Baltimore would seem justifiable only if demand

projections were 160 million short-tons per year (i.e., Demand E) or

-32-

1I

higher. Dredging New Orleans in addition to Hampton Roads is viable only

for the highest demand cases (i.e., Demand F and Demand G). Annual demand

has to be on the order of 200 million short-tons per year before the

incremental savings in ocean transportation costs from dredging New Orleans

(in addition to Hampton Roads) can even cover the additional annual

maintenance costs for New Orleans, let alone provide a meaningful return on

the required investment to perform the dredging.

Furthermore, one can also support the dredging of Hampton Roads on

grounds that are not explicitly considered in the model. First, the whole

coal-port development issue is a long-term and complex one and should be

evaluated as a long-term and multifaceted investment. Such huge development

projects tend to take longer to be constructed than original projections

indicate, although they also tend to cost more than originally estimated

(Merrow, et.al., July, 1979). Although coal export demand, for example, may

be disappointingly low in, say, 1990, it may grow rapidly during the 1990's

and, therefore, be rather high in, say, the year 2000. In other words,

while there may be fluctuations in demand, we must emphasize possible

long-term patterns of demand. However, we must be careful not to choose

solutions that are far from those that can be economically ustified on a

societal cost-benefit basis. A recent study, for example, by maintaining

the current ratio of shipments of coal exports by ports, advocates dredging

New Orleans (Greer, 1983). This solution -dredging solely New Orleans--

was never preferred in any of our simulations.*

*Although we "force" a certain amount of coal through each of the fourexisting coal ports that we studied to account for political, logistical,and economic realities, we do not require the long-term maintenance of aspecific ratio of coal-export shipments by ports.

-33-

Another feature of the whole coal-export question is that the United

States now has no deep-water coal port. It may be prudent to have at least

one such port to serve the European coal market in order to capture the

benefits of a growth in demand at some point in the future and also to gain

experience in using such facilities. According to our analysis, dredging

Hampton Roads to 55 feet is the clear choice for at least the East Coast and

Gulf region for accomplishing such broad policy goals.

Even when we include the Port of New York in our analysis and then run

our model, the solution of dredging Hampton Roads to 55 feet emerges as

optimal under a number of likely conditions. As seen in Tables 28-A through

28-G, this solution is optimal at least through Demand C. As seen in Table

29, when the Port of New York has no cost savings over Hampton Roads, then

the dredging of Hampton Roads to 55 feet seems to dominate the dredging of

New York. (But then New York dominates Baltimore.) However, when the Port

of New York has some transportation savings over Hampton Roads, it is less

clear. It seems that if the savings are from t1.00 to 2.00 per ton, then

the Port of New York is either preferred to Hampton Roads or can be

justified along with Hampton Roads for several of the low demand scenarios.

When savings are more than $2.00 per ton, then the Port of New York is

preferred, although typically both can be

justified.

This study deals with a specific issue in one industry. However, at a

more general level, the way we structured the coal-port dredging question

--presenting a small number of variables and nominally simple alternatives

in formulating the problem and our model-- has highlighted some of the

classical problems of such society-wide policy issues as "national

industrial policy". We have actually found that such phenomena involve

-34-

alternative sets of different formulations, different answers, and different

beneficiaries.

To focus once more on the specific issue at hand -- coal-port

development on the East and Gulf Coasts, what is very clear and what emerges

unambiguously is that the concurrent dredging of more than one port is

unwise unless one supports the most optimistic projections for coal-export

demand or relatively low real interest rates over the long run. Moreover,

under no condition that we examined, does it make sense to dredge either of

the Gulf ports --Mobile or New Orleans-- before dredging Hampton Roads or

Baltimore.

-35-

Table 1

Trends in U.S. Coal Production and Exports(Million Short-Tons)

TotalProduction

(estimated)

434.3420.4439.0477.2504.2527.0546.8564.9556.7571.0612.7560.9602.5598.6610.0654.6684.9697.2670.2781.1829.7820.1833.0

Total

Exports

38.036.441.251.350.952.250.851.052.057.972.458.057.254.061.166.860.654.741.066.491.7112.5108.0

Percentage

Exports

of Total

8.7%

8.7%9.4%10.8%10.1%9.9%9.1%9.0%9.3%

10.1%11.8%10.3%9.5%9.0%

10.0%10.2%8.8%7.8%6.1%8.5%

11.1%13.7%13.0%

SOURCES: U.S. Department of Energy, Quarterly Coal Report: January -March, 1982, DOE/EIA-0121 (82/10) (Washington, D.C.: GovernmentPrinting Office, August, 1982), page 63; personal communicationwith U.S. Department of Energy on January 13, 1983.

-36-

Year

19601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982

Table 2

U.S. Bituminous Coal Exports, 1973-1981(Million Short-Tons)

MetallurgicalCoal Exports_

42.651.651.647.841.929.850.763.165.2

Steam CoalExports

10.38.3

14.111.611.810.014.126.845.0

Total

Exports

52.959.965.759.453.739.864.889.9

110.2

Steam Coalas a

Percentageof Total

Exports

19.5%13.6%21.5%19.5%22.0%25.1%21.8%29.8%40.8%

SOURCE: U.S. Department of Energy, U.S. Coal Exports: Projections andDocumentation, #DOE/ElA-0137 (Washington, D.C.: GovernmentPrinting Office, March, 1982), page 5.

-37-

Year

197319741975197619771978197919801981

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Table 4

Survey of World Ports with Existing and PlannedOperating Channel Depths in Excess of 45 Feet

Port

Japan:KimitsuKashimaMuroranKawasakiMizushimaFukuyamaChibaTobataKakoganaOita

United Kingdom:HunterstonPort TalbotRedcar

The Netherlands:Rotterdam

ProposedIJmulden

Federal Republic ofGermany:WilhelmshavenHamberg

France:Le HarveProposed

MarseilleDunkerque

ProposedNates St-NazaireFos

Italy:Taranto

MaximumDraft

in Feet

59.0457.0052.4867.0052.4852.4855.7657.0052.4879.00

95.1246.9752.97

68.0072.0052.00

47.0047.00

45.9252.4861.0045.9275.4451.0057.00

52.00

Port

Belgium:Antwerp

Finland: PortSweden:

GoteborgOxelosund

Denmark:AabenraaStignaes

Spain:BarcelonaGijon-MuselSaguntoCarboneras

Yugoslavia:RiJeka

Australia:Abbots PointHay PaintNewcastlePort KemblaGladstone

South Africa:Richards Bay

ProposedCanada:

Quebec CityVancouverPrince Rupert

Poland:Gdansk

U.S.S.R.:Vostochnyy

SOURCE: U.S. Congress House, Port Development, 97th Congress, 2ndReport 97-454, Port I (Washington, D.C.: House Committeeand Fisheries, March 9, 1982), page 28.

Session,on Marine

-39-

MaximumDraft

in Feet

54.0051.00

56.0072.00

55.0049.00

127.0050.0049.0055.00

51.00

72.0056.0054.0053.0054.00

56.0075.00

48.0065.0065.00

50.00

50.00

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Table 6A

U.S. Metallurgical Coal Exports - Projections

(Million Short-Tons)

Base Year

1981

AustriaBel/LuxDenmarkFinlandFranceGreeceIrelandItalyThe NetherlandsNorwaySpainSwedenUnited Kingdom

West Germany

Total

Japan

03.0.4

04.8.1.3

6.62.8.32.71.11.91.9

25.9

10%

03.3.4

05.3.1.3

7.33.1.33.01.22.12.1

28.5

21.9

Table 6B

U.S. Metallurgical Coal Exports to Europe fromSelected U.S. Ports in 1981

(Million Short-Tons)

BaltimoreHampton RoadsMobileNew Orleans

Total

4.112.61.32.8

20.8

SOURCE: International Coal Review, February 12, 1982.

-41-

20%

03.6.5

05.8.1.4

7.93.4.4

3.21.32.32.3

31.2

Table 7

Projected U.S. Steam Coal Exports From

East Coast and Gulf Ports: 1990

(Million Short-Tons)

Low Medium High

Austria 0 1.0 2.0

Bel/Lux 2.6 3.8 5.1

Denmark .8 2.8 4.8

Finland 1.4 1.8 2.1

France 2.9 4.2 5.7

Greece .4 1.0 1.6

Ireland .4 .8 1.2

Italy 3.9 5.9 7.8

The Netherlands .8 1.9 3.0

Norway .2 .3 .4

Spain 1.8 2.7 3.6

Sweden 0 1.7 3.3

United Kingdom .8 1.0 1.2

West Germany 1.6 3.1 4.7

17.6 32.0 46.5

SOURCE: U.S. Department of Energy, (Draft) Interim Report of theInteragency Coal Export Task Force, January, 1981, pages 47, 48.

-42-

111

Table 8

Projected U.S. Steam Coal Exports fromEast Coast and Gulf Ports: 2000

(Million Short-Tons)

Low Medium--_

AustriaBel/Lux

DenmarkFinlandFranceGreeceIrelandItalyThe NetherlandsNorwaySpainSwedenUnited KingdomWest Germany

01.42.22.64.6.3.47.51.8.5

6.0015.9

34.2

2.64.92.23.39.21.21.38.84.4.9

6.64.11.38.8

59.6

5.1

8.42.23.913.72.02.110.07.01.37.28.11.511.7

84.2

SOURCE: U.S. Department of Energy, (Draft) Interim Report of theInteragency of Coal Export Task Force, (ICE Report), pages 47, 48.

-43-

Table 9

U.S. Coal Exports Demand Scenarios(Million Short-Tons)

Demand A

MetallurgicalCoal

SteamCoal Total

Northwest Europe 19.2 17.5

Mediterranean Europe 9.3 14.5

28.5 32.0

Assumptions: - 10% growth for Metallurgical Coal- Midpoint projections for 1990 from ICE Report

Demand B9-B

MetallurgicalCoal

SteamCoal

Northwest Europe 21.0 36.5

Mediterranean Europe 10.2 23.1

31.2 59.6

Assumptions: - 20% growth for Metallurgical Coal- MidpoinL projections for 2000 from ICE Report

Demand C9-C

MetallurgicalCoal

Northwest Europe

Mediterranean Europe

21.0

10.2

31.2

SteamCoal

51.6

32.6

84.2

36.7

23.8

60.5

Total

57.5

33.3

90.8

Total

72.6

42.8

115.4

Assumptions: - High-range Steam Coal projections for 2000 fromSteam Coal.

ICE Report

-44-

9-A

Table 9(cont.)

Demand D9-D

MetallurgicalCoal

Northwest Europe

Mediterranean Europe

21.0

10.2

31.2

SteamCoal

67.4

42.6

110.0

Total

88.4

52.8

141.2

Assumptions: - Steam Coal increased by about 25 million short-tons over

Demand C.

Demand E9-E

MetallurgicalCoal

Northwest Europe

Mediterranean Europe

21.0

10.2

31.2

SteamCoal

82.7

52.3

135.0

Total

103.7

62.5

166.2

Assumptions: Steam coal is increased by 25 million short-tons overDemand D. Higher steam coal projections for U.S. coal towestern Europe, which is comparable to U.S. Department ofEnergy, U.S. Coal Exports: Projections and Documentation,March, 1982 (133 million short-tons for the year 2000), page23 and ICE Report on page 102 (145 million short-tons forEurope in 2000).

-45-

Table 9(cont.)

Demand F

MetallurgicalCoal

NorthwestEurope

MediterraneanEurope

Assumptions: Steam coal is increased by 25 million short-tons over Demand E.

Demand G

9-G

MetallurgicalCoal

Northwest Europe 21.0 109.1 130.1

Mediterranean Europe 10.2 67.2 77.4

31.2 176.3 207.5

Assumptions: "Best case" steam coal projections for U.S. exports to Europefor Ray Long, Constraints on International Trade in Coal,draft report (London: IEA Coal Research, May, 1982), page83. Converted 160 million metric tons to 176.3 millionshort-tons.

-46-

9-F

21.0

10.2

31.2

SteamCoal

99.0

61.0

160.0

Total

120.0

71.2

191,2

SteamCoal Total

Table 10

Port Capacity

(Million Short-Tons Per Year)

Existing** Underway**

Hampton Roads 61.8 16.0(61.8)* (17.0)*

Baltimore 16.6 22.0(16.6)* (22.0)*

Mobile 5.0 4.0(11.0)* (14.0)*

New Orleans 16.0 15.0(18.0)* (55.0)*

SOURCE: U.S. Congress, House, Port Development, pages 86-87.

Planned

49.0(37.0)*

15.0(6.0)

11.0 (0)*

80.0(41.0)*

* The categorization and estimation of port capacity is somewhatidiosyncratic and variable. For example, contrast the capacity figuresin parenthesis, which are from the U.S. Maritime Administration (U.S.Maritime Administration, "Loading Terminals", pages 62-63), with the U.S.House figures.

** Base Case: Existing plus Underway

-47-

Table 11

1981 Coal Shipments

(Million Short-Tons)

Total Coal

Shipped

1981

Total Coal

Exports to

Non-Europe

1981

European-Bound

Coal "Forced"

Through Port in

Model as a Minimum

Export Level

Hampton Roads 52.0 21.1

Baltimore 12.9 5.1

Mobile 3.5 2.0

New Orleans 13.9 5.5

SOURCE: International Coal Review, February 12, 1982.

-48-

30.9

7.8

1.5

8.4

Table 12

Dredging Depth Options and Costs(Millions of 1981 U.S. Dollars)

Depth to be Dredged

45 Feet 50 Feet

Hampton Roads:Investment costAnnual maintenance cost

Baltimore:Investment costAnnual maintenance cost

Mobile:Investment costAnnual maintenance cost

New Orleans:Investment costAnnual maintenance cost

3104.3

151.9

2441.5

22536

301.51.8

3051.9

32271

55 Feet

4806.7

NA *NA *

4072.5

435113

SOURCE: Discussion and telephone interviews with officials in theappropriate U.S. Corps of Engineers District Offices for each ofthe four ports.

All numbers are as of October, 1981.

*Baltimore is only authorized to dredge up to 50 feet.

-49-

Port

Table 13

Ocean Transport Assumptions

Comparable

Rate

Austria TBel/Lux RDenmark TFinland TFrance RGreece TIreland RItaly TThe Netherlands RNorway TSpain RSweden TUnited Kingdom RWest Germany R

T = Taranto, Italy R = Rotterdam

We assume that all countries will have 55 feet draft coal ports and willtherefore, be able to receive as large a colliers that can be loaded andshipped from a fully dredged (i.e. 55 feet) U.S. port on the East and Gulfcoasts.

-50-

Table 14

General Relationships Between Port Draft and Ship Size

Port Draft

40 feet

45 feet

50 feet

55 feet

Ship Size

60,000 - 70,000 DT

75,000 - 90,000 DWT

100,000 - 120,000 DWT

130,000 - 175,000 DWT·

SOURCE: H. P. Drewry, pages 73, 90; discussions with R. S. Platou and slidesof R. S. Platou.

-51-

Table 15

Assumptions Regarding the Relationships Between PortDraft and Ship Size That Are Used in the Model

Port Draft Ship Size

40 feet

42 feet

45 feet

50 feet

55 feet

64,000 DWT (Panamax)

75,000 DWT (Panamax)

90,000 DWT (Coal Collier)

120,000 DWT (Bulk)

160,000 DWT (Coal Collier)

-52-

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E:

Table 25

Ocean Transportation Costs

(Dollars Per Short-Ton)

Destination: Northwest Europe Mediterranean Europe

(Rotterdam)

"Low

(Taranto)

"High

Cost Savings Scenarios* Savings" Savings" Savings" Savings"

25-A East Coast

Size (DWT) Draft (Feet)

64,000

75,00090,000

120,000160,000

4042455055

25-B Gulf Coast

Size (DWT) Draft (Feet)

64,00075,00090,000

120,000160,000

4042455055

*We will also take the midpoints of thesewhich we term "Medium Savings."

-62-

rates for a third set of rates,

"Low "High

10.339.519.11

8.668.23

10.339.518.648.126.95

12.0611.1110.529.999.33

12.0611.119.889.267.62

12.4311.4110.7910.269.61

12.4311.4110.329.718.33

14.1913.2412.2211.6110.74

14.1913.2411.5710.879.00

Table 26

Results of Model Runs

26-A

Assumptions:Port Capacity: Existing and Underway

Demand: A

Transportation Cost: "Low Savings"Cost/Ton*

Capital Dredging with Without Investment**Cost Decisions Dredging Dredging Range

15% - - 10.2612% - - 10.2610% - - 10.267.5% HR - 55' 10.22 10.26 5.5%

Breakeven Capital Cost = 8%***

Transportation Cost - "Medium Savings"Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% - 10.0612% HR - 55' 10.04 10.06 1.8%10% HR - 55' 9.88 10.06 19.7%7.5% HR - 55' 9.69 10.06 53.3%

Breakeven Capital Cost = 12.2%

Transportation Cost = "High Savings"Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.74 9.86 9.1%7.5% HR - 55' 9.15 9.86 101.2%

Breakeven Capital Cost = 16.5%

* - Cost/ton is the total Trans-Atlantic transportation cost plusannualized investment plus maintenance costs for new dredging dividedby total tons of coal shipped.

** - Investment Range is the maximum percent that the dredging investmentplus maintenance costs may increase before the no dredgiag option ispreferred.

*** - Breakeven Capital Cost is the lowest capital cost at which a dredgingdecision is preferred to a no-dredging option.

-63-

Table 26(contd.)

26-B

Demand: B

Port Capacity: Existing, Underway and Planned (and for all remaining cases)

Transportation Cost = "Low Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% -- 10.02

12 HR - 55' 9.91 10.02 16.1%10% HR - 55' 9.80 10.02 35.6%7.5% HR - 55' 9.67 10.02 74.8%

Breakeven Capital Cost = 14.2%

Transportation Cost = "Medium Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.48 9.81 38.0%7.5% HR - 55' 9.08 9.81 154.4%

Breakeven Capital Cost = 21.2%

Transportation Cost = "High Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 8.88 9.58 81.1%

7.5% HR - 55' 8.48 9.58 233.8%

Breakeven Capital-Cost = 28.3%

-64-

Table 26(contd.)

26-C

Demand: C

Transportation Cost = "Low Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.76 9.94 26%

7.5% HR - 55' 9.45 9.94 132%

Breakeven Capital Cost = 19.3%

Transportation Cost = "Medium Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.15 9.72 83.5%

7.5% HR - 55' 8.84 9.72 238.0%

Breakeven Capital Cost = 28.7%

Transportation Cost = "High Savings"

-~~~~~~~ ~~Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 8.52 9.48 141%

7.5% HR - 55' 8.21 9.48 344%

Breakeven Capital Cost = 38.1%

-65-

Table 26(contd.)

26-D

Demand: D

Transportation Cost = "Low Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.73 9.94 39%

7.5% HR - 55' 9.47 9.94 156%

Breakeven Capital Cost = 21.4%

Transportation Cost "Medium Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.17 9.74 102%

12% HR - 55' 9.07 9.74 147%

10% HR - 55', B - 45' 8.99 9.74 148%

7.5% HR - 55', B - 50' 8.88 9.74 179%

Breakeven Capital Cost for HR - 55' = 31.8%

Transportation Cost = "High Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 8.61 9.53 165%

12% HR - 55', B - 45' 8.48 9.53 177%

10% HR - 55', B - 45' 8.39 9.53 227%

7.5% HR - 55', B - 50' 8.27 9.53 264%

Breakeven Capital Cost for HR - 55' = 42.1%

-66-

Table 26(contd.)

26-E

Transportation Cost = "Low Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.79 10.00 43%

12% HR - 55', B - 50' 9.69 10.00 50%

10% HR - 55', B - 50' 9.59 10.00 77%

7.5% HR - 55', B - 50' 9.48 10.00 129%

Breakeven Capital Cost for HR - 55' = 22%

Transportation Cost = "Medium Savings"

Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', B - 50' 9.26 9.82 73%

7.5% HR - 55', B - 50' 8.91 9.82 224%

Breakeven Capital Cost = 26.8%

Transportation Cost = "High Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', B - 50' 8.70 9.63 124%

7.5% HR - 55', B - 50' 8.34 9.63 320%

Bieakeven Capital Cost for HR - 55', B - 50' = 35.0%

-67-

`-`~�'�I~�"""""""""""""""

Table 26(contd.)

26-F

Transportation Cost = "Low Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 10.19 10.38 46%

12% HR - 55', B - 50', 10.09 10.38 39%M - 50'

10% HR - 55', B - 50', 9.98 10.38 59%M - 55'

7.5% HR - 55', B - 50' 9.82 10.38 107%M - 55'

Breakeven Capital Cost = for HR-55', B-50', M-55' = 16.5%

Transportation Cost = "Medium Savings"Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR- 55', B - 50' 9.72 10.22 76%

12% HR - 55', B - 50', 9.54 10.22 85%M - 50'

10% HR - 55', B - 50', 9.41 10.22 118%M - 55'

7.5% HR - 55', B - 50', 9.25 10.22 183%M - 55'

Breakeven Capital Cost = for HR-55', B-50', M-55' = 23.1%

Transportation Cost = "High Savings"Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', B - 50', 9.16 10.06 90%M - 55'

7.5% HR - 55', B - 50', 8.69 10.06 260%M - 55'

Breakeven Capital Cost = 29.5%

-68-

.1 --l' --I - .1 -1 - - - l' ' ,~ ---- --- --- , -- -- -- --- -- - --- - --- -- .1 .I- - - -

26-G

Transportation Cost = "Low Savings"

Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', NO - 45' 10.32 10.58 36%

12% B - 50', HR - 55', 10.21 10.58 47%NO - 45'

10% B - 50', HR - 55', 10.11 10.58 68%NO - 45'

7.5% B - 50', HR - 55', 9.99 10.58 103%NO - 45'

Breakeven Capital Cost for B - 50', HR - 55', NO - 45' = 20.3%

Transportation Cost = "Medium Savings"

Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% B - 50', HR - 55', 9.83 10.43 64%NO - 45'

7.5% B - 50', HR - 55', 9.46 10.43 167%NO - 45'

Breakeven Capital Cost 28.1%

Transportation Cost = "High Savings"

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', NO - 55' 9.19 10.28 88%

7.5% HR - 55', NO - 55' 8.86 10.28 156%

Breakeven Capital Cost = 41.3%

-69-

Table 27

A Smunmary of Dredging Solutions in Tables 26A - 26G

Demand Levels and TransportationCost Savings Levels

15%

A - "Low Savings"

A - "Medium Savings"A - "High Savings"B - "Low Savings"B - "Medium Savings"B - "High Savings"C - "Low Savings"C - "Medium Savings"C - "High Savings"D - "Low Savings"D - "Medium Savings"

D - "High Savings"

E - "Low Savings"

E - "Medium Savings"

E - "High Savings"

F - "Low Savings"

F - "Medium Savings"

F - "High Savings"

G - "Low Savings"

G - "Medium Savings"

G - "High Savings"

HR - 55'

HR - 55'HR - 55'

HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'

Demand and TransportationCapital Cost Levels

12%

HR - 55'

HR - 55HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'

HR - 55' HR - 55'B - 45'

HR - 55' HR - 55'B - 50'

HR - 55' HR - 55'B - 50' B - 50'

HR - 55' HR - 55'B - 50' B - 50'

HR - 55' HR - 55'B - 50'M - 50'

HR - 55' HR - 55'B - 50' B - 50'

M - 50'HR - 55' HR - 55'B - 50' B - 50'M - 55' M - 55'HR - 55' B - 50'NO - 45' HR - 55'

NO - 45'B - 50' B - 50'HR - 55' HR - 55'NO - 45' NO - 45'HR - 55' HR - 55'NO - 55' NO - 55'

10%

HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'B - 45'

HR - 55'B - 45'

HR - 55'B - 50'

HR - 55'B - 50'

HR - 55'B - 50'

HR - 55'B - 50'M - 55'

HR - 55'B - 50'M - 55'

HR - 55'B - 50'M - 55'B - 50'

HR ' 55'NO - 45'B - 50'HR - 55'NO - 45'HR - 55'NO - 55'

-70-

7.5%

HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'HR - 55'B - 50'HR - 55'B - 50'

HR - 55'B - 50'

HR - 55'B - 50'

HR - 55'B - 50'

HR - 55'B - 50'M - 55'

HR - 55'B - 50'M - 55'HR - 55'B - 50'M - 55'B - 50'

HR - 55'NO - 45'B - 50'

HR - 55'NO - 45'HR - 55'NO - 55'

9

t

Table 28

Model Runs that Include the Port of New York

Assumptions:

- Transportation Savings for the Port of New York are Comparableto Hampton Roads

- Ocean Transportation Cost: "Medium Savings" for all runs

28-A

Demand A:

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% - 10.06

7.5% HR - 55' 9.68 10.06 53%

Breakeven Capital Cost = 12.2%

28-B

Demand: B

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.48 9.81 38%

7.5% HR - 55' 9.08 9.81 154%

Breakeven Capital Cost 21.2%

-71-

II'

Table 28(contd)

28-C

Demand: C

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.15 9.72 83%

7.5% HR - 55' 8.84 9.72 238%

Breakeven Capital Cost = 28.7%

28-D

Demand: D

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55' 9.17 9.74 102%

12% HR - 55', NY - 68' 9.03 9.74 107%

10% HR - 55', NY - 68' 8.93 9.74 142%

7.5% HR - 55', NY - 68' 8.81 9.74 208%

-72-

Breakeven Capital Cost for HR - 55', NYC - 68' = 26.7%

Table 28(contd)

28-E

Demand: E

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', NY - 68' 9.14 9.82 99%

12% HR - 55', NY - 68' 9.01 9.82 143%

10% HR - 55', NY - 68' 8.93 9.82 184%

7.5% HR - 55', NY - 68', 8.83 9.82 220%B - 45'

Breakeven Capital Cost for HR - 55', NY - 68' = 31.7%

28-F

Demand: F

Cost/Ton

Capital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', NYC - 68', 9.20 10.22 142%B - 45'

12% HR - 55', NYC - 68', 9.05 10.22 170%B - 50'

10% HR - 55', NYC - 68', 8.95 10.22 218%B - 50'

7.5% HR - 55', NYC - 68', 8.82 10.22 307%B - 50'

-73-

Breakeven Capital Cost for HR - 55', NYC - 68', B - 50' 34.8%

Table 28(contd)

28-G

Demand: G

Cost/TonCapital Dredging With Without InvestmentCost Decisions Dredging Dredging Range

15% HR - 55', NYC - 68', 9.43 10.43 130%B - 50'

12% HR - 55', NYC - 68' 9.28 10.43 130%B - 50', M - 55'

10% HR - 55', NYC - 68' 9.15 10.43 172%B - 50', M - 55'

7.5% HR - 55', NYC - 68', 8.98 10.43 250%B - 50', M - 55'

Breakeven Capital Cost for HR - 55', NYC - 68'M - 55', B - 50' = 30.0%

-74-

Table 29

Dredging Solutions Under Various Transportation Cost Savingsfor the Port of New York Over Hampton Roads

Assumptions:

Demand = A

15%

12%

10%

7.5%

Demand = B

15%

12%

10%

7.5%

Demand = C

15%

12%

10%

7.5%

Demand = D

15%

12%

10%

7.5%

- Transportation Savings = "Medi

- Include Port of New York

Port of New York Transportation Savings

Save Save Save0 $.50/Ton tl.00Ton

HR

HR

HR

NO DRE

HR

HR

HR

HR

HR

HR

HR

HR

HR

HR

HR

HR

Both

Both

NY

HR

HR

HR

HR

HR

HR

HR

Bot

Bot]

Bot

Bot)Both

DGING

NYC

HR

HR

NY

NY

Both

Both

HR

Both

Both

Both

h Both

h Both

h Both

h Both

.um"

Over Hampton Roads

Save$2.00/Ton

NY

NY

NY

Both

NY

NY

Both

Both

Both

Both

Both

Both

Both

Both

Both

Both

-75-

Save

4 .00/Ton

NY

NY

NY

Both

NY

NY

Both

Both

Both

Both

Both

Both

Both

Both

Both

Both

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-76-

References

Akinc, U. and B. Khumawala, "An Efficient Branch and Bound Algorithm for theCapacitated Warehouse Location Problem," Management Science, Vol. 23,No. 6 (February, 1977), pp. 585-594.

Coal Week International, January 12, 1983.

"Commission Releases Dravo Report Which Reviews Coal Port," WW/S WorldPorts, April/May, 1982.

Dunbar, Frederick, "The Coal Boom: Will it Last?," WWS/World Ports,

April/May, 1982, pp. 41-44.

Evered, J. Erich, "Statement Before the U.S. House Committee on MerchantMarine and Fisheries," Subcommittee on Merchant Marine, April 21, 1983.

"For Coal the Recovery is Heating Up Slowly", Business Week, August 1, 1983,pp. 89-90.

Geoffrion, A. and R. McBride, "Lagrangean Relaxation Applied to CapacitatedFacility Location Problems," AIIE Transactions, Vol. 10, No. 1 (March,1978), pp. 40-47.

Greer, Boyce I., The Effect of Port User Fees on U.S. Coal Exports, #E-83-04(Cambridge, MA: Energy and Environmental Policy Center, JFK School ofGovernment, Harvard University, March, 1983).

H. P. Drewry, Ltd., Ocean Shipping of Coal: See Transportation Methods,Constraints and Costs, (London: HPD Shipping Publications, 1981).

ICF, Inc., Potential Role of Appalachian Producers in the Steam Coal ExportMarket: Task #1 - International Steam Coal Trade Analysis preparedfor the Appalachian Regional Commission, November, 1981.

ICF, Inc. and J. P. Coal Associates, Market Guide for Steam Coal Exportsfrom Appalachian, prepared for the Appalachian Regional Commission,March, 162.

International Coal Review, National Coal Association, February 12, 1982.

Long, R. A., Contraints on International Trade in Coal, Draft ReportNo. G3/92 (London: IEA Coal Research, May, 1982).

Madison, Christopher, "Money for Deeper U.S. Coal Ports - Needed or JustMore Pork Barrel," National Journal, February 7, 1981, pp. 225-228.

Merrow, Edward W., Stephen W. Chapel, and Christopher Worthing, A Review ofCost Estimation in New Technologies: Implications for Energy ProcessPlants, #R-2483-DOW (Santa Monica, Cal.: The Rand Corporation, July,1979).

-77-

---- ��------�--�--------

Ill

References(contd.)

National Coal Association, NCA News Release of June 25, 1982.

New York City and New York Port Authority, discussions with variousofficials in the spring and summer of 1982.

R. S. Platou, various slides and discussions at MIT in 1982.

Royal Dutch Shell, Telexes of May 6 and June 5, 1982 and discussions inLondon in June, 1982.

U.S. Congress, House, Port Development, 97th Congress, 2nd Session, Report97-454, Part I (Washington, D.C.: House Committee on Merchant Marineand Fisheries, March 9, 1982).

U.S. Congress, Senate, National Harbors Improvement and Maintenance Act of1981, Report of the Committee on Environment and Public Works, 97thCongress, 1st Session, Calendar No. 418, Report No. 97-301 (Washington,D.C.: Government Printing Office, 1981).

U.S. Corps of Engineers, discussions with officials at district offices forBaltimore, Mobile, New Orleans, and Norfolk-Hampton Roads in the Springand Summer of 1982.

U.S. Department of Energy, Energy Information Administrations, CoalDistribution: January-December, 1981, #DOE/ETA-0125(81/4Q) (Washington,D.C.: Energy Information Administration, April, 1982).

U.S. Department of Energy, Energy Information Administrations, Office ofCoal, Nuclear, Electric and Alternate Fuels, Port Deepening and UserFees: Impact on U.S. Coal Exports, #DOE/EIA-0400 (Washington, D.C.:Energy Information Administration, May, 1983).

U.S. Department of Energy, Energy Information Administration, Office of CoalNuclear, Electric and Alternate Fuels, Quarterly Coal Report:January-March, 1982, #DOE/EIA-0121 (82/1Q) (Washington, D.C.: EnergyInformation Administration, August, 1982).

U.S. Department of Energy, Energy Information Administration, Office ofCoal, Nuclear, Electric and Alternate Fuels, personal discussion withMs. Mary Hutlzer, head of Data Analysis and Forecasting Branch on.January 13, 1983.

U.S. Department of Energy, Energy Information Administration, Office ofCoal, Nuclear, Electric, and Other Fuels, U.S. Coal Exports:Projections and Documentation, #DOE/EIA-0317 (Washington, D.C.: EnergyInformation Administration, March, 1982).

U.S. Department of Energy, Interagency Coal Export Task Force, (Draft)Interim Report of the Interagency Coal Export Task Force, January,1981. (Also known as the "ICE Report .)

-78-

References(contd.)

U.S. General General Accounting Office, Prospects for Long-Term Steam CoalExports to European and Pacific Rim Markets, #GAO/NSIAD-83-08(Washington, D.C., General Accounting Office, August 4, 1983).

U.S. Maritime Administration, "Loading Terminals: Existing and Potential,"WWS/World Ports, April/May 1982, pp. 61-65.

"Unveil Coal Industry Plan Which May End Impasse Over Port User Fees,"WWS/World Ports, April/May, 1982, p. 49.

U.S. Office of Technology Assessment, Coal Exports and Port Development: ATechnical Memorandum, (Washington, D.C.: Government Printing Office,April, 981).

Waters, W. G., II, "Transportation and Market Prospects in the World CoalTrade," The Logistics and Transportation Review, Vol. 18, No. 2 (1982),pp. 139-167.

World Coal Study, Coal-Bridge to the Future (Cambridge Mass: Ballinger,1980). (1980A).

World Coal Study, Fugure Coal Propects: Country and Regional Assessments(Cambridge, Mass: Ballionger, 1980).(1980B).

-79-

1---^1-----�-----�111�_1�__1_�____�_