NMA Responds to Inspector General Report on Coal Leasing Program

The IG’s report confirms that the federal leasing program is sound and contributes substantial net benefits to American taxpayers. In 2012, bonuses and royalties exceeded $2.4 billion and totaled $4.8 billion over the past three years.

Importantly, and contrary to early media reports, the IG report did NOT conclude the program has resulted in loss of revenue. It found that updating certain agency polices would minimize certain hypothetical risks for the undervaluation of the resource.

Moreover, the biggest shortcoming the IG identified – i.e., the valuation of smaller tracts, if added later – incorrectly assumes that these smaller tracts would fetch the same valuation as the original larger tracts. These smaller tracts are by nature less attractive due to lower quality and higher cost coal.

If not leased, this less valuable coal will likely be left in the ground, yielding the government zero revenue from bonus bids and royalties.

The IG report offers guidance to the Bureau of Land Management for assuring the program’s continued effectiveness. But the resulting hypothetical gains the IG estimates amount to rounding errors compared to the total sums, documented in the report, that are paid to taxpayers.

The report’s observation that the potential for coal exports from federal coal leases is not fully considered is of marginal value upon consideration that coal exports comprise a very small market currently for federal coal: only 1.6 percent of the total volume sold from the Powder River Basin.

Our experience is that BLM employees are professional and responsible and, as this report specifically notes, confront very “complex and unique” market and financial variables when evaluating coal leases – variables that could as easily lead to above-market as below-market estimates based upon opinion.

The IG reports that variables in the valuation process include: the price of coal; current and future demand for coal; market conditions; shipping costs; proximity of the mine to available transportation and end market; coal quality (including energy content and impurities such as ash and sulfur); depth of coal seams; equipment and labor for operating the mine; and surface or underground mining extraction methods.

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