The Interior Department has proposed to amend the rules guiding mineral royalty collection and penalties to relieve industry of regulatory burdens and promote domestic energy development, according to an announcement released last week.
The amendments would change how coal, oil and gas companies calculate royalty payments for minerals extracted from public land to bring the Interior Department’s policies in line with some of President Donald Trump’s executive orders, one of which requires government agencies to prioritize “energy independence and economic growth,” according to the department.
If implemented, the new guidelines would reverse the valuation rule put in place by the Obama administration in 2016, which sought to close “loopholes” in mineral royalty policies and increase the financial returns on federal land use.
“This proposal provides regulatory certainty and clarity to States, Tribes and stakeholders, removing unnecessary and burdensome regulations for domestic energy production,” U.S. Secretary of the Interior David Bernhardt said in a statement.
The most recent rewrite of the rules would overhaul the Obama-era valuation rule in an effort to provide greater clarity in the collection of royalty payments, relieving companies of the requirement to sell minerals in “arms-length transactions.” The 2016 valuation rule mandated companies pay market value price on royalties after extracting minerals on federal and tribal land.
The National Mining Association called the 2016 valuation rule “simply unworkable for federal coal leases,” and cheered the Interior’s revisions.
“We are glad to see the Department of Interior taking action to address concerns over the 2016 rule,” a spokeswoman for the National Mining Association said in a statement. “NMA is currently reviewing the new proposal but our initial review indicates that it provides a balanced and workable path forward to valuing mineral resources on the nation’s federal lands.”
Recent modifications to mineral royalty policies would effectively reinstate most of the “familiar” valuation practices in place before 2016, albeit with some minor tweaks, according to statements from the Interior Department.
Adopting the proposed changes would result in an estimated $42.1 million net loss in annual royalty collections, or about 0.05% less than what the federal government collected in mineral royalties in 2018, according to the Interior Department.
“The financial impact, as evident in the total annual estimate ($42.1 million) reflected above, does impact the royalty disbursements for the Treasury and States who are stakeholders and recipients of ONRR’s distributions,” the filing states. That’s because about 48% of collected federal royalties wind back to Wyoming’s state budget.
Yet federal regulators also assert the Trump administration’s rules could help boost energy production, thereby offsetting these predicted losses.
Advocates for public land, conservation and taxpayers slammed the proposed rules.
“This is yet another attempt by the Trump administration to reopen loopholes that would allow oil and gas companies to skirt royalty payments owed to taxpayers,” said Jesse Prentice-Dunn, policy director at the Center for Western Priorities.
“The winners and losers from this proposal are very clear — oil and gas companies will pocket money that is owed to taxpayers for drilling publicly-owned resources,” Prentice-Dunn added.
Once the proposed rule changes are published in the Federal Register, the public will have 60 days to comment.
Where this began
Back in 2016, the Obama administration had modified the methods the Interior Department used to calculate mineral royalty rates to close what it identified as loopholes in the rules. The 2016 valuation rule requires royalty payments to be based on the market rate of extracted minerals. That means companies had to engage in “arms-length transactions” and could not sell off minerals to subsidiaries at cheaper prices to avoid higher royalties.
But the modified royalty system came under fire from energy companies.
According to its critics, the valuation rule restricted economic development and created “substantial and unnecessary burdens” for operators. Complying with the new valuation rule would require companies to dish out more cash for extracted minerals in addition to paying for the implementation of new software and personnel to retroactively calculate past royalty payments, industry said in a lawsuit against the Interior Department.
Before the 2016 revisions were made to the valuation rule, companies would sometimes use affiliate companies to sell minerals at deflated prices, often avoiding higher royalties associated with selling resources at market value.
The Obama administration buffed up the royalties policy in an effort to halt the practice of skirting higher royalty payments. It required companies pay mineral taxes at full market value. The new rule went into effect on Jan. 1, 2017. At the time, the Interior Department estimated the change would bring in between $71.9 million and $84.9 million in additional royalties each year to the government.
But in 2017, the Trump administration took over and promulgated rules to repeal the 2016 valuation rule, giving energy companies mining for coal or drilling for oil and gas on federal land a financial and regulatory break.
The American Petroleum Institute lauded the repeal as a necessary step to relieve industry of “substantial burdens” stifling energy development. Last year, the association sent a letter to the Trump administration requesting it take an additional step and update the rules.
That said, the Trump administration’s reversal of the 2016 valuation rule has run into several roadblocks in court.
Extended court battles
An extended battle over these mineral royalty rates has raged in the courts between energy groups and the Interior Department for several months.
In April 2019, U.S. District Judge Saundra Brown Armstrong in California struck down the Trump administration’s delay and eventual repeal of the Obama-era valuation rule. She deemed Interiors’ decision to repeal the rule “arbitrary and capricious” and reinstated the 2016 valuation rule. The administration did not provide sufficient reasoning for the rollback of the rule, she concluded.
Several energy companies filed lawsuits in response to the April 2019 ruling from the federal California court. Plaintiffs also moved the case to Wyoming.
In October, a Wyoming court ruled in favor of industry by partially blocking the 2020 launch of the valuation rule.
The U.S. District Court of Wyoming announced it would grant a preliminary injunction on the application of the new rule, as it applies to coal production. The decision partially granted and partially blocked the valuation rule as the court considers the case in full.
The judge handed the coal industry — saddled with paying full market price for the extracted minerals under the new rule — a temporary win.
In his decision, U.S. District Judge Scott Skavdahl reasoned the valuation rules could cause “irreparable harm” to the coal mining industry. However, the judge did not find merit in the arguments made by the petroleum sector against the rule. Ultimately, his decision requires the Interior Department to uphold the new royalty standards for oil and gas operators.
Several conservation groups, including the Wilderness Society, intervened in the lawsuit. After the court ruling in October, Bruce Pendery of the Wilderness Society predicted the rollback of the 2016 valuation rule would likely translate into less money coming into the federal government, and ultimately states, in the form of royalties.
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