REGULATORY: U.S. Regulatory: As Coal Exports Hit Record Highs, Interior Inspector General Questions Lease Valuations

by King & Spalding

Even as U.S. coal exports surge to record highs,[1] the Bureau of Land Management (BLM) is being taken to task for (among other items) failing to take account of the burgeoning export market when calculating the fair market value (FMV) of federally owned coal.

The Inspector General of the Department of the Interior recently issued an evaluation of the Department's coal mining activities on federal land that are overseen by BLM (the "Report").[2] Among the objectives of the Report, the Inspector General investigated whether Interior's coal leasing process obtains a fair return for the public's coal.
The Report's findings critiqued the manner in which the BLM manages the coal program, noting certain "weaknesses" in the lease sale process that put the government "at risk of not receiving full value for coal leases." The Report called out in detail weaknesses involving processes for determining the FMV for coal leases and determining lease modifications.

The Valuation Process

As outlined in the Report, prior to each competitive coal lease sale, BLM estimates the FMV of the property. The FMV is based on BLM's assessment of projected income to a coal mining company, an analysis of comparable, prior lease sales, as well as economic, geologic, and engineering variables unique to each proposed mining operation. Some of these variables include the price of coal; current and future demand for coal; market conditions; shipping costs; proximity of the mine to available transportation and an end market; quality of the coal, which includes energy content and impurities such as ash and sulfur; depth of coal seams; equipment and labor required to operate the mine; and whether the coal would be extracted by surface or underground mining methods.

According to the Report, the export potential of coal is notably absent from the list of variables weighed by BLM. Despite the fact that the price of exported coal more than doubled between 2007 to 2011, and that 2012 exports of coal totaled over 125 million tons (more than twice 2007 totals), the Report notes that only one state office routinely calculated FMV with the potential for exporting as a consideration. Evaluators concluded that most state offices overlook the export potential of coal, thus possibly undervaluing the FMV of the lease.

To that end, evaluators identified $60 million in potentially undervalued lease modifications that occurred, in part, due to inconsistent valuation practices. The Report noted that a 1-cent-per-ton undervaluation in the FMV calculation for a sale can result in millions of dollars in lost lease sale revenues, an assertion supported by the sheer tonnage of coal produced from federal and Indian lands, which totaled 473 million tons in 2011.[3]


The Report recommended changes to BLM's processes for valuation and acceptance of bids on federal coal lease sales. BLM was urged to follow established procedures documented in Interior's Department Manual and work with Interior's Office of Valuation Services in preparing FMV appraisals. The Report noted that Valuation Services maintains particular expertise in mineral valuation, a complex and unique field of appraisal, and serves as Interior's "authority on valuation for all minerals extracted from public lands." BLM was also encouraged to account fully for the export potential in developing coal FMVs.

Bidding Process

Weighing the valuation factors, BLM computes a FMV for the lease, which is kept secret, and publicly announces a sale. Since many leases offered for sale receive limited bids, and BLM is prohibited by statute from accepting a bid that is less than the established FMV, BLM's determination of this value often is the critical driver in whether a successful sale is held.

The Report also noted that procedures for accepting the winning bid at a lease sale are not consistent among BLM state offices. According to the Report, these inconsistencies are most prevalent in situations involving unsuccessful lease sales. In some state offices, if a bid does not meet or exceed the FMV, the office rejects the bid and holds a "reoffer" (including repeating administrative actions such as reassessing the FMV and publishing Federal Register notices). Other state offices allow companies to provide information to justify their original bids, a practice that the Report says led to the acceptance of bids below the established FMV. Evaluators identified lost bonus revenues of $2 million in recent lease sales because BLM accepted bids that were below the established FMV, a violation of provisions of the Mineral Leasing Act.


Evaluators suggested that BLM reject bids less than the established FMV in compliance with the Mineral Leasing Act and explore options for a more efficient lease reoffer process in instances when initial bids fail to meet the established FMV.

Royalty Rate Reduction

BLM permits companies to request a reduction in royalty rate if a mine becomes unprofitable because of adverse geologic conditions or financial hardship. If BLM considers a request justified, a royalty rate may be reduced to as low as two percent of sales value. Reductions are granted on a temporary basis and may expire after a designated period, when a specified volume of coal has been mined, or when mining operations cease.

Evaluators noted that when a royalty rate reduction is based on financial hardship, BLM coal program officials, who are mostly trained in geology and mine engineering, may not have the expertise to evaluate a company's financial statements and supporting documentation. In these cases, the Report noted that the Department's Office of Natural Resources Revenue (ONRR) officials, who have accounting expertise in financial record analysis, could provide important assistance to BLM.


The Report encouraged BLM to work with ONRR when processing applications for royalty rate reductions that are based on financial hardship grounds.


The Report recommendations should be viewed in light of an average lease sale price of $320 million and the $2.4 billion in bonuses and royalties collected by the government from coal mining activities on federal and Indian lands in FY 2012. As we noted in March,[4 ] there is a push by some in the 113th Congress to exercise more stringent oversight of federal mineral royalties beyond traditional oil and gas targets; it is almost certain that the content of the Inspector General's report will be considered while weighing possible coal royalty reforms.

The Government Accountability Office (GAO) is expected to issue a separate report on the Department's coal leasing program this summer.
[1] U.S. coal exports set monthly record, U.S. Energy Information Administration, 2013, available at
[2] Final Evaluation Report – Coal Management Program, Report No. CR-EV-BLM-0001-2012, U.S. Department of the Interior, Office of the Inspector General, U.S. Department of the Interior, June 11, 2013, available at
[3] Id. at 3.
[4] A Decade's Worth of Coal Sales to be Scrutinized by Interior, Senate, King & Spalding Energy Newsletter, March, 2013, available at


Jeffrey H. Perry
Washington, DC
+1 202 626 5521
View Profile »


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.