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July 03, 2013
BLM losing money on coal sales, says inspector

The Department of Interior’s (DOI) Bureau of Land Management (BLM) is not receiving fair market value (FMV) for some leases it sells to energy companies that want to mine coal on public land.  That’s the view of DOI’s Office of Inspector General (OIG), which prepared a report that covered BLM’s revenue from its coal management program as well as other program elements, including inspections, enforcement, and venting of methane gas. 

The nation may be dialing down its use of coal to generate energy, but it is hard to find evidence of that trend in coal mining on public land.  In 2011, mining operations on public and Indian land produced 473 million tons of coal, about 40 percent of the nation’s total coal production.  In 2010, coal revenues collected by the fed totaled $810 million; revenues tripled by 2012 to $2.4 billion, the highest amount recorded in the last decade.  Yet, the OIG said weaknesses it found in BLM’s current coal sale process resulted in lost bonus revenues of $2 million in recent lease sales and $60 million in potentially undervalued lease modifications.

In addition, the OIG said it found flaws in BLM’s inspection and enforcement programs.  No evidence that mines improperly vented methane gas was detected, said the OIG. 

The BLM agreed with all 13 recommendations made by the OIG to improve the coal management program and said it would adjust its programs, policies, and guidance accordingly.

Fair market value

According to the OIG, a critical aspect of competitive coal lease sales is determining the value of the property.  The OIG notes that mineral valuation is a complex process requiring analysis of comparable prior lease sales as well as economic, geologic, and engineering variables unique to each proposed mining operation. 

But in estimating FMV before each sale, the BLM uses its own real estate appraisers, who deal primarily with a land’s surface.  The OIG believes the process can be improved by involving DOI’s Office of Valuation Services (OVS), which puts a value on minerals extracted from public land.  The BLM agreed with OIG’s recommendation and said it would explore options for obtaining OVS’s input into coal lease sales and revising the relevant guidance. 

The OIG was also troubled by inconsistencies in how some BLM states offices accept bids that are less than the FMV after giving companies the opportunity to justify their bids.  Yet the Mineral Leasing Act prohibits the BLM from accepting bids that do not meet or that exceed the FMV.  The BLM said it would fix this problem by strengthening Washington office oversight of the state offices.  Also, the OIG said it found holes in how the BLM ensures that FMV determinations are kept confidential; acquiring this sensitive information could give a company an unfair competitive advantage.  The BLM responded that it would reissue guidance on FMV security protocols and conduct internal control reviews every 2 years.

Export potential

Other recommendations to the BLM among the 13 made by the OIG include:

  • The BLM and OVS should fully account for export potential when calculating FMV.
  • The BLM should require that all state and field offices conduct and document inspections of exploration operations.
  • The BLM should protect the integrity of exploration data by requiring coal companies to certify the accuracy of the data under penalty of the applicable false statement statute, and it should periodically verify data through an independent laboratory.
  • The BLM should take action to improve inspections and enforcement, including updating its policies and procedures for better consistency, developing and implementing a rotation policy for inspectors as well as a cross-training program and succession plan, and finalizing the inspector certification program.

Click here for the OIG report.

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