Federal Coal Leasing – Under Review

In President Obama’s final State of the Union Address in January, he foreshadowed changes to the management of energy resources on federal lands:

Rather than subsidize the past, we should invest in the future – especially in communities that rely on fossil fuels. That’s why I’m going to push to change the way we manage our oil and coal resources, so that they better reflect the costs they impose on taxpayers and our planet.

On January 15th, the U.S. Department of the Interior announced an approximately three-year moratorium on new coal leases on federal lands pending a “formal, comprehensive review” of the federal coal leasing program. The department stated:

Over the past few years, it has become clear that many of the decades-old regulations and procedures that govern the federal coal program are outdated and may not reflect the realities of today’s economy or current understanding of the environmental and public health impacts from coal production.

Specifically, the department will prepare a Programmatic Environmental Impact Statement (PEIS) to identify and examine potential changes to the program. Changes to the program would be the first in 30 years and the pause in new leases would be consistent with previous reviews.
Two reports released in June provide good perspective on where changes will take place. Both reports (one being a ruling on regulatory reform and the other an analysis of potential changes from an economic perspective) focus heavily on the evaluation of royalty rates. The Department of the Interior’s final Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule will come into effect on January 1, 2017. This ruling simplifies the long-standing and often convoluted valuation benchmarks surrounding non-arm’s length contracts in favor of a system that determines the market value of coal via gross proceeds from transactions between independent entities. Its roots can be traced back to several community outreach workshops conducted in 2011 with the purpose of gauging public opinion on existing regulations prior to the proposal of new ones.
The second report (The Economics of Coal Leasing on Federal Lands: Ensuring a Fair Return to Taxpayers), conducted by the Council of Economic Advisors, discusses two approaches in adjusting royalty rates and their economic impacts on both private and public sectors. The first approach would determine royalties based on the true observable market value of coal (taking into account deduction claims, heat content and other factors) while the second would involve a direct increase in the royalty rate in order to maximize taxpayer return.
SPRB Mines - ABB
(click to enlarge)
Changes to royalty rates could have wide-ranging effects, particularly for companies and communities heavily invested in federal coal. The Powder River Basin (PRB) is a prime example. Coal produced from federal lands currently accounts for nearly 40 percent of total US coal production with over 85 percent of that originating from the PRB. Mines from the PRB benefit from large acreages, high productivity and low costs comparative to their Appalachian counterparts. However, pending any adjustments to royalty rates, the market could see a shift away from federal coal in favor of other options viewed as less cost-prohibitive. One of the criticisms of the federal coal program has been its tendency to provide companies the ability to price coal as low as possible, reducing required royalty payments all while incurring relatively minimal penalties. The latter report makes the case that even with higher royalty rates, federal coal costs would increase modestly. Benefits from this scenario include non-federal coal becoming more competitive nationwide while seeing only a small decrease in western federal coal production, though the impacts of reform are still several years away.
Andrew Colley – Energy Analyst – Fuels
Garrick Hoops – Advisory Consultant

Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule
The Economics of Coal Leasing on Federal Lands: Ensuring a Fair Return to Taxpayers
Interior Department Announces Final Regulations To Ensure American Public Receives Every Dollar Due for Production of Oil, Gas & Coal on Public Lands
The President’s Plan to Reform Federal Coal Leasing: Key Things to Know