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DOI Releases Flawed Royalty Plan


After four years of examination and public input, the U.S. Department of Interior (DOI) published reforms that it said will more properly value the royalties the nation receives from the energy sources found on federal lands, namely coal, oil and natural gas. This would be the first significant adjustment to the system in more than 10 years.

Released at the end of June, the agency said the reforms will also provide more clarity by replacing benchmarks with a “market-driven” mechanism. “[The] valuation rule is important because it ensures, in part, that our federal coal program is properly structured to obtain all revenue due to taxpayers,” U.S. Interior Secretary Sally Jewell said. The Obama administration has maintained throughout the process that coal producers in particular have abused loopholes in the royalty system. The White House released a report during June entitled, “The Economics of Coal Leasing on Federal Lands: Ensuring a Fair Return to Taxpayers.”

Currently, the Bureau of Land Management (BLM) collects revenue from coal leases at three points: a bonus is paid at the time BLM issues a lease, lease rentals fees and production royalties. The annual rental rate for coal leases is $3 per acre (or fraction thereof). The royalty for federal coal has been established by law at 12.5% of the gross value of the coal produced from surface mining methods. For coal mined by underground methods, BLM applied an 8% royalty. The new reforms would, according the White House report, be a Btu add-on to the current 12.5% or an increase in the initial bonus paid for the lease. The DOI said the 12.5% royalty will not change when the new regulations go into effect on January 1, 2017.

BLM manages a total of approximately 570 million acres of federal lands with coal reserves. In 2015, it administered 306 leases that total more than 482,000 acres, including 102 leases and 201,000 acres in Wyoming, 54 leases and 88,000 acres in Colorado, and 72 leases and 85,000 acres in Utah. The response from Republican politicians in those states was swift, basically accusing the Obama administration of further gouging the energy industry.

The truth is that the system is already market-based and the people currently managing these agencies do not understand the coal mining business. If Powder River Basin (PRB) coal traded for $30/ton, the U.S. government, not the American people, would collect more revenue. The calorific value (Btus per pound) of the PRB is much lower than bituminous coal. It contains a great deal of moisture, therefore, the market, not the coal operators, has determined a price in the range of $10/ton-$12/ton. Power producers are buying Btus, not tons. Raising the royalty rate won’t increase the price of coal, it will place coal operators at a further disadvantage.

The coal industry’s detractors said the American people have been subsidizing the coal miners who operate on federal land, claiming that “King Coal” has profited at the American taxpayer’s expense — not true. What the American people have subsidized is low-cost electricity from coal and these politically motivated bureaucrats are upending a system that has worked for years.

Steve Fiscor, Coal Age Editor-in-Chief
[email protected]