The Billings Outpost

Experts: States losing on coal

By WILBUR WOOD - For The Outpost

A coal train with empty cars returning from the west stopped traffic on North 27th Street on Tuesday, Aug. 20, and kept me from arriving on time for a presentation by two experts talking about problems with the leasing of federally owned coal in the Powder River Basin.

So I missed the first 10 minutes of Mark Squillace’s slide show at the headquarters of Northern Plains Resource Council on South 27th Street, on the other side of the tracks. Squillace’s opening slides (I obtained a copy of them afterward) showed how coal-fired power plants had declined from generating more than half of the electricity produced in the U.S. – 53 percent back in 1993 – to 42 percent by 2011. (And that figure today, two years later, is likely down to 40 percent.)

This plummeting demand for coal in the U.S – and the consequent clogging of intersections by coal trains in cities and towns all the way from here to ports on the West Coast where coal can be shipped to Asia – is due to several factors.

Natural gas replacing coal

Chief among these is the sudden availability of relatively cheap natural gas, retrieved from deep deposits of shale by hydraulic fracturing — or “fracking.” Though it’s not cheap to shove chemical-laced water down one shaft and blast apart deep deposits of shale to release gas or oil to be sucked up another shaft, here is a cost comparison between natural gas and coal, as expressed in dollars per one million British thermal units—or mmbtu. (One Btu is the heat required to raise one pound of water one degree Fahrenheit.)

Only five years ago, in 2008, coal cost $2.07 per mmbtu while natural gas was $9.05.  By 2010 coal had risen to $2.27/mmbtu while natural gas had dropped to $5.09. By August 15, 2013, coal had risen to $2.44/mmbtu while gas was down to $3.36.

Coal’s still cheaper, you observe, but coal has lost its competitive edge over natural gas because it is less expensive to build natural gas power plants or, increasingly, wind farms or solar facilities – than to upgrade pollution controls at existing coal-fired plants or to build new coal-fired plants with state-of-the-art controls.

And that, Mark Squillace said, does not even take into account coal’s “substantial external costs (which are) not captured in the marketplace.”  These externalized costs include conventional air pollution (sulfur dioxide, mercury, fly ash, etc.) and the attendant health costs; greenhouse gas emissions exacerbating climate change; social, economic and environmental impacts from coal mining, combustion, and disposal of ash and other waste products; mining accidents; and direct and indirect subsidies.

Federal coal at a discount

One of those subsidies is what both Mark Quillace and the other speaker, Tom Sanzillo, term “the discounted prices for federal coal.” It is particularly discounted in the Powder River Basin of Wyoming and (some of) Montana, the largest and most prolific coal-producing region in the United States.

The U.S. government owns about one-third of all recoverable coal reserves in the U.S., some 88 billion tons.  If current rates of domestic coal consumption were to stay at the level they are today, federal coal alone could handle all U.S. needs for the next 80 years.

But both speakers expect that U.S. demand will keep going down. Hence, the push to keep the coal industry alive by exporting coal to Asia. But in its leasing program, the Bureau of Land Management (BLM) has neglected to take into account the higher prices that foreign countries are willing to pay for U.S. coal.

BLM coal leasing rules, established in 1975, require comprehensive land use planning as well as coal lease activity planning—in order to promote competitive bidding for the coal. These rules require the BLM to set a fair market value (FMV) for the coal in six “coal producing regions” of the U.S. The six, established in 1979, were the Powder River Basin, Uinta Basin, Rocky Mountain region, Illinois Basin, Central Appalachia and Northern Appalachia.

Somewhere along the line, however, BLM was persuaded - or persuaded itself - to “decertify” all six regions. One might ask: how could the Powder River Basin - the most extensive and prolific producer of coal in the U.S.—not be considered a “coal producing region”?

Ignoring its own rules

This decertification allowed BLM to ignore the rules. Leasing is now done “by application” from a coal company, which means that coal companies—not the federal government—control the process. While the BLM still has to establish a fair market value for coal, its process (as both Sanzillo and Quillace pointed out) is flawed.

First, it is confidential — read: secretive. Next, there is rarely more than one company bidding for a tract—read: no competition. And FMV (fair market value) is based on a standard appraisal method that limits its inquiry to local sales. This disregards the higher coal prices of the global market.

An alternative approach to valuing coal, comparing expected income from sales with expected income from costs, is “even more problematic,” said Quillace, “because it tells you nothing about whether the specific coal proposed for leasing should be mined”—this is thanks to the lack of “comprehensive coal lease planning” mandated by 1975 rules but circumvented by the decertification.

Under the federal FMV program the government collects its lease payment and it collects a 12.5 percent royalty on the “gross revenue” from every ton of federal coal sold in the U.S., The federal government shares this 50-50 with states where the coal is mined.

Reduced revenues

But the difference between the domestic price of coal and the global price of coal is exempted from “gross revenue.” Such exemptions, plus too-low FMV, reduce revenues to both the federal government and the states.

The Inspector General of the Department of the Interior has noticed this, stating on June 11 that “weaknesses in the current coal sale process … could put the Government at risk of not receiving the full, fair market value of the leases.”

Anticipating that “exports from the Powder River Basin are expected to increase substantially in the coming years,” the DOI Inspector General emphasized that “all coal lease sales should recognize this (export market) factor in the valuation of the commodity.”

An investigation of federal coal leases (far broader than that done by the Department of the Interior) was carried out in 2012 by the Government Accountability Office (GAO)., which calculated that undervalued federal coal has cheated U.S. taxpayers out of $28.9 billion.

One way that coal companies game the system is to set up a subsidiary company, or work with an affiliated company, to which it sells coal at a low price, generating low royalties for state and federal governments. Then that subsidiary or affiliate sells the coal to a foreign buyer at a much higher price, and both entities come out ahead. 

Powder River Basin coal is currently selling for $11 a ton, he noted, while Asian buyers are paying $50 a ton.

The summer 2013 issue of Northern Plains Resource Council’s newsletter, The Plains Truth, disclosed just such an arrangement between Cloud Peak and an Australian-based company called Ambre Energy. Ambre is now attempting to lease 40.6 million tons of publicly owned coal at Decker, Montana (and is also investing in coal shipping ports proposed to be built in Longview, Wash., and Boardman, Ore).

In a question-answer session, Margie MacDonald of the Western Organization of Resource Councils mentioned that an upcoming GAO report could reveal even more about BLM’s coal leasing deficiencies.

Sanzillo, who is director of finance at the Institute for Energy Economics and Financial Analysis, agreed. BLM is “ill equipped” to handle its leasing program.

“Engineers and geologists don’t review coal data,” he said. “Staff people can’t read a balance sheet. There is no internal control to assure fair market value. There are flaws in the appraisal process—markets are not just domestic but global. There are too many leases right now, yet the BLM is saying ‘yes’ to new leases while asserting there’s no export market.  How does that compute?”

Sanzillo said he’s more and more inclined to call for a moratorium on BLM leasing.  MacDonald said that WORC was doing just that. Quillace, who is professor of law and director of the University of Colorado Natural Resources Law Center, said that while he’d like to see those externalities costs rolled into the price of coal, he believes that “coal is with us for the short term.”  Given that, our interest is in a healthy coal industry, profits up, revenues to the government good. “It’s in our interest to pay a higher price for coal,” he said. He said the BLM should consider setting a base price below which a bid would not be accepted.

Both speakers alluded to a BLM coal lease sale in Cheyenne, Wyo., slated for the next day.  They thought that the tract, called the Maysdorf II North Coal Tract, two square miles in size and containing 148.6 tons of mineable coal, would attract just one bidder, which is typical.

There are two companies, however, that runs coal mines near this site: Virginia-based Alpha Natural Resources and Cloud Peak Energy, which is based in Gillette, Wyoming. Seven years ago a company that is now a subsidiary of Cloud Peak had requested that the BLM offer this tract for lease.

But neither company entered a bid—the first time that’s happened in Wyoming, according to BLM spokeswoman Beverly Gorny. In a dispatch on the afternoon of the Aug. 21 sale, Laura Hancock of the Casper (Wyo.) Star-Tribune reported that Cloud Peak had “evaluated the coal tract and declined to bid due to current coal market conditions and the uncertain political and regulatory environment for coal and coal-fired electricity.”

Hancock also reported that Cloud Peak executives were considering reducing production at their Cordero Rojo mine. Some coal companies may be considering their own coal-leasing moratorium.

Copyright 2012 Wild Raspberry Inc.

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