Interior plans revamp of federal coal royalty rules

The Interior Dept. announced Dec. 19 the release of a draft proposed federal regulation by the Office of Natural Resources Revenue (ONRR) governing the valuation of federal oil and gas, and federal and American Indian coal resources, as well as expanded guidance on the production of coal on public lands issued by the Bureau of Land Management (BLM).

The current oil, gas and coal valuation regulations – originally put in place for natural gas and coal in the late 1980s – have not kept pace with the significant market changes that have occurred in the domestic natural gas and coal markets since that time, said Interior. The existing federal oil valuation regulations are a decade old. The proposed draft regulation being released by ONRR will update the regulations to help keep pace with modern technology and practices.

“Coal produced on public lands is an important part of our domestic energy portfolio, but we have an obligation – and we are fully committed – to ensure that the American taxpayer receives a fair return for the production of domestic energy resources,” said Deputy Secretary of the Interior Mike Connor. “The initial steps we are taking are part of the larger effort to strengthen the management of coal production on public lands by providing greater certainty and predictability to the industry and helping to protect American taxpayers. We look forward to receiving public comment on the draft proposal.”

Existing gas and coal valuation regulations may require an energy company to follow benchmarks when it sells its product to an affiliated company. The benchmarks for coal are applied sequentially and include such factors as comparable arm’s-length sales, prices reported to state public utility commissions and the Federal Energy Regulatory Commission, other relevant matters and a netback calculation.

These benchmarks can be administratively burdensome to industry trying to report and pay proper royalties, and to regulators reviewing royalty payments for audit and compliance purposes. The proposed regulation aims to remedy this and other issues caused by outdated rules with more clear regulations that better reflect the changing energy industry, while protecting taxpayer and American Indian assets.

The BLM is also sending updated guidance to the field that will help ensure a consistent and efficient coal lease sale process, increase clarity in determining fair market value and provide guidance on independent review of appraisal reports. The guidance will enable the BLM to account for export potential through analysis of comparable sales and income.

The BLM coal program’s revised manuals and handbooks are part of a suite of actions that the BLM has undertaken following the recommendations of a June 2013 audit by Interior’s Office of Inspector General and a February 2014 Government Accountability Office report. Previous guidance has been issued regarding publicly available information such as the accepted fair market value and historical lease sale data, and not accepting coal lease bids below the pre-sale fair market value. Over the past two years, the BLM has developed new training programs for coal specialists and completed the first phase of a bureau-wide tracking system for coal inspections.

The BLM has also released safety, inspection and enforcement guidance to promote more responsible development of coal resources on the nation’s public lands, including: improved documentation for coal operation inspections on coal exploration licenses, licenses to mine, leases, and logical mining units; and increased Mineral Mine Inspector training and certification requirements.

The Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform rule will be published in the Federal Register on January 6, 2015, which initiates a 60-day public comment period.

Sierra Club Director of Lands Protection Program Athan Manuel said Dec. 19 about this proposal: “Coal companies are making windfall profits as American taxpayers are being cheated, and today’s announcement signals a willingness to enact much-needed reform. The final rule should close loopholes that give the coal industry an unfair market advantage for decimating public lands and paying bargain-basement rates for public resources. Further, the Department of the Interior should enact changes to our coal program that are in line with the President’s climate action plan and keep dirty coal in the ground.”

Environmental groups have failed for years in federal court to force BLM to take into account the CO2 emissions when coal produced from federal lands is burned when making its coal leasing decisions.

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.