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Insight: U.S. taxpayers poised to subsidize Asian coal demand
WASHINGTON (Reuters) - Asian economies, hungry for coal, stand to gain from a U.S. program meant to keep domestic power cheap and abundant.
At issue is how much miners pay the government to tap the coal-rich Powder River Basin in eastern Montana and Wyoming. Much of the basin is on federal land.
Selling that coal cheap at a time of increasing exports across the Pacific could amount to a U.S. taxpayer subsidy for industrial rivals like China.
Government auditors have long faulted lax oversight of the coal lease program, saying miners have too much sway. Officials have defended the system, saying their approach is the right one to help utilize a region that provides a large share of the country's power.
That argument has crumbled as more coal from federal land is being sold overseas and Asian economies anticipate gains from the program meant to keep lights on in American homes.
If U.S. miners can find ports to reach Asian markets easily it could mean hundreds of millions of dollars in additional profits and marginally lower coal prices for countries in those markets.
U.S. coal exports have steadily climbed since 2009 and are on track for a record high this year, as miners such as Peabody Energy and Arch Coal scramble to ship surplus coal overseas in deals that can double or triple their margins, analysts say.
That dynamic raises questions about whether taxpayers are essentially helping Asian economies save on energy costs, according to six former officials who served both Democratic and Republican presidents. The possibility of large-scale exports was far from their minds when they managed federal land years ago.
"A key question is whether the taxpayer is getting a fair return on the use of those lands," said Lynn Scarlett, who served as a deputy to two Secretaries of the Interior under President George W. Bush between 2005 and 2009.
The investigative arm of Congress, the Government Accountability Office, is examining whether miners are paying fair market value for coal on federal land.
The Bureau of Land Management, which oversees coal leases for the Department of the Interior, points out that the program has generated more than $9 billion in revenue in the last decade.
"It should be noted that the Bureau is obliged ... to obtain fair market value, not maximize value, for federal coal," a department spokeswoman said on Wednesday.
Questions about the coal lease program could frame an intensifying debate about how the United States should manage its abundance of fossil fuels and achieve energy independence.
The engine for future Asian coal profits is the Powder River Basin - a high western plain where the black rock runs in rich seams 10 stories deep. Eighty percent of the basin is on federal land.
Cloud Peak Energy of the Powder River Basin has seen its Asian exports climb to nearly 5 million tons a year from 100,000 tons five years ago. While that is only about 5 percent of sales, it accounted for nearly 19 percent of revenue last year, according to securities filings.
Click here for a graphic on U.S. coal exports:
Miners need large coal ports on the West Coast to best tap Asian markets. Opposition from environmentalists means developing such ports is no sure bet in the near-term.
Without that coal export hub on the West Coast, shipments to Asia would likely continue the costly and circuitous trip down the Mississippi and through the Gulf of Mexico.
"We believe that Asia represents a promising source of sales for the Powder River Basin, though (development) there is acknowledged to be a number of years in the future," said Peabody spokesman Vic Svec.
Powder River Basin prices have fallen by roughly a third in the last 12 months owing in part to an abundance of cheap natural gas, tougher pollution limits on power plants and uncertain growth in China.
Still, analysts said, miners are eager to position themselves to access Asian markets with big West Coast ports when there is a rebound.
"It could be hugely lucrative, which is why they're all trying to do it," said Goldman Sachs coal analyst Andre Benjamin.
Arch Coal, another mining giant with large reserves on federal land, is partnering with an Australian company to send coal through ports in the Pacific Northwest.
That partner, Ambre Energy, is already a big supplier of coal to China and has said it wants to "take competitive advantage of an undervalued US coal market," according to a confidential prospectus seen by Reuters.
In the current market, benchmark Indonesian coal and its equivalent in the Powder River Basin are valued roughly the same at port, analysts said.
"But if the price of Indonesian coal went up, Powder River Basin miners could try to take some of that market share," said Benjamin.
$30 BILLION SQUANDERED?
The easy-to-reach coal and sheer size of the Powder River Basin explain the region's appeal, but the leasing program also gives miners a boost, current and former officials said.
Rather than the government putting blocks of land up for auction, miners select ideal plots at will and rarely face rivals in the cash-bid process that awards new coal leases. Officials tasked with seeking fair market value said exports were not factored into a process that has frequently been faulted by regulators as giving miners undue leverage.
In 1983 the GAO said the government lost $100 million in one coal lease spree in the early 1980s.
A decade later the GAO noted that officials were still not getting the most from coal leases, but "the department's defense was that it was not seeking to maximize revenues but instead was considering consumers who required electricity and jobs."
Former officials said the coal lease program was seen more as an energy policy tool than a way to generate big revenues.
"Our guiding philosophy was: How do we serve the public interest?" said John Leshy, the top attorney for the Department of the Interior under President Bill Clinton, who said domestic power plants counted on steady, low-cost coal supplies.
Now that coal giants are using the conventions of the domestic coal economy to reach eager Asian markets, the government should give the program a closer look, say former officials who oversaw it.
"We are a nation of capitalists and reward enterprise," said Bob Abbey, who in May stepped down as head of the Bureau of Land Management. "But these are public resources, and there needs to be a fair return for taxpayers."
Using the GAO report from 1983 as a benchmark, one analyst concludes that the federal government missed out on nearly $30 billion in revenue over the last three decades through poor management of the coal lease program.
"Without market competition for this coal, the government has consistently left it undervalued," said Tom Sanzillo, a former deputy comptroller for New York state who leads the Institute for Energy Economics and Financial Analysis.
The Bureau of Land Management does not disclose its past work to determine fair market value.
Sanzillo's report is partly what prompted lawmakers to request that the GAO finish its report in about eight months.
Former officials who administered the coal lease program said the next president could unilaterally retool standards for leases if taxpayers are not getting their fair share.
"It goes back to the public interest," said Leshy. "Changing the coal program is within the Secretary of the Interior's discretion."
(Reporting by Patrick Rucker; editing by Jonathan Leff and Prudence Crowther)
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