REPORT:

A Fair Share: The Case for Updating Oil and Gas Royalty Rates on Our Public Lands

A report highlighting how Western state taxpayers lose between $490 million and $730 million annually due to low royalty rates for oil and gas extracted from U.S. public lands.

BLOG:

Debunking Coal Industry Arguments Against “Fair Share” Reforms to the Federal Coal Program

Surface_coal_mine_detail,_Gillette,_Wyoming

Over the next month, officials from the U.S. Department of the Interior and the Bureau of Land Management will be traveling across the Rocky Mountain West to hear directly from Westerners about new efforts to reform the way coal is valued on public lands and whether taxpayers receive a fair return from mining.

The first listening session will be held this week in Washington, DC, with listening sessions to follow in Billings, Montana; Gillette, Wyoming; Denver, Colorado; and Farmington, New Mexico. This is welcome news as evidence mounts that the Interior Department’s coal leasing program is rife with loopholes and handouts that benefit a few companies at the expense of taxpayers. The Government Accountability Office, the Congressional Research Service, Interior Department audits, investigative journalists, and government watchdogs have all raised red flags warning that American taxpayers are shorted on coal mined from public lands.

The listening sessions are expected to generate a healthy debate about solutions to bring the U.S. coal program into the 21st century, with two key reforms currently on the table:

  • Closing a loophole that allows companies to avoid paying royalties to the American people by selling coal to their own subsidiaries at discounted rates, then turning around and selling coal for a higher price to a third-party.
  • Ensuring coal companies pay a fair royalty to taxpayers for the right to mine publicly-owned coal.

But coal companies have already made up their mind about these proposals – and they will be opposing any and all efforts at reform. Here are four complaints that coal companies, their lobbyists, and political allies will likely make during these listening sessions, and why they’re off base.

1) Reforms are an attempt to put the coal industry out of business.

What they are actually after is trying to make [coal mining] unprofitableRichard Reavey, Cloud Peak Energy.

Newspapers are filled with stories about the ascendance of renewable energy, cheap natural gas replacing coal, and coal companies hitting hard times.

Despite shifting energy markets, America’s largest coal company, Peabody Energy, still brought in nearly $7 billion in revenue in 2014, and paid its CEO $11 million dollars.

And the data show that coal will continue making key contributions to America’s energy mix for decades to come. In fact, the Energy Information Administration expects coal to provide approximately one-third of all American electricity through 2040. Much of this coal will be from mines on U.S. public lands in Montana, Wyoming, Colorado, and New Mexico.

War on Coal? Percent of U.S. Electricity Generated from Coal to Remain Flat Through 2040

Blog Chart - Power from Coal Electricity from Coal
Source: Energy Information Administration, 2015

Just because some coal companies hit hard times does not mean American taxpayers should be shortchanged. On public lands, coal companies have found a way to pay less at the expense of communities and at the expense of all Americans who share ownership of these resources.

As the coal industry restructures, it’s vital that companies pay their fair share for mining on public lands. Companies like Peabody report that coal production will rebound and stay high on public lands in the near term. Kicking fiscal reforms down the road means that citizens who own the land will continue to make less while coal companies make more.

2) Reforms are intended to stymie coal exports.

We believe the [Office of Natural Resources Revenue] rule is designed to inhibit coal exports from the Powder River Basin and could, if unchanged, cost Montana and Wyoming access to a potential 100-million ton export market… Rick Curtsinger, Cloud Peak Energy.

Coal has more competition from other energy sources than ever before. Natural gas production in the U.S. is higher than any time in history and electricity from renewable energy sources increases each year.

With other fuels emerging as viable, low-cost alternatives to coal, companies mining on public lands are looking towards foreign markets in Europe and Asia to export American coal.

Since President Obama entered office coal exports have increased dramatically.

U.S. Coal Exports, 2009-2014

Blog Char - Coal Exports
Source: Energy Information Administration, 2015

Coal exports, however, are particularly vulnerable to price manipulation and the practice of dodging royalty payments.

A 2012 Reuters investigation revealed that coal companies mining on public lands are taking advantage of a loophole that allows them to sell coal to themselves at a discount through “captive transactions.” The result of the loophole is below-market royalty payments to American taxpayers and a huge windfall for companies selling coal at a premium, particularly in foreign markets.

The Obama administration has proposed a new rule that attempts to close the “captive transaction” loophole and ensure companies are paying a fair value in royalties owed to taxpayers. The rule, proposed by the Office of Natural Resources Revenue, would simply require companies to pay a royalty on the first sale to a non-affiliated company to ensure royalties are paid in full on an “arm’s-length” transaction, and is in no way intended to stymie coal exports.

3) Coal produced on public lands is already burdened by too many taxes and regulations.

The proposed [Office of Natural Resources Revenue] rule creates complex regulatory policy… Charlene Murdock, Peabody Energy.

[Coal from U.S. public land] is among the most heavily taxed coal products… Chris Curran, Peabody Energy.

The rule proposed by the Obama administration to close the “captive transaction” loophole serves to simplify a complex set of regulations, not create more. Under current rules, when a company sells coal to its own subsidiary, the value of the coal is set by a complicated series of “benchmarks” which are neither straightforward nor transparent.

The rule would do away with these “benchmarks” and require companies to pay a royalty on the first sale to a non-affiliated company. Setting the value of coal on this first “arm’s-length” transaction simplifies compliance for companies and simplifies oversight for the U.S. government.

Despite these gains, the proposed rule still does not go far enough to ensure American taxpayers receive a fair return from coal mined on public lands. The royalty rate for surface-mined coal from U.S. public lands is currently set at 12.5 percent and underground-mined coal is set at 8 percent. However, recent independent studies have shown that coal companies effectively pay a royalty of only 4.9 percent due to tax breaks and other subsidies.

The 4.9 percent paid by coal companies is grossly lower than what Americans are owed and it’s these inefficiencies that allow companies to reimburse taxpayers at a below-market value for coal. BLM can readily fix this discrepancy by increasing the royalty rate for surface-mined coal at the next lease sale.

4) Reforms harm coal-producing states.

“[Reforms] may seem like a small change in the process, but it would have huge repercussions in Montana, especially counties supported by mines…” Montana Congressman Ryan Zinke.

Western states and U.S. taxpayers – who evenly split the revenue generated from coal mining on national public lands – are shortchanged by the status quo. In fact, one analysis finds that Western states are losing out on nearly $1 billion each year because of subsidies and the government’s failure to close loopholes. This revenue could be used to fund schools, repair roads, and fix aging infrastructure.

Closing loopholes and eliminating subsidies would generate...
Source: Headwaters Economics, 2015

States like Montana and Wyoming in particular – where a large majority of public land coal is mined – stand to benefit significantly from a modernized royalty. One analysis from independent economists demonstrates that action by the U.S. government to increase the royalty paid would result in millions of dollars more for taxpayers.

Big coal companies have found a way to pay less at the expense of communities who share ownership of these resources. As the Billings Gazette wrote:

Once mined, the coal is gone forever. With it, so is a part of the land’s value. Coal royalties ensure that Americans see some value for coal to offset the resource being lost. There has been a debate about how to value coal. But, keeping this loophole would mean that citizens who own the land will continue to make less while coal companies make more on it.

 

Photo Credit: Greg Goebel

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REPORT:

A Fair Share: The Case for Updating Oil and Gas Royalty Rates on Our Public Lands

A report highlighting how Western state taxpayers lose between $490 million and $730 million annually due to low royalty rates for oil and gas extracted from U.S. public lands.