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Our Call for Federal Coal-Lease Reforms

August 18, 2015
Tom Sanzillo

 

[Editor’s note: This testimony is being presented in person today at a BLM “listening session” in Denver.]

Just over 30 years ago our federal leaders decided to flood the nation’s energy markets with cheap coal from the Powder River Basin (PRB). From a business perspective, the plan worked—coal took over 50 percent of the nation’s electricity market share and a proliferation of coal plants were built and financed mostly under state regulation. Coal companies experienced healthy balance sheets as production and sales remained robust.

Today the business partnership between the Department of Interior (DOI) and the coal industry in the PRB has run its course.

The business model of the coal companies in the PRB is losing market share nationally and globally, and it is losing revenues and investor confidence. Coal stock prices have collapsed at the same time the nation’s stock market has achieved important new growth benchmarks. There is no clear business plan from PRB coal producers on how to orchestrate a turnaround short of bankruptcy.

Coal markets in the U.S., if not the world over, are getting smaller, not larger. Right now there is too much coal and too many coal companies chasing too few customers.

AS IMPORTANT AS THE QUESTIONS OF FAIR MARKET VALUE, COMPETITIVE BIDDING, ROYALTY RATES, PROGRAM TRANSPARENCY AND AGENCY ACCOUNTABILITY ARE, current market conditions have swallowed up the basic premise of the federal coal lease program. This is a no-growth environment and the companies mining coal in the PRB are in a state of financial distress and leadership disarray.

We have offered detailed comments for this hearing and have commented extensively in the past about the current program and the issues facing it.

Fundamentally, the federal coal lease program no longer serves the financial interest of the public or the coal industry. It is designed for a period of expansion and growth and we are in a period of consolidation and contraction.

DOI and The Bureau of Land Management (BLM) need to become active owners. Passive ownership on the part of the federal government, which is the current program design, will insure that the PRB is littered with bankruptcies, distressed sales and layoff notices. Allowing the coal companies to remain in charge of all aspects of federal coal leasing is a recipe for growing inefficiencies in the strategic use of this national asset. You will not have a stable employment base in the PRB without some order and discipline brought to the markets.

Our view of active ownership is detailed in the memo we submitted for this session.

The list starts with the need for a moratorium on all new leases and expanded lease applications. We also propose a process for taking back existing leases from companies when the coal is no longer economically recoverable. Our research supports a finding that DOI and the coal companies have entered a period when almost one third of the coal under lease in the PRB is economically unrecoverable. Even more is at risk.

Our suggestions focus on maintaining low-cost mines and raising prices for the coal under lease.

WE URGE YOU TO DO EVERYTHING POSSIBLE TO DIRECT FUTURE PROFITS TO HELP SOLVE THE NATION’S ENERGY CRISIS and not allow coal companies to support speculative export ventures or fanciful inter-regional domestic coal competition. BLM has for decades been quite good at using the law and regulation to support coal company initiatives; it is time to start using the same tools for the public interest.

Interim steps related to royalty reform have already been spelled out in your regulatory proposal and we have commented mostly favorably on it. Our suggestions also include ways to simultaneously bring order to a shrinking market, reform royalties, improve environmental performance and support the bottom lines of a smaller, leaner coal industry.

And, whatever you do, open up this program to a regular process of outside scrutiny. Nothing credible will happen until the agency takes these steps.

In short, you need a program and a staff that supports this nation through the rest of the 21st century and forward, not one wedded to 20th-century practices based on a 19th-century vision.

Tom Sanzillo is IEEFA’s director of finance.

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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