Interior’s Inspector General recommends coal lease program changes

The Sierra Club on June 11 immediately hailed a new report on federal coal leasing from the Department of Interior’s Office of the Inspector General, saying it shows that the government offers “massive subsidies” for mining leases on public lands.

The Inspector General (IG) report faults BLM for failing to take into account potential profits from coal exports and for failing to follow an Interior Secretary order intended to ensure unbiased evaluations of the fair market value for federal coal, said the club. 

Bill Corcoran, Deputy Director of the Sierra Club’s Beyond Coal campaign, said: “We are heartened by the DOI Inspector General’s thorough evaluation of the seriously flawed practices of the Bureau of Land Management’s coal leasing program. This report is the first step in giving Interior Secretary Sally Jewell the tools needed to facilitate a long overdue revamping of the BLM’s public leasing program.”

It is a “testament” to how “flawed” the leasing program truly is when 80% of coal leases granted by the BLM are done without a competing bid, and companies like Peabody Energy (NYSE: BTU) consistently receive coal leases as low $1.10 per ton, said Corcoran.

Notable is that the Sierra Club is being simplistic here. There often isn’t a competing bid in BLM lease auctions because no other coal company has a nearby mine, and the blocks up for lease often aren’t big enough to establish a competing mine. Or, in the case of the Wyoming end of the Powder River Basin, the blocks are sometimes big enough to support a new mine, but there are other impediments to competing lease offers, like the applicant company already controlling surface rights over the federal coal.

“Now, as we await the release of the Department of Interior’s investigation into coal royalties, we renew our call on for a moratorium of all coal leasing on federal public lands,” said Corcoran. “These federal agencies must get their houses in order to prevent predatory coal companies from further taking advantage of U.S. taxpayers and damaging our economy.”

The report said the IG focused on the program’s goal of obtaining a fair return for coal on public lands, its mine inspection and enforcement activities, and venting of methane gas from mines. It found weaknesses in the current coal sale process that could put the government at risk of not receiving the full, fair market value for the leases. For instance, the IG identified lost bonus revenues of $2m in recent lease sales and $60m in potentially undervalued lease modifications.

Report makes 13 recommendations for fix the BLM leasing system

The IG made 13 recommendations to enhance BLM’s coal sales and inspections, with BLM generally agreeing with pretty much all of them and promising program changes to comply.

  • BLM should work with the Office of Valuation Services (OVS) when establishing fair market value (FMV) policies and methods, and when identifying FMV for coal leases. BLM sets an FMV prior to a lease sale, which is held as a secret, and rejects any bid that doesn’t meet or exceed that secret FMV.
  • BLM and OVS should take action to fully account for export potential in developing coal FMVs.
  • BLM should ensure a consistent and efficient coal lease sale process by designing a system that prevents individual BLM State Office discretion.
  • BLM should reject bids less than the established FMV in compliance with the Mineral Leasing Act (MLA).
  • BLM should explore options for a more efficient lease reoffer process, such as initiating direct negotiations with the coal company, or otherwise revising current procedures to execute a timely sale. BLM partially concurred with the recommendation, stating that it will evaluate options for a more efficient lease reoffer process and evaluate available alternatives. BLM, however, disagreed that direct negotiations would be permitted under existing law and guidance.
  • BLM should strengthen its internal controls and safeguards over the FMV records. This should include a thorough assessment of the data’s information security protocol at all BLM state offices, the data’s physical security, and security when allowing access to an outside party.
  • BLM should require that all state and field offices conduct and document inspections of exploration operations.
  • BLM should protect the integrity of exploration data by requiring coal companies to certify the accuracy of the data under penalty of the applicable false statement statute, and it should periodically verify data through an independent laboratory.
  • BLM should work with OVS in preparing the FMV appraisals for lease modifications, which involve additions of smaller tracts to an existing lease without having to go through an auction process. This should include establishing recordkeeping standards.
  • BLM should process applications for royalty rate reductions on a timely basis and request the Office of Natural Resources Revenue (ONRR) to assist when requests are based on financial hardship.
  • BLM should update its policies and procedures to ensure consistent and effective inspections and enforcement. Documentation and reporting standards should be included.
  • BLM should evaluate its enforcement policies and, where necessary, augment its enforcement capability.
  • BLM should enhance the effectiveness of its inspectors by developing and implementing a rotation policy, cross-training program, succession plan, and finalization of the inspector certification program.

In FY 2011, mining operations on public and Indian lands produced 473 million tons of coal, which was mostly shipped to U.S. power plants. The largest coal producing state is Wyoming. In FY 2011, Wyoming accounted for 83% of the Department’s total coal production and 86% of its coal revenues.

Seventy-one companies operate about 80 mines (surface and underground) on public and Indian lands, mostly in the Western U.S. Four companies – Alpha Natural Resources (NYSE: ANR), Arch Coal (NYSE: ACI), Cloud Peak Energy (NYSE: CLD) and Peabody Energy – account for over 90% of the Department’s sales volume.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.