Big Energy Balks at Feds’ New Royalty Rule

CHEYENNE, Wyo. (CN) – Some of the West’s largest energy producers are challenging a new federal rule that changes the way oil and gas royalties are calculated on federal and Indian lands.

While agreeing on some of the faults, the three lawsuits – filed within hours of one another last week – cite differences in the cases. The American Petroleum Institute’s arguments focus on offshore oil and gas leases, and the intricacies of transportation and processing costs to reflect the value of the lease.

Cloud Peak Energy, the Black Hills Corp., and the National and Wyoming mining associations talk about the need to determine the value of coal at or near the mine, not including international sales or the cost of electricity being produced from that coal. The Tri-State Generation and Transmission Association, Basin Electric Power Cooperative and Western Fuels-Wyoming also take umbrage with the plan’s deriving the value of the coal from the electricity it produces.

All three lawsuits generally state that the new formula that took effect Jan. 1 is “arbitrary and capricious” and creates a valuation system that makes it impossible for energy producers to operate. The three lawsuits claim the defendants lack the statutory authority to impose the rule, and seek a review of Interior’s action.

“The United States is leading the world in the production of oil and natural gas, and in the reduction of carbon emissions, which are near 20-year lows,” said Erik Milito, the American Petroleum Institute’s upstream group director. “We are committed to paying our fair share of royalties for oil and natural gas production on federal lands, but the administration’s proposed rule is tantamount to trying to play a sports game when there are no clear rules.”

He added that when moving forward, the federal government needs to provide clear, consistent leasing and royalty terms that will enable the nation’s energy renaissance to continue for the benefit of American consumers, American workers and the environment.

Other plaintiffs couldn’t be reached for comment.

Interior Secretary Sally Jewell and Gregory Gould, the director of the U.S. Office of Natural Resources Revenue, are named as defendant in the cases.

Treci Johnson, a public affairs specialist with Interior’s Office of Natural Resources Revenue, said they don’t comment on pending litigation. But she did note that the previous regulations, created in the late 1980s, didn’t keep pace with significant market changes that occurred in the domestic natural gas and coal markets. The lawsuit stems from efforts to modernize those energy regulations, updating the formulas in July for calculating mineral extractions on public and Indian lands.

“These improvements were long overdue and urgently needed to better align our regulatory framework with a 21st century energy marketplace, offering a simpler, smarter, market-oriented process,” Jewell said in a statement when the final rule was released in July. “As the steward of America’s oil, natural gas and coal production on public lands, Interior has an obligation – and is fully committed – to ensuring that the American taxpayer receives every dollar due for the production of these domestic energy resources.”

Shortly before the new rule was released, a White House study found that loopholes in the previous rules were costing taxpayers billions in lost revenue. For example, the U.S. Treasury is supposed to collect a 12.5 percent royalty from coal extracted from federal lands, but was actually only collecting about 5 percent.

The new rule is meant to stop companies from selling coal, gas and oil to affiliated companies at a low price, which allows it to pay smaller royalties. Instead, the royalties are set by the first customer that’s unaffiliated – known as “arms-length” companies under the new rule.

The coal-mining companies call that a “netback” method and say that both the courts and the Department of Interior have long recognized it is “complex, difficult to implement, and far less reliable than comparable sales, index prices and the other indicia of value at or near the mine,” according to the Cloud Peak lawsuit.

The American Petroleum Institute adds that the new rule allows the government to arbitrarily demand additional royalties years after a sales contract is executed.

Johnson said that the rule requires lessees to value coal based on the first arm’s-length sale, regardless if that sale is for coal or electricity.

“However, the rule does allow lessees to deduct costs associated with converting the coal to electricity to arrive at the value of the coal at the lease – not the value of the electricity,” Johnson wrote in an email.

She added that the Office of Natural Resources Revenue also has a seven-year period of limitations for the collection of obligations.

The new rule stems from a five-year process that began in 2011, and ended after more than 1,000 pages of comments from more than 300 organizations and individuals, and 190,000 petition signatures, were received.

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