Judge orders industries to pay royalties for public land extraction

Editor's note: On June 13, the Department of the Interior ordered all companies with federal oil, gas, or coal leases to recalculate the royalties they owe under the Valuation Rule going back to January 1, 2017. Companies have six months to pay back these taxes.

When energy corporations produce oil, gas or coal on public lands, they make royalty payments to the federal government and the states where production takes place. In 2016, the Obama administration closed a loophole that allowed companies to dodge those fees. The valuation rule was set to provide tens of millions of dollars to taxpayers, until then-Interior Secretary Ryan Zinke repealed it shortly into his tenure in 2017.

Now, a federal judge has deemed that move illegal, putting the valuation rule into effect immediately. In a case brought by the states of California and New Mexico, U.S. District Court Judge Saundra Brown Armstrong found that Trump’s Interior Department failed to justify the repeal, which she called “arbitrary and capricious.”

One of the strongest rebuttals of the Trump administration’s energy policies to date, this case could have serious implications for the West, home to nearly all public-land mining and drilling.

Here are the key takeaways:

When energy industries profit from public lands, the public should benefit, too.

Under President Barack Obama, the Interior Department closed a loophole. Previously, companies would sell the oil, gas and minerals to their own subsidiaries at below-market value. Low prices meant low royalties. The valuation rule made sure that corporations paid full royalties, ensuring taxpayers received proper value for profit derived from public lands.

Obama’s Interior Department estimated the rule, which applies to both drilling and mining, would bring in at least $71.9 million annually, funding public institutions and infrastructure, including schools, roads, transit and parks in the states where the resources are extracted.

“The Valuation Rule attempted to ensure that the value of the coal and oil and gas was based on something that was more likely to be fair market value,” wrote Bruce Kramer, professor of oil and gas law at Texas Tech University, in an email.

When it comes to deregulation, the Trump administration does not do its homework.

This ruling joins a broad trend of legal losses for the administration: Earlier this year, a judge found that it did not properly consider climate change impacts when leasing public land for oil and gas production. And just last week, a different judge ruled that the administration ignored environmental regulations when it rolled back a moratorium on public land coal leases.

In this case, calling the rollback “wholly improper,” Armstrong found that the administration cut the rule without legally mandated justification or support. She questioned Zinke’s conclusion that the valuation rule posed an “unduly burdensome” obstacle to energy production. Armstrong also rejected the Interior Department’s reasoning that it would, at some point, write a replacement valuation rule, noting that “predicted future actions cannot be used to support a decision already made. 

“This particular repeal attempt was emblematic of other similar attempts by the Interior and other departments to overturn Obama-era regulations,” Kramer wrote. “They all share the same quality of being poorly drafted without the necessary background work that you need when you want to change or repeal a federal regulation.”

Fixing this loophole has been a bipartisan concern.

Western politicians of both parties long feared that the loophole was costing their constituents money. In 2013, the two highest-ranking members of the Senate Committee on Energy and Natural Resources, Ron Wyden, D-Ore., and Lisa Murkowski, R-Alaska, urged then-Interior Secretary Ken Salazar to deal with it.

“Royalty revenue collected by the U.S. Department of the Interior is an important part of both federal and state budgets, particularly in Western states,” the committee wrote.

There could be trouble ahead for the Trump administration’s energy policies.

Plenty of lawsuits have challenged the administration’s persistent environmental rule rollbacks, designed to boost fossil fuel production. But the valuation rule decision was the first time a judge found a regulation repeal illegal; until now, only delays or stays of Obama-era rules had been shot down. More court wins could be on the way, using similar reasoning.

“This can be cited as persuasive authority in many of the other cases involving deregulatory actions,” said Jayni Hein, natural resources director at New York University School of Law's Institute for Policy Integrity, which submitted an amicus brief and comments on the case.

Several ongoing lawsuits make similar claims of improper legal justification: The rollback of an Interior Department hydraulic fracturing rule and of the Bureau of Land Management’s methane rule were challenged in the same California district court that ruled against the valuation rule rollback.

Here’s what could come next.

The Trump administration, or possibly energy industry groups that supported the valuation rule repeal, have until mid-June to submit an appeal. The American Petroleum Institute, the largest oil and gas trade group, sued the Obama administration over the valuation rule in 2016. The legal process continues, but for now, the valuation rule is back on the books.

Nick Bowlin is an editorial intern at High Country News. Email him at [email protected] or submit a letter to the editor.

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