Cheyenne lecture will focus on Powder River Basin coal leasing program

— August 16, 2013

Did you know that the Powder River Basin — where 400 million tons of coal is extracted each year — is not classified as a coal-producing region?

Did you know that competitive lease sales of federal coal tracts in the Powder River Basin often attract just one bidder — usually it’s the party that nominated the tract for lease in the first place.

The laws and regulations guiding federal coal leases in the Powder River Basin are a compilation of many strange turns throughout the past four decades. Tom Sanzillo and Mark Squillace are going to give their take on this evolution and the current state of federal leasing at a breakfast forum from 7:30 a.m. to 9 a.m. Tuesday at the Herschler Building, room 1699, in Cheyenne.

The lecture is sponsored by the Powder River Basin Resource Council and Western Organization of Resource Councils.

Squillace, a professor of law and director of the University of Colorado Natural Resources Law Center, and Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis, will discuss what they view as problems with the current federal coal leasing system. They’ll offer their own ideas for reforming the system.

I recently caught up with Squillace in a phone interview to get his take on the federal leasing program in the Powder River Basin. He said that in the early 1970s federal — or publicly-owned coal — was being snapped up by corporations mostly on speculation, leading to a moratorium on leasing. The Federal Coal Leasing Amendments Act of 1976 was essentially aimed at increasing revenue from federal coals, and to put the federal government in charge of ensuring that the lease program was competitive. Wyoming and Montana set their own severance tax rates, and large-scale surface mining took hold on the Wyoming side of the Powder River Basin.

Lawsuits re-shaped the leasing program after President Ronald Reagan’s Interior Secretary James Watt put together what many considered a public giveaway deal on coal tracts in Montana and Wyoming in 1982.

“That ultimately got James Watt fired,” said Squillace.

A three-step process was put into place to improve competitive leasing, again meant to make sure the federal government — not the mining companies — was driving the competitive lease process. But in 1990, after stagnant coal sales in the basin, the Powder River Basin was decertified as a coal producing region — a move meant to boost coal sales for the purpose of domestic energy production.

An amendment to the Clean Air Act in the early 1990s aimed to address “acid rain” put the Powder River Basin’s low sulfur coal in high demand. Coal extraction in the basin flourished, while mining companies paid less than $1 per ton of coal (plus handsome bonus bid payments) for federal coal tracts.

“The problem with this is, when (the U.S. Bureau of Land Management) does its appraisal, it bases its fair market value determination on local sales. But Powder River Basin coal is sold all over the nation, and increasingly all over the world,” said Squillace.

The industry argues that the price paid for federal coal leases in the basin have steadily risen — often more than $1 per ton — over the past decade. And given the increasing cost of mining (coal becomes more expensive to mine as basin producers chase coal seams deeper and deeper underground [read this Platts report]), the current leasing program is not only competitive among existing coal companies there, but it also keeps speculation out of the picture.

So there’s a vigorous debate in the nation about whether the federal government — and citizens of the United States — ought to gain more revenue from Powder River Basin coal by volume or by value.

Squillace suggests the federal government ought to test out a pricing floor — say $2 per ton or even $5.

“You might limit the scale of coal production, but vastly increase how much money it contributes to the Federal Treasury,” said Squillace.

Wyoming Mining Association executive director Marion Loomis told WyoFile: “State and federal, get all of the money owed to them … Every ton of coal is audited for every year of production. The companies adhere to the laws that have been written and are in compliance with the statutes.”

And that’s the question: are the laws and regulations fair, given the ever-changing dynamics today?

Obviously, there are many who are concerned about coal’s contribution to climate change and they’d rather see Powder River Basin coal remain in the ground. And another dynamic hotly debated right now is whether the Powder River Basin coal mining industry’s ambition to export more product to Asian countries is in direct conflict with the federal leasing program’s expressed aim to benefit domestic energy production — an aim also bolstered in the Energy Policy Act of 2005.

“The government often says, under Energy Policy Act of 2005, they are obliged to make energy available to domestic markets,” said Squillace. “But that argument goes away if you’re selling coal to China. Well, then shouldn’t the government be trying to maximize revenues from selling coal leases?”

The ambitions to export more Powder River Basin coal to Asia also raise questions about the current coal royalty payment program, which is currently under review.

Wyoming’s political leadership remains staunchly in favor of keeping the current leasing program intact, while they join the industry’s efforts to bolster coal exports.

(Click here to download a pdf of the Bureau of Land Management’s guide for economic evaluation of coal properties.)

— Dustin Bleizeffer is WyoFile editor-in-chief. You can reach him at (307) 267-3327 or email dustin@wyofile.com. Follow Dustin on Twitter at @DBleizeffer

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