CHAPTER 3 FEDERAL COAL VALUATION REGULATIONS

• Jurisdiction: United States

Federal Royalty Revolution--Coal
(Nov 1986)
CHAPTER 3
FEDERAL COAL VALUATION REGULATIONS
Charles W. Margolf
Vice President—Western Coal Development W. R. Grace & Co.
Denver, Colorado

I. Background

A. Royalty provisions under the Mineral Leasing Act of 1920, 30 U.S.C. Section 181 et seq.

(1) Coal — 30 U.S.C. Section 207, as originally enacted, provided in part: "...the lessee shall pay to the United States such royalties as may be specified in the lease, which shall be fixed...and which shall not be less than 5 cents per ton of two thousand pounds..." (Emphasis supplied.)

(2) Oil and gas — 30 U.S.C. Section 226, as originally enacted, provided for "...such royalty as may be fixed in the lease, which shall be not less than 12 1/2 per centum in amount or value of the production removed or sold from the lease" for lands within known geologic structure of a producing oil or gas field. For lands not within the geologic structure of a producing oil or gas field, the royalty was stated to be: ". .

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. 12 1/2 per centum in amount or value of the production removed or sold from the lease." (Emphasis supplied.)

B. Royalty provisions under the Federal Coal Leasing Amendments Act of 1976 (which amended 30 U.S.C. Section 207) provides in part: "...A lease shall require payment of a royalty in such amount as the Secretary shall determine of not less than 12 1/2 per centum of the value of coal as defined by regulation, except the Secretary may determine a lesser amount in the case of coal recovered by underground mining operations...." (Emphasis supplied.)

C. Administrative actions taken under the Mineral Leasing Act of 1920 (MLA) prior to the enactment of the Federal Coal Leasing Amendments Act of 1976 (FCLAA).

(1) An Interior Department Memorandum dated February 3, 1971 from the Chief, Conservation Division, U.S. Geological Survey, to the U.S.G.S. Regional Mining Supervisors, states in part: "With the seller's market in coal, our royalties expressed in cents per ton ... are too inflexible to adjust with changing prices. A reasonable percentage royalty is permissible under the Act (MLA) so long as a minimum is expressed in cents per ton, we believe. Accordingly, our recommended royalties should now be a percentage of the value of coal sold or used, as determined by.... (an) empirical formula, but not less than the ¢/T rates adopted in 1964..." (Emphasis supplied.)

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(2) An Interior Department Memorandum dated May 3, 1971 from the Chief, Branch of Mining Operations, U.S. Geological Survey, to the Regional Mining Supervisors, states in part: "Since we have started using a percentage royalty rate for coal, it is necessary that we expand on the royalty provision for determining the point at which royalty attaches. Enclosed is a copy of the royalty provisions for guidance...

"A. Royalty for coal mined by strip or auger mining methods: 5 percent of the gross value of the products produced but not less than:

1. 17 1/2 cents per ton of 2,000 pounds for the first 10 years.

2. 20 cents per ton of 2,000 pounds for the second 10 years.

"B. Royalty for coal mined by underground mining methods: 4 percent of the gross value of 2,000 pounds of the products produced but not less than:

1. 15 cents per ton of 2,000 pounds for the first 10 years.

2. 20 cents per ton of 2,000 pounds for the second 10 years.

"Gross value shall be the value of the coal mined hereunder at the point of shipment to market, such point of shipment to be the mine or preparation plant as the case may be.

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"The lessee agrees that the Secretary of the Interior, for the purpose of determining the royalties due hereunder, may establish reasonable minimum values for the coal mined, due consideration being given to the highest price paid for a part of a majority of the production of coal of like quality produced from the same general area, the price received by the lessee, posted prices, and other relevant matters."

(3) Interior instituted a self-imposed moratorium on new Federal Coal Leasing sometime in 1971 whch was officially announced in February 1973.

A non-governmental Federal Coal Lease data base shows that in the years 1971 through August 4, 1976 (the date FCLAA was enacted) a total of 17 Federal Coal Leases were issued (of which 8 were for less than 500 acres).

Query: Were these "new" leases all issued with the royalty expressed as a "percent of gross value but not less than x cents per ton"? Did the lessees protest? If so, what was the result? What was the percentage?

Also, during the period 1971 through August 4, 1976, 14 leases issued between 1931 and 1936 presumeably came up for their 2nd readjustment. (Six were under 200 acres. Only 3 of the 14 leases exceeded 1000 acres.)

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Also, during the period 1971 through August 4, 1976, 39 leases issued between 1951 and 1956 presumeably came up for their 1st readjustment. (Twenty-two of these 39 leases were under 1000 acres.)

Query: Were...