According to the Center for American Progress:
For decades the Bureau of Land Management (BLM) has run a fundamentally noncompetitive leasing program, which has been a boon to industry. Since 1990, 96 of the 107 coal-lease sales held by the BLM have had only one bidder, despite a clear mandate under the Mineral Leasing Act of 1920 that federal coal leases be offered “competitively.” This means that almost 90% of all federal coal-lease sales over the past 25 years have been noncompetitive.
Powder River Basin (PRB) coal is significantly undervalued and sells at a fraction of the cost of coal produced in other regions of the United States. Coal produced in the Appalachian region, for example, sells for $63 per short ton, but PRB coal sells for a shockingly low $13 per short ton—$50 less per short ton. Even accounting for the higher energy content of Appalachian coal, PRB coal is cheaper, just $0.74 per million British thermal units (BTU), versus $2.46 per million BTUs for Appalachian coal.
In 2013, the Government Accountability Office (GAO) and U.S. Department of the Interior issued separate reports in which they each found major deficiencies in the coal-leasing program and concluded that it lacks rigor and oversight. Both noted that the BLM employs a deeply flawed process to assess the fair market value of federal coal. The artificially low market price of Powder River Basin coal costs U.S. taxpayers in several ways. Although the GAO and the Office of Inspector General refrained from assessing the full loss to taxpayers from the noncompetitive nature of BLM’s coal-leasing program, a third-party review estimated that over the past 30 years, the government’s undervaluation of coal may have cost taxpayers upward of $30 billion in lost revenue.
What’s more, taxpayers are missing out on royalty payments that would accrue if the coal were sold at a higher price on the market. A short ton of coal sold at $60 per short ton provides a 12.5% royalty payment of $7.50 per short ton for taxpayers, a short ton of coal sold at $13 per short ton returns a 12.5% royalty payment of just $1.63 per short ton. With hundreds of millions of tons of federal coal sold annually from the Powder River Basin, these losses to American taxpayers add up quickly (Thakar, N. 2014. Federal Coal Leasing in the Powder River Basin: A Bad Deal for Taxpayers. CAP)
Below is an excerpt of a House of Representatives oversight hearing on BLM leasing practices. A shorter summary is a 2014 Summary of GAO Report on Federal Coal Leasing Prepared for Sen. Edward J. Markey and Rep. Peter DeFazio and the full GAO report is at December 2013 COAL LEASING. BLM Could Enhance Appraisal Process, More Explicitly Consider Coal Exports, and Provide More Public Information ].
July 9, 2013. Mining in America, Powder River Basin coal mining. The Benefits & Challenges. Oversight hearing, subcommittee on energy & mineral resources. House of Representatives .Serial No. 113–29. 56 pages.
DOUG LAMBORN, COLORADO. About 40% of the coal mined in the United States comes from the Powder River Basin. The region has tremendous potential. According to a recent U.S. Geological Survey assessment, the Powder River Basin of Wyoming and Montana contains about 162 billion short tons of recoverable coal from a total of 1.07 trillion short tons of in-place resources.
JARED HUFFMAN, CALIFORNIA. Forty percent of our Nation’s coal production occurs on public lands; and the vast majority of that, more than 80%, is produced in Wyoming. And yet, coal production from public lands in the Powder River Basin has largely escaped oversight in recent years. It has been nearly 20 years since the GAO has examined the Federal coal program. This is the first hearing that we have had on coal production in this region, in 2.5 years under the Majority. We have a responsibility in this Committee, I believe, to ensure that taxpayers are getting a proper return on this incredibly valuable public resource. Indeed, taxpayers have a history of getting short-changed when it comes to coal production in the Powder River Basin. In the early 1980s, at the request of Ranking Member Markey, the GAO undertook an investigation into the coal leasing program in that region. And the GAO found that the Reagan Administration had been leasing coal in the Basin for $100 million less than fair market value. As a result, Congress created a special commission to look at this issue, and enacted a moratorium on leasing until the problems could be addressed and taxpayers could be guaranteed a proper return.
There are troubling indications that taxpayers may once again be losing millions of dollars that they are rightfully owed from coal leases in the Powder River Basin. Last month the Interior Department Inspector General issued a report which concluded that taxpayers may have lost $2 million in recent lease sales and $60 million in potentially under-valued lease modifications.
Now, according to the inspector general, the vast majority of lease sales in the Powder River Basin are not, in reality, competitive. Over the past 20 years, more than 80% of the coal lease sales in the Basin received bids from a single company. This lack of industry competition means that if the Department is not correctly estimating the fair market value of the federally owned coal, then taxpayers could be losing millions of dollars.
And as coal companies are increasingly looking to export coal produced in the United States abroad, where it can be sold for higher prices, the inspector general report found that the Interior Department does not fully account for the possibility of exports in determining the value of coal below our public lands. In fact, the amount of coal being exported from the United States and the price of exported coal has doubled since 2007. Coal companies have told their investors they want to continue growing the amount of American coal sent overseas.
Leases in the Powder River Basin are issued for 20 years. Despite the claims of the Majority, the Obama Administration is leasing coal in the Powder River Basin. In fact, there were more successful coal lease sales in the region during President Obama’s first term than during President Bush’s first term. We have produced slightly more coal from Federal lands during the last 4 years under the Obama Administration than during the previous 4 years under the Bush administration. And I will say I take no joy in these facts, as somebody who happens to care about climate change, and happens to believe we should be transitioning away from coal. But the facts are the facts, and we should bear that in mind as we move forward with this hearing. We must now ensure that taxpayers are getting their fair share for that public resource.
I was disappointed to see that the Interior Department will not be able to testify at the hearing today. This Committee needs to hear from the Department directly on what it is doing to respond to the recommendations from the inspector general, and to ensure that taxpayers are being protected. I hope that the Majority would work with us on that, and I look forward to the testimony of our witnesses.
DAN COOLIDGE, CHAIRMAN, CAMPBELL COUNTY COMMISSIONERS. Wyoming is the largest producer of coal in the United States. The PRB has 13 surface mines and up to 100 foot thick coal seams. Nine of the Nation’s 10 largest coal mines operate in the PRB. Coal is mined at the rate of 12 tons per second in the PRB and over 80 coal trains per day leave the PRB loaded with coal to destinations outside of Wyoming. Since 2006, PRB coal production has averaged approximately 425 million tons per year. Most of the coal mined in the PRB is burned as ‘‘steam’’ coal used in power plants to produce steam for generating electricity.
The majority of PRB coal is exported out of State to power plants in 34 States. In 2011, Texas was the top consumer, followed by Illinois, Mississippi, Iowa, and Oklahoma, respectively. Of the 20 States that consume over 8 million tons, all but one have electrical rates below the national average.
Approximately 28% of the coal used for U.S. electricity generation in 2012 came from the PRB. This is equivalent to approximately 95 nuclear plants, 175 Hoover Dams or 200,000 wind turbines.
As an example, Wyoming’s North Antelope Rochelle and Black Thunder coal mines accounted for 20% of the United States’ coal production by tons in 2012. In 2012, Wyoming mines produced 401 million tons, with a total value of approximately $4 billion. By utilizing the coal resources that currently exist in Wyoming, our country can strive toward energy independence for North America. Coal provides electricity for hundreds of thousands of American homes, hospitals, roadways and schools. The U.S. Geological Survey estimates that PRB recoverable coal reserves amount to 127 billion tons in 2010.
MARY J. HUTZLER, DISTINGUISHED SENIOR FELLOW, INSTITUTE FOR ENERGY RESEARCH
Coal is the world’s most plentiful fossil fuel and is the most abundant fossil fuel produced in the United States. Over 90% of the coal consumed in the United States is used to generate electricity. Coal is also used as a basic industry source for making steel, cement and paper, and is used in other industries as well. As the first concentrated energy source to be used by man, coal fueled the Industrial Revolution and lifted the burden of labor from the backs of men and animals. The Industrial Revolution was begun in England, the first nation to employ its coal resources to increase human productivity, in turn becoming the first economic and political superpower of the energy age. For over a century, coal served as the chief transportation energy source and fed the world’s commerce with railroads and steamships. Its transformation from an abundant but useless rock into a valuable energy source created an explosion of intellectual creativity that changed the course of human events. Currently, coal is used to meet almost 20% of America’s total energy demand and generate about 40% of all its electricity.
In additional to its pivotal role as an affordable source of electricity, coal can also be converted into liquid fuels—gasoline, diesel, and jet fuel—as well as into an alternative to liquid natural gas (LNG) for use in synthetic and industrial gases. South Africa currently produces much of its liquid fuel from coal, using a process pioneered and used by Germany prior to World War II. Many nations are exploring methods by which coal can be utilized in cleaner forms. American coal production is currently the second highest in the world (behind China), delivering 1.01 billion short tons in 2012. China produces over 3.8 billion short tons a year and still needs to import coal. While coal use has slightly decreased over the last few years in the United States due to low cost natural gas and government policies against coal use, its share of world energy consumption has increased to 29.9% in 2012, the highest since 1970.
According to data from BP’s 2013 Statistical Review of World Energy, coal constituted almost 70% of China’s 2012 energy consumption.
In Germany, new coal-fired plants with a capacity of 5.3 gigawatts of electricity will come online this year to replace retiring nuclear plants and to back-up intermittent renewable technologies. In total, 10 new coal and lignite power plants are currently under construction in Germany.
To fuel these overseas plants, countries are importing U.S. coal. U.S. coal exports totaled 125.7 million short tons in 2012, 17% higher than in 2011, and the highest level in the history of the United States. About 75% of U.S. coal exports were shipped to Europe and Asia in 2012. Their desirability is continuing. The EIA reports that U.S. coal exports in March 2013 totaled 13.6 million short tons, almost 0.9 million short tons above the previous monthly export peak in June 2012. EIA is projecting a third straight year of more than 100 million short tons of coal exports in 2013. The top five destinations of exported coal (in descending order) during March were China, Netherlands (a large transshipment point), United Kingdom, South Korea, and Brazil. China imports U.S. metallurgical coal that has a high Btu content that the country uses for steelmaking and steam coal for electric generation.
Wyoming is the largest coal producing State, producing more coal than the next six largest coal producing States combined. Powder River Basin coal seams are thick, facilitating surface mining and making extraction easy and efficient. As a result, the price of Powder River Basin coal at the mine mouth tends to be less than that of coal produced elsewhere in the Nation.
According to a multi-agency Government study required by the Energy Policy Act of 2005, the Federal Government owns 957 billion short tons of coal in the lower 48 States, of which about 550 billion short tons are available in the Powder River Basin. The Bureau of Land Management has under lease or lease application about another 11.6 billion short tons of coal in the Basin. The report found that approximately 1.5% of the Federal mineral estate assessed in the Powder River Basin—or 82,000 out of 5.4 million acres—is available for coal mining under standard lease terms, which is about 27 billion tons of Federal coal. Nearly 88% of the Federal mineral estate in the basin is available for mining with varying degrees of access restrictions and about 11% is prohibited from being leased by statute or because of land-use planning decisions. Clearly, there is plenty of public land yet to be leased.
We evaluated the entire 957 billion short tons of federally owned lower 48 coal at an average price of $15 per ton for the subbituminous Powder River Basin coal and $35 per ton for the remainder of the Federal lower 48 coal, the worth of federally owned coal in the lower 48 States to the economy would be $22.5 trillion. Most of the coal resources in Alaska are deemed to be federally owned and are estimated to be 60% higher than those in the entire lower 48 States but are not included in these estimates. The United States, with the largest estimated coal resource base in the world, does not count Alaska’s coal in its resources, but Alaska has more coal in place than the entire lower 48 States.
Until recently, coal had been used to produce 50% of the Nation’s electricity, but is losing market share to natural gas and renewable energy as natural gas prices drop, renewable energy is mandated and subsidized, and new environmental regulations take effect. The Environmental Protection Agency (EPA) has produced regulations that essentially ban new coal plants and make its continued use in existing plants extremely costly. As a result, coal produced only 37% of our electricity in 2012.
Some have suggested that these closures are mainly due to the low price of natural gas made possible through shale gas discoveries. Regardless, it would be prudent for policy makers and analysts to consider the consequences of removing one of the major three sources of electrical generation from our fuel mix for electricity. Currently our electrical generation mix is largely coal, natural gas and nuclear power. While natural gas prices are currently low, gas-directed rig activity is also very low, which could have an impact on supplies in the out years. Further, the Wall Street Journal reported on January 29 that pressure is increasing to shutter nuclear power plants. If the United States decides that it can provide the vast majority of its electricity from natural gas, it must assure that those supplies will not be threatened by Government actions, including the federalization of hydraulic fracturing regulation or other attempts to require Federal permission to drill natural gas wells, as many have advocated.
MARY L. KENDALL, DEPUTY INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF THE INTERIOR
We conducted our evaluation to determine if the Department’s coal leasing process obtains a fair return on coal, produced from public and Indian lands, and assessed the effectiveness of the Department’s coal lease inspection and enforcement program. We found several areas in which BLM could improve its coal program. I will discuss a few of these. BLM is responsible for obtaining fair market value for coal production on public and Indian lands. Mineral valuation expertise is critical for setting fair market value. But BLM does not use the Department’s authority on valuation for minerals. We believe that BLM’s coal lease sales would be greatly enhanced if the Office of Valuation Services assumed the appraisal function. In addition, BLM does not fully account for export potential in developing fair market value. A reported 125 million tons of coal were exported in 2012, an amount that has almost doubled in 5 years. The price of exported coal has also more than doubled in only 4 years. This trend suggests that export potential should be considered in calculating fair market value. Accurately calculating fair market value is particularly important in coal leasing, because a competitive market does not generally exist for coal leases, making fair market value a substitute for competition.
BLM is required by law to reject bids that fail to meet or exceed fair market value. We found instances, however, in which BLM accepted bids below fair market value, resulting in over $2 million in lost revenue. We believe that any bid below fair market value should be rejected.
Prior to a lease sale, a mining company explores the site for the existence and extent of coal seams and considers the energy content and quality of the coal. The company must then furnish this information to BLM, which uses the information to develop fair market value. BLM does not, however, independently verify this information, and places itself at risk of receiving and relying upon incorrect data from mining companies.
We also found that BLM may not be getting a fair return for lease modifications. BLM typically approved a substantially lower price for modifications, averaging more than 80% lower than the price used in the regular lease sales. We estimated a potential $60 million in lost revenues because of this practice.
BLM does have an active inspection and enforcement program, but runs the risk of inconsistencies among its State offices due to its decentralized organization structure and outdated and never-finalized guidance. BLM also has an inspector certification initiative underway that covers all personnel who inspect solid minerals, including coal. This initiative should improve the quality and consistency of inspections and enforcement.
Coal management is a high-dollar program for the Department. In fiscal year 2012, the Department collected $876 million in coal royalties, and over $1.5 billion in bonuses from six lease sales. The budget for coal management is approximately $9.5 million.
BLM manages a total of 314 leases—306 leases on public lands and 8 on Indian lands. In fiscal year 2011, 473 tons of coal were produced from these mining operations. Seventy-one companies operate about 80 mines on public and Indian lands. Four companies account for over 90% of BLM’s sales volume. The largest coal producing State is Wyoming, primarily from the Powder River Basin. In fiscal year 2011, Wyoming accounted for 83% of the Department’s total coal production and 86% of its coal revenues.
We conducted our evaluation to determine if the Department’s coal leasing process obtains a fair return on coal produced from public and Indian lands. We also assessed the effectiveness of the Department’s coal lease inspection and enforcement program.
We found several areas in which BLM could improve the coal leasing process— in valuation, bid acceptance, internal controls, exploration integrity, modifications, and royalty rate reduction—and strengthen the inspection and enforcement program.
In addition, BLM does not fully account for export potential in developing FMV. The U.S. Energy Information Administration reported that 125 million tons of coal were exported in 2012, an amount that has more than doubled in 5 years. The price of exported coal has also more than doubled in only 4 years. This trend suggests that export potential should be considered in calculating FMV. Exported coal volumes from the Powder River Basin represent about 1.6% of production (6 million tons), but mining companies are actively exploring methods to transport the coal to western ports to export the coal overseas. Export volumes have stabilized in 2013 but are expected to rise in the long term.
Accurately calculating FMV is particularly important in coal leasing because a competitive market does not generally exist for coal leases, making FMV a substitute for competition. Over 80% of the sales for coal leases in Wyoming’s Powder River Basin had only one bid in the past 20 years. None had more than two bidders on a sale. The lack of competition is attributed to BLM’s decision in 1990 to discontinue large-scale regional lease sales and use smaller scale lease sales to continue or extend the life of existing mines.
We also found that BLM has internal control weaknesses regarding FMV data security and review and approval of FMV determinations. Procedures for safeguarding FMV data are inconsistent among BLM offices, and in one State office, a single individual computes FMV, increasing the possibility of undetected errors, a higher risk of fraud, and an inability to move sales forward if that person is absent.
We found that BLM may not be getting a fair return for lease modifications. In the lease modifications we reviewed, BLM typically approved a substantially lower price—averaging more than 80% lower—than the price used in the regular lease sales during the same period. We estimated a potential $60 million in lost revenues. While the modifications may have been justified, we could not validate BLM’s decision-making process with the documentation available to us.
Mining companies may apply for a royalty rate reduction for a number of reasons. When a royalty rate reduction is based on financial hardship, however, BLM program officials generally do not have the expertise to evaluate a company’s financial statements and other supporting documentation. We recommended that in such cases, BLM seek the assistance of the Office of Natural Resources Revenue (ONRR), which has accounting expertise in financial records analysis.
BLM has an active inspection and enforcement program. The Bureau runs the risk of inconsistencies among its State offices, however, due to its decentralized organizational structure and outdated and never-finalized guidance. The practice of BLM coal inspectors is to work informally with mining companies to resolve noncompliance. This is due, in part, to the ineffective tools they have for enforcement. The Notices of Noncompliance that BLM uses to cite companies for infractions do not have a financial penalty associated with them. BLM told us that it is limited by current statutory authority.
BLM has assigned inspectors to the same mines for many years, sometimes decades. This may result in over familiarity with mine operators and complacency in inspections and enforcement.
Mr. HUFFMAN. We have heard a $62 million figure that you offered up as the possible loss to the taxpayers. Whether you actually attempted to quantify the full extent that BLM may have failed to accurately reflect Federal coal before the leasing, and so, how you would characterize the $62 million estimate? Is it is a conservative estimate? What would you say about that?
Ms. KENDALL. It is hard for me to call it, really, anything. It is based on the sample of leases that we looked at. And the way we looked at it, we could not extrapolate out the entire body. It is just one approach to looking at a program. In this case it was a select sample. It was not the kind of sample where we could figure out what the whole universe was.
Mr. HUFFMAN. I realize I am asking you to speculate. But if you were asked to speculate, would you say the actual number is more likely to be higher or lower than that amount?
Ms. KENDALL. I would say higher.
Mr. DAINES. According to the Government’s own stats, about 40% of Americans’ electricity comes from coal, about 30% from natural gas, about 20% nuclear, 7% hydro, 3% wind, and 0.1% solar.
I am not opposed to electric cars, but we ought to remind the American consumer that, based on these statistics, a sign on the back of that Tesla might read, ‘‘This car likely powered by coal.’’ That is what the statistics would show us.
When I toured Colstrip last week they told me they used to use 1,000 homes per megawatt as their ratio. Now it is 750 homes. Why is that? Americans are using more electricity. They like their flat-screen TVs, they like their mobile devices, they like their computers. We are using more electricity.