U.S. taxpayer due to subsidize Koch-controlled coal mine

WASHINGTON, Jan 12 (Reuters) - The Obama administration is set to refund as much as $14 million in royalties to a coal company run by billionaire investor William Koch that says it is entitled to the money since the now-shut mine on federal land was costly to operate.

The Interior Department recommended the payout in a December letter to Colorado Governor John Hickenlooper, seen by Reuters, that gives the state executive a chance to object.

The subsidy, part of a decades-old program to promote coal production on public lands, is now under scrutiny since President Barack Obama has vowed to curb the nation’s reliance on fossil fuels, which contribute to global warming.

Oxbow Mining, a subsidiary of Koch-controlled Oxbow Carbon LLC, closed its Elk Creek site in western Colorado two years ago after setbacks such as a fire and partial collapse made working the underground mine too costly, according to the company and regulatory paperwork.

Oxbow has said it has no plans to reopen the facility, which once employed more than 200 people. Machinery is being sold for scrap and the mine is ready to be sealed, according to regulatory paperwork.

“Although production at the mine has been idled indefinitely since the end of 2013 ... the royalty rate reduction would be retroactive,” the Bureau of Land Management wrote in an opinion to Colorado officials, who have a say in the decision since they share coal revenue.

The rebate would come in the form of a “royalty rate reduction” going back to 2012 and lower the government’s take to 5 percent from the usual 8 percent of coal sales.

“We are proposing to approve the royalty rate reduction,” the BLM letter said.

The company has asked the federal government to refund royalties it paid in years when the site yielded millions of tons coal a year, according to regulatory paperwork.

Officials have used discretionary power to lower royalty payments and spur production at mines where coal is hard to reach.

William Koch was an heir to the Fred C. Koch family fortune, and two of his brothers, Charles and David, are leading figures in conservative politics.

While William Koch is not as politically prominent as his brothers, he has been a significant political donor to conservative causes in the past.

Oxbow has also lobbied the Environmental Protection Agency to relax pollution controls and over a planned study of the health impact of pet coke, a byproduct of oil refining used in industrial furnaces.

The health study died in Congress.

“Sometimes we need to influence politicians,” William Koch told the Tampa Bay Times in 2014. “And the easiest way to influence is with money.”

A spokesman for Koch and Oxbow declined to comment.

Rocky Mountain coal has been valued at $35 a ton or more in the last several years, according to a Reuters review of Energy Information Administration data.

Because the BLM recommends a royalty rate reduction on 13.1 million tons of coal, the decision positions Oxbow to receive at least a $14 million refund on fuel mined since 2012, according to a Reuters calculation.

Reducing royalty rates has been a tool used by the federal government for decades when maximizing coal production was part of a national energy policy.

“Royalty rate reductions on coal leases are authorized by statute and BLM current implementing regulations,” the agency said in a statement. “As a result, the agency is obligated to consider all properly filed applications.”

The BLM has not made a final decision on the Oxbow royalty rate reduction, the agency said.

Royalty rate reduction has been criticized for decades, and an Interior Department review in 2013 found that officials often lacked the financial expertise to determine whether a coal company needed a lower rate.

The Obama administration has taken particular aim at coal, introducing regulations that require utilities to obtain a greater share of their raw energy from cleaner sources to produce electricity.

Those regulations have added to the financial pressures on the coal sector, which was already facing a steep decline in domestic demand because of competition from cheap, cleaner-burning natural gas. (Reporting by Patrick Rucker; Editing by Dan Grebler and Steve Orlofsky)