A royal(ty) mess

If a U.S. company sells coal overseas, should it pay royalties based on the price of that coal if it was sold domestically, or on the actual price it is sold for overseas?

Mining companies have been paying royalties based on the first price, that of domestically-sold coal. That's never been much of an issue, since most coal mined in the U.S. has historically been sold in the country. But the price of coal in the U.S. has plummeted this year due to abundant natural gas supplies and other factors. The value of coal from Wyoming's Powder River Basin fell nearly 20 percent in 2012, to around $13 per ton.

So a lot of the fuel is being shipped to China and India, where it fetches about 10 times as much per ton (see our coverage Coal-export schemes ignite unusual opposition, from Wyoming to India and The Global West: how foreign investment fuels resource extraction in western states). The companies sell coal destined for overseas markets to  agents affiliated with the companies. These brokers add in transportation costs and jack up the price.  Politicians and industry watchers say that system means that the federal government is getting far lower royalties than it ought to (companies pay a 12.5 percent royalty on the value of coal taken from public lands).

Reuters reports that two top members of the Senate Energy and Natural Resources Committee, Sen. Ron Wyden, D-Ore., and Sen. Lisa Murkowski, R-Alaska, just sent Interior Secretary Ken Salazar a letter asking the department to determine if taxpayers are getting shortchanged. They wrote:

Taxpayers must be confident that (Interior has) stringent royalty collection and auditing controls in place as coal markets become increasingly oriented toward international buyers. If the department's regulations are inadequate to ensure that full royalty value is returned, those regulations must be reformed.

Coal mining companies say they are calculating royalties fairly by using the domestic price. But royalties on another fossil fuel, oil, are effectively based on the overseas price because oil is a global market. And as the Reuters story notes, there's precedent for basing energy royalties on the overseas price:

In the late 1970s, Marathon Oil Corp used a similar accounting system for royalties on natural gas that was produced in Alaska but sold to Japan. A federal court eventually told Marathon to pay out royalties based on the overseas value. Officials fined Marathon $10 million. Peter Appel, a former Justice Department attorney, said the case shows that officials expect taxpayers to get a taste of the true gains on exported fuel but that the matter should remain a civil, not a criminal, case.

A followup Reuters story quoted a statement from Sen. Wyden. "This is so obvious it shouldn't need to be said: Coal companies need to be paying taxpayers all of the money they are owed. If regulators, or decades-old laws, are not doing enough to protect the public interest, our committee intends to find out, and to fix it."

Meanwhile, the Government Accountability Office and Interior are already investigating the fairness of the federal coal leasing program. And in another recent report on mining royalties, the GAO found that the lack of any royalties on hardrock minerals mined from federal land cost the government about $800 million last year alone.

Royalties on oil and gas generate about $11 billion annually, but no royalties are collected for gold, silver, copper, uranium or other metals. Mining companies say royalties should be less on minerals because the processing and refining costs are higher than they are for coal and oil. Rep. Raul Grijalva, D-Ariz. and Sen. Tom Udall, D-New Mexico, say they want the next Congress to undertake reform of the 1872 Mining Act to add royalties, require mines to disclose how much they extract from federal land, and improve mine cleanup. They'll be opposed, as usual, by Nevada Sen. Harry Reid, D, who's fought reform for years to protect the gold-mining industry in his state (see our story Nevada's Golden Child).

The Huffington Post quotes Grijalva on the need for long-overdue reforms to make companies pay for profits taken from public lands:

“We’re not dealing with a grub stake or prospector going out there, but multinational companies that end up exporting most of the minerals they take out,” Grijalva said. “And we’re getting nothing back for taxpayers to maintain parks, offset the deficit and to clean up abandoned mines all over the West.”

Jodi Peterson is HCN's managing editor.

Photo of Wyodak coal mine, Wyoming, courtesy of Flickr user "tommytex2001"