Released by the DOI’s Office of Natural Resources Revenue (ONRR) on June 30, the outlines focus on federal energy resource valuations so that production royalty rates can be more accurately assessed using the outlines, which were first implemented in the 1980s. The agency said the rule will also provide more clarity and certainty for the industry to determine market value for these commodities.
“[T]he rule reaffirms that valuation, for royalty purposes, is best determined at or near the lease and that gross proceeds from arm’s-length contracts are the best indication of market value,” the DOI said. “Eliminating the difficult-to-use benchmarks for non-arm’s-length sales, the rule replaces them with a simplified method of valuating production by using gross proceeds from the first arm’s-length-sale with applicable allowances. By replacing them with a market-driven mechanism, the rule provides greater efficiency for payers, reducing industry’s cost of compliance as well as ONRR’s cost to ensure industry’s compliance.”
The new outlines provide mostly the same valuation changes for both federal and American Indian coal, though the agency said the two programs will continue to be regulated under separate regimes.
“[The] valuation rule is important because it ensures, in part, that our federal coal program is properly structured to obtain all revenue due to taxpayers,” U.S. Interior Secretary Sally Jewell said. “The updated rule will increase the effectiveness and efficiency of the valuation process, and provide greater clarity and consistency for lessees and revenue recipients.”
She and the Obama administration have maintained throughout the process that coal producers in particular have abused loopholes in the royalty system as it existed and, by design, were cutting the public short of their due. Both said the new rules would close those holes and protect taxpayers.
The existing royalty program had outlined 12.5% on coal sold from surface operations that conducted business on federal land. An administration review said the true total was closer to 5% after allowances. The federal and state government also receive a per-acre lease amount when a respective producer successfully bids on a tract for mining. The DOI said the 12.5% royalty will not change when the new regulations go into effect on January 1, 2017.
The industry’s response has been swift; U.S. Sen. Mike Enzi of Wyoming called the regulations a “sham” designed by the Obama administration to raised prices and put coal, oil and natural gas companies out of business.
“The administration doesn’t care as much about ensuring taxpayers get a fair return as it does about ending coal,” he said. “There won’t be a boon for taxpayers if the coal industry isn’t around to pay royalties. Instead of leading an attack that will destroy jobs and raise energy prices, the administration should be working to help support innovation in the coal industry.”