Taxpayers Avoid Huge Losses from Federal Coal Royalty Relief

Relief TrackingTaxpayers Avoid Huge Losses from Federal Coal Royalty ReliefAfter inviting applications, Bureau of Land Management denies Covid-19 based relief

Energy & Natural Resources,  | Analysis
Jul 29, 2020  | 5 min read | Print Article

The Bureau of Land Management has been considering reducing royalties paid to taxpayers by coal companies operating on more than 20 federal coal leases – all under the guise of Covid-19-related economic relief. If granted, royalty relief for mine operators could have reduced revenues by hundreds of millions of dollars, half of which would normally be shared with the state where mines are located. Thankfully, attempts to circumvent the normal royalty relief process have been largely denied.

In exchange for the right to explore, extract, and sell taxpayer-owned coal from federal lands, private companies are required to pay a set percentage of coal sales to the Department of the Interior.  This percentage, or royalty rate, is typically set at 12.5 percent for surface mines on federal land and 8 percent for underground mines.

In the spring, the Bureau of Land Management (the Bureau) published guidance explaining how operators of federal coal mines could apply to have their royalty rate reduced using Covid-19-related rationales. In response, operators of 22 federal coal leases stretching across nearly 62,000 acres of federal land in Wyoming applied for relief in May. All of the leases in question are held by subsidiaries of just two major coal companies – Arch Resources and Peabody Energy.

The leases held by Arch and Peabody govern operations on five mines which collectively produce a huge portion of not just federal coal, but all U.S. production. In particular, the Peabody-run North Antelope Rochelle mine and the Arch-operated Black Thunder mine in Wyoming’s prolific Powder River Basin are the two biggest coal mines in the U.S. Collectively, the five mines for which royalty relief was sought accounted for 63 percent of all federal coal production and 26 percent of all U.S. production in 2019.

Granting royalty relief to such a substantial segment of coal production would have been a backdoor subsidy to an industry the Trump administration has tried to support on multiple fronts. According to the Bureau’s guidance, if their applications had been granted, these operators would have received a royalty cut for up two years. If production at the five mines remained constant over those two years, royalty relief could have meant more than $300 million in lost revenue.

Thankfully, Bureau records updated this week reveal that none of the applications for relief were granted. The Bureau appears to have denied all 18 requests submitted by Peabody Energy subsidiaries on July 21, citing incomplete applications. The records indicate Arch Resources withdrew relief applications for its four leases in early July. However, one application for relief was re-submitted for the lease associated with Arch’s Coal Creek mine.

In addition, the updated records indicate that Bureau staff edited the files for certain leases to remove references to Covid-19. This is consistent with the agency’s removal of the operator guidance from its website, even though U.S. transmission rates of the coronavirus are worse now than when originally posted. The moves may reflect that under current regulations, using the pandemic as justification for royalty rate reductions was always tenuous. The Bureau is directed by statute to grant relief only when necessary to conserve federal resources or continue the life of a mine that would be shuttered otherwise.

Normally, operators can apply for royalty rate reductions under one of five categories. In its guidance, the Bureau directed operators to apply for category 3 or 4 relief (see BLM Manual 3485 for details). But operators were always able to apply for relief in these categories if they fit the necessary criteria, raising the obvious question – did the Bureau consider granting relief outside the statutory and regulatory standards?

Ultimately, the Bureau seems to have opted not to circumvent normal procedure and grant relief based on Covid-19 justifications. Taxpayers may still lose some revenue, however, if the Bureau approves any of the three applications for relief still pending, which may or may not have been prompted by the agency’s spring guidance. In addition to Arch’s resubmitted application, two leases in Montana and Utah are awaiting an agency decision.

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