Pittsburgh, Pennsylvania - April 25, 2008

J. Brett Harvey

President and Chief Executive Officer

CONSOL Energy Inc.

 

Thank you very much, for that nice introduction. It is a great honor to be invited to speak at the Shoemaker Lecture Series in Mineral Engineering. If I did the math right, I am the 17th speaker since the Series was inaugurated in 1992. It is an impressive list of business leaders who have come to this podium before me, and I feel privileged to be in such company. 

The other reason I am honored to be invited is that Al Shoemaker was one of CONSOL’s great leaders. He led Consolidation Coal Company in the 1960s – a period of significant transition for the coal industry. A tough period. A period after we stopped heating our homes and running our railroads with coal, but before the great surge in coal consumption driven by the national wave of coal-fired electric generating station construction.

 

CONSOL Energy has changed in many ways since Al Shoemaker’s days. Where once we had 25,000 employees, we now have 8,000. But 8,000 producing 40 percent more coal from two-third fewer mines.

Today, CONSOL Energy is listed on the New York Stock Exchange and we are a member of the S&P 500.   Our market cap is nearly $16 billion dollars. We have evolved from a coal company to a multi-facet energy company with a focus on coal. We remain the largest bituminous coal producer in the United States and the largest producer of coal by underground mining methods.

While much has changed since Al Shoemaker’s day, one challenge has remained with us – mine safety.

 

In the past two years, the coal industry has spent a lot of time trying to deal with the aftershocks of several mine accidents that captured nationwide attention and that created very mixed emotions in most Americans.

On the one hand, people marveled at the dedication, skill and courage of the miners and the safety officials involved in the rescue operation -- at the way we pulled together as an industry attempting to save the lives of a few of our fellow miners.

But those same Americans probably wondered whether coal mining is a safe business, or an anachronism – a relic of another era when death and injury were accepted as a cost of doing business. Perhaps they even wondered whether this is a business on which they want to depend for so much of their energy?

How our industry deals with the issue of mine safety in the next few years may very well determine the future of the industry. Not just mining underground, but the future of coal in our nation’s energy mix.            

Today the coal industry suffers from what you might call a perception-reality gap. In our case, the gap is in regard to the industry’s safety record.

The media coverage of the coal industry and the tone of the discussion among legislators and regulators would have you believe that the U.S. coal industry had made no progress in safety for the last 100 years. That people still died by the thousands every year. That coal mining was “dark, dirty, and dangerous.”

We seem to be shackled by the media not just to the recent mine accidents, but to all the mine tragedies of the last 100 years. The result has been that our progress in mine safety in the last 50 years seems always clouded by the events of the past.

I am not being critical of the news media. Their job is to cover the news. Their job is also to provide perspective on the news. The recent history of accidents in the U.S. mining industry is part of the perspective. But it is only a partial perspective.

First, the mining industry has made substantial progress in the area of safety. In the 30 year period from 1975 through 2005, U.S. mine fatalities were reduced from 1,068 to 22. In 2006, because of several mining accidents in West Virginia, including the Sago accident, U.S. coal mining fatalities climbed to the highest number of fatalities since 1995. However, despite the tragedy at Crandall Canyon, fatalities for 2007 were down from the 2006 level.

Moreover, the total injury rates for U.S. coal mining are as low as they have ever been, based on MSHA records data back to the beginning of the 20th century.

In fact, the coal industry has a better overall safety record than many other industries or sectors of the U.S. economy and we are far ahead of countries such as China, where the coal mine fatality rate is 13 PER DAY.

 

High profile mine accidents affect the way we are perceived and impact the safety regulatory environment in which we operate. But I also believe that our reputation for poor safety – however undeserved we think it is – impacts our ability to manage other issues of equal importance to us.

Remember the scene from the movie “The Godfather?” 

Don Corleone explains why he must say no to the drug dealer who wants the Don’s political protection. He says, “It’s true I have many friends in politics. But they wouldn’t be my friends for long if they knew my business was drugs, because….frankly…drugs is a dirty business.”

If we are perceived as “a dirty business” when it comes to safety, why would our friends in Congress or the agencies work with us on other important issues such as global climate legislation, or even coal’s role as a key part of the U.S. energy portfolio. 

Thomas Sowell, the noted conservative economist at the Hoover Institute, wrote recently that the U.S. could reduce mine accidents if we had more nuclear generated power and less coal-fired power.

The message could not be clear to all of us. Either eliminate the problem or someone will eliminate us.

That’s why we need to reclaim the high ground on safety.

We need to eliminate accidents. We need to be at ZERO. 

Only when key stakeholders believe that mine accidents are the exception rather than the rule will we truly be able to effectively manage the many public policy issues we face, or recruit the next generation of mining engineers.

My great-grandfather was a member of one of the industry’s first mine rescue team. I believe in the importance of safety – it is part of my heritage – part of my DNA.

At the same time, I recognize that expecting coal to be a zero-accident industry might be seen as tilting at windmills. But I believe that if we commit ourselves to this goal, we can reach zero.  It is within our grasp. Last year 7,515 CONSOL Energy employees worked the entire year accident free. That is 97% of our workforce. Is it really a stretch to think we can’t get to 100%?

 

Moreover, we owe it to the men and women who go into the mines everyday to produce America’s energy. We owe it to them, and we owe it to their families.   We also owe it to the country -- because America needs us. We mine America’s energy resources. As we like to say at CONSOL, we are America’s On Switch.

For our part, CONSOL Energy will not wait for others in the industry. We are taking action now.

I believe it is axiomatic that safe mines are productive mines.

When I first began to reconsider my thinking regarding safety CONSOL Energy’s safety record was nearly 3 times better than the industry incidence rate for underground mines. We were very proud of our performance. But when I translated the statistics into human terms, I saw that 236 CONSOL employees had recordable injuries. 

Ordinarily, corporate improvement is achieved incrementally. And it is a perfectly rational and useful way for a business to operate.

Except for safety.

In CONSOL’s case, even if we improved our safety performance by 50%, it still means that 118 of our people would be injured. And that was unacceptable.

That was my epiphany! That our traditional, incremental approach to safety created an unintended tolerance for accidents.

Whether we are talking about CONSOL or the whole coal industry, we must admit to ourselves that we can no longer continue to run our opeations with an unspoken assumption that a certain number of accidents are simply inherent in our business. 

So let me discuss three issues today that are critical to reclaiming the high ground on safety: 1) the law and compliance; 2) the technology/safety interface; and 3) the culture of safety. It’s what I call the safety triad.

 

 

First, compliance with the law is an obligation of every company, every mine manager and every employee. Failure to comply with the law is unacceptable job performance. However, if we limit ourselves, as an industry, only to complying with the law, we will not eliminate accidents. Compliance with the law is only one element of my safety triad.

There are several reasons for that. 

For example, safety laws and safety are not synonymous. Take highway safety as an example. The legislature has passed numerous laws regarding speed limits and driving behavior on state roads, yet accidents still occur every day. Laws, by themselves, are not enough to guarantee safety.

Moreover, compliance with the law and achievement of safety goals don’t necessarily go hand in hand. We discovered, based on research we conducted last year, that our safety professionals spend 90% of their time on compliance issues and only 10% on preventing accidents. It revealed that our safety professionals spend most of their time escorting inspectors and dealing with compliance paper work that flows from issues raised by inspectors with very little time left over for observing employees on the job – an activity that can lead to improved work habits and to the elimination of accidents caused by human error.

So compliance with the law is not enough to get us to where we need to be.

A second element of my safety triad is the technology/safety interface. 

Effective technology, properly applied, can be an important component of an overall effort to eliminate accidents.

We are an industry with a long history and with strong traditions that often change slowly. But where safety is concerned, the industry – and here I mean management, labor unions and government agencies – should be open to the possibility that a new technology can create a new safety paradigm. 

By being receptive to new technologies, important safety innovations have occurred such as CO monitoring of belt lines to provide early detection of potential combustion situations, the development of Automatic Temporary Roof Supports, coal bed degasification in advance of mining, or the application of digital technologies, to name a few.

While being receptive to technology-driven shifts in the safety paradigm, I am not suggesting that we always be first-adopters. Like all businesses, mining companies keep a close eye on costs. And we are understandably reluctant to invest millions of dollars in technologies that are unproven in the name of “doing something.” 

For example, there is little doubt that wireless communications systems underground would be highly desirable – provided that they work reliably. 

In conjunction with MSHA and other parties, we tested over the last 18 months many of the technologies available for communication both within the mine and between the mine and the surface. What we found is that no single technology completely satisfied the intent of the new regulation, and none was effective in all applications. The varying geologic conditions that exist in U.S. coal mines have precluded, thus far, the adoption of a single communication technology standard that will work reliably in all mines.

That said, the bottom line remains that, as managers, we have an obligation to engineer our mines to eliminate, to the extent humanly possible the risk of accidents caused by physical conditions underground. And that includes deploying technology effectively.

 

                                                PAUSE

 

Even with the best crafted statutes and regulations, and with well engineered mines and the application of the best technologies, mine accidents will continue to occur unless we address the third, and most important element of the safety triad, that of the human element. At CONSOL, we refer to it as the culture of safety.

When we talk about the culture of safety, we talk about it in very broad terms.

It includes a discussion of the role of the individual and the need for each employee to make safety a core value in their lives. Individual work safety is a condition of employment at CONSOL Energy. We hold every employee – salaried and hourly alike – responsible for working safety.

It also includes discussion of the culture as created by the company, including a consideration of signals we send everyday by the manner in which we run the business. Does production trump safety, or does safety trump production? At CONSOL Energy, our commitment is to a culture where safety trumps production, where it trumps profits, where it trumps all other rules, policies or procedures.

We are committed to a culture of safety that empowers every employee, whether hourly or salaried, to stop the normal course of operation if he believes that safety is being compromised. For us, safety has no rank.

There are, of course, some challenges in living this commitment – to “walking the talk” if you will.

 It will take a constancy of effort to convince employees that they have the right, without suffering a consequence, to interrupt work in the name of safety.

 It will take steadfastness of commitment to convince managers that subordinate employees should be empowered in this way.

We have to run our business consistent with the percepts that our culture of safety is built upon.

 

WE believe that you cannot create the culture of safety nor invest every employee with both the authority and the responsibility for safety unless we give them the tools that they need. Not just the physical tools, but the tools that allow every employee to reach his full potential as a safe and productive contributor to CONSOL Energy.

We believe that creating the culture of safety comes, in part, from engaging in a constant conversation about safety. And it is not a one-way conversation. Our culture of safety demands the recognition that there is no monopoly on good ideas when it comes to eliminating accidents. Everyone should be engaged in the conversation.

A culture of safety is a culture of constant analysis and observation of job procedures and processes. The goal is to root out any action that could lead to an accident and replace it with a better one.

A culture of safety requires that we submit ourselves to the discipline of constant training and evaluation rather than just the periodic training required by law.

And a culture of safety demands a commitment on the part of every employee to work accident free. As part of our ZERO accidents program, we ask employees to identify the reason why they are personally committed to being at ZERO. Not surprisingly, many say, “so I can come home to my family” or “so I will be around to teach my son to fish”. Every one of us has a reason – maybe even several reasons – to be at ZERO accidents. By asking each employee to identify, articulate and visualize that reason, we hope to create a constant reminder on a deep, personal level of why this is important.

 

There is even room for government to be a part of our culture of safety.

Unfortunately, events like Crandall Canyon or Sago often elicit from government an attitude of greater sternness – to write more violations, to levy more fines, to create, if you will, the culture of punishment. But are we really naïve enough to believe that increasing the level of a fine is the best way to eliminate accidents? If the road to ZERO accidents were paved with higher fines, then the road to zero highway accidents would long ago have been built. 

I certainly understand that a proper function of government is to enforce the law. What I am asking is whether there is a role for government beyond that of antagonist or opponent. Can government be more than just policeman?

At the individual level, we reward those who work at ZERO accidents. Every employee, even those who work in office settings, has the opportunity to enhance his or her pay by working safely as an individual. Greater rewards can be achieved if their work site and if the company work safely as well. But it is important to note that the requirement is ZERO. Nothing else will meet the “reward” standard.

We don’t view this as “paying” for safety. We view it as one of several ways in which we acknowledge, reward and encourage safe work.

Should we not then have a serious discussion about how government might acknowledge, reward and encourage safe work? Should we not have a serious discussion about the government’s objective? Is it to enforce the law, or make the mines safe? As I said earlier, compliance and safety are not necessarily synonymous.

I am offering no particular prescriptive actions here. Government has a role, though not the sole role, in safety training. While some aspects of training can be standardized, some elements must be customized to fit the needs of the individual mines.

Government most certainly can help with tax incentives or funding to accelerate the development of new technologies that improve safety and to provide incentives for their rapid deployment.

Make no mistake. This will take courage, because there will be those who will be, at best, skeptical, or, more likely, highly critical of any effort to change the government’s role from policeman to partner in this matter of mine safety. But those who take that approach must answer the question – what is the goal: to enforce the law or to make the mines safe?

 

As CEO, I do interviews with reporters from time-to-time. Several have asked me what I hope will be my legacy at CONSOL. My answer is the same every time. I say that I want to be remembered as part of the generation of miners who eliminated accidents in coal mines. 

We can do this. When the technology of safety and the values of safety converge, we will be at ZERO.

We owe nothing less to our heritage – to leaders like Al Shoemaker who helped build the foundation for the CONSOL of today – just as we owe it to the next generation of CONSOL leaders (some of whom may come from Penn State) who will write the next chapter in our history.

We can reclaim the high ground in safety. All that is wanted is the commitment to try.

 

Thank you very much.