The US Interior Department announced January 15 that it is going to “review” the Bureau of Land Management’s leasing program of federal lands upon which an estimated 41% of all US coal is currently produced, and is putting a hold on all new lease applications while the three-year review is underway.
The announcement raised immediate suspicions in some quarters that the department was angling at more than a mere review of leasing procedures, a possible royalty fee hike and a benign moratorium on future leases. At the very least, the announcement was seen as a shot across the bow of coal production in the US.
The Secretary of Interior, Sally Jewell, said the department wants to “identify and evaluate” potential reforms to the federal coal program “in order to ensure that it is properly structured to provide a fair return to taxpayers and reflects its impacts on the environment.”
Jewell also called the review “another step” along the path that President Barack Obama announced in his recent State of the Union address to improve the way the US manages its fossil fuel resources “and move the country towards a clean energy economy.”
Jonathan Downing, the executive director of the Wyoming Mining Association, was emphatic in his response. “This is yet another salvo in the president’s efforts to kill the coal industry. He and his allies in the extreme environmental movement know full well that this measure will make federal coal uneconomical to mine, thereby locking up America’s most abundant and reliable source of electricity generation.”
Downing added that coal remains a main source of baseload power in the US, one that renewable generation such as wind and solar is “unable to provide regardless of the billions in federal subsidies currently being funneled their way.”
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Coal squeaked past gas for power gen in 2015
Even as it has been rearranging generation portfolios, retiring coal-fired facilities and switching from coal to gas, the US power sector nonetheless has an enormous stake in the Interior Department’s review. Literally hundreds of generating firms and utilities are big coal buyers.
In 2015, coal fueled 33.8% of all power generation, compared to 32.6% by natural gas, according to data released January 12 by the Department of Energy’s Energy Information Administration. Moreover, the Interior Department said Friday that 14% of the country’s electricity was generated by federal coal.
Total coal production in the US in 2015 was 890.5 million short tons. The electric power sector consumed 754 million short tons of that total.
In fiscal year 2014, 402 million short tons of coal were produced on federal lands. According to the Interior Department, the Bureau of Land Management has responsibility for coal leasing on 570 million acres “where the coal mineral estate is owned by the federal government.”
As of fiscal year 2014, there were 310 federal coal leases that encompassed 475,692 acres in 10 states that had recoverable coal reserves of 7.75 billion short tons.
The BLM receives revenue from coal leasing from bonuses paid at the time it issues a lease; rental fees; and production royalties. In 2015, according to the BLM, its coal program had taken in about $1.29 billion in royalties, rents and bonuses.
The Powder River Basin as the federal coal epicenter
Pointing to the huge Powder River Basin coal producing area in Wyoming and Montana, the Interior Department noted last week that over 85% of all federal coal is the low-sulfur, low-priced PBR coal.
The BLM says that 19 coal mines and 91 coal leases in the Wyoming portion of the Powder River Basin produced 382 million short tons in 2014 and employed over 6,500 personnel.
The largest PBR mine, owned by Peabody Energy, is the North Antelope Rochelle facility, which produced 117.9 million tons in 2014, according to the BLM. The second largest is Black Thunder, which produced 101 million tons in 2014 and is owned by Arch Coal.
On January 12, Arch Coal filed for bankruptcy protection in a federal court in Missouri in an effort to shed some $4.5 billion in debt. In the first 10 months of 2015, Arch delivered 73.7 million short tons of PBR coal to 51 clients.
The biggest Arch customer in the 10-month period was Tennessee Valley Authority, which took delivery of 7.5 million short tons of Wyoming coal. Alabama Power received 5.1 million short tons from Arch. MidAmerican Energy, Entergy Arkansas, Consumers Energy and Kansas City Power & Light each received more than 4 million short tons.
The 2,697 MW coal-fired Parish facility received just over 2 million short tons of Wyoming coal from Arch in the first ten months of 2015.
The ‘pause’ and climate change
The Interior Department, which issued Order 3338 outlining the review, said that in its “pause,” the BLM will not hold lease sales or process new lease applications for surface and underground coal.
Jewel, noted there had not been a comprehensive review of the program “in more than 30 years,” and said there is “concern” about the “fair return” on the leases, 90% of which, she argued, received bids from only one bidder, and, she said, the current royalty rate of 8% for underground mines and not less than 12.5% for surface mines, “may be inadequate.”
From her statement, though, it seemed clear what was really on her mind.
The “second broad category of concerns” about the federal coal program “relates to its impacts on climate change,” she said.
She said that the US has “pledged to the United Nations Framework Convention on Climate Change to reduce its greenhouse gas emissions by 26-28% below 2005 levels by 2025.”
“At the same time, the federal coal program is a significant component of overall US coal production and, when combusted, federal coal contributes roughly 10% of the total US GHG emissions,” she said.
The Interior Secretary said that many stakeholders have highlighted the contradiction of producing very large quantities of federal coal while pursuing policies to reduce US GHG emissions substantially, including from coal combustion.
“The current leasing system does not provide a way to systematically consider the climate impacts and costs to taxpayers of federal coal development,” she said.
One suspects the review will figure out how to fix that.