* Illinois Basin coal production on rise
* Region has lower costs, easier mining than Appalachia
* Mining companies see growth potential
By Steve James
NEW YORK, May 11 (Reuters) - Two years ago, Peabody Energy Corp opened a new coal mine in Sullivan County, Indiana. The mine, called Bear Run, is now the largest surface mine in the eastern United States and a symbol of the revival of one of America's historical coal fields.
As coal mining slows in Appalachia, Midwestern fields are drawing new coal investors as more efficient anti-pollution technology at coal-fired power plants has made Illinois Basin coal competitive again.
"It's probably the fastest growing region because now utilities have scrubbers, they can burn that nasty coal," said William Burns, a coal industry analyst with Johnson Rice in New Orleans.
Coal entrepreneur Chris Cline is betting on an Illinois Basin boom with a planned $300 million initial public offering (IPO) for his Foresight Energy and producers like Peabody and Alliance Coal are ramping up operations or opening new mines.
Peabody, the largest U.S. coal producer, opened another new mine, Wild Boar, in Indiana last year and is expanding its Gateway mine in southern Illinois, in a region where Peabody traces its roots back to its first mine in 1895. The Bear Run mine alone employs 460 miners and produces 6 million tons of coal a year.
Production in the Illinois Basin, which covers parts of Illinois, Indiana and western Kentucky, shrank by more than one-third i n the last two decades on environmental concerns over the high-sulphur content of its coal.
The game changer was the advance of anti-pollution scrubber technology that allows burning high-sulphur coal with fewer pollutant emissions, analyst Burns said.
Also, stricter emissions regulations requiring scrubbers mean power plants can no longer get by burning lower-sulphur Appalachian coal.
Scrubbers using limestone or lime can remove as much as 97 percent of sulphur dioxide (SO2) emissions at a coal-fired electricity plant. Most utilities have now installed scrubbers following the 2005 Clean Air Interstate Rule that required further reduction in SO2 emissions in the eastern United States.
Burns noted that the Illinois Basin was the region most affected by the Clean Air Act and subsequent amendments that set federal controls on air pollution.
The resurgence of the Illinois Basin contrasts with the central and northern Appalachian region of West Virginia, Virginia, eastern Kentucky and Pennsylvania, where many of its mines are played out or increasingly difficult and expensive to work.
"Now most plants have installed scrubbers and there are very favorable conditions for mining there," said analyst Lucas Pipes, of Brean Murray Carret & Co. "There are still virgin seams that have never been mined and costs are extremely low."
Illinois Basin coal is cheaper to mine because the coal seams are closer to the surface, and the region is well-positioned to ship coal to Gulf ports for growing U.S. exports, Svec said.
"The Illinois Basin has good growth potential from a variety of perspectives," said Peabody spokesman Vic Svec. "It is a backfill against the continuing decline of central Appalachia."
LOWER COSTS, EASIER TO MINE
The Illinois Basin, one of America's four major coal basins besides northern Appalachia, central Appalachia and the Powder River Basin of Wyoming, has been mined since the 1800s.
In the 1970s, it was producing about 140 million tons per year, according to U.S. Energy Department data. But it fell below 100 million tons per year after 1990, following implementation of Clean Air Act amendments.
In 2011, Illinois Basin output rose to about 116 million tons.
By contrast, Appalachia's total production has fallen from a high of 488 million tons in 1990 to about 336 million last year.
Overall, the U.S. coal industry is in a slump, with prices for thermal coal, used for power generation, plummeting as demand from utilities has fallen off.
Coal producers, mostly operating in Appalachia, have suffered as power plants increase the use of natural gas, which is at historically low prices, and switch off many older coal-fired power plants.
The relatively mild U.S. winter has also led utilities to burn less coal, forcing producers to shut mines to manage supply.
The lower prices, combined with the higher costs of mining in increasingly more difficult Appalachian coal seams, are squeezing margins and forcing producers to scramble to find lower-cost alternatives.
"They have discovered that Illinois Basin coal is a suitable replacement of high-cost Appalachian coal," said John Hanou, whose Hanou Energy Consulting LLC just carried out a survey on the region's prospects for the next 10 years.
Adding to the attraction of Illinois Basin coal is that costs are about 40 percent to 50 percent lower than in Appalachia because the coal seams are close to the surface.
Mark Levin, an analyst with BB&T Capital Markets, said some companies operating there had mining costs of $20-$30 per ton, compared with as much as $70 per ton in Appalachia.
In its IPO filing, Foresight said its average costs last year were $19.85 per ton.
Hanou predicts Illinois Basin production could rise to 136 million tons in 2012, with the addition of two Foresight mines.
Daniel Scott, an analyst with Dahlman Rose & Co, believes production can increase by 50 percent in the next few years.
Peabody produced 28.1 million tons in the Illinois Basin last year and expects to boost mining as it forecasts U.S. coal exports will increase by more than 75 percent to 250 million tons in the next five years.
Alliance Coal, a subsidiary of Alliance Resource Partners LP , was the No. 2 producer in the Basin last year with 27.7 million tons.
Cline's Foresight mined 10.4 million tons last year but with two mines -- Sugar Camp and Hillsboro -- opening this year, it could rise to 25 million by 2013, Hanou said.
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