Interior to Kill Rule on Value of Federal Oil, Gas, Coal

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By Alan Kovski

The White House will remove one regulatory cloud over the heads of oil, natural gas, coal and electric power companies by repealing an Obama administration change to the way fossil fuels from federal and Indian lands are valued for royalty purposes.

The Interior Department told a federal court March 23 the department would repeal the new valuation rule (RIN:1012–AA13) because several provisions in the rule did not meet the objectives of “greater simplicity, certainty, clarity, and consistency in mineral valuation reporting.”

The U.S. District Court for the District of Wyoming responded the next day by issuing a stay until June 22 for three lawsuits filed against Interior’s rule ( Cloud Peak Energy Inc. v. Interior, D. Wyo., No. 2:16-cv-315, 3/24/17 American Petroleum Inst. v. Interior, D. Wyo., No. 2:16-cv-316, 3/24/17 Tri-State Generation and Transmission Ass’n Inc. v. Interior, D. Wyo., No. 2:16-cv-319, 3/24/17 ).

Interior did not respond to questions March 27 about whether it would try to revamp the valuation regulations in some different way or revert to the status quo before the July 1, 2016, issuance of the rule. The Office of Natural Resources Revenue (ONRR) within Interior suspended the rule Feb. 27, reverting to the status quo before the new rule.

After Interior’s suspension of the rule in February, Sen. Maria Cantwell (D-Wash.), the Senate Energy and Natural Resources Committee’s ranking member, said the Administrative Procedure Act did not give the department authority to postpone the rule and that doing so was “plainly contrary to law.” She asked Interior Secretary Ryan Zinke to let the rule go back into effect.

Established Rules Defended

Cloud Peak Energy Inc., one of the largest U.S. coal producers and a lead plaintiff in one of the lawsuits, welcomed the Interior reversal; as did the American Petroleum Institute, plaintiff in the second of the lawsuits; and Tri-State Generation and Transmission Association Inc., lead plaintiff in the third suit.

More than 90 percent of Cloud Peak’s coal is produced from federal lands, while API’s member companies produce much oil and gas from offshore as well as onshore federal lands.

“ONRR receives detailed information on the price at which every single ton of federal coal is sold and already has the power to impose penalties and fines on any sale which can be shown to have been undervalued. The rules work,” said Cloud Peak spokesman Rick Curtsinger in a statement issued after the court acted.

Interior had argued that the regulatory changes were needed to make sure fair value was received in the royalties paid on federal resources when sales were to affiliates or other parties that are not at “arm’s length” in terms of their economic interests. Such sales can be underpriced to reduce royalties.

Rule Called Unclear, Inflationary

The plaintiffs in all three lawsuits said the rule would create significant uncertainty about valuations and royalties because of the complex and unclear new methods ONRR had written, including the substantial discretion the agency was allowing itself to assess different sales.

They also feared inadequate deductions of transportation costs from the values of the commodities.

The uncertainty also made it very difficult for companies to estimate what the economic impact of the regulations would be, Curtsinger told Bloomberg BNA.

The API complaint excoriated the new rule. The rule “upends a longstanding valuation system and replaces it with widespread uncertainty and unconstrained agency ‘discretion,’ thereby placing both offshore and onshore federal oil and gas lessees in an untenable position,” the association said.

Environmental groups, however, have gone to court to try to keep the rule in place.

“We are concerned that this administration and some in Congress have decided the fossil fuel industry need not pay every dollar due to taxpayers by suspending this rule to eliminate loopholes,” said Chase Huntley, director of the Wilderness Society’s energy and climate program, in a news release earlier this month.

Coal Values and Power Sales

Electric power co-ops and coal supply co-ops are by definition not at arm’s length in their dealings with their owner-members.

The lead plaintiff in the third suit, Tri-State, is a wholesale electric cooperative owned by retail electric co-ops using electricity generated to a substantial extent from coal. Basin Electric Power Cooperative and a coal supply co-op joined Tri-State in the suit.

They were faced with the possibility of ONRR analyzing electric power sales and then using what is called a “netback” calculation to estimate the value of the coal used in generating the power.

All three lawsuits were filed Dec. 29 in the same court, and the Cloud Peak and API suits shared Washington-based attorneys at Beveridge & Diamond P.C. (Peter Schaumberg and James Auslander) and Northern Rockies regional law firm Crowley Fleck PLLP (Keith Burron).

The co-op plaintiffs used attorneys from Denver-based Davis Graham & Stubbs LLP and a Wyoming firm, Sherard, Sherard, Artery & Johnson.

To contact the reporter on this story: Alan Kovski in Washington at akovski@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

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