UPDATE 2-U.S. to probe coal sector for export royalty shortfalls

Fri Feb 8, 2013 5:32pm EST

By Patrick Rucker

WASHINGTON Feb 8 (Reuters) - The U.S. Interior Department said on Friday it will investigate whether coal miners and traders skirted royalty payments on lucrative exports to Asia.

The probe aims to determine whether miners on federal land wrongly cleared their sales through sister companies in order to dodge royalty payouts, Interior Department Secretary Ken Salazar wrote in a letter to lawmakers outlining the investigation.

Salazar has ordered officials to look for criminal wrongdoing and he said civil penalties would be sought for any deliberate royalty shortfall.

Salazar's letter follows a Reuters investigation that found taxpayers stand to lose out on hundreds of millions of dollars if current royalty practices hold sway and Asian coal demand climbs.

"The Department shares your concern that this matter should be taken seriously and be thoroughly investigated," Salazar wrote in the letter to the Senate Energy and Natural Resources Committee.

Specifically, Salazar said a special task force would audit coal export sales from 2009, a year when many western miners ramped up exports.

Arch Coal Inc, Peabody Energy Corp and Cloud Peak Energy Corp. are among the leaders in Asian coal exports. The companies did not immediately respond to a request for comment.

CHANGING TERRAIN

At the heart of the investigation is mining in the Powder River Basin, a coal-rich region of eastern Montana and Wyoming that supplies about 40 percent of U.S. demand and is chiefly on federal land.

For decades, officials promoted mining in the Powder River Basin as a way to meet domestic energy needs but Asian demand has more miners eager to take their product across the Pacific.

U.S. taxpayers are due 12.5 percent of the value of coal from the Powder River Basin but Salazar wrote that royalty rules have not kept up with the market.

One clue of a royalty shortfall, Salazar wrote, would be if miners gain more from a coal sale than what they claim the fuel was worth.

By pushing their sales through affiliated brokers, Reuters found, coal companies could clear their royalties at a low domestic price and actually pocket more than that value when prices in Asia climbed.

Such trading tactics should be halted if they are found, senators Ron Wyden and Lisa Murkowski, the leading Democrat and Republican respectively of the energy committee, told Salazar in a January letter calling for action.

Mining companies have declined to explain how they book Asian coal sales, and their securities filings give only a partial picture of how miners operate in volatile energy markets. Industry and publicly available data, though, indicates that taxpayers stand to lose out.

Paying royalties calculated on the true gains from exports to Asia from Wyoming and Montana rather than on the benchmark domestic price would have yielded around $40 million in additional revenue for the government last year alone, according to data from Goldman Sachs and other analysts, and figures from the U.S. Energy Information Administration.

Extended to the last few years of increased Asian demand, that total could exceed $100 million in lost royalties. The sum could balloon into billions of dollars if mining giants are able to ship 150 million tons of coal a year or more through the Pacific Northwest, as the industry wants.

Wyoming and Montana state auditors have said they are concerned about the coal companies' trades and federal officials drafted rules in 2011 meant to modernize royalty payments but they have not been ratified.