Pub. 6 2016 Issue 1

13 MINING FOCUS C iting concerns over fair return for federal coal, on January 15, 2016, U.S. Department of the Interior Secretary Sally Jewell took the dramatic step of halting federal coal leasing on public lands. West- ern coal companies are attempting to sort out the implications of the moratorium and exemptions set out in Secretarial Or- der 3338 (Order). The Order places a “pause” on leasing for an indefinite period while the Bureau of Land Management (BLM) prepares Programmatic Environmental Impact State- ment (PEIS) of the Federal Coal Program. Specifically, the Secretary directs BLM to examine “whether bonus bids, rents and royalties received under the Federal Coal Program are successfully securing a fair return to the American public for Federal coal.” The moratorium on leasing is likely to last three years or more. During this time, BLM is ordered to examine “whether the decision to lease large amounts of relatively low- cost coal artificially drives down pricing in the U.S. market, and if so, how the taxpayer may best be compensated for the reduced royalties due to artificially low prices.” 1 Using U.S. Energy Information Administration estimates that coal pro- duction has declined, the U.S. Department of the Interior (Department) justifies the moratorium on leasing, asserting that the approximately 7.75 billion tons of recoverable federal reserves now leased are sufficient to continue production at current levels for 20 years. 2 Although several major coal companies are in bankruptcy and coal miners have been laid off in large numbers, the Order further adds to the industry’s concerns by suggesting that an increase in federal royalties is justified. Moratorium on Federal Coal Leasing Pending Comprehensive Program Review By Denise A. Dragoo, Esq. MORATORIUM continued on page 14 The Secretary makes two contentions for raising royalty rates currently set at 12.5 percent of the gross value of coal produced by surface methods, and 8 percent of the gross value of coal mined by underground methods. Based on a series of five listening sessions in 2015, the Secretary notes concerns that: l) these rates do not compensate the public for the removal of coal and externalities associated with its use; and 2) that federal coal sales, representing nearly 41 percent of total domestic production, artificially lowers market prices, further reducing the amount of royalties received. However, to the contrary, there is significant evidence that the current royalty rates do provide a fair return to the American Public. Reports prepared by the Inspector General’s Office (IG Report) 3 and Government Accountability Office (GAOReport) 4 investigating the Federal Coal Program do not propose an increase in the current royalty rates. The GAOReport confirms that royalties collected at current rates provide a substantial return to American taxpayers. In 2012 alone, federal lease bonuses and royalties totaled $1.2 billion. 5 Arguments in favor of increasing the federal royalty rate disregard the current economic conditions of the coal industry. Increasing the royalty rate will only increase royalty revenue if coal production remains the same. However, a raise in royalty rates will increase the overall cost of coal and may well reduce demand and production. As evidenced by a spate of bankruptcies and reorganizations, many coal companies are operating on thin margins and may not be able to absorb these additional costs.