Potential Effects of Section 3 of the Federal

Coal Leasing Amendments Act of 1976

March 1986

NTIS order #PB86-182029
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Potential Effects of Section 3 of the Federal Coal Leasing Amendments Act of 1976—A Special Report, OTA-ITE-300 (Washington, DC: U.S. Government Printing Office, March 1986).

Library of Congress Catalog Card Number 86-600512

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402
FOREWORD

Section 3 of the Federal Coal Leasing Amendments Act of 1976 (FCLAA) forbids the

issuance of any new Federal onshore mineral leases to any person or co m pan y that owns a

Federal coal lease that is not producing coal in commercial quantities and has been held for 10

or more years. This disqualification also applies to all related business entities controlled by or

under common control with the noncomplying coal lessee. The potential impacts of section 3

disqualifications extend beyond coal leasing to all Federal onshore mineral leases, and to onshore

oil and gas leases in particular.

The first section 3 disqualifications were to begin August 4, 1986, however, a provision

in the Continuing Appropriations Resolution for Fiscal Year 1986, Public Law 99-190, delayed

the effect of section 3 to December 31, 1986. Legislation to modify the section 3 penalty has

been introduced in Congress. But these legislative proposals raise difficult issues involving

Federal coal leasing policy, energy supply, and competition.

This OTA special report analyzes the potential effects of section 3 and legislative options

for promoting timely production from Federal coal leases. It was prepared at the request of the

House Committee on Interior and Insular Affairs. This report draws on information and

analyses from OTA’s past work on coal leasing including the 1981 report, An Assessment of

Development and Production Potential of Federal Coal Leases, and the OTA technical

memorandum, Patterns and Trends in Federal Coal Lease Ownership 1950-80. The information

in these reports was updated as needed.

OTA’s analysis of alternative legislative options and our assessment of the likely section

3 compliance status of Federal coal lessees should prove useful to the Congress in considering

proposals for modifying the production requirements for Federal coal leases.

OTA thanks the many companies, organizations, government agencies, and individuals

who assisted us in preparing and reviewing this special report. We particularly acknowledge the

special contributions made by the participants in OTA’s May 1985 workshop to the analysis of

alternative legislative options for amendment or repeal of section 3.

Director
OTA Project Staff - Special Report: The Potential Effects of Section 3

of the Federal Coal Leasing Amendments Act of 1976

Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division

Peter D. Blair, Energy and Materials Program Manager

Richard E. Row berg, Energy and Materials Program Manager (until December 1985)

Audrey Buyrn, Industry, Technology, and Employment Program Manager

Project Staff

Karen L. Larsen, Project Director and Principal Investigator

Administrative Staff

Lillian Chapman Edna Saunders

Sharon Scott Andrea Amiri

Individual Contractors

J. Russell Boulding

James S. Cannon

David A. Gulley

Contributors

OTA wishes to acknowledge the special assistance

Gregg Conrad

David Charles Massell

Bruce Watzman

Norman Williams

of the following individuals:

iv
WORKSHOP ON SECTION 3 OF

THE FEDERAL COAL LEASING AMENDMENTS ACT OF 1976

Sandra Blackstone

Professor of Law

University of Denver

College of Law

Denver, Colorado

Russell Boulding

Environmental and Mining Consultant

Bloomington, Indiana

James Cannon

Consultant

Western Network

Sante Fe, New Mexico

Karl Gawell

Legislative Representative

National Wildlife Federation

Washington, D.C.

Bill Grant

Manager, Government Affairs

Utah International, Inc.

Washington, D.C.

David Gulley

Assistant Professor of Mining

Henry Krumb School of Mines

Columbia University

New York, New York

Tom Hoffman

Director, Federal Government Affairs

Consolidation Coal Company

Washington, D.C.

Lawrence G. McBride

Assistant Solicitor for

Onshore Minerals

Office of the Solicitor

Department of the Interior

Washington, D.C.

Harry Moritz

Chief, Branch of Technical Support

Solid Minerals Operations Division

Bureau of Land Management

Department of the Interior

Washington, D.C.

Dianne Nielson

Director

Division of Oil, Gas & Mining

State of Utah

Salt Lake City, Utah

Steven P. Quarles

Partner

Crowell & Moring

Washington, D.C.

Lynn Walker

Counsel

Mobil Oil Corporation

Denver, Colorado

Geoff Webb

Washington Director

Friends of the Earth

Washington, D.C.

Warren White

State Planning Coordinator

State of Wyoming

Cheyenne, Wyoming

Brooks Yeager

Washington Representative

Sierra Club

Washington, D.C.
-- ———. .

Contents

Page

Chapter 1: Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2: Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Chapter 3: Federal Coal Leases 1985: An Analysis of Current Development Status,

Ownership Trends, and Potential Section 3 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Chapter 4: Legal and Legislative Analysis: Section 3 and Other

Production Requirements for Federal Coal Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Chapter 5: Alternative Legislative Options for Promoting Timely Development

of Federal Coal Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Appendix A: Background: Federal Coal Lease Ownership and Section 3

Compliance Status by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Appendix B: The Top 20 Federal Coal Reserve Holders

and Their Section 3 Compliance Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

Appendix C: Assessment of Coal Lease Holding Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

Appendix D: Federal Coal Lessees and Their Parent Corporations . . . . . . . 159

Parent Companies and Leaseholding Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Development Status of Federal Coal Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Key. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .................... 185

List of Tables

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

vi

page

Development Status of Federal Coal Leases.........., . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ~.. 19

Production Status of Federal Coal Lease in Seven Western States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Development Status of Pre-FCLAA Leases in Seven Western States . . . . . . . 21

Section 3 Dates for Pre-FCLAA Federal Coal Leases in the Seven Western States . . . . . ..2 2

Reasons for Projected Section 3 Compliance Status for Pre-FCLAA Leases in

Seven Western States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Ownership of Federal Coal Leases by Industry Category - 1975,

1980, and 1984 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Section 3 Compliance Status of Western Pre-FCLAA Federal Coal

Leases by Industry Category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,,. 30

The Top 20 Federal Reserve Holders - Section 3 Compliance Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Options for Promoting Timely Production From Federal Coal Leases

Comparison of Section 3 Options and Policy Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Development Status of Federal Coal Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 39

Production Status of Federal Coal Leases in Seven Western States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..4 0

Development Status of Pre-FCLAA Leases in Seven Western States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..4 3

Section 3 Dates for Pre-FCLAA Federal Coal Leases in the Seven Western States . . . . . ..4 4

Section 3 Compliance Status of Pre-FCLAA Leases in Seven Western Coal States . . . . . . . . . . . . . 45

Reasons for Projected Section 3 Compliance Status for Pre-FCLAA

Leases in Seven Western States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Joint Ventures Owning Federal Coal Leases . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Corporate Acquisitions Affecting Lessees Since Passage of FCLAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Ownership of Federal Coal Leases by Industry Category - 1975, 1980, and 1984 . . . . . . ..5 2
19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

Ownership and Production of Federal Coal Leases by Industry

Category - Mid-1970s~-~..-t~~~~~~~~- ~-ti-~=tiumu-ti-mmm~~~~~- mm.m-u-~..~-~~~.~--.. 53

Ownership and Production of Federal Coal Leases by Industry

Category - About 1980 ti-==mmtimvm-mmti=-mm ummmm..m-uuum-tim---=i-= . . . . . . . . . . . . . . .5 4

Ownership and Production of Federal Coal Leases by Industry

Category - About 1984 m...u.tie_otitutitititi --.=...-ti............ti . . . . . . . . . . . . ..5 4

Section 3 Compliance Status of Western Pre-FCLAA Federal Coal

Leases by Industry Category . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

The Top 20 Federal Reserve Holders - Section 3 Compliance Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Federal Onshore Mineral Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Selected Forecasts for Total U.S. Coal Demand in 1980 and 1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Forecasts for Western and Federal Coal Demand Circa 1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Comparison of 1979 and 1985 Coal Leasing EIS Coal Production Forecasts . . . . . . . . . . . . . . . . . . . . . . . 69

Selected Forecasts for Western Coal Production 1980-95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Top 13 Federal Leaseholders 1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 80

Selected Holding Fee Proposals for Federal Coal Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Analysis of Selected Holding Fee Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Options for Promoting Timely Production From Federal Coal Leases

Comparison of Section 3 Options and Policy Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Al. The Top 20 Federal Reserve Holders - Section 3 Compliance Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

A2. Analysis of Holding Fee options - After Tax Net present Cost to Lessee . . . . . . . . . . . . . . . . . . . . . . . 158

List of Figures

page

1. Forecasted 1990 Demand . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

2. Age of Federal Coal Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. How Long Have Leases Been Held? ...........=---titititi ti~-~ . . . . . . . . . . . . . . . . . . . . . ..

4. How Federal Coal Leases Were Acquired . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Forecasted 1990 Demand ~~.~~~~~-~ti-~ ~ti.-~~.--tititi~t~~.mtitimtim- . . . . . . . . . . . . . . . .

6. Fort Union Region: Capacity and Production 1980 - 2000.. . ..

7. Powder River Basin: Capacity and Production 1980 - 2000 . .

8. Southern Wyoming: Capacity and Production 1980 - 2000 . ..

9. Colorado: Capacity and Production 1980 - 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10. Utah: Capacity and Production 1980-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. New Mexico: Capacity and Production 1980-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 5

2 5

41

42

50

72

73

74

74

75

75

76

vii
CHAPTER 1

EXECUTIVE SUMMARY

In 1976, concerned over the large number of nonproducing Federal coal leases, Congress

amended the Mineral Leasing Act of 1920 (M LA) to prevent the issuance of new onshore

mineral leases to any person or company that owns a nonproducing coal lease and has held it for

more than 10 years after August 4, 1976.1 This restriction on the issuance of new leases, found

in section 3 of the Federal Coal Leasing Amendments Act of 1976 (FCLAA), applies not only to

coal leases, but also to leases for oil and gas and other minerals on Federal lands leased under

the MLA. (Federal offshore lands are not leased under the MLA and thus are not affected. )

The disqualification attaches to the noncomplying lessee and to any other firms “controlled by or

under common control with” the lessee. Under section 3 a major oil company could be barred

from competing for Federal oil and gas leases if the oil company’s coal mining subsidiary had

even one noncomplying Federal coal lease. While there has been a significant increase both in

the number of producing Federal coal leases and in the amount of coal produced from Federal

reserves in the past decade, over 40 percent of existing Federal leases remain undeveloped. As a

result of section 3, some major U.S. energy firms will be ineligible to compete for new onshore

Federal mineral leases when section 3 disqualifications take effect unless they sell or relinquish

their old nonproducing Federal coal leases.

Legislation to repeal or modify section 3 has been introduced in Congress, but may

conflict with a basic policy of FCLAA: that Federal coal leases are to be held only for timely

production. As the result of administrative actions by the Department of the Interior, section 3

now is the only penalty that might be imposed on most nonproducing Federal coal leases before

the mid- 1990s. Following hearings on section 3 legislation in June 1984, the House Committee

on Interior and Insular Affairs asked OTA to assess the potential impacts of both enforcement

and repeal of section 3 and to examine alternative legislative options for promoting timely

development from Federal coal leases.

WHAT DOES SECTION 3 REQUIRE?

As a lessee qualification, section 3 is similar to citizenship requirements and acreage

limitations; it does not directly affect the terms or conditions of any existing lease. Section 3

creates a nonproduction penalty only if and when the noncomplying lessee or a related company

seeks a new Federal mineral lease. Moreover, section 3 does not restrict the Secretary’s approval

of lease assignments between private parties nor limit the noncompetitive modification of an

existing coal lease to include up to 160 more acres. Enforcement of a section 3 disqualification

is nondiscretionary. The Secretary however was given considerable discretion in defining the

amount of coal that must be produced to avoid disqualification, i.e. “commercial quantities”, and

in interpreting the availability of statutory exceptions. The Secretary of the Interior can thus

influence significantly the extent of the potential impacts of section 3 enforcement.

OTA has found that Department of Interior guidelines and regulations have made

section 3 compliance more difficult for some producing lessees than previously anticipated.

OTA believes, however, that Department has ample, though not unlimited, discretion to resolve

1 Congress delayed the effective date of section 3 disqualifications to Dec. 31, 1986, in the Continuing Appropriations

Resolution for FY 1986, H.J. Res. 465, 99th Cong., 1st sess., Dec. 19, 1985, (Public Law, 99-190).
2 OTA SPECIAL REPORT

many of the compliance problems of producing lessees. The Department has very limited

discretion to assist lessees with no production. Moreover, the Department’s delay in issuing

final section 3 policy guidance has left many lessees with less than a year to complete all the

administrative steps necessary to avoid disqualification, such as formation of a logical mining

unit (LMU), assignment, lease amendment, or relinquishment.

HOW CAN A LESSEE AVOID A SECTION 3 PENALTY?

Section 3 gives a lessee 10 years after acquiring a lease before imposing its

nonproduction penalty. A lessee has at least eight options for avoiding a section 3

disqualification: 1) The lessee can produce commercial quantities of coal from the lease which

may require mining of up to 1 percent of lease reserves annually from the 10th year on. 2) If

there is already some commercial production, the lessee may be eligible to comply by paying

advance royalties in lieu of production. 3) If mining has been disrupted because of strikes, the

elements, or other casualties not attributable to the lessee, the section 3 production obligation

can be suspended under a nondiscretionary statutory force majeure suspension provision. 4)

The lessee can assign (i.e., sell) the lease to an unrelated party. 5) The lessee can relinquish all

or part of the noncomplying lease. 6) Under section 39 of the MLA, the Secretary can suspend

lease production requirements in the interests of resource conservation. These discretionary

suspensions can not be granted for purely economic reasons, such as lack of markets, but can be

used, for example, to defer development while additional environmental studies are done. 7)

The noncomplying lease can be combined with producing leases in an LMU and total LMU

production can be used to comply with section 3. 8) The lessee can ask the Department to

consolidate the nonproducing lease with one or more of the lessee’s producing leases to form a

single producing lease.

Lessees may encounter several constraints in using these options for compliance with

section 3. The Department has decided to limit force majeure suspensions and payment of

advance royalties only to leases that have been specifically amended by readjustment or

voluntary agreement to include higher post- FCLAA advance royalties and production

requirements. For policy reasons, current regulations provide that coal leases cannot be assigned

to a noncomplying lessee, thus eliminating some potential buyers for nonproducing leases.

LMU formation is perhaps the most flexible and powerful compliance mechanism for leases tied

to producing mines, however nonstatutory preconditions for LMU approval may make this

option unattractive for some lessees. OTA has found at least two producing mines that may not

be able to form LMUs to comply with section 3

lands included must be contiguous.

WHAT IS THE CURRENT DEVELOPMENT

OTA reviewed a total of 648 Federal coal

because of the statutory-requirement that all

STATUS OF FEDERAL COAL LEASES?

leases for this report. We found that 33 coal

leases have been relinquished, exchanged, or consolidated since 1981 leaving 615 Federal coal

leases in effect (“existing leases”) as of September 1985. Our focus was primarily on the 583

existing leases in seven western states of Colorado, New Mexico, North Dakota, Oklahoma,

Utah, and Wyoming, representing 95 percent of the existing leases and over 99 percent of the

Federal reserves under lease. There are 32 leases in other states.

Since 1976, there has been a significant increase in the number of Federal coal leases

that are producing or are under development. Over 48 percent of western leases and 61 percent

of the leased reserves are in or associated with permitted mines. Another 6 percent of leases and

5 percent of reserves are covered by proposed mines now under permit review. About 40

percent of existing leases with 30 percent of the reserves under lease still remain undeveloped,

however.
OTA SPECIAL REPORT 3

WHAT IS THE LIKELY SECTION 3 COMPLIANCE STATUS OF FEDERAL COAL LEASES?

OTA found that nearly all of the undeveloped leases and some leases within or

associated with mines that are permitted or under permit review will face section 3 compliance

problems if leases are retained beyond the 10-year holding period. Section 3 disqualifications

will initially involve nonproducing leases that were issued before passage of FCLAA.

There are 489 western pre-FCLAA leases with over 16.2 billion tons of reserves. About

330 of these leases have section 3 deadlines in 1986; because of transfers after 1976, section 3

dates for the remaining leases fall over the next 10 years.

OTA estimates that 189 pre-FCLAA leases with 8.3 billion tons of reserves are likely to

comply with section 3. Another 56 leases with 1.6 billion tons of reserves have an uncertain

status because of insufficient production, lack of contracts for planned production, or the need

to obtain LMU approval for non-Federal coal. Many of these 56 leases will eventually comply,

however some lessees may be disqualified briefly and others may have to relinquish or sell some

lease reserves in order to qualify.

About half of the western pre-FCLAA leases (244 leases with 6.2 billion tons of

reserves) are unlikely to be producing in commercial quantities by their section 3 deadlines.

Because of probable continued low growth in energy demand and the large inventory of

undeveloped lease reserves, most of these 244 leases will not be mined in time to comply with

section 3 and other production requirements despite even the most diligent efforts at developing

and marketing the coal. The current market outlook suggests that slow growth in western coal

demand will continue until the late 1990s. The noncomplying leases include some tracts in areas

such as southern Utah and the Star Lake-Bisti area of the San Juan Basin of New Mexico,

where coal development is controversial because of potential environmental impacts on National

Parks, wilderness areas, and roadless areas.

WHAT ARE THE POTENTIAL IMPACTS OF SECTION 3 ENFORCEMENT?

The effects, or threat, of a disqualification could lead to the relinquishment or sale of

noncomplying leases. In fact some recent sales and relinquishments were prompted in part by

section 3. Noncomplying leases with unfavorable short-term development potential or poor

quality reserves are most likely to be relinquished. Nonproducing leases with better quality

reserves and favorable or uncertain development potential will probably be sold to new owners.

The legislative history indicates that section 3 was directed at the nonproducing Federal

lease holdings of major oil companies and large energy conglomerates. OTA’s analysis indicates

that many, but not all, of these lessees will have section 3 compliance problems. Section 3 will

have little or no effect on some nonproducing lessees, particularly individuals and companies

that are not actively involved in mineral leasing because they are unlikely to seek additional

mineral leases.

OTA estimates that as many as 120 of the more than 220 current Federal coal lessees

face a potential section 3 penalty. When the holdings of corporate subsidiaries and joint

ventures are attributed to the controlling companies, about 70 distinct corporate families and

about 20 individuals and other lessees could be disqualified.

The 20 largest Federal coal reserves holders control over 65 percent of the Federal coal

reserves under lease. Fifteen of these 20 lessees face potential disqualification because their

leases are either uncertain or unlikely to be producing in commercial quantities. It is likely,

●
4 OTA SPECIAL REPORT

however, that several of these firms will be able to resolve their compliance problems through

LMU approvals, lease assignments, or relinquishments before their section 3 dates. But several

major energy company lessees are likely to be disqualified from Federal leasing unless they get

rid of their noncomplying Federal coal leases.

Section 3 applies to the issuance of all minerals on Federal onshore lands including coal, oil

and gas, oil shale, gilsonite, and fertilizer minerals. If section 3 disqualifications take effect, the

number of potential bidders for Federal coal leases and other mineral leases will be reduced

creating an incentive for the remaining participants to bid less. This could theoretically reduce

the government’s ability to capture any increased value in Federal leases due to competitive

interest. The impacts on competition for and bonuses for coal leases are likely to smaller than

the section 3 noncompliance figures suggest however, because there are normally few bidders

for any given coal tract and the statutory fair market value requirement, if strongly

administered, can assure that acceptable bids reflect a fair return to the government. It is

possible also that fewer new tracts may be leased if the most likely bidders are disqualified.

OTA found that coal production is unlikely to be affected for several years, as few producing

mines are nearing exhaustion of their Federal reserves and many other producers who will be in

compliance with section 3 have excess production capacity available to meet any shortfall.

The overall impacts of section 3 on competition for oil and gas leases also should be

minimal. Most Federal oil and gas leases are not awarded by competitive bidding. As a

practical matter, many potential oil industry bidders for competitive and “lottery” leases will be

unaffected by section 3. It is doubtful that any major oil and gas producer would abandon

participation in Federal onshore oil and gas leasing to preserve nonproducing coal leases,

particularly since coal typically contributes only a minor share of corporate revenues for such

companies. Because noncomplying firms could still acquire oil and gas leases by assignment, the

primary adverse impact of any disqualification will be their exclusion from noncompetitive or

“over the counter” leasing for lands in previously unleased and unexplored frontier areas.

Section 3 guidelines have been adopted for coal leases, but several major uncertainties

remain unresolved. Other leasing programs could be disrupted and lease issuances contested if

the Department fails to move quickly and effectively to prepare for the implementation of

section 3 for all leasable minerals. The Department has not established procedures for reviewing

section 3 qualifications for the thousands of new oil and gas leases issued yearly or to acquire

the information needed to make the determinations.

Section 3 could potentially enhance competition in the western coal supply market by

transferring nonproducing leases to new entrants. However, these leases could also be sold to

existing producers possibly reducing potential competitors for coal supply contracts. Some

major energy firms with noncomplying or problem leases may at least temporarily withdraw

from western Federal coal leasing by selling or spinning off their coal subsidiaries, or as a last

resort, relinquishing their leases, further reducing the number of existing competitors. Once

purged of section 3 disqualification, these firms could later reenter western leasing and thus

remain as potential new competitors.

As better quality reserves are sold to new owners and poorer quality reserves are

relinquished, the amount of undeveloped Federal coal reserves under lease could be reduced,

but the overall quality of the remaining inventory in private hands would be improved. Old

leases could be turned back and could be sold again if they survive the land use planning,

suitability screening, and surface owner consent reviews required of new leases. New leases

require payment of a fair market value bonus and higher statutory royalties which might offset

any loss in rentals or royalties from relinquished leases. The leases that have been relinquished

so far will probably not be reoffered for lease because they generally had poor quality reserves

or were located outside of active mining areas.
OTA SPECIAL REPORT 5

WHAT IF ANY IS THE IMPACT OF SECTION 3 ENFORCEMENT OR REPEAL ON

FEDERAL MINERAL REVENUES?

Repeal or modification of section 3 without imposing substantial payment obligations on

nonproducing leases as the price of relief would be a lost opportunity to generate additional

revenues from nonproducing leases and, perhaps, to recapture a portion of value of old leases

originally sold at very low prices. OTA examined several payment options that might be used

as alternatives to section 3 as it currently exists and found that such an approach has some

advantages. A payment alternative gives the lessee additional flexibility in deciding how long

to hold a nonproducing lease and allows lessees to qualify for additional leases. The payment

creates an economic penalty for nonproduction, thus reinforcing basic policies of FCLAA, and

has the additional benefit of generating some preproduction revenues for Federal and State

governments. The payments could be based on a flat or escalating rate on the acreage, reserves,

or minimum production levels or could be a percentage of the value of the coal. A relatively

simple payment structure of cents per ton of reserves or dollars per acre offers the advantage of

predictability and ease of administration. The payment should be high enough to force some

leases to be relinquished and to lessen the assignment values of other leases, thus discouraging

potential speculation. OTA found that a minimum annual payment of at least one cent per ton

of recoverable reserves, for example, would measurably affect the economics of holding leases

in virtually all coal regions and would provide at least some economic pressure on the lessee to

develop or get rid of a nonproducing lease.

WHAT ALTERNATIVES ARE AVAILABLE TO ENCOURAGE THE TIMELY

DEVELOPMENT OF FEDERAL COAL LEASES?

A dynamic Federal leasing system that offers Federal resources to create opportunities

for private sector firms to compete for coal supply contracts and thus keep fuel costs low for

consumers is highly dependent on a diligence mechanism. Without some means of returning

undeveloped tracts to the system, the Government might soon exhaust its supply of marketable

tracts and lose its ability to affect the price or supply of coal to consumers. However, section 3

and the current diligence requirements can have harsh consequences on some lessees that have

made substantial investments in mine development, but fall short of required production levels.

OTA believes that the existing system could be improved by the adoption of provisions that

allow more flexibility in the achievement of diligence, while reaffirming the principle that

Federal resources are to be held for timely production. For example, as noted previously,

properly structured holding fees create an economic incentive to develop a lease and offer

greater flexibility than the existing system in avoiding forfeiture of leases that are otherwise

economically viable because of unforeseen or unavoidable delays in lease development.

OTA examined various approaches for promoting timely production used in Federal and

private coal leases. Examples include minimum annual production clauses, minimum investment

or equipment clauses, recoupable advance royalties, minimum annual royalties, and short

primary lease terms that can be extended only by production or payment of an additional delay

rental. OTA found that the effectiveness of the minimum production and investment

requirements in Federal coal leases has been hampered historically by the lack of a prompt and

efficient enforcement mechanism. Before 1976, advance and minimum royalties in Federal

leases were generally too low to have any effect on the economics of holding the lease. FCLAA

sharply increased advance royalties for new and readjusted leases, but this condition is only

triggered once the lessee has produced enough coal to satisfy the diligent development

obligation. Current advance royalty provisions in Federal leases therefore do not encourage

initial development and production, and in some cases may be a deterrent.
6 OTA SPECIAL REPORT

OTA looked at the advantages and disadvantages of keeping section 3 unchanged and of

a range of alternative legislative options. The possible legislative options for section 3 relief are:

repealing section 3, limiting the new lease disqualifications to coal leases only, extending the

10-year holding period, using the attainment of lease development milestones as an alternative

to actual commercial production, allowing the payment of holding fees on nonproducing leases

instead of production, requiring a turnback of an equivalent amount of old leases to acquire any

new leases, and allowing noncomplying leases to be relinquished in exchange for a preferential

option to purchase a new lease on the same lands. OTA also analyzed the potential effects of

applying the section 3 producing in commercial quantities requirements to all leases that are

more than 10 years old, regardless of how long they have been held. Some of OTA’s

conclusions from its analysis of these options are summarized here.

Leaving section 3 unchanged retains perhaps the only statutory production requirement

for most old Federal coal leases, particularly because the Department of the Interior has

substantially relaxed, or even nullified, most other production requirements for pre-FCLAA

leases. This “no action” option would maintain fairness for lessees who have already

relinquished or sold leases in order to comply.

Lessees with leases that are producing or

satisfy the Department’s producing in commercial

options: an extension of the section 3 deadline;

production; and acceptance of achievement of

comply with section 3.

under active development but which cannot

quantities test would be aided most by three

acceptance of qualifying payments in lieu of

alternative mine development milestones to

The lease turnback option is administratively workable only if section 3 is limited to coal

leases. Turnback primarily benefits lessees with large amounts of nonproducing acreage or

reserves. Turnback offers no relief to lessees who merely need additional time to produce coal

and do not have nonproducing leases to relinquish.

Repeal of section 3 or limiting the disqualification to coal leases only would provide the

greatest relief from the effects of section 3 enforcement. For some large lessees, limiting

section 3 disqualifications to coal leases only would be tantamount to repeal. It is probable that

some lessees with very large holdings of noncomplying reserves will have little need for

additional Federal coal leases for many years. However, more than two thirds of noncomplying

coal reserves are held by lessees who are also actively involved in onshore oil and gas leasing.

The threat of disqualification from oil and gas leasing makes section 3 a powerful development

incentive for these large energy firms. If section 3 were repealed or limited to coal only, lessees

could maintain their existing inventory of leased reserves for later development or sale and

compete freely for other Federal mineral resources. These two options remove or lessen the

only statutory incentive for the major nonproducing lessees to either begin mining coal from

their leases or get rid of them before the mid-1990s when current diligence regulations might be

enforced. Given the uncertainty created by Department policies about what diligence

requirements are applicable to pre-FCLAA leases and when, if ever, they must be enforced,

these options may effectively remove the only restraint on continued holding of these old leases

without production. These two options would not promote timely development or limit the

potential for speculation in Federal coal were either to be adopted without substantial

counterbalancing changes in section 7 diligence requirements for pre-FCLAA leases.

There is now more Federal coal under lease than can be sold or burned within the

market areas served by Federal coal within the next two decades and beyond. It is likely that

the amount of Federal coal under lease will exceed by a significant margin, the amount of coal

expected to be needed by consumers. Many lessees will be unable to comply with lease

development and production requirements despite even their most diligent efforts at securing
OTA SPECIAL REPORT 7

purchasers for their coal. Allowing lessees to retain coal leases indefinitely without development

in the same manner that companies might, for example, hold the coal reserves that they own

outright, would be equivalent for policy purposes to transferring ownership of these reserves to

private parties and runs contrary to the longstanding Federal policy against disposal of public

coal resources. For this reason, the Federal leasing program will need some mechanism to

determine which leases can continue to be held, and for how long, and which must be returned

to the government for possible resale to others. Whether this mechanism will be section 3, the

current diligence system, or some other provision is a matter for congressional consideration.
CHAPTER 2

OVERVIEW

In 1976 Congress amended the Mineral Leasing Act of 1920 (MLA) to bar the issuance

of any new Federal onshore mineral lease to any person or company that owns a nonproducing

coal lease and has held it for 10 years after August 4, 1976. This provision, section 3 of the

Federal Coal Leasing Amendments Act of 1976 (FCLAA) (also known as section 2(a)(2)(A) of

the MLA)l

, was adopted as a result of congressional concern over the large number of Federal

coal leases that were being held without production and the recent acquisitions of Federal coal

leases by the major oil companies and other large energy conglomerates. On August 4, 1986,

the 10-year section 3 holding period will end for 331 leases and the owners of as many as 197

nonproducing Federal coal leases could be disqualified. Over the next decade the owners of

another 103 nonproducing leases could also become ineligible to acquire new mineral leases

unless they sell or relinquish their old nonproducing coal leases.

Legislation to repeal or modify the section 3 nonproduction penalty has been introduced

in Congress. Section 3 relief legislation has become a high priority for many coal lessees and

especially for those with oil and gas operations because of section 3’s applicability to Federal

onshore oil and gas leases. The Department of the Interior has endorsed repeal or replacement

of section 3 with economic penalties. But legislation repealing or modifying section 3 raises a

number of difficult issues concerning the management of Federal mineral resources. To allow

additional time for consideration of legislation, Congress has delayed the effect of section 3

disqualifications from August 4, 1986 to December 31, 1986.2

At the request of the House Committee on Interior and Insular Affairs, OTA has

prepared this special report assessing both the potential impacts of enforcement of section 3 and

the possible consequences of amendment or repeal. OTA examined the availability and

effectiveness of other mechanisms for promoting timely development of Federal coal leases and

analyzed a range of possible legislative alternatives for congressional consideration.

In 1976 there were some 533 Federal coal leases with over 16 billion tons of recoverable

reserves; only 59 of the leases were being mined. Federal coal production in 1974 was 20.6

million tons, scarcely 3 percent of national production. At the same time, the Federal Energy

Administration Project Independence Blueprint report projected that national coal demand in

1980 could grow to 895 million tons under a business as usual scenario and to as much as 1.376

billion tons under an accelerated development scenario. Western coal production was also

projected to increase steeply. Thus, when FCLAA was under consideration it appeared that

Federal coal reserves, while substantial, were not contributing proportionately to meeting rapidly

expanding national energy needs. There was also concern that the benefit of any future

increase in the value of the Federal coal reserves would not flow to the Federal Treasury and

the States, but would accrue to private lessees who had acquired Federal leases at little or no

initial cost and held them without production. As a result of these concerns, FCLAA contains

several provisions intended to encourage early production from new Federal leases and to limit

the potential for speculative gain, Competitive bidding and payment of fair market value are

required for all new leases; any new lease not producing within 10 years will be terminated.

Congress dealt with the existing nonproducing leases by restricting the future acquisition of

1 Public Law 94- 377, 90 Stat. 1083, Aug. 4, 1976, 30 U.S.C. 201(a)(2)(A).

2 H.J. Res. 465, 99th Cong., 1st sess, Dec. 19, 1985, (Public Law, 99-190).
OTA SPECIAL REPORT 9

Federal mineral leases by lessees who did not bring their coal leases into production within 10

years of acquiring the lease. The Department of the Interior also began to enforce statutory

development obligations in Federal leases by adopting regulations in 1976 that required all

existing Federal coal leases to produce 2.5 percent of lease reserves by June 1, 1986 under threat

of cancellation.

In the years since enactment of FCLAA, both the coal leasing program and the market

outlook for western coal have changed. The number of producing leases has increased to 118.

In 1985, a total of 298 existing Federal leases were in permitted mines or associated with them;

but 250 leases still remained undeveloped. Federal coal production in fiscal year 1984 was 104

million tons or about 12 percent of total U.S. production in the same period. Forecasts of

greatly expanded western coal demand have been scaled back as plans for new coal fired

powerplants and synthetic fuels facilities have been cancelled or delayed. Coal production

reached 830 million tons in 1980 and is now projected expected to reach 894 million tons in

1985 by the Energy Information Administration. Actual production levels are well below some

projections of the mid- 1970s.

The Department of the Interior now favors the maintenance of a large inventory of

leased reserves as a hedge against dramatic, unanticipated future increases in coal demand and

has accordingly relaxed the 1986 production deadline imposed by regulation on all existing coal

leases in 1976. The Department substituted instead, a diligence system that requires old leases

to produce 1 percent of recoverable reserves within 10 years of the first lease readjustment after

passage of FCLAA shifting the diligent production deadlines for most pre-1976 leases to the

1990s. As a result of administrative actions, section 3 disqualification is now, in effect, the

only penalty that might be imposed on most nonproducing pre-FCLAA leases before the mid1990s absent enforcement of either specific lease minimum production provisions or the more

general statutory diligent development requirement. Section 3 is the only statutory requirement

that might force the holders of most nonproducing old leases to

or to give them up during the next decade.

Section 3 and Production Requirements for

either mine coal from the leases

Federal Coal Leases

From 1920 to 1976, Federal coal leases were issued for indeterminate periods on the

conditions of diligent development and continued operation of the mine or mines under lease.

The leases were further subject to the revision or “readjustment” of specific lease terms,

conditions, rentals, and royalties at the end of of the initial 20-year term and every 20 years

after unless provided otherwise at the expiration of such period. Federal coal leases could be

revoked for noncompliance with requirements imposed by statute, lease provisions, or general

regulations in force on the date of lease issuance. Revocation was accomplished through

cancellation proceedings in Federal district court, an administratively cumbersome and

potentially expensive enforcement process for all parties.

In 1976, the law was changed. New coal leases are issued for an initial term of 20 years

and may be extended beyond that initial term only for as long as the lease is producing coal

annually in commercial quantities. Rentals, royalties and other lease conditions may be

readjusted at the end of the 20-year primary term and subsequently every 10 years if the lease

is extended. New leases must begin producing within 10 years of lease issuance or the lease is

terminated automatically by operation of law. Cancellation proceedings must still be used for

violation of other statutory and lease provisions. A new disqualification penalty was added for

lessees that held leases for more than 10 years without producing.
10 OTA SPECIAL REPORT

WHAT IS SECTION 3 AND WHAT DOES IT REQUIRE?

Section 3 provides that, subject to certain limited exceptions, the Secretary shall not

issue a lease under the terms of the MLA to anyone who holds and has held a Federal coal lease

for 10 years after August 4, 1976, unless the coal lease is producing in commercial quantities.

Section 3 is thus a general qualification provision for Federal onshore mineral leases. The

disqualification attaches to the nonproducing lessee and to all entities “controlled by or under

common control with” the noncomplying lessee, such as parent or subsidiary corporations, and

affiliates. OTA has concluded that section 3 prevents issuance of all new leases for coal and for

oil, gas, oil shale, phosphate, potash, sulfur, sodium, or gilsonite on Federal lands (both public

domain and acquired lands). Federal offshore oil and gas leases are not affected by section 3

because these leases are issued under the Outer Continental Shelf Lands Act, not the MLA.3

Section 3 was directed primarily at “old” leases (leases issued before passage of FCLAA)

and particularly at the large nonproducing lease holdings of major oil companies, large coal

companies, and other energy conglomerates. The disqualification extends to oil and gas and

other mineral leases to deter these firms from holding undeveloped Federal coal leases by

threatening their participation in other leasing activities. The legislative history makes clear that

the provision was adopted in response to concern that these companies might sit on their leases

waiting for the price of coal to go up in the future instead of producing coal from them to meet

more immediate energy needs. Passage of FCLAA followed on the first OPEC oil embargo and

a doubling of the average domestic price of coal from 1974 to 1976. Real coal prices have

remained relatively stable since then.

The Department’s 1982 regulations and final guidelines on section 3 and logical mining

unit (LMU) formation have made section 3 compliance more difficult for some producing

lessees. The delay in issuing guidelines has put lessees at a disadvantage in preparing and

getting approval of assignments, relinquishments, and LMUS before the section 3

disqualification will start for many lessees. The Department has effectively created three

different section 3 compliance schedules and commercial quantities production levels based on

whether or not the lease has been adjusted or amended to include the post- FCLAA production

and royalty provisions. While this disparity creates some inequity among nonproducing lessees,

it does allow the Department a second chance to amend the leases that were not readjusted to

include the statutory royalties and 1982 diligent development terms, provided that the lessee also

agrees to the amendment as the price of section 3 compliance.

OTA believes that the Department has ample discretion to allow coal lessees who are

actually producing from the lease or LMU to comply with section 3. This discretion is found

in interpreting such terms in section 3 as “holds and has held”, “producing in commercial

quantities”, and “controlled by or under common control with” the lessee, and in determining the

availability of exceptions in section 7(b). The Department has only extremely limited discretion

to assist nonproducing lessees in complying with section 3.

Both old leases and new leases are subject to section 3. The threat of disqualification is a

strong incentive to develop leases or to transfer them. For most old leases, the 10-year section 3

production deadline will come years before any production requirement imposed under the 1982

diligence system. It is also a backup production requirement for new leases once such leases

3 OTA has also concluded that section 3 would bar the issuance of a preference right lease for coal or other minerals to an

applicant with a noncomplying coal lease. OTA’S conclusions are in general agreement with those of the Department of the

Interior in its Solicitor’s Memorandum M-36951, Feb. 12, 1985. The Department has not yet reached an opinion on the

effect of section 3 on preference right lease applications or its effect on acquired land leases.
OTA SPECIAL REPORT 1 1

have met the initial 10-year production requirement and can no longer be terminated. Section 3

could be used to encourage production, assignment, or relinquishment of such leases before the

primary 20-year term expires if the leases are not producing and advance royalties can no

longer be accepted in lieu of continued operation.

Section 3 “enforcement” is not discretionary. Implementation of section 3 is n o t

contingent on rulemaking or guidelines. If the Department does not move effectively to

establish qualification procedures, unsuccessful applicants for oil and gas leases will certainly

use DOI’s failure to determine section 3 eligibility as one basis for challenging new oil and gas

leases even where it is not apparent that the successful applicant in fact holds any coal leases.

Section 3 has already affected the pattern of leaseholdings of some major oil companies

and large energy companies. Section 3 has

inventories and to assign or relinquish some

prospects in order to comply.

What Must A Lessee Do

OTA reviewed the MLA, FCLAA and

forced some companies to reevaluate their lease

leases with unfavorable short-term development

To Comply With Section 3?

its legislative history, and Department regulations.

guidelines, and other documents to determine the availability of exceptions to the section 3

producing in commercial quantities requirement. We found several statutory provisions that

confer extensive, but not unlimited, discretion on the Secretary of the Interior to resolve man\

of the difficulties that Federal coal lessees may face in complying with section 3. OTA

identified at least eight ways for a lessee to avoid disqualification.

1. The lessee can produce coal in commercial quantities from the lease.

“Commercial quantities” is defined by regulation as production of 1 percent of lease or

LMU reserves. However “producing in commercial quantities” for section 3 purposes is defined

differently depending on whether or not a lease is subject to the 1982 “diligence system” and

whether it is part of an approved LMU. Under Department guidelines, section 3 compliance

may require production of as much as 1 percent of lease reserves annually or mere 1>’

“producing toward” 1 percent of lease (or approved LMU) reserves over a period that may be as

long as 10 years after the new lease is issued. The use of an inflexible 1 percent as commercial

quantities may mean that some producing lessees with very large reserves or that have just

started production will not comply with section 3. FCLAA does not define what is meant by

commercial quantities, but OTA believes that section 3 requires that the lessee must actually

produce some coal from the old lease or LMU before qualifying for a new lease.

2. The lessee can pay advance royalties in lieu of continued operation under section 7(b) of the

MLA .

The MLA allows payment of advance royalties in lieu of production to satisfy the

statutory requirement of continued operation. This exception is available only if the lessee has

already developed the mine and produced commercial quantities of coal to comply with the

diligent development requirement and has thus triggered the statutory continued operation

obligation. The Department has interpreted this section 3 exception as referring only to advance

royalties paid under section 7(b) as amended by FCLAA and thus available only if a lease has

been readjusted or modified to include the FCLAA advance royalties and the lessee has satisfied

its diligent development condition by producing. OTA estimates that about 133 pre-FCLAA

leases are scheduled for readjustment between August 4, 1976 and August 4, 1986, and might

qualify for this exception, but other pre-FCLAA leases would not unless the leases were
12 OTA SPECIAL REPORT

amended voluntarily to include the FCLAA advance royalties and other requirements.

However, as discussed below, not all leases have been effectively readjusted as scheduled. As a

result, even fewer than 133 lessees would initially be able to pay advance royalties to comply

with section 3.

3. The [essee might obtain a force majeure suspension of the lease under section 7(b) of the

MLA.

If the lease operations are interrupted because of strikes, the elements or casualties not

attributable to the lessee, the diligent development and continued operations obligations can be

suspended. The Secretary’s approval of a force majeure suspension is not discretionary.

“Casualties not attributable to the lessee” have not in the past been interpreted to include

ordinarily foreseeable risks of doing business, such as ordinary delays in acquiring permits or in

delivery of equipment, or the lack of markets. The Department has decided that section 7(b)

force majeure suspensions as exceptions to section 3 are only available for leases that have been

readjusted or otherwise amended to include all FCLAA terms and conditions.4

4. The lessee can transferor assign the lease to an unrelated entity.

If the lease is assigned, the lessee no longer “holds” the lease and the disqualification is

lifted. Coal lease assignments become effective following approval by the Department. The

assignment must be an arm’s-length transaction between the lessee and a new owner that is not

controlled by or under common control with the lessee for it to remove the lessee and related

business entities from the threat of a section 3 disqualification. If the lessee (or a related

entity) later reacquires the lease, the new holding period is added to the previous tenure for

section 3 purposes. There may be several mechanisms that would allow the lessee to assign the

nonproducing lease, or its producing leases, to another entity while still keeping some interest in

the leased Federal reserves and avoiding section 3 problems. The lessee might, for example,

convey the lease to a trust or to the firms financing mine development, while retaining the

rights to mine the lease under an operating agreement.

5. The lessee can relinquish all or part of the noncomplying lease.

Relinquishments take effect on approval by the Department, however the effective date

may be made retroactive to the date the application was filed. As a precondition, all rents and

royalties due must be fully paid and the lessee must be in compliance with all terms and

conditions of the lease. The regulations provide that the Secretary must find that

“relinquishment would not impair the public interest.” Examples of relinquishments that might

not be in the public interest are where it would result in “high grading,” bypass, or wastage of

Federal coal, or where abandoned mine workings have not yet been successfully reclaimed in

compliance with lease obligations. OTA estimates that at least 44 currently nonproducing leases

were mined before passage of the Surface Mining Control and Reclamation Act (SMCRA) and

were never permitted. The coal lease terms may perhaps be the only effective reclamation

obligations for these disturbed areas. Even after a relinquishment application has been filed on

such a lease, it may take several growing seasons to determine if the surface restoration has

been sufficient to allow approval of the relinquishment.

4Nondiscretionary force maieure suspensions are still available for unadjusted leases under specific lease provisions and the

authority of MLA section 7 in effect when the lease was issued or last readjusted. These suspensions do not however lift the

section 3 requirement.
OTA SPECIAL REPORT 13

6. The lessee can obtain a suspension of the lease in the interests of conservation under section 39

of the MLA.

The Secretary can suspend operations and production on a lease “in the interests of

conservation of the resource” under section 39. During the suspension, the rights and

obligations of the lease are held in abeyance. No development or production activities can take

place, no rent is due. (FCLAA amended section 39 to provide that it could not be used to

suspend or reduce section 7(b) advance royalties. ) A section 39 suspension might be justified

for a nonproducing lease that would not be mined for a number of years and could not be

mined except from the lessee’s operation instead of forcing relinquishment to comply with

section 3. (In such a situation, LMU formation or an order barring wastage of the leased coal

could also be used to prevent the actual bypass of Federal coal. ) Suspension allows the lessee to

preserve many of the advantages of pre-FCLAA leases, It delays readjustment and the

imposition of higher royalties, and extends the section 3 holding period for the length of the

suspension. An important restraint is that section 39 suspensions are not available for purely

economic reasons alone, such as failure to find a buyer for the coal.

7. The lease can be combined with other Federal leases or non-Federal coal into a producing

logical mining unit (LMU).

Under section 5 of FCLAA, production anywhere in an approved LMU can be used to

satisfy the production requirements for any Federal leases in the LMU. The Department has

determined that LMU production can be used to satisfy the section 3 “producing in commercial

quantities” requirement. An LMU can only be approved if it promotes maximum economic

recovery of the coal, if all lessees consent, and if the all areas within the LMU are contiguous,

can be mined as a single operation, are under the effective control of one operator and total less

than 25,000 acres. A public hearing may be required before approval. An LMU mine plan

must provide for the LMU reserves to be mined out in no more than 40 years. The Department

has imposed additional conditions on LMU formation that may make use of this option

unattractive for some lessees.

The Department’s section 3 and LMU guidelines and 1982 regulations may make it more

difficult than previously anticipated for some producing mines to satisfy the section 3

requirement for all leases within the mine without forming an LMU. The LMU approval

includes some additional obligations that some lessees may want to avoid, such as: an apparent

requirement to mine at an average rate of 2.5 percent of LMU reserves annually; provisions for

canceling the LMU if that rate is not met; and the relinquishment or segregation of lease

reserves excluded from the LMU. It is therefore possible, but not likely in most cases, that

some lessees with active mines will not combine nonproducing leases into an LMU for section 3

compliance. These lessees may choose to live with a short-term section 3 disqualification or to

relinquish the leases rather than create an LMU.

The statutory requirement that the areas within the LMU must be contiguous may bar

LMU formation for a few mining operations. OTA found two mining operations, one in

Colorado, one in North Dakota, where noncontiguity might prevent LMU formation for active

mines that meet all other LMU requirements and where LMU formation is necessary to comply

with section 3. OTA believes that the Secretary probably has sufficient administrative

discretion, under section 5 and section 39 for example, to allow the lessees to keep the leases

intact and to avoid section 3 noncompliance. The contiguity requirement could in the future

present problems in LMU formation in North Dakota because scattered Federal coal tracts are

intermingled with larger areas of fee coal. Moreover, mining operations in North Dakota

sometimes include several pits that are separated by lands that will not be mined. The amount

of Federal land and coal involved, however, is small.
14 OTA SPECIAL REPORT

8. The lease can reconsolidated with a producing Federal coal lease.

The Secretary of the Interior has general administrative authority over coal leases and

could approve the consolidation of two or more coal leases into a single lease in appropriate

cases. There are currently no regulations governing this action. OTA notes that lease

consolidations have been made in the past and would allow lessees to comply with section 3

without forming an LMU and subjecting a lease to the LMU requirements. There is no

requirement for notice or public hearings for a lease consolidation.

How Has the Interior Department’s Implementation of Section 3 Guidelines

Affected the Ability of Companies to Comply With Section 3?

The Department of the Interior has contributed to the potential adverse impacts of

section 3 on Federal coal lessees by making it more difficult for many lessees to understand

and comply with section 3 within the time remaining before August 4, 1986 (or by December

31, 1986, the delayed effective date of disqualifications). Proposed guidelines on section 3 were

not published until February 1985, and related guidelines on LMU formation were not proposed

until April 1985. The final guidelines were issued, largely unchanged in September 1985. The

Department’s delay has left many lessees less than a year to apply for and obtain approval of

any administrative actions needed to comply with section 3, such as lease relinquishments,

assignments, suspensions, and LMU approvals.

The Department has made compliance more difficult for some producing lessees by

limiting the availability of statutory exceptions, and interpreting the producing in commercial

quantities requirement as a kind of additional continuous production requirement of 1 percent

per year for some lessees, while giving others up to 10 years to produce 1 percent of reserves.

Under the guidelines, the section 3 production bracket for some lessees could extend up to 10

years after a new lease is issued. The Department has tied the availability of section 3

exceptions and its definition of producing in commercial quantities to whether or not a lease has

been readjusted to include the 1982 diligence regulations. Lessees who have held nonproducing

leases for 10 years are treated differently on this basis. This distinction is not found in section

3, but is probably within the Secretary’s discretion in implementing the law.

Conditions placed on approval of LMUS and penalties for LMU failure are disincentives

for some lessees to form LMUS. These requirements in the 1982 regulations and LMU

guidelines, in OTA’s opinion, go beyond what is required by section 5 of FCLAA for LMU

formation, but are fully within the discretion accorded to the Secretary in implementing the

law. LMU approval is an extremely powerful and flexible tool for promoting the most efficient

development of Federal coal reserves and for resolving any difficulties created by different

lease provisions for Federal lands in the LMU.

Several important issues in section 3 enforcement have been left unanswered. The

Department has failed to define how it will interpret “controlled by or under common control

with” language of section 3 to determine when the 10-year holding period begins and ends and

what affiliated firms might be precluded from acquiring leases. This is particularly important

for leases that are held by companies that were acquired by and subsequently merged into other

companies. There have been more than 16 corporate acquisitions involving more than 150 leases

since 1976. The Department has merely advised that “common principles of corporate law”

would apply to determining control and that only 100 percent arm’s-length assignments would

restart the section 3 clock. This suggests that corporate acquisitions would not restart the

section 3 clock for the acquired lessee, and that a subsequent merger, or reassignment of the

leases to the acquiring corporation would also not restart the clock. The Department has not
OTA SPECIAL REPORT 1 5

suggested how section 3 would be applied to the sale or spin off of a coal leasing subsidiary to

an independent company. OTA believes that the section 3 clock would not be restarted in such

a case under the suggested interpretation.

The concept of “control” was included in section 3 and in the MLA’s coal lease acreage

limitations to prevent these restrictions from being avoided by devices of corporate and other

business organization. The Department however has not clarified whether it will apply the same

attribution principles used for acreage limitations for section 3 purposes. The Department has

not yet indicated how it will determine control for other noncorporate business entities that hold

leases, such as partnerships and various kinds of business trusts. The Department intends to

make “control” determination on a case by case basis that, at present, will leave some non-coal

lessees unsure about their section 3 compliance status.

Several major leaseholding corporations own stock in nonsubsidiary companies that also

hold Federal coal leases. The Department has not offered any clear guidance on when stock

participation might impose a section 3 disqualification on the stockholder lessee or on the

nonsubsidiary/affiliate. For example, Chevron owns Gulf Oil Corp. and more than of 20

percent of AMAX, and the Williams Companies own Western Slope Carbon, a coal lessee, and

over 30 percent of Peabody Holding Co. If control is interpreted as stock ownership and the

ability to dictate the affairs of the company, 20 percent would in many companies give the

holder substantial influence over the company, but not dictatorial control. How and when

section 3 sanctions might apply to the companies involved is still apparently unresolved.

Ownership of 10 percent or less of corporate stock has been interpreted as a “controlling”

interest for purposes of disclosure on corporate qualifications statements and calculating total

allowable acreage holdings. In the absence of any published Interior Department guidance on

this matter, OTA did not attribute noncompliance status to stockholders of a corporate lessee

except for wholly owned subsidiaries or joint ventures involving two or three companies. OTA

believes however that the Department could, but may not be required to, find control for

section 3 purposes in stock ownership above a minimal amount, such as for example 5 percent

of a publicly traded company.

If the conclusions are changed on how section 3 holding periods and control are to be

determined, the compliance deadlines for some major lessees are extended significantly. If

DuPont’s acquisition of Conoco (parent company of Consolidation Coal Co. ) restarts the section

3 clock, Consolidation Coal Co. will have a section 3 deadline in 1991 instead of 1986. Gulf

Oil, which owns Pittsburgh and Midway Coal Co., bought Kemmerer Coal Co. from the Lincoln

Corp. in 1981. Kemmerer was then dissolved and its major assets, including its coal leases, were

distributed to its shareholder Gulf Oil Corp. The lease title records reflect the assignment to

Gulf Oil Corp. However, at the time of the transfer, (as best we can determine) this was not an

arm’s-length transaction between independent entities because Gulf owned all of Kemmerer. In

1984 Chevron acquired Gulf, which is now being merged into Chevron. Will Chevron be

charged with Kemmerer’s section 3 holding period and be disqualified from obtaining Federal

oil and gas leases because of the nonproducing leases that Gulf acquired with Kemmerer? We

think that is the proper result, because of the nature of the assignments transferring title to the

leases. If corporate acquisitions are viewed as restarting the section 3 clock however, Chevron,

and one would assume its subsidiary Gulf, would not face a possible section 3 penalty until 1992

when the 10-year holding period ends for Chevron’s 50 percent interest in a Montana lease.

DILIGENT DEVELOPMENT AND OTHER PRODUCTION REQUIREMENTS

FOR FEDERAL COAL LEASES

The expectation of a profit to be made from mining and selling coal is clearly the most

powerful incentive for any lessee to develop a mine, however, there are times when
16 OTA SPECIAL REPORT

nondevelopment may be economically preferable. For example, if the lessee expects the price

of coal to increase, deferring production might offer the potential of greater profits later. In

other instances, low growth market conditions and an excess of capacity in existing mines may

significantly reduce the probability that a lessee can successfully find a buyer for the coal if

development proceeds without an assured contract. A risk-averse lessee may prefer to wait

until the perceived probability of success improves. But the lessor’s interest may not be served

by this delay if receiving royalty payments from production is the lessor’s major benefit from

the lease. Early production or return of the lease so it can be sold to another who might be

more successful at developing a mine and generating revenues would be more advantageous to

the lessor. The public interest is also served by encouraging more development so that

competition among coal suppliers will tend to keep fuel prices low. To protect the economic

interests of the lessor and to balance them against those of the lessee, the legal concept of

diligent development of mineral leases arose.

Mineral leases under Federal law and common law contain either an express or implied

promise that the lessee will make a reasonably “diligent” effort to develop and market the

mineral under lease so that production royalties will be paid to the lessor. These “diligence”

provisions come in many forms and are intended to protect the interests of the lessor by

encouraging production or forcing relinquishment of a nonproducing lease. Not all leases

require actual production as evidence of the lessee’s diligence, however. For example, some

leases allow the lessee to keep the lease by paying a holding fee instead of producing. Such a

payment requirement does not however relieve the lessee indefinitely of all obligation to

develop the lease. Other examples of diligence requirements are minimum production and

minimum investment conditions, advance or minimum royalties, and short primary lease terms.

OTA found that many of the same diligence conditions used in private leases have also been

used in Federal coal leases. The effectiveness of these provisions in Federal leases has

historically been hampered by lack of prompt and efficient enforcement methods.

The diligence requirement for Federal coal leases is found in section 7 of the MLA.

Originally and in its current amended form, section 7 provides that every Federal coal lease is

held under the conditions of diligent development and continued operation of the mine or mines

on the lands under lease. Section 7 originally imposed no time limit for development, but a

lessee who failed to develop the lease could be sued for violation of the statutory requirement

and the lease forfeited. Federal coal leases until the mid- 1970s typically included a provision

requiring minimum production to begin in the fourth or sixth year of the lease. The minimum

production obligation could be waived on payment of advance royalties with the approval of the

Secretary. These advance royalties were usually equal to and credited against the annual rental

so that no additional payment was required to delay production. There was no statutory or lease

provision that authorized waiver of the diligent development condition by payment of advance

royalties, however. OTA found some evidence that lessees were reminded of the diligence

obligation as late as the early 1960s, but there is no record of any lessee actually being sued for

nonproduction. This was, perhaps, because cancellation required the Attorney General to sue

the lessee in Federal district court, a relatively costly and time-consuming process. In FCLAA,

diligence requirements were made more stringent. New Federal coal leases must begin

producing within 10 years of issuance or they are terminated. Lease suspensions and LMU

formation are probably the only exceptions to the new statutory diligent production provision.

Section 3 is effectively an “independent” diligence requirement because it creates an

incentive to produce from the lease or get rid of it. But, section 3 is different from other

diligence provisions in that it is not a term or condition of a lease and does not directly impose

any penalties on a lessee unless a new lease is sought. (To avoid confusion in this report, when

we refer to diligence obligations, we mean the requirements imposed under section 7 of the

MLA and not the production requirement of section 3.)
OTA SPECIAL REPORT 17

The effectiveness of current diligent production requirements for old or pre-FCLAA

coal leases is now uncertain, largely as the result of a more than 20-year history of

nonenforcement of existing lease provisions by the Department and the 1982 relaxation of 1976

regulations which would have required most old leases to be producing by 1986 under threat of

cancellation. The 1982 diligence regulations provide that pre-FCLAA leases are governed by the

production provisions in the lease until the lease is readjusted or voluntarily amended to include

the new terms required by FCLAA and the “1982 diligence system”. The 1982 regulations

require production of commercial quantities (defined as 1 percent of lease reserves) within 10

years of the first post- FCLAA lease readjustment. Similar diligence requirements are applied to

LMUs. Under the 1982 system, old leases thus face production deadlines between 1987 a nd

2007, and in some cases later, depending on when and whether the Department readjusts the

leases.

There are two major weaknesses in the 1982 diligence system as currently administered.

First, it is almost entirely dependent on timely and effective readjustment of pre-FCLA.A

leases. Second, the current lease form does not include specific production amounts or

deadlines, but merely states that the lessee must satisfy diligent development and continued

operations requirements as defined in applicable regulations (which can be changed). This

enforcement scheme thus suffers from many of the same infirmities that the Department

attributed to the 1976 regulations that, ostensibly, required the 1982 rules changes, such as, lack

of specific lease production obligations and potential modification of lease terms through

changes in regulations.

OTA has learned that the Department has failed to adjust in an effective or timely

manner an undetermined number of more than 130 leases that were scheduled for readjustment

since FCLAA. The Department in some cases failed to send required notices on time, or

attempted to readjust the leases several years after the scheduled readjustment dates. Some

lessees consented to the changes and did not contest the readjustments. Other lessees however

appealed the decisions administratively to the Interior Board of Land Appeals (IBLA) (a special

hearings board established by and acting for the Secretary of the Interior) and to the Federal

courts. Some of the attempted readjustments were reversed or sent back to the Bureau of Land

Management for review. As a result, the leases involved were not conformed to the FCLAA

requirements or to the 1982 diligence system. In September 1981, then Interior Solicitor William

Coldiron issued an opinion that coal leases are only “subject to” adjustment under the MLA and

that the Secretary is not therefore required to readjust any leases at the end of their current

terms to include FCLAA provisions. (It is

however. ) Under this interpretation, if the

pre-FCLAA lease, none of the provisions of

the lease could continue under the old royalty

20 years. To date the Secretary has not

readjustments. There also appears to be no

and has been the Department’s policy to do so,

Department either fails or declines to readjust a

FCLAA are made applicable to the old lease, and

provisions for another 10 years, and in some cases

reviewed the decisions of IBLA reversing the

institutional mechanism for the Bureau of Land

Management or others to appeal decisions of IBLA reversing lease readjustments. 5 Thes e

readjustment decisions have important implications for future enforcement of diligence

provisions, but more significantly in the case of producing leases, they could result in the loss

of millions of dollars in increased production royalties to the Federal Government and the

States,

5 Under the MLA, each public land State, except Alaska, receives 50 percent of the revenues from mineral lease sales,

rentals, and royalties on Federal lands in the State. (Alaska receives 90 percent of mineral leasing revenues from Alaska

Federal lands. ) The States obviously have a significant financial interest in lease readjustments. They are not, however,

currently parties to cases involving readjustments and, thus, may have no notice or opportunity to appeal reversals.
18 OTA SPECIAL REPORT

OTA has previously analyzed the prospects that lessees will comply with the diligent

development requirements imposed by the 1982 regulations.6 We did not however analyze how

the problem with lease readjustments might affect these results. This analysis included 502

leases in Colorado, Montana, New Mexico, North Dakota, Utah, and Wyoming. OTA found

that:

o 272 1eases with 11.4 billion tons of reserves are likely to meet the 1 percent

diligent production requirement by the end of the new individualized diligence

period;

o 169 leases with 4.5 billion tons of reserves face uncertainties in meeting the 1

percent production requirement at the end of the new individual diligence

periods; and

o 61 leases with 0.5 billion tons are unlikely to satisfy the diligent development

requirements of the 1982 regulations.

The 1982 regulations made it more likely that pre-FCLAA leases would comply with

diligence obligations by reducing the amount of coal required to be produced and extending the

production deadlines from 1 to 20 years from the June 1, 1986 deadline imposed under the prior

1976 regulations. Unlike the 1976 regulations, the 1982 diligence system does not provide

discretionary extensions to the diligence deadline for lessees who have very large mines,

difficult mining conditions, or unanticipated problems or delays in mine development.

Continuation of current low growth trends in western coal markets may make compliance more

unlikely for some leases that OTA

Federal Coal

classified as uncertain in our 1983 analysis.

Leases and Section 3 Compliance

WHAT IS THE DEVELOPMENT STATUS OF FEDERAL COAL LEASES?

In preparing this report, OTA reviewed a total of 648 Federal coal leases, including all

leases currently in effect and leases that have been relinquished or exchanged since 1980.7 

o ur

major focus was on the 616 leases in the States of Colorado, Montana, New Mexico, North

Dakota, Oklahoma, Utah, and Wyoming. We also looked at the 32 leases in other States (Alaska,

Alabama, California, Kentucky, Oregon, Pennsylvania, Virginia, and Washington). Table 1

shows the distribution and the current development status of the leases reviewed.

There are 298 leases with approved mine plans. This represents about 48.8 percent of

the 616 leases in western States and over 60 percent of total leased reserves in these States.

Most of these leases are either producing or associated with active mining operations. There

are also several permitted mines that either have not yet begun commercial operations or are

temporarily idled because of market or other conditions. (See table 2.) Total reported

production from Federal coal leases was 104 million tons in fiscal year 1984.

6

See statement of Karen L. Larsen, Senior Analyst, Office of Technology Assessment, before the Subcommittee on Mining,

Forest Management, and Bonneville Power Administration of the House Committee on Interior and Insular Affairs, June 7,

1983, at 13.

7 OTA’s December 1981 report, An Assessment of Development and Production Potential of Federal Coal Leases, analyzed

the status of Federal coal leases then in effect and was the starting point for our analysis in this study.
OTA SPECIAL REPORT 19

TABLE 1

DEVELOPMENT STATUS OF FEDERAL COAL LEASES

(ALL LEASES, ALL STATES IN OTA DATABASE)

AUGUST 1985

STATE DEVELOPMENT NO. ACRES RECOVERABLE

STATUS LEASES % % RESERVES % .

Colorado

Montana

N eW Mexico

North Dakota

Approved

Pending

Undeveloped

Relinquished

Subtotal

Approved

Pending

Undeveloped

Relinquished

Subtotal

Approved

Pending

Undeveloped

Relinquished

Subtotal

Approved

Pending

Undeveloped

Relinquished

Subtotal

Utah

Approved

Pending

Undeveloped

Relinquished

Subtotal

Wyoming

Approved

Pending

Undeveloped

Relinquished

Subtotal

Oklahoma

Approved

Pending

Undeveloped

Relinquished

Subtotal

Total West

Approved

Pending

Undeveloped

Relinquished

Subtotal

Other States

East

Other West

Total All Leases

not determined

not determined

Subtotal

81

6

54

6

147

19

2

6

0

27

17

1

12

1

31

16

0

4

1

21

77

20

108

14

219

8 2

3

26

9

120

6

3

40

2

51

298

35

250

33

616

24

8

32

648

55.1% 88,15 5

4.1% 20,891

36.7% 55,24 6

4.1% 3,35 5

167,647

70.4% 35,54 8

7.4% 1,19 8

22.2% 7,89 3

0.0% o

44,63 9

54.8% 33,27 5

3.2% 2,04 4

38.7% 9,28 7

3.2% 1,24 0

45,84 6

76.2% 15,198

0.0% o

19.0% 3,91 4

4.8% 80

19,192

35.2% 95,54 8

9.1% 23,88 5

49.3% 174,84 1

6.4% 22,84 4

317,11 8

68.3% 166,88 4

2.5% 3,58 0

21.7% 78,242

7.5% 11,438

260,144

11.8% 8,66 6

5.9% 4,90 0

78.4% 66,85 1

3.9% 1,120

81,53 7

48.4% 443,27 4

5.7% 56,49 8

40.6% 396,27 4

5.4% 40,07 7

936,12 3

17,86 8

9,17 3

27,041

963,16 4

52.6%

12.5%

33.0%

2.0%

79.6%

2.7%

17.7%

0.0%

72.6%

4.5%

20.3%

2.7%

79.2%

0.0%

20.4%

0.4%

30.1%

7.5%

55.1%

7.2%

64.2%

1.4%

30.1%

4.4%

10.6%

6.0%

82.0%

1.4%

47.4%

6.0%

42.3%

4.3%

1,15 3

136

1,295

62

2,64 6

974

150

503

0

1,62 7

314

60

75

21

470

220

0

46

0

266

1,21 0

300

1,645

341

3,49 6

8,32 3

268

2,38 7

216

11,194

6

15

179

0

201

12,200

928

6,13 0

641

19,899

64

39

103

20,00 3

43.6%

5.1%

48.9%

2.4%

100%

59.9%

9.2%

30.9%

0.0%

100%

66.9%

12.8%

15.9%

4.5%

100%

82.7%

0.0%

17.2%

0.0%

100%

34.6%

8.6%

47.1%

9.8%

100%

74.4%

2.4%

21.3%

1.9%

100%

2.9%

7.4%

89.5%

0.0%

100%

61.3%

4.7%

30.8%

3.2%

100%

NOTE: All reserves in millions of tons.

SOURCE: Office of Technology Assessment
20 OTA SPECIAL REPORT

Table 2

PRODUCTION STATUS OF FEDERAL COAL LEASES

IN SEVEN WESTERN STATES

Total In Permit Outside Permit

Development Production No . No. No.

Status Status Leases Acres Reserves Leases Acre s Leases Acres

Approved

Permit

Pending

Permit

Undeveloped

TOTAL

Producing 226

Mined Out a

Inactiv e 39

Contracts 6

No Contracts 1 9

Subtotal 298

Contracts 4

No Contracts 3 1

Subtotal 35

No Production 206

Past Prod. 44

Subtotal 250

583

333,27 7

12,908

50,64 4

14,679

31,76 6

443,27 4

6,94 4

49,54 4

56,49 8

366,785

29,48 9

396,27 4

896,04 6

9,67 6

12

515

1,22 6

806

12,236

75

835

928

5,86 3

267

6,13 0

19,294

190

8

34

6

19

257

4

26

30

288,09 4

12,90 8

42,74 5

14,67 9

31,76 6

390,19 2

6,94 4

33,10 8

40,05 2

36

0

5

0

0

41

0

5

5

45,18 3

0

7,89 9

0

0

53,082

0

16,446

16,446

All reserves in millions of tons.

NOTE: Totals exclude leases that have been relinquished and 32 leases outside

of the seven Western States. Individual column entries may not add to totals because

of independent rounding.

SOURCE: Office of Technology Assessment

There are 35 leases with 928 million tons of reserves in mine plans undergoing active

permit review in 1984-85. Thus, by 1985, 333 leases, over half of the western leases, and over

65 percent of leased reserves had an approved or pending mine plan. Not all leases that a r e

permitted or have submitted a mine plan will necessarily be mined. Mine development o r

operations may be reduced, deferred, or abandoned if mining conditions become uneconomic or

there are no customers for the coal produced.

There are 250 undeveloped leases with about 6.1 billion tons of recoverable reserves.

These undeveloped leases include a significant number of leases on which little or no

development activity has taken place and 44 leases that were mined before SMCRA and may not

Yet be reclaimed.

OTA found that 33 leases with over 640 million tons of reserves have been turned back

through relinquishments, exchanges or consolidation since 1981 and are no longer in effect. For

the most part, the relinquished leases had poor short term development potential and were

unlikely to be mined because the amount or quality of the reserves, or the location made them

uncompetitive in today’s market. There are some additional relinquishments awaiting approval

which are not included in this category. Exchanges sometimes resulted in the issuance of new

leases to replace the lands turned back. (In this report, we generally refer to all leases that have

been turned back for whatever reason as ’’relinquished.”)
OTA SPECIAL REPORT 21

HOW MANY FEDERAL COAL LESSEES WILL COMPLY WITH SECTION 3?

Excluding the 33 relinquished leases, there remain 489 pre-FCLAA western leases that,

theoretically, could create section 3 disqualifications for their owners in 1986 and after. (Table

3 shows the development status of pre-FCLAA leases in the seven major western coal States.)

These “old” or “pre-FCLAA“ leases are the ones most likely to impose a section 3

disqualification penalty on the lessee. (A post- FCLAA or “new” lease terminates if is not

producing 10 years after it is issued, so few of these leases will survive to cause later section 3

problems.)

Table 3

DEVELOPMENT STATUS OF PRE-FCLAA LEASES

IN SEVEN WESTERN STATES

AUGUST 1985

STATE DEVELOPMENT NO. ACRES RECOVERABLE

STATUS LEASES % % RESERVES % .

Wyoming

Oklahoma

Colorado

Approved

Pending

Undeveloped

Subtotal

Montana

Approved

Pending

Undeveloped

Subtotal

New Mexico

Approved

Pending

Undeveloped

Subtotal

North Dakota

Approved

Pending

Undeveloped

Subtotal

Utah

Approved

Pending

Undeveloped

Subtotal

Approved

Pending

Undeveloped

Subtotal

All West

Approved

Pending

Undeveloped

Subtotal

Approved

Pending

Undeveloped

TOTAL

60

3

46

109

11

2

5

18

15

1

11

27

11

0

4

15

65

19

100

184

68

3

22

93

5

3

35

43

235

31

223

489

NOTE : All reserves in millions of tons

SOURCE: Office of Technology Assessment

55.0%

2.8%

42.2%

100%

61.1%

11.1%

27.8%

100%

55.6%

3.7%

40.7%

100%

73.3%

0.0%

26.7%

100%

35.3%

10.3%

54.3%

100%

73.1%

3.2%

23.7%

100%

11.6%

7.0%

81.4%

100%

48.1%

6.3%

45.6%

100%

72,93 4

6,16 2

41,97 3

121,069

29,30 3

1,19 8

5,79 7

36,29 8

28,491

2,04 4

9,12 7

39,66 2

12,449

0

3,91 4

16,363

78,91 6

23,245

139,213

241,374

141,437

3,58 0

58,51 4

203,531

8,52 6

4,90 0

59,59 6

73,02 2

372,05 6

41,12 9

318,13 4

731,31 9

60.2%

5.1%

34.7%

100%

80.7%

3.3%

16.0%

100%

71.8%

5.2%

23.0%

100%

76.1%

0.0%

23.9%

100%

32.7%

9.6%

57.7%

100%

69.5%

1.8%

28.7%

100%

11.7%

6.7%

81.6%

100%

50.9%

5.6%

43.5%

100%

921

12

967

1,900

805

150

325

1,280

218

60

74

352

187

0

46

233

1,123

300

1,460

2,88 2

7,33 4

268

1,76 8

9,371

6

15

163

184

10,594

804

4,80 3

16,201

48.5%

0.6%

50.9%

100%

62.9%

11.7%

25.4%

100%

61.9%

17.0%

21.0%

100%

80.3%

0.0%

19.7%

100%

39.0%

10.4%

50.6%

100%

78.3%

2.9%

18.9%

100%

3.2%

8.0%

88.8%

100%

65.4%

5.0%

29.6%

100%
22 OTA SPECIAL REPORT

OTA projected section 3 compliance for the 489 western pre-FCLAA leases still in

effect. These results are shown in table 4. About 331 leases have a section 3 deadline of

August 4, 1986; because of lease assignments, section 3 dates for the remaining leases fall

between August 5, 1986 and about January 1995 (assuming that the current lessees do not sell

or relinquish the leases before the section 3 dates). Table 5 shows the major reasons why leases

will or will not comply with the section 3 production requirement.

OTA found that there are 189 leases with 8.3 billion tons of reserves that are likely to

comply with section 3. At least 169 of these leases are in mines currently producing at an

average rate of 1 percent or more of reserves per year. Another 13 leases with 1.6 billion tons

of reserves will be producing in commercial quantities at the end of their 10-year holding

periods. Seven pre-FCLAA leases in permitted operations have already been mined out and are

probably under reclamation. In classifying leases as producing, OTA assumed that a lessee

would form an LMU if necessary to continue to qualify for new Federal mineral leases.

OTA estimates that 244 leases with over 6.2 billion ton of reserves will not comply with

the section 3 producing in commercial quantities requirement. Lack of markets is the dominant

reason why 178 noncomplying leases with over 4 billion tons of reserves are not likley to be in

production. Another 13 leases with 1.2 billion tons of reserves are suitable only for onsite uses,

such as power generation or synthetic fuels production. Unfavorable development potential was

the reason why 53 leases with 900 million tons of reserves will not comply.

TABLE 4

SECTION 3 DATES FOR PRE-FCLAA FEDERAL COAL LEASES

IN THE SEVEN WESTERN STATES

SECTION 3 SECTION 3 NO. OF

DATE* COMPLIANCE LEASES ACRES RESERVES**

Aug. 4, 1986 In Compliance 134 228,47 7 7,491

Uncertain 2 7 42,30 7 942

Noncompliance 170 247,40 4 5,03 5

Subtotal 331 518,18 8 13,468

Aug. 5, 1986

to Aug. 4, 1991 In Compliance 23 21,71 5 293

Uncertain 10 18,45 7 344

Noncompliance 39 57,90 4 536

Subtotal 72 98,07 6 1,173

After Aug. 4, 1991 In Compliance 32 41 #934 522

Uncertain 19 34,39 0 355

Noncompliance 35 38,731 683

Subtotal 86 115,055 1,561

TOTAL 489 731,31 9 16,201

In Compliance 189 292,12 6 8,30 6

Uncertain 56 95,15 4 1,641

Noncompliance 244 344,03 9 6,25 4

NOTES:

All reserves in millions of tons

* Section 3 date is earliest section 3 date for lease, if there is more than one lessee.

● * Total recoverable reserves include pre-FCLAA reserves only; total reserves may

include some associated reserves with later section 3 dates because reserves data were

sometimes not available on a lease by lease basis.

SOURCE : Office of Technology Assessment
OTA SPECIAL REPORT 23

OTA found 56 leases with 1.6 billion tons of reserves where compliance was uncertain

because of potentially insufficient production levels, delays, or the need to combine Federal

leases in an LMU with non-Federal coal. Under current DOI guidelines and regulations, some

of these lessees may have to relinquish a portion of their Federal lease reserves or agree to

amended lease terms in order to comply with section 3. We believe that most of these lessees

will eventually be able to satisfy the producing in commercial quantities requirement and avoid

any extended disqualification.

The section 3 penalties will not be imposed at the same time on nonproducing lessees.

OTA estimates that as many as 197 leases are either uncertain or unlikely to comply with

section 3 on August 4, 1986, thus disqualifying their owners from further new leasing. (See

table 4.) Another 103 nonproducing leases were acquired by the current lessees by

assignments after FCLAA and thus have later section 3 deadlines: 49 leases have section 3 dates

between August 5, 1986 and August 4, 1991 and 54 leases have section 3 deadlines after August

1991. Section 3 disqualifications attach to lessees not leases. These 300 leases in the uncertain

or unlikely to comply categories are held by about 120 different leaseholders. If leaseholdings

are attributed back to parent corporations and joint ventures, about 87 separate entities are

affected.

TABLE 5

REASONS FOR PROJECTED SECTION 3 COMPLIANCE STATUS

FOR PRE-FCLAA LEASES IN SEVEN WESTERN STATES

STATUS LEASES % ACRES % RESERVES % .

Likely to Comply

Producing commercial quantities

Will produce comme rcial quantitie s

Reserves "mined out”

Uncertain to Comply

Limited coal demand

Non- Federal LMU approval required

Unlikely to Comply

Limited coal demand

Suitable for onsite use only

Unfavorable development

potent i a 1

TOTAL

189

169

13

7

56

35

21

244

178

13

53

489

38.7%

34 .6%

2.7%

1 .4%

11 .5%

7.2%

4.3%

49.9%

36.4%

2.7%

10.8%

100.0%

292,12 6

248,364

30,99 4

12,768

95,15 4

64,06 6

31,08 8

344,03 9

266,980

19,093

57,96 6

731,31 9

39.9%

34 .0%

4.2%

1 .7%

13.0%

8.8%

4.3%

47.0%

36.5%

2.6%

7.9%

100.0%

8,30 6

6,68 6

1,61 0

10

1,641

978

663

6,25 4

4,08 5

1,26 4

905

16,201

51 .3%

41 .3%

9.9%

o. 1%

10. 1%

6.0%

4.1%

38.6%

25 .2%

7.8%

5 .6%

100.0%

A 11 reserves in millions of tons.

SOURCE : Office of Technology Assessment
24 OTA SPECIAL REPORT

IS 10 YEARS ENOUGH TIME TO BRING A MINE INTO PRODUCTION?

A central element in the reasonableness of both section 3 and the section 7 diligent

development requirement is that the lessee has sufficient time to develop the mine and thus

comply with the statutory obligations. OTA has previously testified that 10 years provides

enough time to bring a lease into production if the question is limited to technical constraints.

There is ample time within 10 years to conduct the necessary reserves delineation,

environmental baseline studies, mine plan design and preparation, permitting, and construction

and to initiate commercial operations (production of coal at a more or less continuous rate for

sale or captive use). From lease acquisition or the decision to develop an existing lease, OTA

found that an average of about seven years is necessary to bring a large mine into initial

commercial operation; less time is needed for small mines. More time is needed to reach full

mine capacity. Timing of that scale up is related to the design of the individual mine and the

requirements of the operator’s coal supply contracts. OTA found that it is feasible to acquire a

lease and to develop a mine and initiate production in amounts necessary to satisfy current

diligent production and continued operations requirements within the allotted 10 years and many

existing mines have in fact done so. The 10-year period thus is a reasonable, but tight schedule

for mine development except in very unusual circumstances, such as very large mines with

complex mining conditions, or mines that are essentially captive to an associated powerplant or

synthetic fuels facility. We note that when FCLAA was under consideration, Department of the

Interior experts advised the congressional committees that from 3 to 5 years were needed to

bring a lease into production.

Technical considerations are not the only relevant consideration in deciding on the

appropriateness of a 10-year production deadline. Perhaps the question might be rephrased for

policy purposes as how long should a Federal coal lessee reasonably be allowed for marketing

the coal under lease?

Ten years may not be enough time for markets to develop to allow all coal lessees to

develop their leases profitably. Given the current excess of reserves over the amount of coal to

meet long term demand, even the better tracts may not be brought into production in 10 years.

Indeed, if policies persist which favor aggressive leasing of Federal coal to assure competition

for coal supply contracts, all coal leased will not be developed within 10 years of leasing. The

coal glut will tend to keep prices low. This in turn may induce some producers to defer

development in hopes of getting a more favorable return later. Policies such as the 10-year

diligent production deadline and the section 3 disqualification act to curb any tendency to delay

production under such conditions. OTA estimates that the 10-year production periods under

section 3 and section 7 of FCLAA allow a lessee at most from 3 to 5 years to seek a customer

for the coal to be produced from the lease before making a decision to commit significant effort

and resources into developing a new mine in time to meet the diligence schedule. Some lessees

have testified that they will not proceed with development without first securing a contract for

the coal to be mined. This approach may now be out of step with the contracting practices of

utilities. A producer might take a risk that a customer will be found later and proceed with

mine plan design and permitting to within two to three years of the 10-year production

deadline, but at that point, mine construction must begin in order to be producing even at the

modest levels required for commercial quantities. There are western producers who have in fact

begun mine development without contracts. For some the gambit has been successful, but

others are now experiencing difficulty in finding enough contracts under existing market

conditions to increase production to planned capacity levels. It is now fairly certain that most

leases that are not permitted and under mine construction, or affiliated with a producing mine

will not be able to satisfy the section 3 commercial quantities test by August 1986.
OTA SPECIAL REPORT 25

2 9 5

I I

HOW HAVE COAL MARKET CONDITIONS AFFECTED PROSPECTS FOR

SECTION 3 COMPLIANCE?

When FCLAA was enacted, substantial increases in western and Federal coal production

were anticipated. This has in fact occurred with the Rocky Mountain and Northern Great

Plains States increasing their share of total U.S. coal production from 12.1 percent in 1975 to

25.8 percent in 1984. Similarly, Federal coal production in these States increased from 4.8 to

11.6 percent of total U.S. production over the same period.

The very dramatic increases in demand for western Federal coal projected in some high

range forecasts in the late 1970s and early 1980s have not materialized. Recent years have seen a

scaling back of coal demand projections for the next decade. (See figure 1.) Three major

factors have contributed to this:

1. The decline in the growth of electricity demand leading to cancellation and deferral

of powerplants in western market areas;

2. High rail transportation costs for western coal which have effectively foreclosed

some potential market areas; and
26 OTA SPECIAL REPORT

3. The failure of coal to make significant gains in the industrial markets or in

synthetic fuels production.

Moreover, there is some evidence that utilities have modified their coal purchasing behavior to

take advantage of the “buyers’ market” for coal and are deferring commitments for coal

contracts until shortly (2 to 3 years or less) before the plant is scheduled to come on line.

Some powerplants with initial contracts signed in the mid-1970s have yet to be built and

scheduled deliveries have been deferred under escape clauses. Rather than entering into a coal

supply contract before building the plant, utilities can narrow their choices to one or more

potential supply markets where there are ample amounts of coal are available and where there

are few uncertainties that might contribute to cost increases. The utility can then delay the

actual coal purchase contracts until shortly before the plant begins operation. The long lag time

between signing a coal supply contract and actual deliveries to a newly built plant may no

longer serve the economic interests of the buyer or seller.

For a coal lessee with uncommitted and undeveloped reserves today, there is little

likelihood for any significant growth in coal demand to materialize in the next 5 to 10 years

given the lead times for coal powerplant construction and the fact that very few new plants will

be ordered during that period. Perhaps the major opportunity for a nonproducing lessee is to

compete with existing mines in the spot market and for contract renewals and reofferings.

Production from some existing mines could be displaced by new entrants with lower cost

reserves. Without production, these lessees face loss of their leases, either voluntarily to avoid

section 3 sanctions or eventually, involuntarily through enforcement of diligence requirements.

The chronic overcapacity and low demand growth have important implications for

proposed section 3 relief and diligence legislation. If aggressive leasing policies to assure

competition are continued, and there are many policy reasons that favor such “overleasing”, a

significant amount of reserves leased will not be brought into production even if the lessee

makes substantial and “diligent” efforts at seeking a market and developing the lease.

the implications of these trends are:

1. Lessees will lose leases through diligence enforcement or termination, or

relinquishment (assuming that leases are readjusted to include effective

production requirements and that these provisions are vigorously enforced).

Among

through

diligent

2. Pressure for legislative relief from production requirements will continue.

However, this pressure may subside or be counterbalanced with an increase in the

number of lessees who either have satisfied diligence obligations or have new leases with

stringent diligence requirements and thus have some interest in seeing that their

competitors are subject to similar requirements.

3. Lessees will tend to lower lease bonus bids if they think they will not be able to

mine or keep the lease. (Statutory fair market value requirements offset this tendency

and should, if strongly implemented, prevent leasing of coal with little near term

prospects of development.)

4. The reserves posture of producing lessees will be enhanced as only those lessees

who can satisfy section 3 and diligence requirements will be able to assemble large

reserves holdings by combining them with the producing leases in an LMU. Small

amounts of production are enough to hold the lease. These lessees also will be tempted

to bid low for new leases because of the anticipated lack of interest from disqualified

lessees and other potential competitors if low growth market conditions continue.
OTA SPECIAL REPORT 27

5. There may well be a reduction in the total amount of Federal coal under lease as

companies choose not to lease coal for inventory purposes. A reduced private inventory

of Federal reserves in private hands makes the reliability and quality of periodic

offerings of new Federal leases more important in assuring an adequate future supply of

coal both to meet energy needs and to place competitive pressure on the prices charged

by coal producers to coal consumers. It also makes it more critical that the coal leasing

program be able to respond rapidly to any great increases in coal demand by offering

tracts that are suitable

diligent development.

WHAT WILL BE THE

The effects of section 3

for development and production within the time allotted for

LIKELY EFFECTS OF SECTION 3 ENFORCEMENT?

are already being felt in lease relinquishments and sales. More

relinquishments and assignments can be expected as the section 3 deadlines near. Some lessees

were prompted to reexamine their inventory of Federal leases and to decide which leases have

near term development potential and are worth keeping. Leases that did not pass this internal

screening were relinquished or offered for sale. As a result the overhang of total leased

reserves has been reduced somewhat and the general quality of what remains has improved. A

reduction in the amount of undeveloped reserves under lease may make it easier politically for

the Department to justify more large scale lease offerings in the future.

Companies most affected by section 3 will be large oil companies and conglomerates who

are involved both in coal and in Federal onshore oil and gas leasing. Not all major oil and gas

producers hold nonproducing Federal coal leases, however, and there are many companies in the

petroleum industry with no coal holdings at all. The major impact on noncomplying oil and gas

company lessees will not be the ban on acquiring additional coal leases, but rather will be their

exclusion from direct participation in the Federal onshore oil and gas leasing program.

Disqualification from competitive oil and gas leasing and from the lottery may not have

significant adverse impacts on the major oil and gas companies since many of them do not

acquire their Federal leases directly through these methods. Oil and gas leases will continue to

be available by assignments from other operators or from lease brokers through transactions as

yet unrestricted by section 3. The greatest impact of section 3 on noncomplying major oil and

gas lessees will be in their inability to obtain new, noncompetitive, over the counter leases for

lands in frontier areas that have not previously been leased. (These “frontier areas” are lands

that do not contain known producing geologic structures and where the oil and gas potential is

unknown. The Overthrust Belt of Wyoming was such an area when many of the Federal oil and

gas leases in that area were originally acquired noncompetitively .)8

Overall the impact of section 3 enforcement on the coal industry and the supply of coal

to consumers will be slight. Producing mines are largely unaffected. In our 1981 study we

found few active mines on Federal leases nearing exhaustion of mine life reserves that would

require more coal to stay in operation. (We note that many operators do take advantage of

emergency, production maintenance, and bypass leasing provisions to acquire additional

reserves adjacent to their operations and mine them before moving to areas of existing leases

with higher mining costs. ) The potential effects of section 3 on competition in the coal industry

8OTA did not analyze what the impacts of section 3 might be if the Federal oil and gas leasing program were changed to a

mostly competitive system. We think it probable that section 3 impacts might be slightly greater since it is expected that

companies will be forced to compete directly for high potential tracts in frontier areas and elsewhere.
28 OTA SPECIAL REPORT

are by no means clear cut. Section 3 enforcement could enhance competition by making more

Federal coal available for acquisition by potential competitors if noncomplying leases are sold.

The better quality tracts will probably be assigned, and the lessees may see some profit from the

sale. The tracts might however be sold to other complying lessees and thus might not result in

more competing firms. Another possibility is that some noncomplying oil and gas companies

may, at least temporarily, get out of mining Federal coal by selling or spinning off their coal

subsidiaries. This could in the long run increase the number of firms that could potentially

mine and sell coal, since the oil and gas companies could later reenter the industry. On the

other hand, it is also possible that some large energy firms will drop out of the Federal coal

leasing program to avoid exposure to a potential section 3 disqualification and would thus

reduce the number of competing firms in some areas.

Among the 300 leases that were ranked as uncertain or unlikely to comply with section

3, there are several permitted mines with section 3 difficulties because they have been idled or

are not yet producing sufficient quantities of coal. But most of the noncomplying leases are

undeveloped tracts. Lessees will probably try to retain the noncomplying tracts with favorable

near term development potential as long as possible. However, there are many noncomplying

properties that have low near term development potential because there are no buyers for the

coal to be produced; these are most likely to be relinquished or sold.

Among the potentially noncomplying properties are leases where development also poses

environmental problems. Section 3 enforcement might cause these leases to be turned back.

There are over 1.4 billion tons of undeveloped leased coal in Southwestern Utah, an arid area

where there is no existing coal transportation network to serve large scale development and

where any development activities are environmentally sensitive and controversial because of the

proximity to Bryce Canyon, Canyonlands, Grand Canyon, Capitol Reef, Arches National Parks,

Glen Canyon National Recreation Area and BLM roadless areas under review for possible

wilderness designation. Several nonproducing leases in the San Juan basin of New Mexico are

associated with pending preference right lease applications and are close to the Chaco Canyon

National Monument and its outliers.

The nonproducing leases also include some 3 billion tons of reserves in the Powder River

basin of Wyoming. About half of these reserves are only suitable for onsite use for power

generation or synthetic fuels production because the coal is generally of poorer quality than coal

elsewhere in the basin making these reserves noncompetitive in out of state markets. Finally

there are some 53 nonproducing leases in scattered small undeveloped tracts with poor

development potential. Many of these are held by individuals who are unlikely to be affected

by section 3 disqualification.

By far the major reason why lease reserves held by major coal producing companies are

not in production is lack of markets. There is simply more coal under lease than can be mined

and sold in response to current and projected demand. In the West today, there is in excess of

100 million tons of excess annual production capacity in mines with Federal coal leases. The

coal industry has historically displayed chronic overcapacity and it is likely that that situation

will continue. The perceived seller’s market for coal of the early to mid-1970s that prompted

many long-term supply contracts appears now to have been an abnormal situation.

Section 3 impacts are being felt by lessees that were the primary targets of the provision:

large energy companies and lessees with many leases which were acquired in the 1960s and

1970s and that are still undeveloped. Moreover, as a result of various mergers and acquisitions,

the potential impacts of section 3 on oil and gas leasing are possibly more far reaching than
OTA SPECIAL REPORT 29

anticipated in 1976. Since 1976 at least some of the public and legislative concerns over the

involvement of these firms in the leasing program, which led to adoption of section 3, may have

shifted. Much of the concern of the mid-1970s about the involvement of oil majors in the coal

industry has subsided. Several major oil company lessees have aggressively developed and

marketed their coal and are now among the West’s largest producers. Some actually started

producing in less than 10 years after acquiring the leases. The patterns of involvement of the

major oil companies in the Federal coal leasing program are varied. Some hold only a few

leases, all of which are producing, and have no inventory of undeveloped coal except that

associated with operating mines. Other companies have some producing mines and a large

inventory of undeveloped reserves. The latter companies (or their corporate predecessors) have

historically preferred to acquire and hold a large inventory of reserves in excess of demand,

including reserves in areas with no developed markets. One consequence of such a strategy is

that it is often possible to acquire such reserves at a low initial cost and to wait for the market

to develop and the price to increase. For this strategy to be successful, the firm must be able

to hold the reserves until they become competitive, which could be decades after acquisition.

This practice of “sitting on reserves and waiting for the market to develop” was seen as a form

of speculation by coal producers which, while fairly common in private coal transactions, was

criticized as inappropriate for Federal resources in the congressional debate over FCLAA. The

perception that some corporate lessees were engaged in long term strategic or speculative

holding of Federal reserves without any clear production plans was one reason for the

imposition of section 3 and the 10-year diligent production period for Federal leases.

TABLE 6

OWNERSHIP OF FEDERAL COAL LEASES

BY INDUSTRY CATEGORY - 1975, 1980, AND 1984

BUSINESS CATEGORY I OWNERSHIP 1975 I OWNERSHIP 1980 I OWNERSHIP 1984

Acres % Acres % Acres %

I

Utilitie s I

Other Cots . I

Oil majors I

Nonres. Divers. Co's. I

Oil & Gas Co’s. I

Steel Co’s. I

Coal Co’s. I

Metals & Mining Co’s. I

Natural Gas Co’s. I

Peabody Holding Co. I

Individual s I

I

TOTAL I

142,077

70,124

138,409

12,580

42,19 3

49,44 8

92,82 5

49,37 7

32,52 2

68,92 3

66,51 5

764, 993

I

19% I

9 % I

18% I

2%

5%

6%

12%

6%

4%

9%

8%

100%

163,259

84,36 7

155,024

35,67 5

45,92 6

60,015

87,601

17,620

36,31 7

62,00 9

43,215

791,02 8

I

21% I

10% I

20% I

5% I

6% I

8% I

11% I

2% I

5% I

8% I

4% I

100% I

204,56 7

189,159

141,157

85,211

70,365

61,98 6

55,24 7

40,22 9

36,231

20,382

18,553

923,08 7

22%

20%

15%

9%

8%

7%

6%

4%

4%

2%

2%

100%

NOTE: Acreage includes all existing Federal coal leases, but excludes relinquishments.

SOURCE : Office of Technology Assessment
30 OTA SPECIAL REPORT

WHO CONTROLS FEDERAL COAL LEASES?

There are currently about 220 different individuals or firms that hold title to Federal

coal leases. Many of the corporate lessees are actually owned or controlled by other companies.

OTA first analyzed ownership of Federal coal leases in our 1981 technical memorandum,

Patterns and Trends in Federal Coal Lease Ownership 1950-80. Table 6 provides updated

information on Federal coal lease ownership for 11 different industry categories from 1975 to

1984. Table 7 shows the section 3 compliance status for the same industry categories.

While useful for historical and policy purposes, recent corporate mergers have made the

original OTA industry category patterns slightly misleading for section 3 analyses. Conoco, an

oil major, and its subsidiary Consolidation Coal Co. were acquired in 1981 by DuPont and were

shifted to the nonresource-related diversified company category. If Conoco’s holdings are

added to those of other major oil companies, the oil majors become the largest leaseholding

category and their noncomplying reserves is increased to 53 percent.

OTA has analyzed the reserve holdings and section 3 status of the 20 major Federal coal

reserve holders. These 20 companies control a total of 264 Federal coal leases and over 65

percent of all Federal reserves under lease. They include major coal producers, major oil

companies, utilities, a steel company, and metals and mining companies. Table 8 summarizes

those reserves holdings and projected section 3 status of these companies.

TABLE 7

SECTION 3 COMPLIANCE STATUS

OF WESTERN PRE-FCLAA FEDERAL COAL LEASES

BY INDUSTRY CATEGORY

BUSINESS CATEGORY I ALL LEASES I LIKELY TO COMPLY POTENTIALLY NONCOMPLYING

Acres Leases Acres % Acres Leases Acres % Acres

I I

Other Co's.

Utilitie s

Nonres. Divers. Co’s.

Oil majors

Steel Co’s.

Metals & Mining Co’s. I

Coal Co’s.

Oil & Gas Co’s. I

Peabody Holding Co.

Natural Gas Co’s. I

Individuals

TOTAL I

148,336

151,552

78,552

130,774

55,014

37,821

37,677

35,904

20,257

28,949

6,513

731,319

32

50

5

39

9

7

18

16

6

17

3

189

56,730

76,924

6,603

66,836

14,568

9,542

15,584

18,636

7,907

18,596

200

292,126

I

38% ‘

51%

8%

51% I

26%

25% I

41%

52% I

39%

64%

3% j

I

40% I

64 91,606

48 74,62 8

41 71,919

51 63,938

31 40,446

28 28,27 9

23 22,093

13 17,268

4 12,350

7 10,353

17 6,313

300 439,19 3

62X

49%

92%

49%

74x

75%

59%

48%

61%

36%

97x

60%

NOTES

1. "% Acres" means the percent of total acreage held by an industry in each category.

2. Total acreage does not include post-FCLAA leases or leases located outside the seven major

western States, or relinquished leases.

3. The number of leases includes all leases for which one or more of the lesseesi parent companies

fall into the designated industry category. The number of leases in each category reflects the

total of all leases held by lessees in each category and exceed the total of pre-FCLAA leases

because jointly held leases owned by companies indifferent categories appear in each category. The

total number of leases has been adjusted to avoid double counting of these 40 leases. Acreages

have been prorated to reflect the ownership percentages of joint lessees.

4. Al\ ownership data is current as of Sept. 1, 1985.

SOURCE: Office of Technology Assessment
OTA SPECIAL REPORT 3 1

Table 8

THE TOP 20 FEDERAL RESERVE HOLDERS

SECTION 3 COMPLIANCE STATUS

PARENT COMPANY OF TOTAL NUMBER RECOVERABLE POTENT I ALLY

LESSEES OF LEASES RESERVES UNDER NONCOMPLYING

LEASE (m.t.) LEASES RESERVES*

1

2

3 .

4 .

5 .

6 .

7.

8 .

9 .

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

Exxon Corp.

Pacific Power & Light Co.

Amax, Inc.

Atlantic Richfield Co.

DuPont 1

b

Peabody Holding Co. c

Broken Hill Prop. Ltd. d

Texaco, Inc. e

Chevron Corp. f

Kerr-McGee Corp. g

The Sun Co. h

Shell Oil Corp.

Peter Kiewit Sons, Inc. i

Kaneb Services, Inc. &

Northwest Life Insurance

United States Steel Corp.

Mobil Corp. J

Swanton Corp.

Arizona Public Service

San Diego Gas & Electric

Southern Ca. Edison

Idaho Power Co.

Montana Power Co.

TOTAL**

NOTES *

● ☛

✚✚

c .

d.

e .

f .

g.

h.

i .

j .

k.

5

a 3 1

6

13

35

11

30

17

38

5

8

4

13

2

19

1

16

21

3

9

1,49 0

1,45 3

1,261

1,24 2

1,13 5

1,01 9

930

927

803

736

643

641

582

445

438

424

361

345

329

287

0

10

0

3

31

4

25

5

24

3

6

2

3

0

12

0

16

21

0

1

All reserves in million s

264 12,593 150

of tons.

o o%

427 27%

o o%

51 4%

1,049 93 %

800 79%

624 67%

800 86%

725 90%

398 54%

9 7 15%

240 37%

70 12%

o o%

339 83%

o o%

361 100%

345 100%

o o%

o o%

5,976 47 %

Totals have been adjusted to avoid double counting of jointly held reserves.

Includes joint ventures.

Includes 14 leases in which CONOCO, subsidiary Consolidation Coal Co., and

Chevron's Gulf Oil subsidiary each own 50%. The leases total 23,890 acres

with 241 million tons of reserves.

Totals exclude leases and reserves on which relinquishments and assignments

have been approved or are currently pending.

Includes subsidiaries Utah International, Inc. and Energy Reserves Group, Inc.

Includes Texaco’s Lake DeSmet holdings and leases held by Getty Minerals, but

does not reflect recently announced sale of Getty’s coal operations to Cyprus

Mining or sale of Getty's 50% share of the Skyline Mine in Utah to Coastal

States Energy Co.

Includes 14 leases in which Chevron's Gulf Oil subsidiary and Dupont's

Consolidation Coal Company subsidiary each own 50%. The [eases tota l

23,890 acres with 241 million tons of reserves.

Does not include adjustments for pending 1-90 [ease exchange of part of the

East Gillette tract in Wyoming.

Does not include Sun's recently announced purchase of Soldier Canyon mine

in Utah from California Portland Cement.

Includes joint ventures.

Total leases reflect two Mobil leases in the Rojo Caballo Mine now

reconsolidated into a single lease.

Includes joint venture Bridger Coal Co. with Pacific Power & Light Co.

SOURCE: Office of Technology Assessment
32 OTA SPECIAL REPORT

Who Faces Section 3 Penalties and Why?

OTA found that leaseholders facing a section 3 penalty in 1986 include 15 of the top 20

Federal reserves holders. (See table 8.) The potentially noncomplying leases include those that

are uncertain or are unlikely to comply with section 3. The 15 noncomplying lessees hold over

three quarters of the potentially noncomplying reserves. There are several lessees who hold

substantially greater share of nonproducing leases than others and who would be particularly

affected by section 3 or any modifications to it. These companies are: Consolidation Coal Co. (a

subsidiary of Conoco, which is owned by E.I. du Pent de Nemours & Co. (DuPont); Chevron

Corp. (which in 1984 acquired Gulf Oil Corp which had previously acquired Kemmerer Coal

Co. a major Federal coal leaseholder); and Utah International, Inc., (acquired by the Australian

company Broken Hill Proprietary Ltd. from General Electric Corp. ) There are other firms with

a significant portion of their lease reserves at risk of noncompliance, but pending assignments

and relinquishments could resolve most of their problems. Still other major reserves holders will

be unaffected by potential disqualification because they have no immediate need for additional

coal reserves and have no involvement in other Federal mineral leasing.

Among all lessees, table 7 shows that individuals, nonresources -related diversified

companies, steel companies, metals and mining companies, Peabody Holding Co., coal

companies, and “other” companies all have over 50 percent of their leased acreage at risk of

noncompliance.

WHAT IS THE REVENUE GAIN OR LOSS TO THE FEDERAL GOVERNMENT FROM

SECTION 3 ENFORCEMENT OR REPEAL?

OTA believes that it is not practicable to calculate the value of the specific gain or loss

from enforcement or repeal because of the countervailing effects of such actions and the

extensive assumptions of fact that would have to be made. However we can discuss the issue in

a more general manner. If section 3 is enforced, leases will be relinquished, the government

will lose annual rental payments, and possibly royalties from leases that might have been mined.

If the relinquished leases were resold later and brought into production, there might be an

intervening revenue loss. On the other hand, any loss of revenues from relinquishments would

be offset by bonus payments on resale of the new leases and higher post-FCLAA royalties on

production. (Bonus revenues, even if only at the current regulatory minimum bid level of $100

per acre would be significantly higher than the $1 to $3 per acre annual rental paid on

nonproducing leases. ) OTA does not believe that all of the leases that might eventually be

relinquished will be reoffered for lease in the next 10 to 15 years, particularly those outside of

currently producing coal fields and those with poor quality reserves. It is unlikely that there

would be much interest in them if payment of a fair market value bonus were required. We

also doubt that all of the noncomplying section 3 leases will be relinquished. Lessees probably

can find buyers for the better quality tracts and, in some cases, the transfer would create little

delay in the tract’s overall development schedule. In such cases, there might be little direct loss

to the Federal Government because rentals would continue and royalties would be paid on

production. It can be argued that if the lease were assigned rather than relinquished, that the

coal might be mined at the lower pre-FCLAA royalty rates. OTA believes that, given the 3 to

7 years needed to bring an unpermitted lease into production, it is likely that any period during

which lower royalties would be paid would be short. (There is one notable exception to this

finding of minimal potential revenue loss. An undetermined number of pre-FCLAA leases

were not readjusted properly or on time, and some readjustments were reversed on appeal. If

these decisions are left unchallenged, these leases might carry pre-FCLAA royalty rates of 15 to

20 cents per ton for 10 to 20 more years. Some of these leases may have section 3 compliance
OTA SPECIAL REPORT 33

problems. Repeal or modification might remove one option left to the Department to correct at

least some of the failed readjustments by inducing the lessees to amend their leases to include

the FCLAA requirements to comply with section 3. This potential loss in royalty revenues from

these leases is not, however, due directly to section 3.)

Repeal or modification of section 3 without requiring a significant payment obligation

on nonproducing leases as the price of relief would represent a lost opportunity for generating

additional revenues to the government from pre-FCLAA leases by reselling relinquished leases

or by allowing payment of holding fees as a means of compliance. Does repeal create a

windfall for the lessee? There is no direct financial transfer to the lessee. To find such a

windfall, one must assume that repeal makes the leases more valuable, but this increase would

be hard to measure. One might assume that the effect of repeal would create a gain for the

lessee of the amount that the original lease value may have been discounted to reflect the risk

that it would lost for nondevelopment after 10 years. The gains would be realized in a higher

resale value of the lease, or in some increased profit in developing the lease later. Such a

theory, if valid in practice, would be more directly applicable to the Department’s 1982

relaxation of the 1986 diligence deadline for pre-FCLAA leases than to section 3. Any discount

for the risk of nondevelopment for section 3 purposes is likely to be small as section 3 does not

deprive a lessee of the lease as a penalty. Moreover, the lessee can be purged of the section 3

disqualification by selling the lease, perhaps even at a profit. A lessee would probably

relinquish the lease only as a last resort.

We think that it is unlikely that lessees in fact have discounted the value of their leases

for the potential impacts of either section 3 or 7 (or the 1976 diligence regulations). For the

largest group of noncomplying lessees, those lessees facing a section 3 disqualification in 1986,

such discounting is particularly unlikely since they would have to have foreseen events

occurring after they acquired the leases in order to reduce the amount they paid for them

originally. We also think it unlikely that such lessees would have foreseen the full extent of

applicability of section 3. For leases sold or transferred after passage of FCLAA, there does not

appear to be any discernible pattern of discounting for future nonproduction penalties. The

reasons for this may be that:

1. The lessees fully expected to be able to mine or resell the reserves within the time

allotted; or

2. The reserves were already underpriced when they bought them; and/or

3. The lessees did not expect that either Congress or the Department would actually

enforce section 3 or any diligence provisions applicable to the leases.

Alternative Legislative Options for Section 3

OTA examined a range of possible legislative options for amending section 3. The

options, their advantages and disadvantages are discussed in this paper and summarized here.

OTA found the contributions of the participants at its May 1985 section 3 workshop were

extremely useful in developing and assessing these options,

In evaluating various proposals for amending the Federal coal leasing laws, it is helpful

to keep two facts in mind.

First, how long and under what conditions a lessee should be allowed to hold a Federal

coal lease without production is fundamentally a political decision. The decision will largely

depend on one’s views of the relative importance of sometimes conflicting policy goals

underlying the Federal coal leasing program and on how vigorously the diligent development
34 OTA SPECIAL REPORT

requirements should be enforced for a resource that is abundant and an industry that historically

suffers chronic overcapacity.

Second, in the “normal” competitive structure of western coal operations there is a

significant excess of production capacity over current production. There is simply more coal

under lease than can reasonably be mined and sold or committed under long-term contract in

the next 5 to 15 years. This situation is not likely to change, because leasing policies over

several administrations have tended for various reasons to favor leasing of Federal coal reserves

well in excess of amounts needed to meet projected demand. As a result there will be many

Federal leaseholders that will not be able to mine their leases despite even their most “diligent”

efforts at marketing and development.

OTA considered several factors in evaluating the options. Among these considerations

were: the extent the option provides relief from section 3 disqualification for noncomplying

lessees; whether the option advances the various policies inherent in section 3 of encouraging

production, deterring speculation, and discouraging the extensive holding of nonproducing coal

leases by large energy conglomerates; and how easily and predictably the option can be

implemented and administered. The major legislative options for amending section 3 include

the following:

Option 1: Keep section 3 unchanged.

Option 2: Repeal section 3.

Option 3: Limit section 3 to new coal leases only.

Option 4: Extend the time to comply with section 3.

Option 5: Modify section 3 to allow achievement of lease development milestones as

alternatives to producing in commercial quantities requirement.

Option 6: Remove the 10-year holding period for section 3 and make the

disqualification applicable to anyone holding a nonproducing lease that is more than 10

years old.

Option 7: Allow qualifying payments to be made annually in lieu of production to

maintain eligibility for new leases.

Option 8: Impose a surcharge on all new leases acquired by a noncomplying lessee.

Option 9: Require turnback of an equivalent amount of noncomplying lease reserves or

acreage to qualify for each new lease.

Option 10: Allow relinquishment of all noncomplying old leases in exchange for section

3 relief and a preferential option to purchase new leases for the same lands if they are

reoffered after being subject to land use planning, environmental screening, and surface

owner consent (“Lease Rollover” Option).

The results of OTA’s analysis of these options are summarized in table 9.

Several of the options are similar to proposed legislation, however OTA’s discussion of

the options does not deal with the specifics of individual bills, but rather contrasts different

generic approaches. OTA’s analysis disclosed several options that are more or less likely to
OTA SPECIAL REPORT 35

promote the various goals of section 3 legislation, depending on which goal is given priority.

Several options would provide relief to nonproducing lessees in complying with the producing in

commercial quantities requirement, while at the same time maintaining the policy that leases are

to be held for development and production, but the balance between these goals is struck

differently.

Option 1 - keeping and enforcing section 3 unchanged is most consistent with the

purposes for which it was enacted, particularly since the Department of the Interior has

substantially relaxed, or even nullified, most production requirements for pre-FCLAA leases.

The Department has ample discretion to resolve the compliance difficulties for any lessees that

are producing or have produced coal from their leases or that have experienced unusual delays

in mine development. Keeping section 3 would maintain fairness for lessees who have already

relinquished or sold leases in order to comply.

Option 7, the adoption of annual holding fees for noncomplying leases, maintains the

underlying policies of section 3 but gives the greatest degree of flexibility to lessees and the

Department in avoiding the section 3 disqualification. Option 7 would allow a lessee to make

qualifying annual payments on all noncomplying leases in order to retain eligibility for new

leases. An economic penalty would be imposed for nonproduction, but lessees would be allowed

to keep old leases and acquire new ones at a cost. (This economic penalty could be reinforced

by requiring similar nonproduction payments from all old leases on the next lease readjustment.)

There are several formulas on which such holding fees could be based, acreage, reserves,

minimum production, or ad valorem. OTA finds that a relatively simple payment structure

should be used since many lessees can be expected to use this option. Moreover the holding fee

should be substantial enough to force some leases to be relinquished and to lessen the

assignment value of others, thus discouraging speculation. An annual payment of one cent per

ton of recoverable reserves, for example, would be easy to administer and offers predictability

and flexibility for lessees. OTA found that payments at that level would measurably affect the

economics of holding leases in virtually all regions and thus would provide at least some

economic pressure to develop or get rid of a lease. The holding fee option has an additional

benefit that section 3 currently does not -- the qualifying payments would provide some preproduction revenues to the Federal and State governments.

Option 1 and Option 10 appear likely to return a significant number of nonproducing

leases to the government. It is likely some leased lands where development is environmentally

unsuitable or controversial will thus be removed from the threats imposed by mining. Other

valuable coal tracts may be reoffered for lease at fair market value. Option 10, the lease

rollover option, would give the relinquishing leaseholder priority in purchasing a new lease on

the same lands at fair market value and would allow the lessee to retain at least some of the

benefit of any initial development work on the lease.

Repeal of section 3 (Option 2) or limiting the disqualification to coal leases only (Option

3) would provide the greatest relief from the effects of section 3 enforcement. These options

would allow lessees to maintain their inventory of leased reserves for development or sale.

These options also remove or lessen the only statutory incentive for the major nonproducing

lessees to either begin mining coal from their leases or get rid of them before the mid-1990s

when current diligence regulations might be enforced. Given the uncertainty over what

diligence requirements are applicable to pre-FCLAA leases and when, if ever, they must be

enforced, these options may effectively remove the only restraint on continued holding of these

leases without production. These two options therefore appear to be inconsistent with the intent

of section 3 were either to be adopted without substantial counterbalancing changes in section 7

diligence requirements for pre-FCLAA leases, (One possible example would be the automatic

imposition of substantial holding fees for nonproducing leases on the date they become subject
36 OTA SPECIAL REPORT

to readjustment and a clear statutory provision terminating pre-FCLAA leases that do not

begin producing within ten years.)

The lease turnback, Option 9 is administratively workable only if section 3 is limited to

coal leases. Turnback offers the greatest benefit (next to repeal of section 3) to lessees with

large amounts of nonproducing acreage or reserves. These lessees would be able to hold onto

nonproducing reserves until new coal lease is sought, and then would only be required to turn

back that amount of acres or reserves necessary to qualify for the new lease, while keeping the

rest of the nonproducing leases.

Option 8 would impose a surcharge on new coal leases sought by a noncomplying

leaseholder and would be an attractive option for some major noncomplying lessees,

particularly if only a small amount of additional acreage or reserves is needed.

Lessees who are or are almost producing, but for some reason cannot satisfy the section

3 producing in commercial quantities test as structured by the Department would be aided most

by three options: Option 4, an extension of the section 3 deadline; Option 7, qualifying

payments in lieu of production; and Option 5, achievement of alternative mine development

milestones to comply with section 3.

Option 6 would magnify the impact of section 3 by making it apply to all nonproducing

leases. This would go beyond the original scope of section 3 and reverse in part the

Department’s relaxation of diligent production rules. Option 6 would create even more pressure

for legislative relief, unless it were combined with additional exceptions, such as the holding

fee, turnback, rollover, or alternative development milestones approaches.
OTA SPECIAL REPORT 37

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FEDERAL COAL LEASES 1985:

AN ANALYSIS OF CURRENT DEVELOPMENT STATUS,

OWNERSHIP TRENDS, AND POTENTIAL SECTION 3 COMPLIANCE

For this report, OTA reviewed some 648 Federal coal leases including over 100 leases

issued since 1976 and more than 30 leases that were relinquished, exchanged, or consolidated

since 1981. A nonproducing coal lease will create a section 3 disqualification for the lessee if

the lease has been held for 10 or more years, is not producing coal in commercial quantities,

and is not covered by one or more of the limited exceptions to section 3. To determine the

extent of the possible impacts of section 3, OTA reviewed the development and production

status of all Federal coal leases. OTA also reviewed the lease ownership histories for the leases

to determine when the section 3 10-year holding period would expire for the current lessees.

Information on lease ownership is discussed later in this section. OTA projected the section 3

compliance status for Federal coal lessees using the lease ownership and development status

information in the OTA data base and estimates of future coal demand in western coal

production regions.

Development and Production Status of Federal Coal Leases

The development status of Federal coal leases reflects their current mine plan status. 1

Leases with an approved mine plan are leases within or associated with a mine plan approved by

the Department of the Interior (DOI) and include leases within the active permit area and leases

designated in the unpermitted life of mine area. Leases with a pending mine plan are those

leases covered by mine plans under active permit review by the Office of Surface Mining

(OSM). Undeveloped leases are all leases that do not have an approved or pending mine plan.

Table 10 summarizes the development status of the 648 Federal coal leases in OTA’s data

base. They include 616 leases in the seven Western States, of Colorado, Montana, New Mexico,

North Dakota, Oklahoma, Utah, and Wyoming. OTA focused on the Federal leases in these

western States with 95 percent of the leases and over 99 percent of the leased reserves. The 32

remaining leases are in the States of Alaska (2), Alabama (15), California (1), Kentucky (5),

Oregon (3), Pennsylvania (2), Virginia (l), and Washington (2).

In 1985, 333 leases, over half of the western leases, with 13.1 billion tons of recoverable

reserves, almost 65 percent of the reserves under lease, were covered by an approved or pending

mine plan. Over 250 leases remain undeveloped, however, and 32 leases have been relinquished,

exchanged or consolidated since 1981.

OTA found that of the 616 western leases, 299 leases or 48.5 percent of all the leases in

the 7 western States were being actively mined or are associated with an permitted mine. About

60 percent of the reserves under lease are covered by an approved mine plan. This category

includes active mines, temporarily inactive permitted mines, newly permitted mines now under

construction, and some leases that are outside of the permit area, but are scheduled for mining

1 OTA’S development status classifications are based on our earlier work in U.S. Congress, Office of Technology

Assessment, An Assessment of Development and Production Potential of Federal Coal Leaees, (Washington, DC: U.S.

Government Printing Office, December 1981) OTA-M-150.
OTA SPECIAL REPORT 39

TABLE 10

DEVELOPMENT STATUS OF FEDERAL COAL LEASES

(ALL LEASES, ALL STATES IN OTA DATABASE)

AUGUST 1985

STATE DEVELOPMENT NO. ACRES RECOVERABLE

STATUS LEASES % % RESERVES % .

Colorado

Approved

Pending

Undeveloped

Relinquished

Subtotal

Montana

New Mexico

Approved

Pending

Undeveloped

Relinquished

Subtotal

Approved

Pending

Undeveloped

Relinquished

Subtotal

North Dakota

Approved

Pending

Undeveloped

Relinquished

Subtotal

Utah

Wyoming

Oklahoma

Approved

Pending

Undeveloped

Relinquished

Subtotal

Approved

Pending

Undeveloped

Relinquished

Subtotal

Approved

Pending

Undeveloped

Relinquished

Subtotal

Total West

Approved

Pending

Undeveloped

Relinquished

Subtotal

Other State s

East not determined

Other West not determined

Subtotal

Total All Leases

81

6

54

6

147

19

2

6

0

27

17

1

12

1

31

16

0

4

1

21

77

20

108

14

219

82

3

26

9

120

6

3

40

2

51

298

35

250

33

616

24

8

32

648

55.1% 88,15 5

4.1% 20,89 1

36.7% 55,24 6

4.1% 3,35 5

167,647

70.4% 35,54 8

7.4% 1,19 8

22.2% 7,89 3

0.0% o

44,639

54.8% 33,275

3.2% 2,044

38.7% 9,287

3.2% 1,240

45,846

76.2% 15,198

0.0% o

19.0% 3,91 4

4.8% 80

19,192

35.2% 95,54 8

9.1% 23,885

49.3% 174,84 1

6.4% 22,84 4

317,11 8

68.3% 166,88 4

2.5% 3,58 0

21.7% 78,24 2

7.5% 11,438

260,144

11.8% 8,66 6

5.9% 4,90 0

78.4% 66,851

3.9% 1,12 0

81,53 7

48.4% 443,274

5.7% 56,498

40.6% 396,274

5.4% 40,077

936,123

17,868

9,17 3

27,041

963,16 4

52.6%

12.5%

33.0%

2.0%

79.6%

2.7%

17.7%

0.0%

72.6%

4.5%

20.3%

2.7%

79.2%

0.0%

20.4%

0.4%

30.1%

7.5%

55.1%

7.2%

64.2%

1.4%

30.1%

4.4%

10.6%

6.0%

82.0%

1.4%

47.4%

6.0%

42.3%

4.3%

1,15 3

136

1,295

62

2,64 6

974

150

503

0

1,62 7

314

60

75

21

470

220

0

46

0

266

1,21 0

300

1,645

341

3,49 6

8,32 3

268

2,38 7

216

11,194

6

15

179

0

201

12,200

928

6,13 0

641

19,899

64

39

103

20,003

43.6%

5.1%

48.9%

2.4%

100%

59.9%

9.2%

30.9%

0.0%

100%

66.9%

12.8%

15.9%

4.5%

100%

82.7%

0.0%

17.2%

0.0%

100%

34.6%

8.6%

47.1%

9.8%

100%

74.4%

2.4%

21.3%

1.9%

100%

2.9%

7.4%

89.5%

0.0%

100%

61.3%

4.7%

30.8%

3.2%

100%

NOTE: All reserves in millions of tons.

SORCE: Office of Technology Assessment
40 OTA SPECIAL REPORT

later. Table 11 summarizes the production status of existing Federal coal leases in western

States.

A mine is “producing” if coal was mined in 1983, 1984 or 1985 and the mine has not

been shut down. Table 11 shows the current production status of western leases and also the

number of leases within and outside the mine permit mine areas.

The approved mine plan category includes leases generally considered as “producing”,

however, not all the 299 leases in this category have actually been mined. OTA found 226

leases in active mines, but actual production was reported on only 118 leases in 1984. There are

a number of reasons why some “producing” leases may not have reported production in any

given year. The sequence of mining operations in multi-lease tracts can mean that a Federal

lease might be mined only every few years over the mine life or perhaps only once during the

40 years that a mine is in operation. Some leases in active mines may have already been

depleted; eight leases were in this category in 1985. These leases aren’t producing, because

presumably there aren’t any recoverable reserves left. The depleted leases can not be

relinquished because reclamation is incomplete and, in some cases, the lessee may need to

maintain control over the lands for reclamation or mine access.

OTA identified 39 leases in inactive permitted mines which were shut down because of

poor markets, or accidents, or other reasons. The approved mine plan category includes 6 leases

in permitted mines that have not begun producing to meet scheduled contract commitments and

Table 11

PRODUCTION STATUS OF FEDERAL COAL LEASES

IN SEVEN WESTERN STATES

Total In Permit Outside Permit

Development Production No . No. No.

Status Status Leases Acres Reserves Leases Acre s Leases Acres

Approved Producing 226 333,27 7 9,67 6 190 288,09 4 36 45,18 3

Permit Mined Out 8 12,908 12 8 12,908 0 0

Inactive 39 50,644 515 34 42,745 5 78899

Contracts 6 14,679 1,226 6 14,679 0 0

No Contracts 1 9 31,76 6 806 19 31,76 6 0 0

Subtotal 298 443,27 4 12,236 257 390,19 2 41 53,08 2

Pending Contracts 4 6,94 4 7 5 4 6,94 4 0 0

Permit No Contracts 3 1 49,54 4 835 26 33,10 8 5 16,446

Subtotal 35 56,49 8 928 30 40,05 2 5 16,446

Undeveloped No Production 206 366,785 5,86 3

Past Prod. 44 29,48 9 267

SubtotaI 250 396,274 6,13 0

TOTAL 583 896,04 6 19,294

All reserves in millions of tons.

NOTE : Totals exclude leases that have been relinquished and 32 leases outside

of the seven Western States. Individual column entries may not add to totals because

of independent rounding.

SOURCE: Office of Technology Assessment
OTA SPECIAL REPORT 41

another 19 leases in permitted mines that have no contracts. There are 41 leases outside the

active permit areas which have been designated by the operator to be mined over the life of the

mine.

review

market

There were 35 leases with mine plans covering some 928 million tons of reserves under

in 1984-85. The pending mine plan category includes some leases that, because of poor

conditions, may not be mined in the near future even if the mine is permitted.

There are 250 leases still undeveloped. They contain about 6.1 billion tons of

recoverable reserves or roughly 30 percent of all Federal leased reserves. They include some

leases with inactive mine plans and others where some initial development work, such as

environmental baseline studies, may have been completed or be ongoing. At least 44

undeveloped leases were mined in the past, but mining and reclamation activities have now been

abandoned. The remaining 179 undeveloped leases appear to have had no production at all.

OTA found 33 leases that have been or are being relinquished. Many of these leases,

particularly those with unfavorable short term development potential, are being turned back to

avoid section 3 problems for the lessees or their parent companies and affiliates. Among

companies that have indicated that they have or are planning to relinquish leases are: Gulf Oil

Corp., Shell Oil, Atlantic Richfield Co., Montana Power Co., and Peabody Holding Co.

Figure 2.

Age of Federal Coal Leases

Source: Office of Technology Assessment
42 OTA SPECIAL REPORT

Figure 3.

How Long Have Leases Been Held?

Source: Office of Technology Assessment

SECTION 3 COMPLIANCE STATUS OF FEDERAL COAL LEASES

As a precondition for a section 3 disqualification, a lessee or a related entity must have

held the nonproducing lease for at least 10 years after August 4, 1976. Figure 2 shows the age

of all existing leases. Fifty-three percent of existing leases are over 20 years old; 65 percent of

pre-FCLAA leases are more than 20 years old. Figure 3 shows how long existing leases have

been held by the current owners. (If a lease is held by more than one party, only the longest

period of ownership was used.) About 39 percent of existing leases have been held for more

than 20 years; almost half of the pre-FCLAA leases have been held for more than 20 years.

Sixty-five percent of the pre-FCLAA leases have been held by their current owners for more

than 15 years.

Section 3’s primary impacts will be on the leases that were issued before enactment of

FCLAA in 1976 (pre-FCLAA or “old” leases). OTA has generally excluded the new postFCLAA leases from its section 3 analysis, but we did include new leases issued under preFCLAA terms and conditions as a result of lease exchanges. Table 12 shows the current

development status of the 489 pre-FCLAA leases still in effect in the seven western States.

Lessees have relinquished or exchanged 32 other pre-FCLAA leases since 1981. Slightly less

than half of the western pre-FCLAA leases, 235 leases, have approved mine plans and 31 preFCLAA leases are in pending mine plans. There are 223 western pre-FCLAA leases with over

4.8 billion tons of coal reserves that are currently undeveloped.
OTA SPECIAL REPORT 43

Table 12

DEVELOPMENT STATUS OF PRE-FCLAA LEASES

IN 7 WESTERN STATES

AUGUST 1985

STATE DEVELOPMENT NO. ACRES RECOVERABLE

STATUS LEASES % % RESERVES % .

Colorado

Approved

Pending

Undeveloped

Subtotal

Montana

Approved

Pending

Undeveloped

Subtotal

New Mexico

Approved

Pending

Undeveloped

Subtotal

North Dakota

Approved

Pending

Undeveloped

Subtotal

Utah

Approved

Pending

Undeveloped

Subtotal

Wyoming

Oklahoma

Approved

Pending

Undeveloped

Subtotal

Approved

Pending

Undeveloped

Subtotal

All West

Approved

Pending

Undeveloped

TOTAL

60

3

46

109

11

2

5

18

15

1

11

27

11

0

4

15

65

19

100

184

68

3

22

93

5

3

35

43

235

31

223

489

55.0%

2.8%

42.2%

100%

61.1%

11.1%

27.8%

100%

55.6%

3.7%

40.7%

100%

73.3%

0.0%

26.7%

100%

35.3%

10.3%

54.3%

100%

73.7%

3.2%

23.7%

100%

11.6%

7.0%

81.4%

100%

48.1%

6.3%

45.6%

100%

72,934

6,16 2

41,97 3

121,069

29,303

1,19 8

5,79 7

36,29 8

28,491

2,04 4

9,12 7

39,66 2

12,449

0

3,91 4

16,363

78,91 6

23,24 5

139,213

241,374

147,437

3,58 0

58,51 4

203,531

8,52 6

4,90 0

59,59 6

73,022

372,05 6

41,12 9

318,134

731,319

60.2%

5.1%

34.7%

100%

80.7%

3.3%

16.0%

100%

71.8%

5.2%

23.0%

100%

76.1%

0.0%

23.9%

100%

32.7%

9.6%

57.7%

100%

69.5%

1.8%

28.7%

100%

11.7%

6.7%

81.6%

100%

50.9%

5.6%

43.5%

100%

921

12

967

1,900

805

150

325

1,280

218

60

74

352

187

0

46

233

1,123

300

1,460

2,88 2

7,33 4

268

1,768

9,371

6

15

163

184

10,594

804

4,80 3

16,201

48.5%

0.6%

50.9%

100%

62.9%

11.7’%

25.4%

100%

61.9%

17.0%

21.0%

100%

80.3%

0.0%

19.7%

100%

39.0%

10.4%

50.6%

100%

78.3%

2.9%

18.9%

100%

3.2%

8.0%

88.8%

100%

65.4%

5.0%

29.6%

100%

NOTE: All reserves in millions of tons

SOURCE: Office of Technology Assessment
44 OTA SPECIAL REPORT

OTA’s review of the development status of the 12 pre-FCLAA leases in other States was

limited. We determined, however, that at least five of the leases are part of mines that were

producing in 1984 and five more leases are undeveloped. At least three undeveloped leases have

abandoned mine workings. The current development status of two leases was undetermined.

OTA estimated the section 3 production deadlines for all pre-FCLAA coal leases using

information on coal lease assignments and corporate ownership. Table 13 shows these results.

(Note: The effective date for section 3 disqualifications was extended to December 31, 1986, by

the Continuing Appropriations Resolution for Fiscal Year 1986; Public Law, 99-190. This delay

does not affect the results of OTA’s analysis of section 3 compliance).

OTA found that 331 western pre-FCLAA leases, 67 percent of these leases, will have been

held by the current lessee for 10 or more years on August 4, 1986 and thus must be producing

in commercial quantities to enable the lessee and all related entities to acquire onshore mineral

leases. over 70 percent of these 331 leases have been held for over 15 years. Because of

assignments and other lease transfers, 158 leases will not be subject to potential section 3

disqualification until after August 4, 1986. OTA assumed that most lease assignments made as

part of a corporate acquisition and merger would not restart the 10-year section 3 clock for

purposes of this analysis.

TABLE 13

SECTION 3 DATES FOR PRE-FCLAA FEDERAL COAL LEASES

IN THE SEVEN WESTERN STATES

SECTION 3 SECTION 3 NO. OF

DATE* COMPLIANCE LEASES ACRES RESERVES**

Aug. 4, 1986 In Compliance 134 228,47 7 7,491

Uncertain 27 42,30 7 942

Noncompliance 170 247,404 5,03 5

Subtotal 331 518,18 8 13,468

Aug. 5, 1986

to Aug. 4, 1991 In Compliance 23 21,715 293

Uncertain 10 18,457 344

Nonconpliance 39 57,90 4 536

Subtotal 72 98,07 6 1,17 3

After Aug. 4, 1991 In Compliance 32 41,93 4 522

Uncertain 19 34,39 0 355

Noncompliance 35 38,731 683

Subtotal 86 115,055 1,561

TOTAL 489 731,319 16,201

In Compliance 189 292,12 6 8,30 6

Uncertain 56 95,15 4 1,641

Noncompliance 244 344,03 9 6,25 4

NOTES :

All reserves in millions of ton s

* Section 3 date is earliest section 3 date for lease, if there is more than one lessee.

** Total recoverable reserves include pre-FCLAA reserves only; total reserves ma y

include some associated reserves with later section 3 dates because reserves data were

sometimes not available on a lease by lease basis.

SOURCE: Office of Technology Assessment
OTA SPECIAL REPORT 45

TABLE 14

SECTION 3 COMPLIANCE STATUS OF PRE-FCLAA LEASES

IN 7 WESTERN COAL STATES

STATE COMPLIANCE LEASES % ACRES % RESERVES % .

COLORADO

MONTANA

NEW MEXICO

NORTH DAKOTA

UTAH

WYOMING

OKLAHOMA

TOTAL WEST

Likely

Uncertain

Unlikely

Total

51

11

4 7

109

46.8%

10.1%

43.1%

100%

53,08 2

22,09 4

45,89 3

121,069

43.8%

18.2%

37.9%

100%

745

150

1,00 5

1,90 0

39.2%

7.9%

52.9%

100%

11 61.1%

0.0%

38.9%

100%

29,30 3 80.7%

0.0%

19.3%

100%

805 62.9%

0.0%

37.1%

100%

Likely

Uncertain

Unlikely

Total

7

18

6,99 5

36,29 8

475

1,280

Likely

Uncertain

Unlikely

Total

11 40.7%

0.0%

59.3%

100%

21,22 9 53.5%

0.0%

46.5%

100%

222 63.1%

0.0%

36.9%

100%

16

27

18,433

39,66 2

130

352

127

61

46

233

54.2%

26.1%

19.7%

100%

Likely

Uncertain

Unlikely

Total

7

4

4

15

46.7%

26.7%

26.7%

100%

8,931

3,51 8

3,91 4

16,363

54.6%

21.5%

23.9%

100%

Likely

Uncertain

Unlikely

Total

49

17

118

184

26.6%

9.2%

64.1%

100%

51,62 2

29,865

159,887

241,374

21.4%

12.4%

66.2%

100%

864

326

1,69 2

2,88 2

30.0%

11.3%

58.7%

100%

Likely

Uncertain

Unlikely

Total

52

14

27

93

55.9%

15.1%

29.0%

100%

114,533

19,042

69,95 6

203,531

56.3%

9.4%

34.4%

100%

5,52 3

1,04 6

2,80 2

9,37 0

58.9%

11.2%

29.9%

100%

Likely

Uncertain

Unlikely

Total

8

10

25

43

18.6%

23.3%

58.1%

100%

13,426

20,635

38,961

73,02 2

18.4%

28.3%

53.4%

21

59

104

184

11.2%

32.1%

56.7%

100% 100%

Likely 189 38.7% 292,12 6 39.9% 8,30 6

1,641

6,25 4

16,201

51.3%

10.1%

38.6%

100%

Uncertain 56 11.5% 951154 13.0%

Unlikely 244 49.9% 344,039 47.0%

Total 489 100% 731,319 100%

All reserves in millions of tons

Note: Table excludes leases that have been relinquished, exchanged or consolidated,

post-FCLAA leases, and leases outside of the 7 major western coal States.

SOURCE: Office of Technology Assessment
46 OTA SPECIAL REPORT

Using the information on lease development and production status and lease ownership

histories, OTA projected the likely section 3 compliance status of the 489 western pre-FCLAA

leases. The aggregate results of this analysis are shown in table 13. The results of this analysis

by State are shown in table 14.

OTA estimates that 189 leases will comply with the section 3 production requirement.

These leases contain over 8.3 billion tons of coal, slightly over half of the pre-FCLAA lease

reserves. In making these estimates, OTA assumed that lessees with active mines with

producing Federal leases would form LMUs if necessary to satisfy the section 3 “producing in

commercial quantities” requirement for any nonproducing pre-FCLAA leases in their mines.

OTA found 56 leases with 1.6 billion tons of coal that are uncertain to comply with the

section 3 producing in commercial quantities requirement. Leases were rated as “uncertain” if:

1) the mine was not producing at a rate of 1 percent of reserves annually; or 2) it has no

reported coal contracts and the existing regional mine capacity is 100 to 150 percent of

projected regional demand in the year the lessee’s section 3 deadline occurs; or 3) the mine has

not yet begun Federal coal production and the lessee must form an LMU with non-Federal coal.

Many of the mines with uncertain status could comply with section 3 if an LMU were

approved, but the terms of some non-Federal coal leases or the amount of reserves involved

may make it undesirable to do so. OTA believes that most of the leases in the uncertain

compliance category could eventually comply with section 3, however some lessees may be

disqualified briefly and others may have to relinquish or sell some nonproducing reserves so that

their actual production levels meet the 1 percent commercial quantities test.

TABLE 15

REASONS FOR PROJECTED SECTION 3 COMPLIANCE STATUS

FOR PRE-FCLAA LEASES IN 7 WESTERN STATES

STATUS LEASES % ACRES % RESERVES % .

Likely to Comply

Producing commercial quantities

will produce commercial quantities

Reserves “mined out”

Uncertain to Comply

Limited coal demand

Non- Federal LMU approval required

Unlikely to Comply

Limited coal demand

Suitable for onsite use only

Unfavorable development

potent i al

TOTAL

189

169

13

7

56

35

21

244

178

13

53

489

38. 7%

34.6%

2.7%

1 .4%

11 .5%

7.2%

4 .3%

49.9%

36.4%

2.7%

10.8%

100. o%

292,126

248,364

30,99 4

12,768

95,154

64,06 6

31,08 8

344,03 9

266,980

19,093

57,96 6

731,31 9

39.9%

34 .0%

4.2%

1 .7%

13.0%

8.8%

4 .3%

47.0%

36. 5%

2 .6%

7.9%

100.0%

8,30 6

6,68 6

1,610

10

1,641

978

663

6,25 4

4,08 5

1,26 4

905

16,201

51. 3%

41 .3%

9.9%

o. 1%

10. 1%

6.0%

4.1%

38.6%

25 .2%

7.8%

5.6%

100.0%

All reserves in millions of tons.

SOURCE : Office of Technology Assessment
OTA SPECIAL REPORT 47

OTA found 244 leases that are unlikely to satisfy the section 3 production requirement.

Table 15 summarizes the reasons why OTA believes these leases will not be producing. Lack of

markets was the major reason for nonproduction for 178 leases with over 4 billion tons of

reserves. These leases generally have good quality minable reserves which are comparable in

mining cost to reserves currently being mined, but under the current coal demand outlook, these

reserves are unmarketable. Another 13 leases with over 1.2 billion tons of reserves are also

currently unmarketable, but these reserves were found by OTA to be suitable only for onsite or

near site use for power generation or synthetic fuels production. Unfavorable development

potential, i.e. insufficient or poor quality reserves, bad mining conditions, access problems, and

environmental conflicts, were the primary reasons why 53 leases with about 900 million tons of

reserves would not be producing.

Under the most optimistic mine development schedule, a minimum of 18 months is

needed to begin producing once a mine has been permitted. Given this minimum lead time,

coal leases that have not yet been permitted or are not associated with a producing mine are

unlikely to be producing in commercial quantities by August 4, 1986, the earliest section 3

“deadline” for Federal coal lessees. OTA estimates that 170 leases that have been held for 10

years are unlikely to be producing in commercial quantities by August 4, 1986; another 27 are

uncertain to comply on that date. (See table 13). For leases with later section 3 production

dates, we estimate that there are 91 leases that are unlikely to comply and 29 leases with

uncertain compliance status These lessees face a section 3 nonproduction penalty unless they

sell or turn back any leases with compliance problems.

The section 3 production requirement applies only indirectly to the existing leases.

Nothing happens to the noncomplying lease, it is not terminated or subject to economic

penalties under existing law. Section 3 penalizes the lessee by disqualifying that person or

corporation and all related business entities from acquiring any new Federal onshore mineral

leases as long as the old lease is in noncompliance. OTA has determined that the 300 leases that

are uncertain or unlikely to comply with section 3 are held by about 120 different lessees. The

120 lessees include leaseholders who hold only a percentage interest of a lease or who share an

undivided interest in a lease. When the leaseholdings are attributed back to parent corporations

and joint venture partners, about 87 distinct controlling entities are affected. These affected

entities include 20 individuals or joint family holdings and 67 corporate and other business

entities. These other business entities include partnerships, business trusts, a university, and a

church. The ownership patterns of Federal coal leases and the impacts of section 3 on major

leaseholders are discussed in the following section of this report.

Section 3 and Federal Coal Lease Ownership

Analysis of lease ownership information is essential to an understanding of the potential

impacts of section 3 and proposed amendments to it. This section summarizes changes in lease

ownership and coal production patterns on western public lands since the passage of FCLAA

and discusses some of the complex ownership arrangements that could affect a company’s

susceptibility to section 3. The industry groups and companies most likely to face section 3

sanctions are identified.
48 OTA SPECIAL. REPORT

BUSINESS STRUCTURE OF CURRENT LESSEES

Title to the 615 existing leases are held by some 220 different lessees. These included

corporations, partnerships, individuals, trustees, trusts, joint ventures, and other business

entities. 2 Because the section 3 noncompliance status of the title holder is attributed to related

business entities, it is necessary to determine whether a lessee is owned by or under the control

of another party.

OTA identified some 114 lessees that are actually subsidiaries of other companies. There

are 51 lessees who hold leases in the name of the sole or parent corporation and 14 lessees that

are joint ventures of two or more companies. (see table 16). One of the largest leaseholders,

Peabody Coal Co., is a subsidiary of Peabody Holding Co. which is owned in turn by a

consortium of five other companies.

Five coal lessees are actually trusts or trustees for individual beneficiaries. Under one

unusual arrangement Bank of America holds four New Mexico leases as trustee for a trust

established by the former lessees, two southwestern utilities. Shares in the trust are being sold

to investors. Before establishing the trust, the beneficiary utilities subleased all the mine

operating rights in exchange for an overriding royalty. The coal mined from leases is burned in

a powerplant operated by one of the lessees. In another unusual ownership structure, an

Oklahoma lessee is acting as the ‘nominee” for two banks which may own the leases or are

acting on behalf of others. Thirty-five individuals also own Federal coal leases. A list of

current coal lessees and their parent companies can be found in Appendix D.

OVERVIEW OF FEDERAL COAL LEASE OWNERSHIP TRENDS 1975-85

Control of Federal coal leases has generally been transferred by one of two methods,

assignments and corporate acquisitions. Between August 1976 and the beginning of 1985 about

half of all pre-FCLAA leases were either assigned or transferred through a corporate

acquisition, or both. Figure 4 shows how current lessees initially acquired their leases.

An assignment is the transfer of the legal title to a Federal coal lease from one party to

another. Assignments also include any transfer of a shared partial interest in the lease and lease

segregation, the subdivision and transfer of a portion of the leased acreage through creation of a

separate new lease. OTA excluded all assignments to a party that is controlled by or affiliated

with the assignor from its analysis for section 3 purposes. Lease assignments among unaffiliated

entities have occurred at least 177 times between the passage of FCLAA and March 1985

involving some 147 leases. At least 79 such ownership transactions have been completed. As of

the beginning of 1985, assignment applications involving several dozen additional leases were

pending before the Bureau of Land Management (BLM).

Control of Federal coal leases can also change with the transfer of ownership of the

lessee company to another company, even though the legal title to the lease remains unchanged.

Since passage of FCLAA, 17 corporate acquisitions affecting the ownership of leaseholding

companies have been completed. These acquisitions involve approximately 154 leases and are

shown in table 17.

2

See U. S. Congress, Office of Technology Assessment technical memorandum, Patterns and Trends in Federal Coal Lease

Ownership 1950-80, (Washington, DC: U.S. Government Printing Office, March 1981) OTA-TM-M-7, at 6-8 for a more

exhaustive discussion of various types of business organizations that hold leases.
OTA SPECIAL REPORT 49

Table 16

JOINT VENTURES OWNING FEDERAL COAL LEASES

Joint Venture (Subsidiary) Part i c i pants

Arch Minerals (Ark Land) Ashland Oil (50%)

Hunt Enterprises(25%)

Hunt Petroleun Corp.(25%)

Black Butte Coal Co. Peter Kiewit Sons, Inc.

Union Pacific Corp. (Rocky Mountain

Energy Co.)

Bridger Coal Co.

Colowyo Coal Co.

Cumberland Coal Co.

Pacific Power & Light Co.

Idaho Power Co.

W. R. Grace & Co.

Hanna Mining Corp.

Peter Kiewit Sons, Inc.

Union pacific Corp. (Rocky Mountain

Energy Co.)

Fort Union Mine Partnership Frontier Coal Co. (90%) (American

subsidiary of Total Petroleun,

a French Company)

Transit Coal Co. (10%) (Subsidiary of

Frontier Coal Co.)

Grand Mesa Properties, Inc.

Carbon Coal

Hayden Gulf West Coal Co.

Medicine Bow Coal Co.

P. I. I. West Ltd.

Powderhorn Properties

Salt Creek Mining Co.

Snowmass Coal Co.

Eastern Gas & Fuel Associates

NICOR, Inc.

Hamilton Bros Joint Venture (80%)

Hamilton Bros Oil Co.

Hamilton Bros Exploration Co.

Hamilton Bros Corp.

W.R. Grace & Co.

Hanna Mining

Arch Minerals:

Ashland Oil (50%)

Hunt Enterprises (25%)

Hunt Petroleum Corp. (25%)

Union Pacific Corp. (Rocky Mountain

Energy Co.)

Petroleun International, Inc.

Westhoff Brothers Inc.

Eastern Gas & Fuels Associates

NICOR, Inc.

Occidental Petroleum Corp.

Colorado-Ute Electric Association

Eastern Gas & Fuels Associates

NICOR, Inc.

SOURCE: Office of Technology Assessment
— .

50 OTA SPECIAL REPORT

Figure 4.

How Federal Coal Leases Were Acquired

New Lease Assignment Segregation Partial Assignmen t

Source: Office of Technology Assessment

As with assignments, several corporate transactions affecting Federal leases are pending

completion or have been completed after the preparation of the OTA database used in this

study. These include: the purchase of Kaiser Steel Co.’s western coal operations by a subsidiary

of Perma Resources Corp.; the sale of some of Texaco’s coal operations acquired in its purchase

of Getty Oil Co. to Cypress Mining, an independent company recently created by a spinoff

from AMOCO: and the purchase of Soldier Creek Coal Co. by SUNEDCO, a subsidiary of The

Sun Co.3 Control of some leases has been affected by both assignments and acquisitions. In

addition to assignments and acquisitions, there are other types of-ownership changes

Federal leases, such as changes in joint venture partners. These transactions, although

for the purposes of interpreting section 3 impacts, affect a small number of leases.

involving

important

3 Coal Week, July 1, 1985.
OTA SPECIAL REPORT 51

Table 1 7

CORPORATE ACQUISITIONS AFFECTING LESSEES SINCE PASSAGE OF FCLAA

Company :

Sunland Mining

Energy Fuels Co.

Getty Oil Corp.

K emmerer Coal Co.

Gulf Oil Corp.

Empire Energy Co.

Peabody Coal Co.

Cambridge Mining Co.

Anchor Coal Co.

Consolidation Coal Co. (CONOCO)

Swisher Coal Co.

U.S. Fuel Co.

Utah International, Inc.

Belco Petroleum Corp.

Midcontinent Limestone

Western Slope Carbon Co.

Energy Reserves Group, Inc.

Acqu ired BY:

Pyro Energy Co.

Getty Oil Corp.

Texaco, Inc.

Gulf Oil Corp.

Chevron Corp.

Standard Oil of Indiana Co. (AMOCO)

Peabody Holding Co.

General Exploration Co.

Fluor Corp.

E.I. du Pont de Nemours & Co.

Atlantic Richfield Co.

Sharon Steel Corp.

Broken Hill Proprietary, Ltd.

Internorth Corp.

Pitkin

The Wil

Broken

SOURCE: Office of Technology Assessment

Iron Corp.

liams Companies

Hill Proprietary, Ltd.

OWNERSHIP AND PRODUCTION BY INDUSTRY CATEGORY 1975-85

OTA has previously summarized the changes in lease ownership patterns for 13 different

industry categories from over 30 years. That information is updated here for the 11 categories

still active in Federal leasing. The industry categories were selected in 1979 based on historical

patterns existing then; each separate group or company controlled at least 5 percent of acreage

under lease at one or more of the 5-year intervals used in the analysis. This information is

useful in defining the types of companies that are active in the Federal coal leasing program

and in assessing potential impacts of policy changes on them. The 11 industry categories and

the companies in each are listed in the appendix.

Table 18 shows the total Federal lease acreage held by each industry category in 1975,

1980 and late 1985. (Individual leases vary in size from 40 acres to over 10,000 acres, so that

acreage provides an alternative indication of the relative size and importance of leaseholdings.)

The electric utility industry has been and continues to be the largest industry group holding

leases. Utilities have increased their share of Federal lease acreage over the past five years.

The major oil companies category is the third largest group of leaseholders, and if the holdings

of the DuPont subsidiary Conoco are added, the major oil companies actually control over

190,000 leased acres, making them the second largest group. The holdings of independent coal

companies and individuals (many of whom were lease brokers or speculators) have dropped

precipitously over the past decade. Nonresource-related diversified companies significantly

increased their leaseholdings during the same period. This group includes large chemical

companies, such as DuPont. Another growing category are companies in the “other” category,
52 OTA SPECIAL. REPORT

TABLE 18

OWNERSHIP OF FEDERAL COAL LEASES

BY INDUSTRY CATEGORY - 1975, 1980, AND 1984

BUSINESS CATEGORY I OWNERSHIP 1975 I OWNERSHIP 1980 I OWNERSHIP 1984

Acres % Acres % Acres %

Utilitie s I

Other Co's. I

Oil majors I

Nonres. Divers. Co's. I

Oil & Gas Co’s. I

Steel Co's. I

Coal Co’s. I

Metals & Mining Co’s.

Natural Gas Co's.

Peabody Holding Co. I

Individual s I

I

TOTAL I

142,07 7

70,124

138,409

12,580

42,19 3

49,44 8

92,825

49,37 7

32,52 2

68,92 3

66,515

764,993

6% i

12% I

i 100% I

163,25 9

84,36 7

155,024

35,67 5

45,92 6

60,01 5

87,601

17,620

36,31 7

62,00 9

43,21 5

791,02 8

21%

10%

20%

5%

6%

8%

11%

2%

5%

8%

4%

I 100% I

204,56 7

189,159

141,157

85,211

70,365

61,98 6

55,24 7

40,22 9

36,231

20,382

18,553

923,08 7

22%

20%

15%

9%

8%

7%

6%

4%

4%

2%

2%

100%

NOTE: Acreage includes all existing Federal coal [eases, but excludes relinquishments.

SOURCE: Office of Technology Assessment

which embraces such diverse businesses as railroads, banks, cement producers, and construction

companies. (Although section 2(c) of the MLA prohibits the land grant railroads from owning

Federal coal leases except for their own use, they nevertheless hold interests in Federal coal

leases. Several leases are held by joint ventures between the railroad’s mining subsidiaries and

other firms and thus avoided the 2(c) ban. According to lease records, the assignment of two

small New Mexico leases to the mining affiliate of the Santa Fe Railroad was approved by the

Department after 1981, despite the statutory prohibition).

The aggregate data in table 18 are the result of a large number of transactions involving

lease and lessee ownership. The aggregate totals for the business categories are in some cases

unaffected by transactions between companies in the same group, such as Chevron’s acquisition

of Gulf Oil Corp. Also, transfers of leases between companies in different industry categories

were often partly or completely offset by other transactions. Gulf Oil Corp.’s purchase of

Kemmerer Coal Co., for example, greatly increased the holdings of the oil majors, but DuPont’s

purchase of Conoco, Inc. resulted in the removal of a large number of leases from that group.

Tables 19, 20 and 21 shows how lease ownership by industry category and the amount of

Federal coal produced from those leases changed over the past decade. In the mid-1970s,

electric utilities were by far the largest producers of Federal coal, independent coal companies

and metals and mining companies also produced a disproportionately large amount of coal

compared to the number of acres they held under lease. In contrast the share of total Federal

coal production of many lessees involved in oil and gas operations, including major oil firms,

natural gas pipeline companies, and smaller oil and gas companies, was substantially less than

their proportionate share of Federal lease acreage.

Production patterns on Federal lease tracts have changed dramatically since the mid1970s. Major oil companies, which produced only minimal quantities of Federal coal in the

mid-1970s and which were accused by some of deliberately holding coal land out of production
OTA SPECIAL REPORT 53

in order to raise the price of oil, have emerged as perhaps the dominant coal producers in the

West. Small oil and gas companies and metals and mining companies now produce a higher

percentage of coal than predicted by the size of their holdings, while the remaining industry

categories underproduce relative to the size of their holdings.

The ownership and production patterns of Federal coal leases have also changed since

FCLAA was passed. One of the concerns of Congress was to limit two practices which held

potential for speculative gain from Federal reserves: (1) holding reserves with no intent of

production for later resale at a profit to others; and (2) deferring production from Federal

reserves with the expectation of mining the coal when the price of coal rises or mining costs

decline generating greater profits in the future than could be gained by mining now. The

potential for speculation by individuals and small companies without the technical or financial

capability of mining coal has declined markedly as many of their leases have been transferred to

companies in other business categories. However, many large companies continue to hold

sizable undeveloped lease tracts that are not in production, suggesting that the potential for

reaping greater future profits through the strategic holding of nonproducing reserves by firms

capable of mining coal still exists. Coal production has grown substantially in a decade, yet

about 40 percent of the existing leases are still undeveloped.

Appendix A contains a brief discussion of the current leaseholdings of major industry

categories and the significant changes since 1975.

Table 1 9

OWNERSHIP AND PRODUCTION OF FEDERAL COAL LEASES

BY INDUSTRY CATEGORY - MID 1970’S

BUSINESS CATEGORY I OWNERSHIP 1975 I PRODUCTION 1972 I

Acres % Million Tons % 1

I I

Utilities i

Oil majors I

Other Company

Nonresource related

Diversified Companies I

Steel Companys I

Peabody Holding Co. I

Oil & Gas Co’s.

Metals & Mining Co's. I

Natural Gas Co's. I

Coal Co's. ~

Individuals

i

TOTAL I

142,077

138,409

63,276

12,580

49,44 8

68,92 3

42,19 3

49,37 7

32,52 2

58,83 7

66,515

724,15 7

4 . 8

0 . 5

0 . 5

0

0 . 8

0

0 . 2

1 . 2

0

2 . 0

0 . 3

10.3

4% I

I

100% I

SOURCE : Office of Technology Assessment
54 OTA SPECIAL REPORT

TABLE 20

OWNERSHIP AND PRODUCTION OF FEDERAL COAL LEASES

BY INDUSTRY CATEGORY - ABOUT 1980

BUSINESS CATEGORY I OWNERSHIP 1980 PRODUCT ION 1979

Acres % Million Tons %

I I

Utilitie s

Oil majors

Coal Co’s.

Other Co's.

Peabody Holding Co.

Steel Co's.

Oil & Gas Co's.

Individual s

Natural Gas Co’s.

Nonres. Divers. Co's.

Metals & Mining Co’s.

163,259

155,024

87,601

84,36 7

62,00 9

60,01 5

45,92 6

43,215

36,31 7

35,67 5

17,620

21% i

20% I

11% I

10% I

8% I

8% I

6% I

5% I

5% I

4% I

2% I

17. 8

9 . 9

4 . 4

5 . 2

2 . 2

1 . 3

5 . 3

0 . 7

2 . 4

1 . 0

9 . 3

30%

16%

7%

9%

4%

2%

9%

1%

4%

2%

16%

i 1

i

TOTAL I 791,028 100% 59.5 100% I

NOTES:

1. Reported Federal production is for closest available year.

2. Acreages have been adjusted to reflect lessee’s proportionate

share of joint holdings.

SOURCE: Office of Technology Assessment

TABLE 21

OWNERSHIP AND PROOUCTION OF FEDERAL COAL LEASES

BY INDUSTRY CATEGORY - ABOUT 1984

BUSINESS CATEGORY I OWNERSHIP 1984 I PRODUCTION 1983 I

Acres % Million Tons %

I

Utilitie s I

Other Co's. I

Oil majors I

Nonres. Divers. Co's. I

Oil & Gas Co’s. I

Steel Co's. I

Coal Co’s. I

Metals & Mining Co's. I

Natural Gas Co's. I

Peabody Holding Co. I

Individual s I

204,56 7

189,159

141,157

85,211

70,365

61,98 6

55,24 7

40,22 9

36,231

20,382

18,553

I

22% I

20% I

15% I

9% I

8% i

22. 5

11. 7

45. 1

1 . 6

12. 2

1.1

3 . 6

13. 2

2 . 1

0 . 9

neg

I

20% I

10% I

40% I

I

TOTAL I 923,087

i

100% [ 114. 0 100% I

NOTES:

1. Reported Federal production is for closest available year.

2 . Acreages have been adjusted to reflect lessee’s proportionate

share of joint holdings.

SOURCE: Office of Technology Assessment
OTA SPECIAL REPORT 55

SECTION 3 COMPLIANCE STATUS OF INDUSTRY GROUPS

Table 22 shows the section 3 compliance status for the 11 different industry groups for

the 489 pre-FCLAA leases in the seven major western coal producing States. It indicates the

number of leases and leased acreage in each category that are likely to comply with section 3

production requirements and those with potential section 3 compliance problems, i.e. leases that

are uncertain or unlikely to comply. (Note that table 22 reflects the total number of leases held

by companies in each category. The total of the leases in each category exceeds the total of

pre-FCLAA leases because some jointly held leases are owned by companies in different

industry groups, so that one lease may appear in two categories. The total acreage figures have

been prorated to reflect the percentage ownership for jointly held leases).

The business categories with the most leases at risk of noncompliance are the “other”

companies, major oil companies, utilities, and the nonresource-related diversified companies.

There are at least 50,000 acres of leaseholdings in each of these categories that are potentially

noncomplying. Together these four industry groups hold 69 percent of the leased acreage

unlikely to be producing in commercial quantities by the applicable section 3 deadlines.

TABLE 2 2

SECTION 3 COMPLIANCE STATUS

OF WESTERN PRE-FCLAA FEDERAL COAL LEASES

BY INDUSTRY CATEGORY

BUSINESS CATEGORY I ALL LEASES I LIKELY TO COMPLY I POTENTIALLY NONCOMPLYING

Acres Leases Acres % Acres Leases Acres % Acres

I I I

Other Co’s.

Utilitie s

Nonres. Divers. Co’s.

Oil major s

Steel Co’s.

Metals & Mining Co’s.

Coal Co’s.

Oil & Gas Co’s.

Peabody Holding Co.

Natural Gas Co’s.

Individual s

TOTAL

148,336

151,552

78,55 2

130, 774

55,01 4

37,821

37,67 7

35 # 904

20,25 7

28,94 9

6,51 3

731,31 9

32

50

5

39

9

7

18

16

6

17

3

189

56,73 0

76,924

6,60 3

6 688 3 6

14,568

9,54 2

15,584

18,636

7,90 7

18,596

200

292,126

38%

51%

8%

51%

26%

25%

41%

52%

39%

64%

3%

40%

64

48

41

51

31

28

23

13

4

7

17

300

91,60 6

74,62 8

71,91 9

63,93 8

40,44 6

28,27 9

22,09 3

17,268

12,350

10,353

6,31 3

439,19 3

62%

49%

92%

49%

74%

75%

59%

48%

61%

36%

97%

60%

NOTES :

1. "% Acres" means the percent of total acreage held by an industry in each category.

2 . Total acreage does not include post-FCLAA leases or leases located outside the seven major

western States, or relinquished leases.

3 . The number of leases includes all leases for which one or more of the lessees’ parent companies

fall into the designated industry category. The number of leases in each category reflects the

total of all leases held by lessees in each category and exceed the total of pre-FCLAA leases

because jointly held leases owned by companies indifferent categories appear in each category. T h e

total number of leases has been adjusted to avoid double counting of these 40 leases. Acreages have

been prorated to reflect the ownership percentages of joint lessees.

4 . All ownership data is current as of Sept. 1, 1985.

SOURCE: Office of Technology Assessment
56 OTA SPECIAL REPORT

Table 22 shows the percentage of leased acreage held by each industry group that is

unlikely to comply with section 3. On a total acreage basis, the industries that are apparently

least impacted by section 3 noncompliance are natural gas companies, oil and gas companies,

utilities, and the oil majors; at least half of their acreage holdings are likely to be in

compliance. Nearly all of the leased acreage held by unincorporated individuals, some 96

percent of their holdings, are unlikely to be in production. Other industry groups with a large

percentage of total lease acreage at risk of noncompliance with section 3 are nonresource-related

diversified companies and steel companies.

THE 20 LARGEST FEDERAI

OTA ranked the 20 major Federal coal

results are shown in table 23. Together these

COAL RESERVES HOLDERS

lessees by their Federal reserves holdings. The

lessees control approximately 65 percent of all

Federal coal reserves under lease, or about 12.6 billion tons of coal. In table 23 the full

recoverable reserves in which a lessee has an interest are attributed to the lessee’s parent

corporation. (Note: A lessee may own 100 percent or less of the lease or participate in a joint

venture which owns a lease). Prorating of the holdings of individual lessees tends to obscure

the extent of “control” or involvement of companies in the leasing program and diminishes their

apparent stake in any changes to the laws regarding coal leasing. The total holdings of the top

20 companies or lessee groups were adjusted to eliminate any double counting of leases or

reserves.

The susceptibility of these 20 lessees and their individual parent companies to section 3

sanctions from nonproducing leases under their control is shown in table 23.4 The table shows

the number of leases and the amount and percent of the lessees total reserves that are at risk of

noncompliance with section 3, i.e. leases that were rated as uncertain or unlikely to comply with

section 3. Approximately 47 percent of the reserves of pre-FCLAA leases held by the top 20

leaseholders are not likely to be in production by the section 3 deadlines applicable to them,

but these represent 75 percent of all potentially noncomplying reserves. About 52 percent of

the reserves held by the top 20 leaseholders are in lease tracts likely to meet section 3

production deadlines.

Fifteen of the top 20 reserves holders face potential compliance problems. Four lessees

(Exxon Corp. Mobil Oil Corp., Amax, Inc., and Idaho Power Co.) will comply with section 3

for all their leases. One lessee group (Kaneb Services, Inc. and Northwest Life Insurance Co.)

has only nonproducing post-FCLAA reserves that will be forfeited if not producing after 10

years. Two of the top 20 reserves holders, Swanton Corp. and the 3 southwestern utilities, are

not likely to comply with section 3 for any of their leases. Montana Power Co. has one

potentially noncomplying lease with negligible reserves for which a relinquishment has been

filed.

4 Note: For the purpose of this analysis OTA has assumed that ‘control” exists when a company is owned in whole, or in

part, by another and the lessee company is conaidered as a subsidiary or joint venture of the parent company. OTA has not

attributed a controlling interest through investments in stock of publicly traded companies or in holding companies. We

note that for some purposes, ownership of 10 percent of a corporation’s stock is sufficient to be considered a “controlling”

interest, There is some participation in the corporate affairs of some coal lessees through stock ownership by other coal

lessees. For example, Chevron, which now owns Gulf, holds over 20 percent of the stock in Amax, another major Federal

coal producer. Peabody Coal Co. is owned by the Peabody Holding Co., which is in turn owned by 5 companies, including

The Williams Companies which also owns Western Slope Carbon, a Federal coal lessee. OTA has not in this report

attributed section S compliance status to the stockholding companies in these cases. However, the Department of the

Interior might elect to do so in enforcing section 3. OTA’s definition and conclusions may not coincide with the

Department’s eventual position on this matter.
OTA SPECIAL REPORT 57

Table 23

THE TOP 20 FEDERAL RESERVE HOLDERS

SECTION 3 Compliance STATUS

PARENT COMPANY OF TOTAL NUMBER RECOVERABLE POTENT I ALLY

LESSEES OF LEASES RESERVES UNDER NONCOMPLYING

LEASE (m.t.) LEASES RESERVES*

1

2

3 .

4 .

5 .

6 .

7.

8 .

9 .

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

Exxon Corp.

Pacific Power & Light Co.

Amax, Inc.

Atlantic Richfield Co.

DuPont 1

b

Peabody Holding Co. c

Broken Hill Prop. Ltd. d

Texaco, Inc. e

Chevron Corp. f

Kerr-McGee Corp. g

The Sun Co.

Shell Oil Corp .

Peter Kiewit Sons, Inc. i

Kaneb Services, Inc. &

Northwest Life Insurance

United States Steel Corp.

Mobil Corp. J

Swanton Corp.

Arizona Public Service

San Diego Gas & Electric

Southern Ca. Edison

Idaho Power Co.

Montana Power Co.

TOTAL**

NOTES

5

a 3 1

6

13

35

11

30

17

38

5

8

4

13

2

19

1

16

21

3

9

1,49 0

1,45 3

1,261

1,24 2

1,135

1,01 9

930

927

803

736

643

641

582

445

438

424

361

345

329

287

0

10

0

3

31

4

25

5

24

3

6

2

3

0

12

0

16

21

0

1

264 12,593 150

0

427

0

51

1,049

800

624

800

725

398

97

240

70

0

339

0

361

345

0

0

o%

27%

o%

4%

93%

79%

67%

86%

90%

54%

15%

37%

12%

o%

83%

o%

100%

100%

o%

o%

5,976 47 %

*

All reserves in millions of tons.

● ☛

a .

b.

c .

d.

e .

f .

g.

h.

i.

j.

k.

Totals have been adjusted to avoid double counting of jointly held reserves.

Includes joint ventures.

Includes 14 leases in which CONOCO, subsidiary Consolidation Coal Co., and

Chevron’s Gulf Oil subsidiary each own 50%. The leases total 23,890 acres

with 241 million tons of reserves.

Totals exclude leases and reserves on which relinquishments and assigmnents

have been approved or are currently pending.

Includes subsidiaries Utah International, Inc. and Energy Reserves Group, Inc.

Includes Texaco's Lake DeSmet holdings and leases held by Getty Minerals, but

does not reflect recently announced sale of Getty’s coal operations to Cyprus

Mining or sale of Getty’s 50% share of the Skyline Mine in Utah to Coastal

States Energy Co.

Includes 14 leases in which Chevron's Gulf Oil subsidiary and Dupont's

Consolidation Coal Company subsidiary each own 50%. The leases total

23,890 acres with 241 million tons of reserves.

Does not include adjustments for pending 1-90 lease exchange of part of the

East Gillette tract in Wyoming.

Does not include Sun’s recently announced purchase of Soldier Canyon mine

in Utah from California Portland Cement.

Includes joint ventures.

Total leases reflect two Mobil leases in the Rojo Caballo Mine now

reconsolidated into a single lease.

Includes joint venture Bridger Coal Co. with Pacific Power & Light Co.

SOURCE: Office of Technology Assessment
58 OTA SPECIAL REPORT

DuPont, the fourth largest lease holder has the largest number of leases and the most

reserves at risk of noncompliance: 31 leases with over 1 billion tons of reserves. Peabody

Holding Co., Texaco, Inc., Chevron Corp., and Broken Hill Proprietary, Ltd. all have at least

500 million tons of potentially noncomplying reserves. Most of Peabody’s at risk reserves are in

the uncertain compliance category because of insufficient production or difficulties in LMU

formation. Appendix B contains a brief summary of the holdings of each of the top 20 lessees

and their section 3 status.

Potential Effects of Section 3

Enforcement of section 3 will have a disparate effect on coal lessees. The provision would

penalize equally a lessee that has made aggressive efforts to develop and operate a mine on its

single lease but has fallen short of the needed production level at the time when section 3 is

enforced, and a lessee that has held many leases for almost 20 years and has made only minimal

effort and investments toward developing those leases. Section 3 will strike most heavily on

major oil companies and other lessees that are actively involved in the Federal onshore oil and

gas leasing program. (Offshore oil and gas leases are not affected by section 3.) Direct

acquisition of oil and gas leases by competitive bidding, the simultaneous leasing or “lottery”

system, and noncompetitive “over the counter” leasing would be cut off by section 3 for

noncomplying firms. These companies would have to rely on the assignment market and

operating agreements to acquire new Federal onshore oil and gas development rights. Many of

the same companies would be relatively unaffected by section 3 enforcement if it were limited

to coal, because of the large amount of undeveloped coal reserves they already hold under lease.

Section 3 enforcement will probably do little to force the sale or relinquishment of the

17 noncomplying leases held by individuals. Application of diligent production requirements or

higher lease payments are more likely to affect these leases.

Section 3 enforcement is also likely to affect the operations of the Federal oil and gas

leasing program to a greater extent than the coal program primarily because of the vastly greater

number of annual transactions in oil and gas leases. According to the annual publication, Public

Land Statistics, there were nearly 130,000 oil and gas leases in effect in 1982 (most recent data

available). Each year the Department handles about 45,000 assignments and transfers of

interests in oil and gas leases. Each new lease will require a determination that the applicant or

bidder and all related entities does not own or control any noncomplying Federal coal leases.

(See table 24.) In contrast, there are only 615 Federal coal leases and about 130 pending coal

preference right lease applications. On the average less than 20 coal lease transfers have been

handled in any year over the past decade.

The Department finalized guidelines to assist it in determining whether a coal lessee is in

compliance with section 3. However, it has not even proposed guidelines or regulations to

assure that section 3 determinations will be made for oil and gas and other mineral lease

transactions or that the Department will have the information it needs in a readily accessible

form so that the other leasing programs will not be adversely affected. OTA believes that the

Department could complete the necessary administrative steps to have an adequate enforcement

process for section 3 in place before August 4, 1986 if it so chooses, but it has yet to make such

a commitment.

Many of the major Federal coal lessees with potential section 3 disqualifications are also

involved in other mineral activities. For example, 15 of the top 20 reserve holders face

disqualification under section 3, if their pre-FCLAA leases are not brought into production.

(See table 23.) Many of these reserve holders are also involved to some extent in oil and gas
OTA SPECIAL REPORT 59

FEDERAL

Public Domain

Mineral Number of Total

TABLE 24

ONSHORE MINERAL LEASES

Acquired & Military Lands Total

Number of Total Number of Total

Oil & Gas

Coal

Tar Sand

Gilsonite

Phosphate

Potash

Sodium

Potassium

TOTAL

115,389

607

12

12

135

170

124

1

116,450

146,501,775

910,07 6

21,270

3,21 0

98,161

221,78 7

179,870

1,94 8

147,938,09 7

Source: United States Department of the Interior,

14,492 11,312,70 8 129,881

11 8,36 3 618

12

12

4 1,14 8 139

170

124

1

14,507 11,322,21 9 130,957

Public Land Statistics 1983.

157,814,48 3

918,43 9

21,27 0

3,21 0

99,30 9

221,78 7

179,870

1,94 8

159,260,31 6

development, although not all of them currently hold Federal oil and gas leases. If Peabody’s

noncompliance status is attributed to its major owners, the Williams Companies might be

foreclosed from Federal oil and gas leasing. The impact on noncomplying major oil and gas

companies of section 3 disqualification could be significant. It is likely that most of them

would divest themselves of their coal leases or coal operating divisions rather than forego the

opportunity of oil and gas leasing on Federal land. The overall impact on the nation’s oil and

gas industry of section 3 would likely be slight given the competitive nature of the industry, the

large number of companies with no involvement in Federal coal leasing, and the current oil

glut. Moreover, at least two major oil company lessees, Exxon Corp. and Mobil Oil Corp., have

no section 3 compliance problems and others are likely to resolve their compliance difficulties

and avoid disqualification.

It is likely that the immediate impacts on other leasable energy minerals, oil shale, tar

sands or gilsonite, would also be slight. No new oil shale leases could be issued to section 3

leaseholders, the near term impact of this restriction is probably nil since the oil shale leasing

program is dormant for lack of interest. There are only four Federal oil shale leases

outstanding. Leasing of tar sands or gilsonite deposits could also be affected. OTA has not

determined how many applicants for these leases also hold Federal coal leases.

The section 3 disqualification would also apply to leases of phosphate, potash, sulfur,

and sodium on Federal lands. Many of the nation’s major fertilizer mineral producers are also

Federal coal lessees. OTA has not analyzed the potential impacts on the issuance of fertilizer

leases of section 3 disqualification. We note, however, that there is currently significant idle

capacity in the domestic fertilizer industry according to the U.S. Bureau of Mines. A primary

means for acquiring these leases is through prospecting permit preference right leasing systems

which are similar to the system for coal leases that was repealed by FCLAA. Section 3, if it is

interpreted to bar issuance of proven preference right leases, could restrict issuance of such

fertilizer leases to section 3 leaseholders. Overall impacts on the fertilizer mineral industry of

such a restriction would likely be minuscule. Coal lessees with interests in phosphate

production include: Amax, Chevron, Mobil, W.R. Grace, Kerr-McGee, Montsanto, Occidental
60 OTA SPECIAL REPORT

and CFI Industries. Potash producers include Kerr-McGee, Amax, IBI, Inc., and Gulf Resources

& Chemicals. Kerr-McGee is a major sodium producer and Occidental Chemical is Frasch

sulfur producer. States which may have Federally-owned fertilizer mineral deposits include

Florida, Louisiana, Arkansas, North Carolina, Idaho, Wyoming, New Mexico, California, and

Utah.

As noted above, the Department has not yet indicated how it will enforce section 3 for

these other minerals. Only the regulations pertaining to coal leases now contain a provision

forbidding issuance of new leases (and assignments) to section 3 leaseholders. Enforcement of

section 3 is not, however, contingent on DOI’s action to promulgate regulations or instructions

for these minerals. In the oil and gas area, if the Department does not act, it can be expected

that the Department’s failure to demonstrate compliance with section 3 of FCLAA in issuing

new oil and gas leases will be come an additional grounds for challenging lease awards, even if

there is no apparent connection between the successful bidder or applicant and a noncomplying

coal lessee.

SPECULATION IN FEDERAL COAL RESOURCES

OTA’s 1981 report has often been cited by some as indicating that section 3 is no longer

needed as a deterrent to speculation in Federal coal reserves because “speculators” have largely

disappeared from the scene by the late 1970s. OTA disagrees with this interpretation because it

defines the problem of speculation too narrowly and ignores a major concern of Congress in

enacting section 3. It is true that one class of “speculators”, the individuals, land agents and

leasebrokers that were so active in the 50s and 60s in acquiring and then reselling Federal coal

leases, have now largely disposed of their holdings. But, the Congressional and public concern

over speculation in Federal reserves that prompted passage of FCLAA provisions was not

limited to the actions of these individuals. OTA finds that the discussion of the issue in the

1974 report of the Ford Foundation Energy Policy Project succinctly summarizes what was

perceived as the problem of speculation when FCLAA was passed. These observations are

probably still representative of today’s concerns, given recent changes in the Federal coal

management program.

Once the resource development rights are sold, the public, as consumer,

has an interest in the development of those resources for its use at an early

date and at a fair price. Assuming that energy prices are on the rise, if the

lessee is allowed to sit on his lease without developing it, it will be costly to

the public in two ways. The lessee will have “purchased” the development

rights (if, in fact, he paid anything) with a lower payment to the treasury than

at future prices; and by not producing his lease until some future time, he can

sell the resource back to the public at a higher price than if he develops it

immediate y. The legal system is designed to encourage early production of

the leased resources and thus discourage such private speculations. But

Interior Department policies are having the opposite effect, contrary to the

intent of the laws.

By not requiring the lessee to either develop his lease or surrender it, the

lessee, not the government is allowed to speculate with the public’s resources.

The nature of this speculation is quite simple. The resources are often leased

at no cost or low cost relative to their actual present value, The initial lease

terms are quite long and extensions are liberally granted. Holding costs in the

form of rentals and minimum royalties are extremely low. Requirements for

speed and diligence in developing the leased tracts are either lacking or not

enforced. And leases can be transferred freely from owner to owner with a
OTA SPECIAL REPORT 61

higher royalty to them than they pay the government. The existence of such

overriding royalties is in itself a good indication that leases have generally

been sold at less than their market value...

This type of private holding without development is possible because coal

leases are issued in perpetuity, although the terms and conditions are to be

reviewed every 20 years. The law States that “leases shall be for indeterminate

periods upon conditions of diligent development and continued operation of

the mine.” This provision can be abrogated only by a finding that it is in the

public interest to do so. Contrary to the clear legal intent, the Department has

allowed lessees to pay an advance annual “royalty” and has never enforced

diligency requirements. The “royalty” is really simply an annual rental which

for most leases is one dollar per acre...

The problem, then, is quite sweeping: extensive leasing, combined with

insufficient competition, little or no understanding of the value of the

resources being leased, and no assurance of development. The public treasury

does not receive a fair return for its resources nor does the public receive the

energy from the resources under lease. The lease holders can sit on, or trade,

There are numerous references in the legislative history of

entry of large energy conglomerates, big oil, and coal companies

the fear that they would sit on their Federal reserves waiting for

mining them to meet domestic energy needs. Since 1976, the holdings of coal leases by oil

majors and other large firms have increased. Concerns over the concentration of holdings by

these companies and their effect on competition in the coal industry are not now as great as

they were in 1974-78. Since 1976 the amount of Federal coal production by these lessees has

also grown significantly providing evidence that many of this group are actively mining and

selling coal and not sitting on large amounts of reserves awaiting future price increases. The

coal mining subsidiaries of major oil companies are now among the largest coal producers in

the West. Market expectations have also changed and coal demand has grown more slowly than

projected in some high range forecasts. However even in 1985, billions of tons of leased

Federal coal remain undeveloped. Oil majors and other energy conglomerates control a

significant share of these nonproducing coal leases and for the next 10 years, section 3 is

effectively the only production requirement imposed on these leases.

Whether the holding of nonproducing Federal coal leases is undesirable speculation from

a policy standpoint is not a matter on which there is universal agreement. There are those who

believe strongly as a matter of policy that Federal resources should be held only for production.

There are also those who do not view speculation as an unwelcome aspect of Federal mineral

policy. For example, the Fair Market Value Commission Report quoted the opinion of one of

its witnesses on the issue:

Speculators, far from being a personification of evil, in fact serve

important social functions in that their actions indirectly provide useful

information in the market, and smooth the transactions among inconstant

fluctuations of supply and demand. Speculation which is in essence the

5 See Energy Policy Project of the Ford Foundation, A Time to Choose: America’s Energy Futurel (Cambridge, Mass.:

Balinger Press, 1974) at 289-291.
62 OTA SPECIAL REPORT

conservation of resources until their value in production is maximized, is

actually legitimate economic behavior that serves the interests of society as

well as the resource owner.6

The quote above demonstrates that when people talk about speculation and speculators, they

often do not share the same definitions of such behavior. The first part of the quote above

more accurately describes the activities of lease brokers, who played a historic role in coal

leasing and now have largely disappeared. In the second part of the quote, the term resource

owner most likely refers to the coal developer lessee and not the Federal Government.

The experience of the “energy shortage” and OPEC threats of the mid- 1970s, have given

away to the current situation of coal gluts and oil gluts. The coal markets have reverted from

the perceived seller’s market of the mid- 1970s, which saw abrupt price increases and a scramble

for long term contracts, to its historical buyer’s market condition of substantial overcapacity

where consumers are now seeking to avoid long term contract commitments. Most forecasts call

for only modest increases in coal demand for two next decades. Few coal industry analysts are

predicting any real price increase in coal due to mining out of available low cost reserves until

the late- 1990s, if then.

There is more coal under lease than can be sold or burned within the market areas

served by Federal coal within the next two decades and beyond barring major realignment in

power generation requiring massive investment in powerplant and synfuels plant construction.

For various policy and other reasons, largely the desire to promote competition among potential

suppliers and the necessary, but at times unbridled, optimism of coal companies in their reserves

acquisition phase, it is likely that the amount of Federal coal under lease will exceed by a

significant margin, the amount of coal expected to be needed by consumers. Many lessees will

be unable to comply with lease development and production requirements despite even their

most diligent efforts at securing purchasers for their coal. Allowing lessees to retain coal leases

indefinitely without development in the same manner that companies might, for example, hold

the coal reserves that they own outright, would be equivalent for policy purposes to transferring

ownership of the reserves to private parties and runs contrary to the longstanding Federal policy

against disposal of public coal resources. For this reason, the Federal leasing program will need

some mechanism to determine which leases can continue to be held, and for how long, and

which must be returned to the government for possible resale to others. Whether this

mechanism will be section 3, the current diligence system, or some other provision is a matter

for congressional consideration.

WHAT IS THE REVENUE GAIN OR LOSS TO THE FEDERAL GOVERNMENT FROM

ENFORCEMENT OR REPEAL OF SECTION 3 WITHOUT PAYMENT REQUIREMENTS?

In the request letter to OTA, Congressman Weaver inquired whether the revenue impacts

on the Federal Government from enforcement or repeal of section 3 could be estimated.

Following a review of likely impacts, and discussions with Committee staff and others, OTA has

concluded that it is neither useful nor practicable to to calculate the value of such gain or loss

because of the countervailing effects of the impacts of section 3 and the extensive assumptions

of fact that would have to be made.

However, we can discuss the issue in a more general manner. If section 3 is enforced,

leases will be relinquished, the government will lose annual rental payments, and possibly

6

See Statement of Daniel E. Klein, Commission on Fair Market Value Policy for Federal Coal Leasing: Report of the

Commission. February 1984, at 296.
OTA SPECIAL REPORT 63

royalties from leases that might have been mined. If the relinquished lease were resold later

and brought into production, there might be an intervening revenue loss. On the other hand,

any loss of revenues from relinquishments is offset by the revenues that might be gained from

bonuses on resale of these leases and higher post- FCLAA royalties on production. (Bonus

revenues, even if only at the current regulatory minimum bid level of $100 per acre would be

significantly higher than the $1 to $3 per acre annual rental now paid on nonproducing leases).

In addition to the financial benefits of enforcement, there are some general public policy

benefits to be gained in limiting the potential for nonproductive, speculative holding of Federal

resources and encouraging Federal lessees to develop their leases to increase competition in the

coal markets.

OTA does not believe that all of the leases that might eventually be relinquished would

be reoffered in the next 10 to 15 years, particularly those outside of currently producing coal

fields and those with poor quality reserves. It is unlikely that there would be enough interest in

them if payment of fair market value were required. We also doubt that all of the

noncomplying section 3 leases will be relinquished. We believe it is highly likely that lessees

will find buyers for the better quality tracts and in some cases with little delay in the tract’s

overall development schedule. In this respect we agree with the conclusions of the Report of

the Commission on Fair Market Value Policy for Federal Coal Leases that one of the main

impacts of section 3 could be the creation of a new class of leaseholders. However, OTA

believes that it is more likely that leases will be purchased by firms that are already active in

western coal mining that either have no other Federal leases or are in compliance with section 3

and thus unaffected by the Department’s ban on assignments to noncomplying lessees. (The

Commission also noted that this impact might be beneficial to consumers because the new

lessees might have lower barriers to entry because of lower prices paid for leases that had to be

sold to avoid a section 3 penalty.7 We are not certain that the impact of section 3 is necessarily

lower prices for the Federal leases that are transferred privately, than leases sold by the

government by competitive bid.)

If the section 3 noncompliance leases with favorable development potential are in fact

transferred rather than relinquished, there might be little direct loss to the Federal Government

because rentals would continue and royalties would be paid on production. It can be argued

that if the lease were assigned rather than relinquished, that the coal might be mined at the

lower pre-FCLAA royalty rates. OTA believes that given the three to seven years needed to

bring an unpermitted lease into production, that it is likely that any period during which lower

royalties would be paid would be short because at least 435 of the 535 pre-FCLAA leases are

scheduled for readjustment by 1991. OTA notes that there is one major exception to this

assumption. Between 1976 and present, there were an undetermined number of pre-FCLAA

leases that the Department failed to readjust on time, or that had readjustments overturned on

appeal and were not further contested by the Department. These unadjusted leases will carry

the pre-FCLAA royalty rates and no regulatory diligent production requirements for 10 to 20

more years. This loss however is not due to section 3.

The repeal or modification of section 3 without requiring a significant payment

obligation on nonproducing leases as the price of relief would represent a lost opportunity for

generating additional revenues to the Government from pre-FCLAA leases. Does repeal create

a windfall for the lessee? To find such a windfall, since there is no direct financial transfer to

the lessee, requires that one assume that repeal makes the leases more valuable, but this would

be hard to measure. One might assume that the effect of repeal would be to confer a gain on

the lessee of the amount that the value of the lease might have been discounted to reflect the

‘Report of the Commission on Fair Market Value Policy for Federal Coal Leases, at 303-304.
64 OTA SPECIAL REPORT

risk that it would lost for nondevelopment after 10 years. Such a theory, if valid in practice,

would be more directly applicable to the Department’s 1982 relaxation of diligence regulations

for pre-FCLAA leases that previously faced possible cancellation in 1986 for nonproduction,

Indeed the Commission on Fair Market Policy for Federal Coal Leases found such a windfall

situation:

The Commission also found that the 1982 extension of diligent

development requirements for pre-1976 leases conferred a windfall gain on

these lease holders that was unnecessarily generous. The Interior Department

decided to allow pre-1976 lease holders to retain their leases in order to

maintain an ample supply of Federal coal reserves under lease. This approach

was neither equitable to the Government nor economically efficient.

An alternative strategy would have been to attempt to cancel undeveloped

pre-1976 leases (at their next adjustment date) and replace them with newly

issued Federal leases. This approach might have generated substantial new

revenues to the Government, instead of a large windfall gain for existing

lessees. Assuming reasonable tract selection efforts, it might also have placed

new, higher quality Federal tracts under lease, replacing tracts leased 20 or

more years ago in a haphazard way. Such a strategy might have achieved

environmental as well as economic benefits in the selection of tracts under

lease. 8

The Commission (two commissioners voting, three abstaining) recommended adoption of a

system of gradually escalating advance royalties to be imposed on pre-FCLAA leases beginning

at the next readjustment and on post-FCLAA leases as a means of extending leases beyond the

10-year statutory diligent development deadline. The Commission also was concerned that

allowing such extensions for new leases issued between 1976 and any Congressional enactment

of such an advance royalty scheme might also confer a windfall gain on those lessees who might

have discounted their winning bids because of the inflexible 10-year diligence period.9

Section 3 does not deprive a lessee of the lease as a penalty, so any discount for the risk

of nondevelopment for section 3 purposes is likely to be small. Moreover, the lessee can be

purged of the section 3 disqualification by selling the lease, perhaps even at a profit. The lessee

may relinquish the lease only as a last resort.

We think that it is unlikely that lessees in fact have discounted the value of their leases

for the potential impacts of either section 3 or section 7 (or the 1976 diligence regulations). For

lessees facing a section 3 disqualification in 1986, the largest group of noncomplying lessees,

such discounting is particularly unlikely since they would have to foresee events occurring after

they acquired the leases in order to reduce the amount they paid for them originally. It is also

improbable that these lessees would also have foreseen the full extent of applicability of section

3. For leases sold or transferred after passage of FCLAA, there does not appear to be any

discernible pattern of discounting for future nonproduction penalties in reported private lease

sales. The reasons for this may be:

1. That the lessees fully expected to be able to mine or resell the reserves within the

time allotted,

2. The reserves were already undervalued when they bought them, and/or

8 Id., at 301.

9 Id. at 198.
OTA SPECIAL REPORT 65

3. That the lessees did not expect that either Congress or the Department would actually

enforce section 3 or any diligence provisions applicable to the leases.

Although the loss may be impracticable to measure and may not be reflected in any

discounting of the amounts paid for Federal coal leases, it is clear that the easing of

development requirements confers something of value on the lessee. The lessee is permitted to

keep a coal lease that he might otherwise have lost through revocation, relinquishment, or

divestiture. A private lessor might seek some additional payment or other undertaking from the

lessee as the price of extending or altering their lease arrangement. The most comparable

private transaction would be delay rentals or other payments for the privilege of extending a

lease without production.

The Market Outlook for Federal Coal

To support proposed changes in the current production requirements for Federal coal

leases, it has been suggested that the market outlook for Federal coal has changed significantly

since passage of FCLAA in 1976. Because actual demand has not grown as rapidly as projected

in the mid- 1970s, according to this argument, the impacts of enforcement of production

requirements may be more punitive than anticipated by Congress in 1976 and some legislative or

administrative relief is warranted. Recent years have seen a scaling back of coal demand

projections for the next decade. Are estimates of probable future coal demand now

substantially lower than forecast when FCLAA was under consideration, thus undercutting some

of the concerns that lead to the adoption of FCLAA’s stringent production requirements? To

determine what the market outlook for Federal coal was in 1976, OTA reviewed legislative

history materials and other published sources for information on expected demand for coal from

Federal leases. We also looked at several later coal demand and production projections for the

Federal coal leasing program and compared them with actual production for 1980 and 1984, and

estimated 1985 production. The results of this exercise were inconclusive. Total U.S. and

western Federal coal production have not in fact grown as dramatically as predicted in some

mid- 1970s high range forecasts. However, actual coal production does match reasonably well

with some of the mid-range coal demand forecasts available to Congress in 1974-1976 and

there, nevertheless, has been a substantial increase in western Federal coal production over the

past decade.

Table 25 summarizes some of the major forecasts for total U.S. coal production

published in 1974 to 1976. Forecasts cited in House and Senate reports on FCLAA are marked

with an asterisk. All projections show anticipated increases from the 1974 actual production of

602 million tons. The 1980 mid-range projection ranged from 665 to 950 million tons. Actual

1980 coal output was 824 million tons, slightly above the midpoint in the forecast ranges. The

1985 forecasts show a much larger spread in the mid-range forecasts: from 820 million to 1,500

million tons. The projections include both supply forecasts (what could be produced if there

was sufficient demand) and consumption forecasts (what actual coal use or demand was likely

to be) under different assumptions about the rate of demand growth and the energy supply mix.

For example, the Federal Energy Administration (FEA) developed both supply and demand

forecasts for the Project Independence Blueprint Report, (P.I.B.), but did not fully integrate the

two forecasts. The P.I B. forecasts assumed that nuclear power would supply a far greater

portion of electricity demand than proved to be the case. When only the 1985 demand based

projections are considered, the mid-level range is narrower (820 million to 980 million tons).
66 OTA SPECIAL REPORT

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OTA SPECIAL REPORT 67

Total 1985 production is now projected by the Energy Information Administration (EIA) to be

about 894 million tons, and is also at about the mid-point of the projected range.l0

Table 26 summarizes forecasts for western and western Federal coal production

published in 1974-1976. Table 26 shows projected production by State from the same

projections and also includes for comparison several more recent projections used in setting

regional leasing targets for the Federal coal management program. Actual 1980 production in the

western coal States (Northern Great Plains and Rocky Mountain Coal Regions) of 196.4 million

tons exceeded the level forecasted in the final Federal Coal Leasing Program EIS by 66.4 million

tons. DOI forecasts of 1980 Federal coal production ranged from 43.0 to 125.7 million tons.

Actual 1980 western Federal coal production of 68.8 million tons was in the lower end of this

range.

The P.I.B. 1985 supply forecasts for western (Northern Great Plains and Rocky

Mountain) coal regions ranged from 194.6 million tons under a business as usual scenario to

380.4 million tons with accelerated development. A 1976 FEA update for congressional

testimony estimated 345 million tons for the same region in 1985. Actual 1984 production of

228.8 million tons was 34.6 million tons above the business as usual forecast but well below the

high or accelerated development forecast. The EIA now projects that total 1985 production in

the region will be about 260 millions tons.

Actual Federal production for FY 1984 of 103 million tons was at about the midpoint

between the 1975 FEIS estimates, and quite close to the projections of 114.2 million tons in

DOI’s 1976 testimony. The State forecasts shown in table 26 are very close to actual 1984 State

Federal coal production. The DOI’s 1975 projections also match 1984 actual production closely,

except for Colorado and Utah where production is much lower than forecast in 1975.

In summary, actual U. S., western and Federal production in 1980 and 1985 are

reasonably close to the mid-level forecasts available to Congress when FCLAA was under

consideration. After 1976, the forecast levels of western and Federal coal production were

higher reflecting the anticipated impacts of higher world oil prices and Federal energy policy

initiatives promoting expanded use of coal over other fossil energy sources. The Federal coal

management program EIS published in 1979 and later DOE projections shown in table 27 reflect

these expectations. The 1979 EIS projected 1985 U.S. production of over 1,116 million tons,

higher than the 1974 P.I.B. high consumption forecast for the same year (See table 25). Midlevel western demand was projected at 400 million tons in 1985, 20 million tons higher than the

1976 P.I.B. accelerated development scenario and more than twice the P.I.B. business as usual

forecast.

Since 1980, however, most energy demand forecasts have been scaled back. There have

been dramatic adjustments downward of the DOE projections used to establish coal production

goals for deciding how much coal should be offered for lease in Federal coal regions. Table 28

shows the changes in projected total U.S. and western demand for 1990 between the 1979 EIS

and the 1985 Draft Supplemental EIS for the coal management program. The most recent 1990

mid-level forecast is 30 percent lower than the 1979 forecast. For 1990, the FEIS projected

national production ranging from 1.1 billion to 1.85 billion tons and western production ranging

from 382 million to 937 million tons. The 1985 draft environmental statement for the Federal

coal management program, in contrast, projects national production in 1990 ranging from 1.03

billion to 1.1 billion tons and western production at 300 to 340 million tons under both its

10 U.S. Department of Energy, Energy Information Administration, Quarterly Coal Report, April-June 1985, (Washington,

DC: U.S. Government Printing Office, October 1985), table 1.
68 OTA SPECIAL REPORT

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SELECTED FORECASTS FOR

TABLE 28

WESTERN COAL PRODUCTION 1980-95

TOTAL WESTERN PRODUCTION *

(Millions of Tons)

FORECAST 1980 1985 1990 1995

DOE Coal Production Goals (1981)

Low .- 363 421 550

Medium -- 382 565 909

High . . 435 727 1274

DOI Coal Leasing FEIS (1979)

Low . . 295 361 - -

Medium - . 386 653 - -

High . . 433 916 . -

DOI Coal Leasing FEIS Supp.(1985)

Proposed Action

Lou - . - . 287 334

Mediun . - - . 305 355

High . . . . 316 399

No New Federal Leasing

Low . . . . 288 335

Medium . . . . 304 355

High . . . . 316 398

EIA 1985 Annual Outlook . - 258 317 384

DRI Coal Review (Sumner 85) . . 253 320 378

Actual Production 219 258(est. )

NOTES:

Western Production generally includes the Northern Great Plains, Rocky

Mountain, and Southwest Coal Production Regions and is roughly

equivalent to the Federal Coal Production Regions for Colorado, Montana,

New Mexico, North Dakota, Utah and Wyoming.

SOURCES: U.S. Department of Energy, The 1980 Biennial Update of

National and Regional Coal Production Goals for 1985. 1990 and 1995.

March 1981.

U.S. Department of the Interior, Bureau of Land Management,

Final Environmental Impact Statement Supplement for the Federal Coal

Management Program, October 1985.

proposed action and “no new leasing” scenarios. For the year 2000, its projections range from

1.35 to 1.8 billion tons nationally and 385 million to 615 million for western States.11

Thus, the projections about future coal demand that were available to the Congress and

others in 1974-76 displayed a wide range of estimates. Some of these projections appear to

have significantly underestimated western coal production in 1985, while overestimating national

coal production. Other high-range forecasts, as one might expect, substantially overstated actual

growth in coal demand. Whatever the differences in outlook, it was clear in 1976 that coal

production would have to expand to meet even modestly increased national energy needs and

that production from the currently idle Federal coal reserves could aid this growth.

11 United States Department of the Interior, Draft Environmental Statement for the Federal Coal Management Program,

(Washington, DC: U.S. Government Printing Office, October 1985) at 90.
OTA SPECIAL REPORT 71

OTA has previously written and testified concerning the demand for coal and the

production potential of western Federal coal leases, The extent of market demand, not the

availability of minable leased reserves will continue to determine how much coal is produced

from Federal coal leases. In the next 10 years, as in the past, the potential production capacity

of Federal coal leases greatly exceeds anticipated annual demand for coal in western Federal

coal regions. The potential for increased coal production from Federal coal lease is substantial.

In our 1981 report OTA found that mines with Federal coal could produce between 410 million

to 550 million ton of coal per year in 1991 if there were sufficient market demand.

Uncertainties in coal demand, rail construction, and synfuels development accounted for the 90

million range in potential 1991 production capacity. In 1981 there was over 100 million tons of

unused production capacity in existing mines on Federal leases. Over 75 million tons of this

overcapacity was in the Powder River basin alone. With the issuance of new competitive leases

and preference right lease applications (with reserves of between 5 and 7 billion tons), the total

annual production capacity of Federal coal leases in the 1990s could increase by 75 to 115

million tons in the 1990s.

In 1985 the market outlook for western coal is not nearly as optimistic as projected in

the late 1970s. Figure 5 compares two DOE 1990 mid-level demand forecasts for the Fort

Union coal region (North Dakota and eastern Montana), the Powder River basin (southeastern

Montana and northeastern Wyoming), southern Wyoming, Colorado, Utah, and New Mexico.

The first was made in 1980 in preparation for the 1981 Green River-Ham’s Fork Federal coal

lease sale and the second was made in 1985

Coal Management Program. Total forecasted

in 1990. All regions and States, except the

expected demand.

What happened? Various factors have

for DOI’s draft supplemental EIS on the Federal

demand was halved from 543 to 278 million tons

Fort Union region showed a substantial drop in

contributed to the declines shown in the figures.

There has been a steady downward trend in forecasted electrical growth rates during the

past ten years. In 1974 the utility industry expected annual growth rates of 7.4 percent. By

1984 annual growth in electricity demand had dropped to 2.5 percent. The demand for western

coal is highly dependent on the electrical growth rate because about 90 percent of western

production coal is used by electric utilities. Most of the decline in figure 5 is a result of this

factor.

The low sulfur content of western coal is no longer a major factor promoting an

increase in the West’s share of total coal demand. There are various reasons for this. Scrubber

and sulfur removal technologies are sufficiently advanced that utilities are no longer as reluctant

to use them with local high sulfur coals. Boilers designed for mid-western and eastern coal

must be derated or experience deterioration of heat rate when coal with lower heat content,

such as that from the Powder River basin is burned,

Transportation costs from western coal regions to Midwestern and southwestern

consumers remain high. Higher transportation costs resulting from rail deregulation have hurt

western coal more than eastern and Midwestern coal because transportation costs are a high

percentage of delivered cost of western coal.

Moderately stable oil and gas prices have reduced the rate of industrial boiler

conversions and eliminated any significant coal demand for synthetic fuels production in the

near future. Also, demand for western coal for export to Pacific Rim countries has not been as

significant as expected in the early 1980s.
72 OTA SPECIAL REPORT

3 5 0

3 0 0

2 5 0

2 0 0

1 5 0

1 0 0

5 0

0

Figure 5.

Forecasted 1990 Demand

295

REGIONAL AND STATE PRODUCTION, CAPACITY AND DEMAND

Figures 6 through 11 show actual production in 1980 to 1984, permitted mine capacity,

and projected production from 1985 to 2000 for the major western coal regions and States. The

production capacity includes Federal and non-Federal mines with approved OSM permits and

takes into account reserve depletion of Federal mines. The projected demand uses the DOE

mid-level forecast (proposed action) for the years 1990, 1995, and 2000 in the draft

supplemental EIS for the Federal coal management program. Actual demand for the period may

well be lower, but is unlikely to be higher than shown.

Coal production has grown steadily in the Fort Union region (figure 6) with 99

percent of this coal from North Dakota mines. Projected demand exceeds capacity in

1995, but State enforcement of prevention of significant deterioration air quality

standards may limit actual production to approved capacity or lower.

Coal production in the Powder River region has also grown steadily and is

expected to continue at about the same rate to the year 2000 (figure 7). Approved

capacity currently far exceeds demand for this period, but gradually declines to an 18

percent surplus in the year 2000.
OTA SPECIAL REPORT 73

Southern Wyoming has experienced a substantial drop in coal production in the

last four years (figure 8). At forecasted levels, demand will exceed approved capacity in

1997.

Coal production in Colorado shows a modest decline in recent years (figure 9)

and is expected to grow modestly during the next fifteen years. Approved capacities are

well above forecasted demand until the late 1990s.

The level of coal production in Utah has varied in recent years and demand is

expected to grow at rates similar to the 1980 to 1981 period (figure 10). Approved

capacity is well above forecasted demand through the early 1990s and has a surplus of

12 percent in the year 2000.

New Mexico has experienced the greatest growth in coal production of the

western coal States (figure 1 1). Demand is expected to grow at a similar rate and

exceeds approved capacity in 1997.

Figure 6.

Fort Union Region: Capacity and Production 1980-2000
74 OTA SPECIAL REPORT

Figure 7.

Powder River Basin: Capacity and Production 1980-2000

3 5 0

3 0 0

2 5 0

1
OTA SPECIAL REPORT 75

Figure 9.

Colorado: Capacity and Production 1980-2000

1980 1985 199 0 1995
76 OTA SPECIAL REPORT

4 5

4 0

3 5

30

15

10

5

0

Figure 11.

New Mexico: Capacity and Production 1980-2000

198 0 198 5 199 0 199 5 200 0
CHAPTER 4

LEGAL AND LEGISLATIVE ANALYSIS:

SECTION 3 AND OTHER PRODUCTION REQUIREMENTS FOR

FEDERAL COAL LEASES

Federal coal leases impose various conditions on the lessee in return for granting of

exclusive rights to mine and sell coal resources owned by the United States. This chapter

analyzes the lease development and production obligations imposed under Federal law and how

they have been interpreted and applied to Federal coal leases. The chapter concludes with an

examination of several alternative mechanisms for encouraging timely production of Federal

coal.

What Is Section 3?

Section 3 of the Federal Coal Leasing Amendments Act of 1976 (FCLAA) added a new

section 2(a)(2)(A) to the Mineral Leasing Act of 1920 (MLA):

The Secretary shall not issue a lease or leases under the terms of this Act to

any person, association, corporation, or any subsidiary, affiliate, or persons

controlled by or under common control with such person, association, or

corporation, where any such entity holds a lease or leases issued by the United

States to coal deposits and has held such lease or leases for a period of ten

years when such entity is not, except as provided for in section 7(b) of this

Act, producing coal from the lease deposits in commercial quantities. In

computing the ten-year period referred to in the preceding sentence, periods

of time prior to the date of enactment of the Federal Coal Leasing

Amendments Act of 1975 shall not be counted.1

The phrase “this Act” is defined in FCLAA as the MLA. 2 Section 3 was intended t.

prevent a coal lessee, and any affiliated entities, from obtaining new leases if the coal lease has

been held for 10 years and is not producing in commercial quantities. The first section 3

disqualifications were to be effective on August 4, 1986, however language added to the Fiscal

Year 1986 Continuing Appropriations Act passed at the close of the 1st Session of the 99th

Congress delayed the effect of section 3 to December 31, 1986.3

.

1 Public Law 94-377, 90 Stat. 1083, Aug. 4, 1976; 30 U.S. C. 201(a)(2)(A). The Act was passed in August, 1976, as the

“Federal Coal Leasing Amendments Act of 1975.” This overnight was corrected in Public Law 95-554, sec. 8, 92 Stat. 2075,

Oct. 30, 1978, so that FCLAA is now properly cited as the “Federal Coal Leasing Amendments Act of 1976.”

2

See 90 Stat. 1083: “(b) except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed

in terms of an amendment to, or repeal of, a section or other provision of the Mineral Lands Leasing Act, the reference shall

be considered to be made to a section or other provision of the Act of February 25, 1920, entitled ‘An Act to Promote the

Mining of Coal, Phosphate, Oil, Oil Shale, Gas, and Sodium on the Public Domain’ (41 Stat. 437).” As a result, section 3 of

FCLAA is codified as follows: “The Secretary shall not issue a lease or leases under the terms of this chapter... except as

provided for in section 207( b)... prior to August 4, 1976.” See 30 U.S.C. 201(a)(2)(A) (1982). Section 201 (a)(2)(A) is found

in Chapter 3A, Title 30 of the United States Code which is codification of the Mineral Leasing Act of 1920, 30 U.S. C. 181 et

seq.

3 H.J. Res. 465, 99th Cong., 1st sess., Dec. 19, 1985, Public Law 99-190. The text of the amendment extending the section 3

deadline is found at 131 Cong. Rec. H12,865, Dec. 19, 1985.
78 OTA SPECIAL REPORT

LEGISLATIVE HISTORY OF SECTION 3

The legislative history indicates that the purposes of section 3 were:

1. to deter speculation in Federal coal leases;

2. to promote the transfer of nonproducing leases back to the Government or to

companies with the resources and capability to mine them;

3. to limit the control of nonproducing Federal coal reserves by Iarge energy companies

and conglomerates; and

4. to back up the diligence policies of section 7 and the 1976 regulations that required

existing leases to begin producing within ten years.

In the Senate debate on passage of FCLAA, Senator Metcalf, then Chairman of the

Senate Committee on Interior and Insular Affairs, described how section 3 and section 6 of

FCLAA (which amended section 7 of the MLA) would work together:

S. 391 states in section 6 that “any lease that is not producing in commercial

quantities at the end of 10 years shall be terminated.” Under the provisions of

Section 3, the Secretary could not issue anew lease to any party holding such

a nonproductive lease, the 10 year period to be computed from the effective

date of the act.

These two provisions are meant to guarantee diligent development and an

end to speculative holding of leases. Contrary to what the Department claims,

the two provisions are entirely consistent. The Secretary would simply be

precluded from issuing any new lease to a party which had failed to produce

coal in commercial quantities--as defined by regulations--within 10 years

after the enactment of the bill. Such party would be required to divest itself

of the unproductive lease before it would become eligible for a new lease.

The bill would thus make it possible for other operators to bid for the

nonproductive lease and undertake to develop the lease and produce coal in

keeping with the intent of the legislation. In this way, over time, the large

proportion of idle leases which have been held, by the Department’s own

admission, for purely speculative reasons, will eventually be brought into

production and royalty payments commensurate with the value of the coal will

begin flowing into the public treasuries.4

The section 3 disqualification strikes hardest at large oil and gas companies, coal

companies, and other resource extracting conglomerates. The report, floor debate, and hearings

on FCLAA are replete with expressions of concern by members over the concentration of

holdings and speculation in Federal coal leases by these entities. The House report cites the

conclusions of the Ford Foundation’s Energy Policy Project.

The coal leasing program presents a clear pictures of private speculation at the

public expense. In the past decades, but particularly during the 1960s, vast

amounts of Federal coal passed freely to private ownership under situations of

little or no competition and extremely low payments.5

4

122 Cong. Rec. 19,377, June 21, 1976.

5 H. Rpt. 94-681, 94th Cong., 1st sess. at 11, (1975), citing Energy Policy Project of the Ford Foundation, (1974). A Time to

Chose: America’s Enerm Future.
OTA SPECIAL REPORT 79

Representative Young of Georgia opened the House discussion of FCLAA by describing

what he saw as the basic thrust of the legislation:

This bill is designed to encourage coal production on Federal lands... Hopefully

it will end the speculative holding of leases by requiring that coal is actually

produced where leases have been obtained. In the past, coal operators --

including some of the giant mining and oil companies -- have gotten leases on

these Federal lands and held them without actually mining the coal, just

waiting for coal prices to rise to a level where huge profits would be assured.

In effect, these companies have sat on large supplies of coal in a period when

the consuming public is told we have an energy shortage.6

These comments were echoed in other congressional criticism of the speculative activities

of lease brokers, and other individuals and companies that held coal leases for resale and did not

mine coal. Representative Seiberling summarized some of the concerns over the effects of coal

lease ownership trends on energy competition:

Among other industrial giants, the big oil companies have been moving

into coal in a very heavy way. As a matter of fact, over 30 percent of all the

coal reserves in this country today are controlled by the oil companies.

Incidentally they already control over 60 percent of the Nation’s uranium

reserves. Many other huge conglomerate corporations have moved into coal,

and they hold a great many leases that have already been let on Federal coal.

As a matter of fact, . . . 5 of the 15 largest lessees of Federal coal are oil

companies, and some of the others are huge corporations such as Kennecott

Copper, which also owns Peabody Coal, the biggest producer in the United

States . . .

Therefore Mr. Chairman, we not only have the problem that many of

these huge companies have gotten leases and then sat on the coal waiting for

the price to rise, I suppose; but we have the problem of preventing

monopolistic control of the Nation’s coal reserves. 7 (The information

referenced in the quote is reproduced as table 29.)

Many provisions of FCLAA were expressly intended to counteract the patterns of

nonproductive lease ownership and concentration that had developed. FCLAA imposed a 10

year diligent production period on all new leases and provided that no lease could be extended

beyond its initial 20 year term unless it was producing in commercial quantities. Other reforms

include the elimination of preference right leasing, the establishment of a higher minimum

royalty, the use of deferred bonus bidding, and the authorization of special leases for public

bodies. (The higher royalty would have the effect of lowering the bonus payment required to

constitute fair market value to reduce the entry cost for smaller companies and other new

competitors in the Federal coal leasing.)

6See 122 Cong. Rec. 484, Jan. 21, 1976.

7

122 Cong. Rec. 493, Jan. 21, 1976.
80 OTA SPECIAL REPORT

Table 29

The Top 15 Federal Leaseholders 1975

(Federal and Indian Lands)

Federal Indian Total

Kennecott Copper Co.:

Peabody Coal Co------------- ---------------------------- ----- 81,981,29 100,345 ----._--------

Kenn. Coal Co---------------- ----------------------------- - 2,736.14 ----------------------------

2.

Total ------------------------ ---------------------------- 84,717.43 ----------------- 185,062.43

Continental Oil Co.:

Consolidation Coal ------------ ----------------------------- - 45,452.12 ----------------------------

1/2 of Consol and Kemmerer.------------ --------- ----------- 9,372.97 ----------------------------

1/2 of Consol and El Paso ------------------------ ------------------------- 20,143.5 --------------

3.

4.

Total ----------------------- ------- ----------------- _ 54,825.09 -------- ------ 74,968.59

Utah International --------------- --------------------------- --- 24,229.61 31,416 55,645.61

Pacific Power & Light:

Pacific Power & Light --------------- ---------------------- - 35,078.15 --------------------------- -

Decker --------------------- ---------------------------- - - 13,610.31 --------------------------- -

5.

6.

7.

8.

11.

12.

15.

Total ---------------------- ---------------------------- - 21,239.97 ------------- - 21,239.9 7

Bass --------------------- --------------------------- -------- - 20,700.71 ------------- - 20,700.7 1

Source: H.Rpt. 94-681, 94th Cong., lst sess. (1975), at 16
OTA SPECIAL REPORT 81

Does Section 3 Apply to Issuance of All Onshore Mineral Leases?

By its plain language, section 3 forbids the issuance of any lease under the MLA for

coal, oil, gas, oil shale, gilsonite and the fertilizer minerals ( sodium, phosphate, potassium, and

sulfur). The legislative history is vague on section 3’s applicability to other minerals, but it

does not contradict this interpretation of the plain meaning of the statutory language. The

report and floor debate say only that the nonproducing leaseholder and any affiliates shall not

be issued “leases” -- The term leases is not modified by the word “coal” as in this discussion in

the section by section analysis of the house report:

This amendment would bar the issuance of new leases to any individual or

corporations that have held a lease for a period of 15 years, beginning on the

date of enactment of the Federal Coal Leasing Amendments (Act of 1975,

without producing coal therefrom.8

Elsewhere in discussing how FCLAA would address the problem of speculation in Federal

coal lands the report says:

The problems of speculation are addressed directly by H.R. 6721, which

requires termination of any lease which is not producing in commercial

quantities at the end of 15 years. Old leases (those existing on the date of

enactment of the 1975 Act) would be exempt from this provision, except to

the extent it might be made applicable upon readjustment of lease terms, but

the lessees would be prohibited from acquiring any new Federal leases should

they continue to hold old leases 15 years after enactment without therefrom.9

The concept of stimulating development of existing Federal coal leases by restricting the

availability of new leases to lessees who did not produce coal from the leases they already had

was advanced in the March 1975 testimony by the National Rural Electric Cooperative

Association.10 Their original proposal would have immediately prohibited the holding, owning,

taking, or controlling or issuance of new leases to any lessee and related entities that already

had “an economically developable lease or leases” and was “not producing coal from such

deposits in substantial quantities or where the entity does not establish, to the satisfaction of the

Secretary, that reasonable, but not speculative, assurances exist that coal will be produced in

substantial quantities from such deposits within the following 5 years, or such longer time as

established by the Secretary for good cause shown.”11

A similar, but not as stringent approach, was adopted in H.R. 6721, introduced May 6,

1975:

No person... shall take, hold, own, or control any lease issued by the

Secretary under the terms of this Act, nor shall the Secretary issue a lease or

8H. Rpt. 94-681, at 22. Note: FCLfi was amended on the house floor to cut the production period for compliance with the

section 7 diligence provision and section 3 from 15 to 10 years, aa had been recommended by the Subcommittee on Mines

and Mining.

‘H. Rpt. 94-681, at 15, emphasis added.

10 Statement of D avid B. Graham, National Rural Electric Association in Hearings on H.R. 3265 fFederal Coal Leasin~

Before the Subcommittee on Mines and Minin~ of the House Committee on Interior and Insular Affairs, 99th Cong., 1st sess.

(1975), at 128, 133. Western Fuels Association, Inc., and the American Public Power Association also endorsed the

proposal.

1lId.
82 OTA SPECIAL REPORT

leases to any such person.. where such entity

the United States to coal deposits and has

period of ten or more years when such entity

section 7(b) of this Act, producing coal from

quantities. 12

holds a lease or leases issued by

held such lease or leases for a

is not, except as provided for in

the lease deposits in commercial

The provision was modified by the full Interior Committee to apply to the issuance of “new

leases under the terms of this act” after a coal lease had been held from 15 years and further

gave lessees an additional 15 year period to comply before the sanction would be imposed, by

excluding all periods of time before passage of the act. Section 3 was later amended on the

floor to cut the holding period to ten years to make it compatible with time given under the

1976 diligence regulations.

The FCLAA clearly states that references to “this Act” are to be interpreted as amending

the MLA. Section 3 refers to leases issued under the terms of “this Act’’ and not to either coal

leases or leases issued under section 2 of the MLA which would limit the provision to coal only,

Other provisions of the MLA were modified by FCLAA by virtue of the “this Act” provision

and another interpretation would make these provisions puzzling. Section 3 may be arguably

misplaced as a generally applicable restriction. It might have been enacted as an amendment to

the general MLA provisions on other lease qualifications, such as U.S. citizenship.13 The full

impact of section 3 on other mineral leases did not escape the notice of the Interior Department

in its comments on the earlier, more extensive version of section 3 in H.R. 6721, the proposed

legislation. In a letter to the House Interior Committee which is reprinted in the House Report

on FCLAA, Jack Horton the Assistant Secretary of the Interior observes:

Section 3 of H.R. 6721 would amend the last sentence of section 2(a) of the

Mineral Leasing Act to prevent any person who holds or has held for 10 years

a Federal coal lease which is not producing in commercial quantities, from

taking, holding, owning or controlling any lease under this Act, and would

prohibit the Secretary from issuing a lease to such person.

This section should be deleted. Although we favor early production,

there can be valid reasons for holding reserves under a Federal lease for more

than 10 years without development. This is particularly true if the lease is

part of a logical mining unit which is being developed. Lead time for power

plants is now generally approaching IO years; in many cases it now exceeds 10

years. The start-up period for a new mine may be as long as 5 to 7 years.

This provision might force an uneconomic and perhaps more environmentally

costly technique of mining in order to avoid the limitation it would impose.

It should also be noted that the penalty for not producing within 10 years

would not only be cancellation of the lease, but cancellation of any other lease

issued under the Mineral Leasing Act that the person, association, or

corporation holds. We recommend that this unusually onerous subsection be

deleted from the bill.14

Partially in response to the Department’s objection, the Committee dropped that portion

of proposed section 3 that would have barred any lessee from the continuing to take or hold

12H.R. 6721, sec. S, 94th Cong., 1st e.ess. (1975).

13See, for example, 30 U. S. C.181, 184, and 187.

14H. Rpt. 94-681, at 38.
OTA SPECIAL REPORT 83

leases issued under the MLA, but kept the language barring issuance of new leases. The

inclusion of this letter in the Committee’s report adds further explanation to how the provisions

were interpreted at the time of enactment.

Despite the very strong indications that section 3 applies to and was intended to apply to

all onshore mineral leases, this view is not universally held. (Conoco, one of the major Federal

coal leaseholders, is currently seeking a declaratory judgment from the Federal district court in

Delaware that section 3 does not in fact apply to leases for other minerals) .15 The argument

that section 3 should be interpreted as applying to coal only generally makes the following

points.

1. The prohibition appears in a section of the MLA dealing with coal leasing

detailing preconditions to issuance of a Federal coal lease. This might be interpreted as

suggesting that the disqualification applied only to coal leases. If it were intended to

apply to all MLA leases, the argument goes, Congress might have amended the MLA

provisions that are generally applicable to all leases rather than placing the provision in

sections applicable primarily to coal leases.

2. The use of the term “new leases” in the legislative history might be construed

as referring only to coal leases in that context since the term is frequently preceded by

discussions of coal leases.

3. The “contemporaneous interpretation” by the Department of the Interior in

modifying its regulations for coal leases to incorporate provisions of FCLAA in January

1977 included the section 3 restriction only in the new coal leasing regulations. l6

Current coal leasing regulations contain the section 3 disqualification provision, but other

mineral leasing regulations do not include section 3 restrictions in their lease

qualifications provisions.

In addition to the points of statutory construction argued above. Several policy

objections are also generally advanced. (1) It is unfair to penalize oil and gas operations for the

failures of a lessee, (or its subsidiaries of affiliates) in the operation of its coal lease(s) over

which the oil and gas operations may have no control. (2) Enforcement of the provision will be

too complex, burdensome, and or disruptive to the coal program and other mineral leasing

activities. (3) Enforcement of the provision will have “disastrous”, far reaching, and unintended

impacts on noncoal leasing areas, particularly oil and gas. (4) The revenue impacts from the

disqualification of section 3 leaseholders and affiliated entities would be significant and

undesirable. (5) Section 3 creates an unfair enforcement scheme since not all lessees are placed

under the same risks for nonproduction.

OTA concludes, however, on the basis of the explicit language of FCLAA and the

concerns expressed in congressional history that section 3 does indeed restrict the issuance of

all Federal onshore mineral leases to leaseholders not in compliance with the section 3. We

note that the Department of the Interior has reached a similar conclusion in the February 1985

Solicitor’s Memorandum. M-36951.17

15 Conoco, Inc. v. Hodell Civil No. 85-27 (D.Del, filed May 10, 1985).

16 See 42 Fed. Reg. 4,454, Jan. 25, 1977 and 43 C.F.R. 3525.l(f) (1977).

17 Solicitor’s Memorandum M-36951 to the Assistant Secretary for Land and Minerals Management on Section 2 (a)(2)(A)

of the Mineral Leasing Act of 1920, Feb. 12, 1985.
84 OTA SPECIAL REPORT

WHAT DOES SECTION 3 DO?

Section 3 is independent of any other coal lease diligence provision and its applicability

is not contingent on lease readjustment or the issuance of regulations or guidelines. The only

precondition for a section 3 penalty is that a lessee has held a lease for ten or more years after

August 4, 1976 and the lease is not producing in commercial quantities and is not subject to one

or more limited exceptions to the production requirement. Section 3 was primarily aimed at

nonproducing pre-FCLAA leases. But it can, in come circumstances, apply to nonproducing

post-FCLAA leases and thus provide an additional, and nondiscretionary production forcing

mechanism that backs up the diligence provisions of the MLA and regulations. Compliance

with other lease diligence provisions is not, however, sufficient to satisfy the section 3

producing in commercial quantities requirement.

As a qualification provision section 3 is similar to other eligibility requirements under

the MLA such as U.S. citizenship, limitations on the total acreage holdings, and the Section 2(c)

restriction on railroad leaseholding.18

Section 3 penalties affect lessees, not leases. A single noncomplying lease will invoke

the disqualification. The section 3 disqualification attaches to a lessee (and related entities) as

long as the lease is in noncompliance. The disqualification is lifted if the lease is brought into

production, assigned to an unaffiliated party, relinquished, suspended, or advance royalties are

paid in lieu of continued operation under section 7(b) of FCLAA. The 10-year holding period

for section 3 compliance is restarted when a noncomplying lease is assigned to an unaffiliated

party.

Section 3 does not raise any constitutional issues involving the alteration or taking of

rights under existing leases because it does not affect the terms or conditions of existing leases.

Section 3 restricts the actions of the Secretary of the Interior in managing Federal lands.

Ownership of a Federal coal lease conveys no “right” to acquire additional Federal coal leases.

The Constitution vests in the Congress extremely broad authority over the management

disposition of the Federal lands and Congress may set virtually whatever conditions it wishes on

their use. Congress might legally, if it so chooses, amend section 3 to eliminate the ten-year

holding period and to provide that the Secretary may not issue a lease to anyone who holds a

Federal coal lease that is not producing in commercial quantities.

The reach of the section 3 disqualification is extensive and bars the issuance of new

leases for coal and for all other minerals leased under the terms of the MLA on public lands

and on acquired lands. The minerals covered include onshore deposits of “coal, phosphate,

sodium, potassium, oil, oil shale, gilsonite (including all vein-type solid hydrocarbons), or gas”.

OTA interprets lease issuance as the creation of a new lease by the Secretary that grants mineral

development rights in lands that are not already subject to a lease for that mineral.

Lease Transactions Not Subject to Section 3

The ban on issuance of new leases to noncomplying parties does not foreclose all means

of acquiring Federal coal, however. Section 3 does not prevent:

o lease assignments (the transfer of a Federal lease between private parties after

issuance);

o modifications (the expansion of a lease to include unleased Federal land - limited by

statute to 160 additional acres for most coal leases);

18 See 30 U.S.C. 181, 184, and 202.
OTA SPECIAL REPORT 85

0 lease segregations (the transfer of land under an existing lease by subdivision into two

or more separate leases bearing the same terms, conditions, and effective date as the

original lease); or

o lease consolidations (the merger of leased lands from one or more existing leases into

a single existing lease).

These lease transactions thus remain available to the Department and to a noncomplying

lessee as means of acquiring additional Federal minerals and/or as a means of reconfiguring a

lease to comply with section 3.

Preference Right Lease Applications (PRLAs)

Because of the plain meaning of the language “the Secretary shall not issue any lease,”

OTA concludes that section 3 bars the issuance of coal leases to preference right lease applicants

who are not in compliance with the section 3 producing in commercial quantities requirement.

(This is consistent with the effect of other eligibility provisions that would stop issuance of a

PRLA in excess of acreage limitations or to a U.S. company controlled by foreign nationals

from a non-reciprocal country.) Section 3 was not enacted “subject to valid existing rights as

were some other sections of FCLAA. Addition of a savings clause would have exempted

PRLAs as did other sections of FCLAA. Although it might be argued that Congress did not

anticipate that processing of some 172 pending PRLAs arising from prospecting permits issued

in the late 1960s and early 1970s would still be continuing in 1986, the statute does not allow

exception. By similar reasoning, OTA concludes that section 3 also prohibits the issuance of

preference right leases for fertilizer minerals to applicants who are not in compliance.

Section 3 clearly applies

of Minerals on acquired lands

from private owners through

acquired lands is authorized by

Leases on Acquired Lands

to leasing of public domain lands, but does it restrict the leasing

(those lands or mineral interests acquired by the United States

purchase, condemnation, or gift, for example)? Leasing of

the Mineral Leasing Act for Acquired Lands, Chapter 7 of Title

30.

19 It can be argued that section 3 does not apply to acquired lands since such lands are not

leased under the authority of Chapter 3A, however, section 3 applies to “any lease under the

terms of” this chapter. The Mineral Leasing Act for Acquired Lands provides that minerals on

acquired lands may be leased by the Secretary “under the same conditions as contained in the

leasing provisions of the mineral leasing laws” (subject only to requirements that the surface

management agency must consent to the lease and may specify conditions that will insure that

the lands can continue to be used for the primary purpose for which they have been acquired or

administered). 20

Moreover, section 3 authorizes the Secretary to prescribe rules and regulations necessary

to carry out the purposes of acquired lands leasing and further provides that such “rules and

regulations shall be the same as those prescribed under the mineral leasing laws to the extent

that they are applicable.” It appears therefore that acquired lands leases are leases under the

terms of the Mineral Leasing Act and subject to section 3. In the administration of the coal

leasing program and its regulations, there is virtually no distinction drawn between public

domain and acquired lands, and thus section 3 might be extended administratively to acquired

land leasing as well even if it were not required by FCLAA,

1 9

30 U.S.C. 351 et seq.

20 See 30 U.S.C. 352.
86 OTA SPECIAL REPORT

WHAT IS PRODUCING IN COMMERCIAL QUANTITIES?

FCLAA does not define “commercial quantities.” Moreover, the legislative history is not

explicit in defining what is commercial quantities or how it should be determined for purposes

of section 3. By regulation, commercial quantities is currently defined as 1 percent of the

recoverable of lease or LMU reserves.21

The term “commercial quantities” is used several places in FCLAA and has been a term

of art in Federal mineral law. Section 6 of FCLAA (section 7(a) of the MLA) provides: “Each

lease shall be for a term of 20 years and for so long thereafter as coal is produced annually in

commercial quantities from that lease. Any lease that is not producing in commercial quantities

at the end of 10 years shall be terminated.”22 The new Federal coal exploration program

established by of FCLAA, is to be designed for “determining whether commercial quantities of

coal are present, in Federal lands.”23 It appears that FCLAA left the definition of commercial

quantities to the Secretary’s discretion. That discretion is, however, not unbounded and is

tempered somewhat by the historical use of the term in Federal mineral law.

Section 2 of the MLA originally provided that a prospector who demonstrated the

discovery of coal in commercial quantities was entitled to a preference right lease. 24 This

authority was repealed by FCLAA subject to valid existing rights.25 Under the preference right

leasing system, commercial quantities is defined using a “prudent man” or “marketability” test

that includes an reasonable expectation that mining of the property will be profitable.26

In correspondence with the House Interior Committee, the DOI recommended modifying

language in the proposed bill that required production in “paying quantities” under section 7(a)

to “quantities which, in the judgment of the Secretary, would justify the continued operation of

the mine or mines.”27 Thereafter the term “paying quantities” was changed by the Committee

to “commercial quantities” without explanation. Both commercial quantities and paying

quantities as used in mineral leasing law suggest operations that are profitable or give rise to a

reasonable expectation that they will be profitable in the future such that a “prudent” man

would be justified in continuing operation of the project.

There is no requirement or suggestion in the FCLAA that commercial quantities be

defined the same in section 3 and section 6. The language in section 3 easily lends itself to

several interpretations. The Interior Solicitor’s Opinion M-3695 1 offered four

possible ways of defining “producing in commercial quantities”:

There are several lawful ways to implement the term: (1) as the term is used

in oil and gas law to describe a rate of production from a solid mineral mine

21 See 43 C.F.R. 3472.1-2(e) and 3480. O-5(a)(6) (1985).

22 Public Law 94-377, sec. 6, 90 Stat. 1087 (1976); 30 U.S.C. 207(a).

23 Public Law 94-377, sec. 7, 90 Stat. 1087 (1976); 30 U.S.C. 208-1.

24Act of Feb. 25, 1920, ch. 85, sec. 2, 43 Stat. 438.

25 Public Law 94-377, sec. 4, 90 Stat.1085 (1976).

26 See 43 C.F.R. 3430.1-2 (1985). The regulation defines commercial quantities aa “The coal deposit discovered under the

prospecting permit shall be of such character that a prudent person would be justified in further expenditure of his labor

and means with a reasonable prospect of success in developing a valuable mine, Further, the applicant must demonstrate

that “there is a reasonable expectation that revenues from the sale of the coal shall exceed the cost of developing the mine

and extracting, removing, transporting, and marketing the coal.”

27See H. Rpt. 94-681 at 33.
-.

OTA SPECIAL REPORT 87

meeting reasonable commercial standards; (2) as the term is used in regulations

defining “continued operation” on a Federal coal lease, as a rate (an amount

over a short period like 1 year) of sustained production; (3) as the term is

used in the regulations defining “diligent development” on a Federal coal lease,

as a cumulative amount (over a longer, fixed period, taking into account start

up time and initial mine production) of initial production, with a succeeding

rate thereafter; or (4) by some combination of the foregoing.28

OTA concludes that at a minimum section 3 requires actual production of coal in

commercial quantities of coal before or at the time a new lease is issued. Section 3 does not

define the period over which the production is to be measured. The Secretary was left to

interpret both “producing” and “commercial quantities.”

By regulation, the Department has established production of 1 percent of the recoverable

reserves of a lease or of the approved logical mining unit (L MU) containing the lease as

“commercial quantities” for both section 3 and the diligent development and continuous

operations requirements of section 6 of FCLAA.29 The production periods are different for

each however. For diligent development purposes a lessee must produce 1 percent of lease

recoverable reserves within 10 years of lease issuance or readjustment. Continued operations

requires an average annual production rate of 1 percent of lease reserves after satisfying the

diligent development requirement.

OTA concludes that the term “commercial quantities” is a term of art in Federal

mineral law and need not be defined as production of a fixed amount of recoverable reserves

for purposes of sections 3 or diligence requirements of FCLAA. OTA believes that as long as a

lessee is actually producing or has produced coal after August 4, 1976, FCLAA allows the

Secretary to consider other factors in determining whether the amount of coal produced is

commercial quantities for the purposes of these provisions or whether the amount produced is

merely “frivolous. ” Examples of such other factors include: the eventual capacity of the mine;

the amount of reserves, and geological and engineering restraints on the rate of initial

production; the demonstrated investment in mine construction and facilities; and the schedule

for production and delivery of coal under a long term contract. The term “producing” implies

some continuity of activity, however OTA believes that section 3 does not impose an additional

annual or continued operation obligation on the lessee. Intermittent or sporadic production

from an ongoing commercial mining operation could be sufficient for compliance with section

3, even if the mine is temporarily idled. We do not however, conclude that production restarts

the 10 year section 3 “clock.” The Secretary has virtually no discretion under FCLAA to find

compliance with section 3 in cases where there is not any production from the lease after 1976.

Are there any difficulties or uncertainties in the determination of commercial quantities

under DOI regulations and guidelines? If a lease has an approved mine plan and is permitted,

there is ample information on which to base a commercial quantities determination of reserves

for the area that is being mined. This information is adequate for DOI and the lessee to

estimate reserves with an acceptable degree of certainty. If the lease has very large reserves

that are not currently proposed to be mined and for which there is less information available, it

is possible that the lessee and the Department might disagree over the reserve base for

commercial quantities. The lessee may, however, be able to demonstrate to the satisfaction of

the Department that portions of the deposit are not, in fact, economically recoverable according

28 Solicitor’s Memorandum M-36951 to the Assistant Secretary for Land and Minerals Management on Section 2(a)(2)(A) of

the Mineral Leasing Act of 1920, Feb.12, 1985, at 1.

2943 C.F.R. 3480.9 5(a)(6) and discussion in preamble of 1982 regulations, 47 Fed. Reg. 33,157, July 30, 1982.
88 OTA SPECIAL REPORT

to the approved plan of operations. The Department could then reduce the commercial

quantities amount. If the Department disagreed, the lessee might relinquish sufficient reserves

to reduce the base, or, alternatively, appeal the Departments action.

HOW HAS THE DEPARTMENT OF THE INTERIOR PREPARED TO

IMPLEMENT SECTION 3?

Since passage of FCLAA, the Department has thrice issued several regulations defining

section 3 production obligations.

In January 1977, final regulations were adopted that made compliance with section 3 a

qualifications requirement for Federal coal leases. Under the 1977 regulation, production of

coal in commercial quantities was “production adequate to meet the requirement for continuous

operation”, which at the time required production at an average annual rate of one percent per

year.

30 The provision was consistent with the 1976 diligence regulations that required all

existing leases to produce 2.5 percent of reserves by June 1, 1986 and 1 percent of reserves

annually thereafter. Exceptions were allowed for operations disrupted by strikes, the elements,

and casualties not attributable to the lessee, and when production was suspended by the

Secretary on payment of advance royalties.

In July 1979 regulations were promulgated that created a substantially revised Federal

Coal Management Program. Compliance with section 3 was continued as a qualifications

requirement for obtaining Federal coal leases .31 The regulations provided that:

After August 4, 1986, no lease shall be issued to any applicant or bidder that

holds and has held for 10 years any lease from which coal is not being

produced, except as authorized under section 3475.4 of this title, in

commercial quantities as defined in 3400.0-5(i)(l) of this title.32

At the time there was no mention of the provision in preamble to the final regulations.

(The provision did not appear in the March 1979 proposed regulations, which were said in the

preamble to restate current regulations adopted in 1976.) Commercial quantities, however, was

defined as production of an amount equal to one fortieth of lease or LMU reserves, an

apparent, but perhaps inadvertent increase over the 1977 requirement. The exceptions refer to

the provisions for diligent development and continued operations under the 1976 diligence

regulations and do not directly track the language of sections 3 and 6 of FCLAA. The 1979

regulations would seem to allow payment of an advance royalty in lieu of continued operations

with approval of the mining supervisor as an exception to section 3. This options was not

limited to leases readjusted after FCLAA. Advance royalties for pre-FCLAA leases were to be

based on a percentage of the value for a minimum number of tons of coal. “The percentage is

not to be less than that prescribed in the lease.” For pre-FCLAA leases, “the minimum number

of tons shall be determined on a schedule sufficient to exhaust the leased reserves in 40 years

from June 1, 1976” or an average of 2.5 percent annually. (This production rate was similar to

that required under the 1976 diligence regulations that were continued under the 1979 coal

management program. ) These regulations suggest that these payment obligations would be

undertaken voluntarily by the lessee. The regulations also suggested that discretionary

extensions of the 10 year diligent production period for pre-FCLAA lessees might also be an

exception from the producing in commercial quantities requirement of section 3.

30 See 42 Fed. Reg. 4,454, Jan. 25, 1977; 43 C.F.R. 3525.l(f) (1977).

3144 Fed. Reg. 42,645, July 19, 1979; 43 C.F.R. 3472.1-l(e) (1985).

3 2 1 d .
OTA SPECIAL REPORT 89

In July 1982 the Department changed the qualifications provisions as part of yet another

overhaul of coal leasing regulations. The regulations establishing the qualifications of coal

lessees and bidders currently provide:

After August 4, 1986, no lease shall be issued to any applicant or bidder and

no existing lease shall be transferred to any party that holds and has held for

10 years any lease from which coal is not being produced, except as

authorized under the advance royalty payment provisions of 43 CFR Part

3480, in commercial quantities as that term is defined in 43 CFR Part 3480.33

The provisions amended the 1979 qualifications regulations by adding a restriction on

lease assignment, limiting the availability of exceptions, and reducing the commercial quantities

production from 2.5 percent to 1 percent of lease reserves.

The 1982 regulations limited the exceptions for payment of advance royalties under

section 3480. Minimum production payments paid under any lease issued before August 4, 1976

and not readjusted are not considered to be advance royalties under section 7(b) of the MLA

for purposes of section 3. When compared with the 1976 and 1979 provisions, the 1982

regulations in many ways tightened up the qualifications provision and limited the options

available to a lessee and to the Department in determining compliance with section 3. The

rulemaking again had 1ittle discussion of the section 3 provisions, except to note that no

determination had been made about the applicability of section 3 qualifications requirement to

other minerals.

In response to inquiries by coal lessees and the absence of congressional action on repeal

of section 3, the Department issued proposed guidelines on section 3 on the related matter of

LMU formation in Spring 1985. The proposed guidelines were published for public comment;

final guidelines were published in August 1985.

OTA has found that the Department’s section 3 guidelines and related regulations are, in

some respects, more stringent than required by FCLAA, and in other respects, border on

accepting very small amounts of production as commercial quantities for compliance with

section 3.

By regulation, the Department has extended the section 3 production requirement to the

qualifications for approval of lease assignments. This is not required by FCLAA. In fact, the

original version of section 3 included language that would also have prevented a noncomplying

lessee and related entities from acquiring a lease by assignment or other means, and might have

required divestiture of other leases. This language was dropped by the Committee on the advice

of the Department in favor of the current provision restricting only lease issuance.

The 1976, 1979 and 1982 coal leasing regulations each restricted the Secretary’s

discretion in applying section 3 and created compliance difficulties for some newly opened

mines by defining “commercial quantities” for section 3 purposes as an inflexible, fixed amount

in the absence of, any guidelines explicitly interpreting section 3. The section 3 guidelines may

partially overcome the impact of the regulations through the flexible interpretations of

“producing” and the period over which commercial production must be measured.

3 3 43 C.F.R. 3472.1 -2(e) (1985).
90 OTA SPECIAL REPORT

SECTION 3 GUIDELINES

The Department has issued guidelines describing current plans to administer section 3

for Federal coal leases. The guidelines are intended to assist Bureau of Land Management

(BLM) field staff in determining compliance and to answer these questions: When is a lease

subject to the section 3 producing in commercial quantities requirement? What is commercial

quantities? When must that production have occurred? What are the recoverable coal reserves

for the purposes of section 3? What can a lessee do to satisfy the requirement? What is an

affiliate of the lessee under section 3?

The draft guidelines on section 3 were published for public review and comment in

February 1985,

34 followed by draft guidelines on LMU formation in April 1985. 35 Afte r

review of the comments, final section 3 and LMU guidelines were published on August 29,

1985. 36 Because the guidelines were not promulgated as regulations, there was no requirement

that the Department publish either the proposed or the final guidelines or respond to public

comments. In publishing the final guidelines, the Department noted that the guidelines are

meant to serve solely as an aid to BLM field offices in determining section 3 compliance within

the discretion allowed to them under existing rules and consistent with the policy statements

contained in the guidelines.37 These “internal” guidelines and policies can be changed without

advance public notice or publication. As guidelines, they may not be as judicially reviewable or

enforceable as regulations. The guidelines offer little assurance to lessees that the current

interpretations will be binding on the Department in the future or given deference by the courts

should section 3 decisions be challenged in litigation. Representatives of the coal industry and

environmentalists testified at June 1985 hearings of the House Subcommittee on Mining and

Natural Resources on the unreliability of guidelines as regulatory tools and their preference for

regulations.

The Department has considerably limited its discretion in implementing section 3 by

regulations defining commercial quantities for section 3 purposes as production of 1 percent of

lease or LMU reserves. The guidelines note the difficulties that may have been created by this

and other provisions in the 1982 rules changes and note that they will be examined during a

planned regulatory review of the coal management program .38 The guidelines nevertheless

attempt to create some flexibility within the constraints imposed by the current regulations

through the interpretation of “producing” and in setting the time frame over which production

of commercial quantities is measured.

3450 Fed. Reg. 6,398, Feb. 15, 1985.

3550 Fed. Reg. 14,303, Apr. 11, 1985.

3650 Fed. Reg. 35,125, Aug. 29, 1985.

3750 Fed. Reg. 35,137, Aug. 29, 1985.

38 The BLM solicited comments on alternative definitions of producing in commercial quantities when it published the draft

guidelines in February. The alternative meaaures of producing in commercial quantities include:

(i) requiring that the lease be producing and that 1 percent of reserves must have been mined before lease

qualifications are determined, without regard to when they production occurred (an approach similar to the diligent

development requirement );

(ii) requiring production of 1 percent of reserves in the year before lease qualifications are determined ( making it

similar to the continuous operations obligation); and

(iii) defining commercial production aa production under a coal sales contract, or production at a rate that operating

revenues exceed operating costs exclusive of capital investment (terma that are similar to the producing in paying

quantities obligations of oil and gas leases).

See 50 Fed. Reg. 6,399, Feb. 15, 1985. Adoption of any of these alternative definitions would require a change in

regulations.
OTA SPECIAL REPORT 91

In determining compliance the field office must first ascertain whether the lease has

been held for 10 years after August 4, 1986. If it has not been held for a total of ten or more

years, section 3 does not apply. If the lease has been held for 10 or more years, the BLM must

determine whether the lease is producing, or is part of an LMU that is producing. If the lease

or LMU is not producing and not subject to an exception, the lessee and all affiliated firms are

disqualified. If the lease or LMU is producing, the guidelines will assist the BLM field offices

in deciding whether the amount of production is sufficient to satisfy the producing in

commercial quantities requirement.

The MLA and regulations set production time frames of 10 years for diligent

development and one year for continuous operations.39 However, neither section 3 nor existing

rules specify a time period for measuring production of commercial quantities. The guidelines

adopt the view that “producing” in section 3 implies a continuing obligation on the part of the

lessee. The guidelines therefore require at least some production at the time that Federal lease

qualifications are being determined, but how much production is necessary depends on the

particular characteristics of the mining operation and whether or not the lease has been made

subject to the 1982 regulatory diligence system.

Lease qualifications are established by the lessee’s compliance status at the time the new

lease is sought. If the old coal lease later goes out of production, the new lease is not revoked.

BLM will determine an appropriate production bracket for each lease to measure

producing in commercial quantities. The maximum production period allowed under the

guidelines is 10 years; most production brackets will be less than 10 years. For the majority of

pre-FCLAA Federal coal leases the production bracket could begin as early as the date that

production begins after August 4, 1976, but not more than 10 years before the date that lease

qualifications are determined. Production before 1976 cannot be credited. The production

bracket is independent of the section 3 10-year holding period. The production bracket can

extend beyond the time when lease qualifications are reviewed and projected production can be

used in determining compliance.

The guidelines interpret “producing in commercial quantities” differently for 3 categories

of producing leases depending on whether a lease has been made subject to the 1982 diligence

rules and other requirements of FCLAA. Production brackets, commercial quantities amounts,

and determination of recoverable reserves are different for each category. No distinctions are

made for nonproducing leases that are not under one of the section 3 exceptions.

Category 1: Producing leases that are subject to the 1982 diligence “system”.

Category 1 includes all leases issued since enactment of FCLAA and all pre-FCLAA

leases that have been amended to include the requirements of the 1982 regulatory diligence

system. According to the guidelines, there are five ways that pre-FCLAA leases come under

the 1982 diligence system.

3943 C.F.R. 3472.1-2(3) (1985).
92 OTA SPECIAL REPORT

1. Readjustment of a pre-FCLAA lease after August 4, 1976 to make it subject to the

1982 diligence provisions.40

2. Modification of a pre-FCLAA lease to add new acreage after August 4, 1976.41

3. Voluntary amendment of lease terms to include specific diligent development terms

in response to BLM request during 1980.42

4. BLM approval of the voluntary amendment of lease terms to be include the 1982

diligence provisions in lieu of lease specific diligence provisions in response to a lessee’s

request filed between August 1982 and August 1983.43

5. Amendment of a pre-FCLAA lease to include the 1982 diligence requirements on

approval of LMU formation.44

Any production after a lease is subject to the diligence system is credited toward achieving

the diligent development requirement and once that is satisfied, production is credited to

meeting the annual continuous operation requirement. (In some circumstances, any production

after August 4, 1976 may be credited toward diligence obligations at the lessee’s request).

The relevant production bracket for measuring commercial quantities is the 10 year

diligent development period for leases that have not yet produced 1 percent of reserves under

the 1982 diligence system. For these leases, the Authorized Officer will determine whether coal

is being mined at a rate that will result in satisfaction of the 1 percent diligent development

obligation at the end of 10 years.45 The lease must actually be in production at the time the

lease qualifications are being determined in order to comply with section 3. If the lease is not

producing, it is not in compliance with section 3, even though it may be fully in compliance

with any diligence obligations. The lessee may actually have produced considerably less than 1

percent of lease reserves on a lease held for 10 or more years when a new lease is sought.

Future production expectations are credited toward the 1 percent commercial quantities amount

if the lease has not yet achieved diligence. If the lessee subsequently fails to produce

commercial quantities on the old lease, the new lease will not be revoked.

40Pre-FCLU leases were originally “subject to” readjustment every 20 years. FCLAA shortened the readjustment periods

for leases to every 10 years after expiration of the initial 20-year term. Pre-FCLM leaaes can be readjusted at the end of

their current 20-year pre-FCLAA term and every ten years thereafter. The MLA and regulations do not require that leases

actually be readjusted, however it is and has been Department policy to do so. See discussion elsewhere in this report of

recent problems with ineffective lease readjustments by BLM. Some leases that missed readjustment after Aug. 4, 1976 will

not become subject to the 1982 diligence system until their next lease readjustment. The issue of how a lease actually

readjusted between Aug. 4, 1976 and Aug. 30, 1982 when the current rules took effect is an interesting one. One ostensible

reason that the diligence rules were changed in 1982 is that the Solicitor’s opinion suggested that production obligations

could not be altered except on readjustment. But the 1982 rules attempt to rewrite diligence terms for leases that had

already been readjusted to contain the more stringent terms of the 1976 regulations.

41The Department has required lessees to consent to amendment of lease terms to include revised diligent development

terms aa a condition of lease modifications.

42BLM sent notices to many lessees in 1980 advising them of the requirements of the 1976 and 1979 diligence requirements

and asking them to sign and return a lease amendment form that required compliance with the rules. Some lessees

complied. Other lessees objected and the Department dropped its efforts to have leases specifically amended to include the

new terms.

43BLM required lessees to file an election with the BLM to take advantage of the provision and to gain credit for post-1976

production for diligence purposes. See 43 C.F.R. 3483.l(b)(l) (1985). Conditional elections were filed on about 30 leases by

the August 1983 deadline, but approvals have been delayed pending clarification of section 3 requirements. Personal

communication from BLM to OTA, May 1985.

44BLM rules require that LMUS comply with the 1982 diligence requirements. See discussion of diligence obligations and

LMUS later in this chapter.

45The “Authorized Officer” is defined as “any employee of the Bureau of Land Management delegated the authority to

perform the duty described in the section in which the term is used,” See 43 C.F.R. 3400. O-5(b) (1985).
OTA SPECIAL REPORT 93

Once the diligent development requirement has been met, the relevant commercial

quantities production bracket is the continuous operations year. Compliance with section 3

requires that in the judgment of the authorized officer the lease is producing at an average

annual rate of 1 percent of reserves based on a three year average. A lessee may pay advance

royalties in 1ieu of actual production to comply with the section 7(b) continuous operations

requirement. Payment of advance royalties also suspends the section 3 production requirement

for that year.

The amount of recoverable reserves on which commercial quantities is calculated is the

amount of reserves as of date the lease became subject to the 1982 diligence system. Under the

1982 regulations, the original recoverable reserves base does not decline with production for

purposes of determining compliance with section 3 and diligence obligations. (The reserves

estimates can be modified to reflect new information or changed conditions however. ) The

guidelines suggest that the regulations create a situation where a lessee might be required to pay

advance royalties to satisfy the continuous operations and section 3 requirements for a category

1 lease that has been mined out and is under reclamation with no prospect of recouping the

payments out of future production royalties on the lease.

The 10-year production bracket over which section 3 compliance is measured begins for

category 1 leases on the date the lease became subject to the 1982 diligence system and may

extend after the date on which new lease qualifications are determined. Once diligent

development has been met, the 10-year bracket is not relevant, the lease must either be

producing an average of 1 percent annually or paying advance royalties.

Category 2: Producing pre-FCLAA leases not yet subject to the 1982 diligence system

Most pre-FCLAA leases will initially be Category 2 leases not subject to the 1982

diligence system because most scheduled readjustment dates for pre-FCLAA leases are in the

late 1980s early 1990s. The guidelines largely leave the determination of how much production

is actually necessary and when it must occur to the discretion of the Authorized Officer taking

into consideration the characteristics of the mine. For these leases, producing in commercial

quantities means the lease is producing at a rate that will result in production of a total of 1

percent of recoverable lease reserves over an appropriate production bracket assigned by the

Authorized Officer. The production bracket can be no more than 10 years. The guidelines

state that “ The time period should be set at less than 10 years in cases where that more closely

approximates what is “commercial” given the reality of the operation.”46 The time frame may be

readjusted to reflect changes in conditions. The bracket begins on the date that production

started after August 4, 1976, but no more than 10 years before the date on which lease

qualifications are determined if production began before 1976 or the lease has been producing

for more than ten years after 1976. The production bracket can extend after the date on which

a new lease is sought and projected production can be used. Commercial quantities is 1 percent

of recoverable reserves existing on the date the bracket begins. The amount of recoverable

reserves on which commercial quantities is calculated will decrease with production until the

lease becomes subject to the 1982 diligence system and thus a category 1 lease.

The guidelines suggest that production of much less than 1 percent of reserves before

the time a new lease is sought can be sufficient for compliance if the lease is producing and the

BLM concludes that it will produce 1 percent of lease reserve by the end of the assigned

bracket under its plan of operations. The guidelines are silent as to when and how much

4650 Fed. Reg. 35,134, Aug. 29, 1985
94 OTA SPECIAL REPORT

commercial production must occur before qualifications are determined to be considered as

“producing” at that time.

This commercial quantities production rate of one percent over whatever production

bracket might be assigned to the lease by the BLM is now, in practical effect, the only

production requirement imposed on old leases before readjustment assuming 1 ) that the lessee

wishes to acquire a new lease and 2) that the Department will not attempt to enforce any

specific minimum production clauses in existing leases or the more general diligence obligation

of the original section 7 of the MLA.

Category 3: Leases in Approved LMUs that are producing.

For Category 3 leases in an producing approved LMU producing in commercial

quantities requires that the LMU production is being credited toward commercial quantities for

either diligent development or continuous operations requirements of the 1982 diligence system.

Section 5 of FCLAA allows production anywhere in an LMU to be used to satisfy production

requirements for all Federal leases in the LMU. The Solicitor’s Memorandum M-36951

concluded that the language of section 5 allows LMU production to satisfy the section 3

producing requirement. Under the 1982 diligence system, the 10-year LMU diligent production

period begins on the date of LMU formation or, if there are no unadjusted pre-FCLAA leases

in the LMU, on the most recent date of post–FCLAA lease issuance readjustment, modification

or election. The determination of whether an LMU is producing in commercial quantities is

similar to that for category 1 leases. The LMU must be currently “producing” and the

production rate must be sufficient to result in satisfaction of the initial 1 percent diligent

development obligation by the end of the applicable LMU diligence period or the 1 percent

annual LMU continuous operations obligation. The LMU recoverable reserves are the total

reserves in the LMU on the effective date of LMU approval. Leases in an LMU can also

satisfy the continued operations and section 3 production requirement by paying section 7(b)

advance royalties.

Impacts of the Guidelines on Section 3 Implementation

The guidelines effectively set different minimum production amounts and production

“brackets” for pre-FCLAA leases depending on whether or not the 1982 diligence regulations

have been made applicable to the lease and when the lease began producing. This means that

some lessees have to be producing at a rate of as much as 1 percent of reserves annually to

comply with section 3, while other lessees have to be producing towards a projected total of 1

percent of lease reserves over a period of up to 10 years which may extend after the time the

new lease is issued. Such a scheme is neither contemplated or required by section 3, but may

be within the Secretary’s discretion. Alternatively, a simple rule change making the

determination of producing in commercial quantities a factual judgement based on consideration

of the lessees overall investment and production efforts, pattern of operations, contractual

commitments, and actual production would provide the necessary flexibility while also

maintaining the intent of section 3.

The production requirement assures that no Federal lease that “meets” section

2(a)(2)(A) is being held for speculative purposes; any lease on which

production (of other than frivolous amounts of coal) is occurring has seen the

investment of millions of dollars of fixed, sunk, costs. Thus the Congressional

intent to force production or relinquishment, in order to qualify for new

Federal leases is fully satisfied.47

4 7 50 Fed. Reg. 6,398, Feb. 15, 1985.
OTA SPECIAL REPORT 95

The Department’s guideline approaches have a number of weaknesses and some

strengths. One weakness is that defining producing in commercial quantities for one class of

lessees as “producing toward” achievement of production of 1 percent of lease or LMU reserves

over a period of up to 10 years after new lease issuance might be viewed as accepting frivolous

amounts of production to qualify under section 3 for some lessees while requiring more

significant efforts from others. Another major weakness, in the view of many lessees and

others, is that the internal guidelines are an unreliable basis for corporate investment decisions

because they could be changed without public notice.

Leaving the determination of the lease production bracket and whether the lessee’s level

of production is sufficient for commercial quantities to the discretion of field office on a lease

by lease basis creates great uncertainty for lessees as to whether at some time in the future their

current or past production levels will be deemed inadequate to qualify them for leases.

Moreover, once a pre-FCLAA lease is readjusted or otherwise made subject to the current

regulatory diligence system, the definition of producing in commercial quantities changes. The

current regulations leave lessees who have depleted their currently recoverable reserves but

retain their leases for reclamation, access, or LMU purposes at considerable risk of

noncompliance.

Section 3 is independent of section 7, there is no requirement that commercial quantities

amounts be the same for both. Many of the contortions and complexities in the guidelines are

attributable to the 1982 diligence rule changes and the adoption of production of 1 percent of

lease reserves as commercial quantities for both the section 7 diligence and continuous

operation requirements and section 3 purposes. The linking of section 3 and section 7

production obligations and exceptions, however, reinforces the 1982 regulatory diligence system

and could potentially bring many pre-FCLAA leases under its requirements voluntarily in order

to comply with section 3. As a result of the voluntary lease amendments and LMU approvals,

many pre-FCLAA lessees could face earlier diligence deadlines than if they waited until the

leases were readjusted as scheduled. On the other hand, the guidelines may tend to undercut

the potential impacts of section 3 by, in some cases, authorizing the acceptance of very small

amounts of production to satisfy the section 3 commercial quantities requirement to counteract

the impact of the regulations.

WHO IS SUBJECT TO SECTION 3 DISQUALIFICATION?

The section 3 nonproduction penalty is a far-reaching disqualification from acquiring

new Federal onshore mineral leases that affects not only the record title holder of the lease but

“any person, association, corporation, or any subsidiary, affiliate, or persons controlled by or

under common control with such person, association, or corporation.” The legislative history did

not discuss this language specifically with regard to section 3. The language is identical to

Section 11 of FCLAA amending section 27(a) of the MLA which imposes acreage limitations on

total Federal leaseholdings. Because the same language was used in the same Act, the legislative

history of section 11 is particularly pertinent. The section 11 amendment was made to broaden

the definition of an entity to which the acreage limitation applied “to assure that the restrictions

on leaseholdings are not circumvented by the formation of holding companies, or other devices

of corporate organization. Henceforth no one entity, under whatever corporate or other form,

will be permitted to take, hold, own or control coal leases on more than 100,000 acres in the

United States or more than 46,080 acres in any one State...”48

48H. Rpt. 94-681, at 25-26 (1975).
96 OTA SPECIAL REPORT

The Department’s guidelines offer some assistance in determining how many lessees and

their corporate families might be affected by section 3. However, the Department has not yet

sufficiently and clearly interpreted the meaning of “affiliate” or “controlled by or under common

control with” for section 3 purposes to predict how section 3 will be enforced against certain

lessees and leases, particularly those that have been transferred in complex corporate acquisitions

and mergers.

The February 1985 Solicitor’s memorandum finds that “control is the key concept

through which ownership of a nonproducing Federal coal lease will be attributed to related

corporate entities.”49 The Solicitor’s opinion concludes that the question of whether a particular

entity is “controlled by or under common control” with another entity (for section 3 purposes)

- - is an issue of fact which generally must be resolved on a case-by-case basis under

established, but inexact, legal principles.”

Coal leases are held in various forms: in the name of corporations, wholly-owned

corporate subsidiaries, joint ventures, by two or more corporations with various percentage

shares, by individuals (singly, as joint tenants, and as tenants in common), and by partnerships,

associations, estates, and trustees (both for individuals and business trusts).

OTA believes that the statutory language and the Secretary’s discretion are sufficient to

apply the section 3 penalty to all types of leaseholding arrangements avoid evasion of Section 3.

However, we note that the Department might use its discretion under this provision to narrow

the applicability of section 3 to certain classes of leaseholders by defining control as ownership

of 51 percent or more of the stock of a corporation or the lease. Similarly, a decision by the

Department to restart the section 3 clock when a lessee is acquired by another corporation could

effectively extend, by five or more years, the compliance period for several corporate lessees

who control a significant share of the currently nonproducing leases.

The preamble to the final section 3 guidelines suggests how how some types of

assignments and acquisitions might be handled. Any record title holders will be deemed to

“hold” a lease for section 3 purposes even if it has a less than 50 percent interest in the lease.

Assignments of leases between parent corporations to subsidiaries or between subsidiaries of the

same corporation will not restart the section 3 holding period. If a new parent corporation gains

control a lessee corporation, the new parent would be governed by the lessee’s original 10-year

holding period. If a lessee (or a related company) reacquires a lease that it previously held after

August 4, 1976, the lease will not have a new 10-year holding period. The subsequent

ownership period will be added to the prior term in determining whether a lease has been held

for a total of 10 or more years.

The preamble and the Appendix C to the final guidelines reiterate that the Secretary will

use “relevant, well accepted principles” in making the determination of parent - subsidiary and

affiliate relationships under section 3. The issue will be decided on a case by case basis when

lease qualifications are determined guided by several principles:

1. A corporation is a subsidiary of another corporation if more than 50 percent of the

its voting securities are held directly or indirectly by the other corporation.

2. A corporation is an affiliate under legal control of another corporation when more

than 50 percent of the voting securities of each such corporation is held directly or

indirectly by another person, corporation, or entity; or

49 Solicitor’s Opinion M-36951, at 28.
OTA SPECIAL REPORT 97

3. The Secretary may determine that in the absence of legal control through stock

ownership a person, association, or corporation is under the actual control of another

person, association or corporation.50

These above “guides” set a very high threshold for presuming control. The appendix

discussion notes the possibility that smaller ownership percentages might confer control over a

company. “Actual control of a corporation will often exist without ownership of a majority of

the corporation’s voting stock. Ownership of less than 50 percent may provide actual control

where stock ownership is widely dispersed.” The appendix does not suggest what circumstances

or criteria might be used to indicate the existence of control by ownership of less than 50

percent of the voting stock of a corporation. For partnerships, joint-ventures, the appendix

notes that BLM intends to “implement ownership/control/affiliation concepts with respect to

such entities in a manner consistent with the Office of Surface Mining’s rules for controlresponsibility of noncorporate business entities.”51

The preamble to the guidelines that corporate affiliations will have to be determined at

the time of lease qualification and notes that this will require changes to lease certification rules

for all onshore leases and the development of procedures and standards that BLM can apply

generically in making these determinations. These changes to regulations and procedures have

yet to be proposed.

IS SECTION 3 RELEVANT FOR POST-FCLAA LEASES?

It is clear that section 3 was aimed primarily at old leases. It can also apply to leases

issued after passage of FCLAA and provides a backup and nondiscretionary production

incentive for such leases. Any post-FCLAA lease not producing within 10 years after issuance

is automatically terminated by operation of law under section 7 of the MLA, making Section 3

redundant as a mechanism to force a post-FCLAA lessee to start producing. However, Section

3 still could apply to a post-FCLAA coal ease once it assignments and other assignments filed in

the future would swell the number of leases and lessees that face Section 3 deadlines far into

the 1990s. OTA has not included pending assignments in its analysis since assignments can and

have been withdrawn and assignments are not effective until approved by DOI.

WHAT MUST A LESSEE DO TO COMPLY WITH SECTION 3?

Section 3 of FCLAA gives a lessee 10 years from August 4, 1976 or 10 years after

acquiring a lease, whichever is later, to bring a coal lease into commercial production or face

disqualification. A lessee has eight options for complying with section 3 and avoiding

disqualification.

1. The lessee can produce coal in commercial quantities from the lease.

Under current regulations and guidelines the amount of production necessary for

commercial quantities depends on whether the lease is subject to the 1982 diligence system and

whether it has satisfied the initial diligent production requirement, Compliance with section 3

5050 Fed. Reg. 35,144, Aug. 29, 1985.

51 Such rules were proposed Apr. 5, 1985, 50 Fed. Reg. 13,724, but have not been issued in final form.
98 OTA SPECIAL REPORT

may require production at a rate of as much as 1 percent of lease or LMU reserves per year if

the lease is subject to the continued operations requirement of the 1982 regulations. If

however, the lease is not under the 1982 diligence system or has not yet satisfied the initial 1

percent diligent production obligation, commercial quantities compliance requires that the lease

be producing at a significantly lower rate that will result in production of atotal of 1 percent

of lease or LMU reserves over period of up to 10 years

2. The lessee can pay advance royalties in lieu of continued operation.

Section 3 recognizes payment of section 7(b) advance royalties as an exception to the

producing in commercial quantities requirement. Section 7(b) authorizes suspension of

production and payment of advance royalties in lieu of continued operation if the Secretary

determines that the public interest will be served.52 The advance royalties must be ‘no less than

the production royalty which would otherwise paid and shall be computed on a fixed reserves to

production ratio.” Advance royalties may only be accepted for a total of ten years during the

period of any lease.

The availability of this option to pre-FCLAA leaseholders whose leases have not yet

been readjusted has been cast in doubt by the February 1985 Solicitor’s Opinions and the

section 3 guidelines. The opinion concluded that only advance royalties paid under a lease

subject to the requirements of the amended section 7(b) can be used to avoid section 3

disqualification. The provisions of the amended section 7(b) can not be applied to pre-FCLAA

leases that have not yet been readjusted. The opinion cited three reasons: (i) Section 3 refers

specifically to section 7(b) and not generally to payment of advance royalties; (ii) Section 7(b)

did not exist before passage of FCLAA; and (iii) FCLAA significantly altered the advance

royalty provisions in comparison to the advance royalty terms of existing pre-FCLAA leases.

Among the significant differences in the post-FCLAA advance royalty provision was that the

amount to be paid was increased significantly, is not creditable against rentals, and can be paid

in lieu of production for only 10 years.

The statutory language could however support an interpretation that is not as

exclusionary on or inconsistent with basic thrust of section 3. One could interpret the

designation of subsection 7(b) as a nonrestrictive reference to the MLA provision authorizing

advance royalties and force majeure suspensions. Pre-FCLAA leases issued under section 7 of

the MLA before 1976 are also subject to the conditions of diligent development and continued

operation of the mine or mines, “except when such operations” shall be interrupted by strikes

the elements, or casualties not attributable to the lessee.” Payment of advance royalties in lieu

of production was authorized for the continued operation requirement in language similar to

that used in section 7(b). The 1976 and 1979 section 3 qualifications provisions seemed to adopt

this less restrictive interpretation.

An important limitation on the availability of advance royalties as a compliance

mechanism under either interpretation is that both the original MLA and FCLAA only authorize

payment of advance royalties in lieu of continued operation and not diligent development. The

lease must be in production before advance royalties can be used to extend the lease. A

producing pre-FCLAA lessee might consent to voluntary amendment of the lease to include the

post-FCLAA advance royalty provision --in effect an early readjustment). This would allow

advance royalties to be used to satisfy section 3. The lessee would have to pay higher royalties,

but it might, in some circumstances, be preferable to forming a logical mining unit or litigating

over the Department’s interpretation.

5230 U.S.C. 207(b).
OTA SPECIAL REPORT 99

OTA estimates that at most only about 130 pre-FCLAA leases might qualify for this

exemption initially through scheduled readjustment. As more leases are readjusted, more will

qualify for the advance royalty exception. It is probable, however that not all of the first 130

leases were effectively readjusted between 1976 and 1984 because of the Department’s failures

to notify the lessees properly and to adjust leases in a timely manner. Many lessees have

contested post- 1976 lease readjustments and some have been successful in appeals to the Federal

Courts and to the Interior Board of Land Appeals. Some post- 1976 lease adjustments were thus

reversed or nullified so that the leases continue with pre-FCLAA terms and royalty provisions.

Under the Department’s section 3 guidelines, these lessees will not be eligible to pay section 7(b)

advance royalties to comply with section 3 unless the leases are amended.

3. The lessee might obtain a force majeure suspension under section 7(b) if the lease operations

are interrupted because of strikes, the elements or casualties not attributable to the lessee.

Section 7(b) provides in pertinent part that:

Each lease shall be subject to the conditions of diligent development and

continued operation of the mine or mines, except where operations under the

lease are interrupted by strikes, the elements, or casualties not attributable to

the lessee (emphasis added).

Casualties not attributable to the lessee do not include ordinarily foreseeable risks of doing

business, such as ordinary delays in acquiring permits or the lack of markets. The Department’s

guidelines limit section 7(b) force majeure suspensions to leases that have been readjusted or

otherwise amended to include all FCLAA terms and conditions. Force majeure suspensions for

unadjusted leases are still available under the prior language of section 7 which is incorporated

by reference into the lease terms.

4. The lessee can assign the lease to an unrelated entity.

An assignment of a nonproducing lease to an unaffiliated party restarts the clock for the

assignee and purges the assignor of its noncompliance status for that lease. A lessee may assign

or all part of the lease to another. An application must be filed with the Department for

approval of the transfer and must show that the new owner is qualified to hold a lease.

(Transfers of other interests in the lease such a working agreements and subleases must also be

approved. ) Transfers take effect on the first day of the month following approval by BLM or

by previous agreement, on the first day of the month of the approval.53 An assignment does

not alter any other terms or extend the time periods for diligent development and continued

operations or for lease readjustment. State governors must be given reasonable notice of any

lease transfer. Until the transfer is approved, the lessee remains the record title holder and can

not obtain new leases if it is in noncompliance with the section 3 production requirement.

Delays in approval of assignments of 6 months or more have been reported. The guidelines

note that regulations and procedures will be developed to protect the priority of applications for

noncompetitive leases due to delays in processing lease assignments and other transfers.

Secretary of the Interior James Watt created a further restraint on a lessee’s ability to rid

itself of nonproducing leases or to obtain new leases

Coal lease assignees must meet all the qualifications

by assignments in the 1982 regulations.54

of a bidders or applicants, including the

5343 C.F.R. 3453.3-3 (1985).

54 See 43 C.F.R. 3472.1-2(e) (1985).
100 OTA SPECIAL REPORT

section 3 production requirement for a transfer to be approved. This restriction is not required

by FCLAA and was a policy decision . This decision was explained as follows:

The Department of the Interior does not interpret section 3 of the Federa l

Coal Leasing Amendments Act to prohibit lease transfers to such lessees, bu t

the Act appears to weigh against allowing these transfers. Section 3 of th e

Mineral Leasing Act as amended (30 U.S.C. 184), gives the Secretary of th e

Interior discretion to approve or disapprove any transfer and requires his

consent for assignment or sublease of leases. This authority was discussed i n

the July 1979 preamble to the existing regulations (44 Fed. Reg. 42602). Th e

Secretary has decided to exercise this authority to refuse approval of a leas e

transfer by requiring transferees to comply with section 3 of the Federal Coa l

Leasing Amendments Act, that is transferees must be eligible to bid for ne w

leases under that section in order to qualify to receive leases by transfer .

If such lessees are not eligible to receive new leases as a result of th e

provisions of section 3 of the Federal Coal Leasing Amendments Act, then it

follows that these lessees should not be allowed to receive Federal coal lease s

by transfer . Such transfers would circumvent section 3 because a lessee no t

eligible for a new coal lease could purchase that lease from the person t o

whom it was issued by transfer . This rulemaking makes consistent th e

legislative policy not to put leases into the hands of persons who, after 1986 ,

have held any nonproducing leases for more than ten years.

The Department of the Interior recognizes the burden placed on industry by

section 3 of the Federal Coal Leasing Amendments Act, but suggests that a

legislative solution is more appropriate than a rulemaking which allow s

circumvention of the intent of the Act.

5 5

This restriction has two effects. It significantly limits the pool of potential purchasers for

nonproducing leases to those lessees who are in compliance or to whom section 3 does not apply

because leases have been held for less than 10 years and to individuals or companies that hold

no Federal coal leases. Secondly, it prevents a noncomplying lessee from obtaining additional

coal leases through the assignment mechanism either as a means of obtaining new leases that

they are barred from bidding on or other old leases.

The Department’s policy goes beyond what FCLAA requires. As discussed previously,

an early version of section 3 would have limited assignments to noncomplying’s lessees, however

this expansive restriction on lease holding and acquisition was deleted and section 3 was limited

to the issuance of new leases.

Regulations governing relinquishment require that an application be filed with the State

BLM office.56 The applicant must show that all accrued rentals and royalties have been paid

and that all other lease obligations have been met.

57 A lessee may relinquish all or part of the

lease or any bed of the coal deposit under lease . The Secretary must find that relinquishmen t

would not impair the public interest. The preamble to the regulations noted tha t

...there may be cases where relinquishment would not be in the public interest.

It would not be in the public interest to allow manipulation of logical mining

5547 Fed. Reg. 33,130, Ju1y 30, 1982.

5643 C.F.R. 3452 (1985).

5743 C.F.R. 3452.1-3(1985).
OTA SPECIAL REPORT 101

unit diligence, high grading and failure to achieve maximum economic

recovery. such practices could theoretically occur if lease relinquishments

were automatically granted.58

There are other circumstances where relinquishment might not be found to be in the

public interest, such as relinquishment of old leases with abandoned and unreclaimed mine

workings. (OTA found that there are at least 47 of these leases that are currently

nonproducing. ) The Federal lease form commonly requires that the lessee seal openings and

remove equipment and structures and restore the surface after mining has ceased. Reclamation

must be complete before approval of any relinquishment. Many old, unreclaimed leases were

mined before permit conditions and reclamation standards for active coal mines were imposed

under the Surface Mining Control and Reclamation Act of 1977 (SMCRA). The lease terms are

probably the only affirmative obligations to clean up any surface disturbance. Although a

relinquishment will be effective as of the date it is filed, it may take some time to determine

whether all the lessee’s obligations under the lease have been satisfied. One or more one

complete growing seasons (i.e., years) may be required to demonstrate compliance with the lease

terms, if for example, the surface restoration involves, for example, revegetation of disturbed

areas. In the interim, since the relinquishment is not yet effective, the lessee still “holds” the

lease and could be barred from obtaining new leases or assignments until the relinquishment

becomes final. If the Department accelerates the relinquishment approval process without a

reasonable assurance that restoration efforts will be successful, the Government might later have

to pay for correction of dangerous or environmentally harmful conditions in inactive mine

workings. One possible solution might be for the Department and the lessee to enter into a

legally enforceable agreement obligating the lessee to restore the surface and to guarantee any

expenses in return for approval of the relinquishment.

6. The lessee can obtain a suspension of the lease under section 39 of the MLA.

The Secretary can suspend operations and production on any coal lease “in the interests

of conservation of the resource” under section 39. 59 During the suspension the rights and

obligations of the lease are held in abeyance. No development or production activities can take

place, no rent is due. (FCLAA amended section 39 to provide that it could not be used to

suspend or reduce advance royalties due under section 7(b), so that advance royalties are due on

new and readjusted leases under the continued operations require merit.) A section 39

suspension might be justified for a lease that was not currently in production and which would

not be reached for a number of years and which could not be mined except from the lessee’s

operation. The Secretary might suspend the lease until it could be mined to conserve coal

resources that might otherwise never be extracted. Other options available to prevent the bypass

of Federal coal in such a situation are LMU formation or issuance of an order barring wastage

of the leased coal. A suspension allows the lessee to preserve the advantages of a pre-FCLAA

lease without satisfying all of the requirements imposed on it. It would also delay readjustment

and would extend the section 3 clock by the duration of the suspension. Section 39 suspensions

are not available for purely economic reasons, such as failure to find a buyer for the coal or

generally poor market conditions.60

5 8 47 Fed. Reg. 33,129, July 30, 1982.

5930 U.S.C. 209.

60FCLAA’S amendment of section 7 of the MLA repealed the Secretary’s authority to suspend operations for up to 6

months during periods when market conditions were such that a lease could not be operated profitably. Public Law 94-

377, 90 Stat. 1087. The Secretary retains authority to reduce production royalties for leases that can not be operated at a

profit under their terms.
102 OTA SPECIAL REPORT

7. The lease can recombined with other Federa! or non-Federal coal into a producing LMU.

Under section 5 of FCLAA, production anywhere in an approved LMU can be used to

satisfy the production requirements for any Federal leases in the LMU. The Department has

determined that LMU production can be used to satisfy the section 3 “producing in commercial

quantities” requirement.

Section 3 is silent as to whether production from an LMU is sufficient for section 3

compliance. The language of section 7(b) and section 5 and legislative history of section 5,

however, strongly suggest that LMU formation was intended as an aid to development and

maximum economic recovery of Federal coal and to satisfaction of diligence production and

continued operations requirements. Section 7(b) provides that each lease is subject to the

conditions of diligent development and continued operation. If production in an approved

LMU can satisfy the section 7 diligence requirement, by extension such production should also

satisfy the section 3 production requirement for a nonproducing lease in the LMU.

Section 5 of FCLAA allows the formation of an LMU and provides that:

In approving a logical mining unit, the Secretary may provide among other

things that (i) diligent development, continuous operation, and production on

any Federal lease or non-Federal land in the logical mining unit shall be

construed as occurring on all Federal leases in the logical mining unit. The

Secretary may even amend the terms of lease included in a logical mining unit

so that mining under that lease will be consistent with he requirements

imposed on the logical mining unit.61

Section 5 specifies certain conditions for a logical mining unit. LMU formation is not

without problems and issues of its own. Under the Department’s regulations and recently

proposed guidelines there are many incentives and disincentives for lessees to form an LMU.

Before issuance of the 1982 diligence regulations and the February 1985 Solicitor’s Opinion and

proposed section 3 and LMU guidelines, it was generally assumed that LMU formation would

be sufficient to deal with any section 3 and diligence problems for producing mines. The major

concerns with LMU formation had been the problem of noncontiguous mine areas, how “excess”

reserves would be handled, and how the Department would interpret the provision that the LMU

mine plan must provide for extraction of reserves in 40 years or less.

8. The lessee can consolidate the nonproducing lease and a producing lease into a single lease.

There is an eighth option for bringing a nonproducing lease into compliance that may be

appropriate in some circumstances. Under his general administrative authority over Federal coal

leasing, the Secretary may approve the combining into a single lease of two or more coal leases

held by the same owner. Two provisions of the MLA expressly authorize lease consolidation or

combination. Section 5 of the MLA allows consolidation of two or more contiguous lease

parcels into a single lease of no more than 2560 acres if the Secretary finds it in the public

interest. 62 Section 6 of the MLA allows up to 2560 acres of noncontiguous lands to be included

in the same lease.63 The consolidation mechanism could be used to combine a producing lease

with a nonproducing lease and might thus allow the lessee to comply with section 3,

Consolidation does not impose any of the conditions of LMU approval such as the “40 year

61 Public Law 94-377, 90 Stat.1086; 30 U.S.C. 202a.

6 2 30 U.S.C. 205.

6 3 30 U.S.C. 206.
OTA SPECIAL REPORT 103

mine out” or application of the 1982 diligence system to the leases. Lease consolidation might

allow noncontiguous lease areas to be combined. There are currently no regulations governing

consolidations. Although the two express consolidation provisions have acreage limits, there is

no longer a statutory acreage limit for coal leases other than the overall limits on total acreage

holding within a State.

Consolidations have been used in the past to combine producing and nonproducing leases

held by the same owner, so that minimum production obligations in the lease terms could be

satisfied. Such requests, however, were not always granted, but there was also little effective

enforcement of the minimum production obligation. More recently Mobil’s Rojo Caballo leases

were recombined into a single lease. An 80 acre tract of acquired land in the original lease had

been segregated administratively because BLM at the time was unsure whether a lease could

contain both public domain and acquired lands. Later, BLM concluded that it could and

consolidated the tracts back into one lease. The consolidation removed the possibility that

Mobil would have to form an LMU or mine each lease separately in order to comply with

diligence and section 3 requirements for what was originally a single lease. Mobil is seeking

approval of an LMU combining Federal and non-Federal lands in its Rojo Caballo Mine.

Diligent Development Requirements and Other Production Incentives

for Federal Coal Leases

Section 3 creates a strong incentive for at least some Federal coal lessees to bring their

leases into production. Section 3 however has disparate effects, it has virtually no impact on a

lessee with no immediate need for more coal leases or one that is not involved in other mineral

leasing activities. Advocates of repeal and modification of section 3 argue that it is a redundant

provision because Federal coal leases are subject to other more direct production requirements

that would remain if section 3 were removed. This section examines the production

requirements currently imposed on Federal coal leases and explores various alternative

mechanisms that can be used to promote timely development of Federal coal deposits.

The expectation of a profit to be made from mining and selling coal is, clearly, the

most powerful incentive for a lessee to develop any mine, however, there are times when

nondevelopment may be economically preferable. For example, if the lessee anticipates that the

price of coal will go up in the future, a delay in development of a particular property may

offer prospects for a greater profit later. In other instances, market conditions and excess

capacity in existing mines may significantly reduce the probability that a lessee can successfully

find a buyer for the coal if development proceeds without any assured contracts. If the lessee is

particularly risk averse, it may decline to develop the lease until it has what it perceives as a

greater probability of success. Thus a lessee’s economic interests can at times be better served by

delay than development. But does delay advance the lessor’s interest or the public interest? If

the lessor’s major interest in leasing the coal is receiving royalty payments from mining, delay is

not to his benefit. Early production or return of the lease so that it could be sold to another

potentially more successful developer would be more advantageous to the lessor. The public

interest is also served by encouraging more development so that competition among coal

suppliers will tend to keep fuel prices low. To protect the interests of the lessor and to balance

them against the interests of the lessee, mineral leases typically contain provisions that assure

that the lessee will make a diligent effort to develop the lease or pay the lessor in lieu of

production revenues or turn back the lease. These diligence provisions are an important and

longstanding part of Federal mineral law as well.
104 OTA SPECIAL REPORT

A 1975 study of the Federal energy mineral leasing systems by the staff of the Federal

Trade Commission noted the benefits of diligence provisions in Federal coal leases:

Underlying the imposition of diligence requirements is the notion that the

public has an interest in early development and continuous operation of leased

Federal resources. Diligence requirements may be viewed as one means of

ensuring that the public and not private speculators, recoups any benefit from

the increased value of coal over time . In addition they could facilitate

alternative uses of coal lands, such as for agricultural purposes, if those uses

become more attractive than coal mining and no coal has been mined from the

leases .64

The Congress reaffirmed the basic policy of the MLA that leases by strengthening the

statutory diligence requirements for new leases so that leases not actually producing commercial

quantities of coal after 10 years are terminated by operation of law. More recently the Report

of the Commission on Fair Market Value Policy for Federal Coal Leases, frequently referred to

as the Linowes Commission, made the following findings concerning Federal coal leases:

The Commission found that diligent development requirements play a central

role in the Federal coal leasing program. In the absence of a diligence

requirement, the leasing of Federal coal would amount for many purposes to

the disposal of coal. The congressional insistence on diligent development of

Federal coal is consistent with the broader congressional philosophy of

retention of the public lands. Diligent development requirements allow each

generation to make its own decisions as to the appropriate development of

Federal coal resources. If Federal coal were to pass into private hands it

would be much more difficult to maintain control over its development...

Diligent development requirements also serve more specific purposes.

Significant Federal royalties and state severance taxes create an artificial

incentive to delay production on Federal coal. The diligence requirement

ensures that production begins fairly promptly.65

Section 7 of the MLA in its original and amended forms provides that all Federal coal

leases are to be held on conditions of diligent development and continued operations of the

mine or mines except when interrupted by strikes, the elements, or casualties not attributable to

the lessee. With the Secretary’s approval a lessee may comply with the continued operation

requirement by paying advance royalties in lieu of production. Payments in lieu of diligent

development are not authorized. The penalty for violation of these statutory conditions is

revocation of the lease.

IMPLEMENTATION OF DILIGENCE REQUIREMENTS

The Department has implemented the MLA diligent development and continued

operations requirements of Federal leases in different ways. All leases are subject to t h e

statutory obligations, although they were not explicitly defined by regulation until 1976. Before

1976, these requirements were applied through various lease provisions and by supervision of

64U.S. Federal Trade Commission, Bureaus of Competition and Economics, Report to the Federal Trade Commission on

Federal EnerKY Land Policy: Efficiency , Revenue, and Competition, Senate Committee on Interior and Insular Affaira, 94th

Cong., 2d sess., (Comm. Print 1976), at 622-23.

65 Report of the Commission on Fair Market Value Policy for Federal Coal Leasing, February 1984, at 295.
OTA SPECIAL REPORT 105

lease operations. In 1976, the Department adopted regulations that defined diligent development

for all leases as requiring actual production of coal within 10 years. In 1982, the regulations

were relaxed to require production within 10 years of the first post- FCLAA lease readjustment

for old leases. Separate diligence requirements were adopted for logical mining units.

Lease forms adopted by the Department used several approaches to require production.

These lease-specific production obligations are relevant because under the 1982 diligence

system, pre-FCLAA leases are subject only to these conditions until the lease is readjusted o r

otherwise amended to apply the 1982 regulations.

From 1920 to the mid-1950s leases generally had both a minimum investment clause

requiring investment of a specified dollar amount in development of the lease within the first

three years after lease issuance and a minimum production clause requiring the mining of a

minimum tonnage beginning in the fourth or sixth year of the lease. These terms could impose

quite substantial obligations.

For example, according to the lease records, Utah lease U06039, issued on May 1, 1953,

carried a minimum investment requirement of $75,000 of which not less than one third was to

be spent during each of the first three years of the lease, unless sooner expended, and a

minimum production requirement of 60,000 tons per year beginning with the sixth lease year.

The lease rental was set at $1 per acre per year and the royalty at 15 cents Per ton. The annual

rental payments were $1360.00 and minimum investments were $25,000 per year for three

years. Royalty payments on the specified minimum production in year six would be $9000.

Not insignificant amounts at the time. 6 6

Although the lease contained these minimum

production terms, the lease was not mined on schedule, and, in fact, it appears never to have

been mined. The Department did not, however, routinely ignore the minimum annual

production requirement. The lease records show that an application was made in 1958 in the

fifth year of the lease to waive the annual production requirement for that year. Another

request for suspension was received in August 1959 and was denied in September 1959. An

application to consolidate the lease into another lease was also denied.

In 1960 the minimum production requirement was suspended for year ending April 30,

1960, but rental payments were not suspended. This decision was appealed. The lease was

subsequently assigned several times and subdivided. It was acquired in 1979-80 by Utah Power

and Light Co. The lease was not adjusted when scheduled in 1973, but was readjusted in 1979

for another 20-year term ending in 1993. According to the Department’s automated lease record

system, the statutory royalty increases were applied to the lease.

Many pre-FCLAA leases also carried a minimum royalty or advance royalty payment

tied to the production of a specified tonnage. The effectiveness of these provisions was

undercut by another lease provision that allowed suspension of the lease production and

payment requirements on payment of an advance royalty with the approval of the Secretary.

The advance royalty in many early leases was set equal to the minimum tonnage, even though

rentals can be subtracted from royalties, these leases still required royalty payments in excess of

rental. In the mid-1950s, the minimum investment clause was dropped and the minimum

66The minimum annual production requirement strangely enough appears to be comparable to the 1 percent commercial

quantities figure. There is no information available on how the production level waa determined. However if one makes

some very conservative assumptions about the characteristics of minable reserves in that area circa 195S: 6 foot seam, and

underground recovery rate of 40 percent and 1800 tons of coal per acre foot for bituminous coal. total estimated

recoverable reserves for the tract would be approximately 5.9 million tons. Annual production of 1 percent would be 60,000

tons.
106 OTA SPECIAL REPORT

production obligation was shifted to the sixth year. The advance royalty in lieu of production

was set equal to the rental and since royalties could be deducted from rentals was effectively $0.

Two observations may be made about these requirements. There were fewer than 200

leases issued before the mid-1960s and many of them eventually produced coal. Suspensions

were often given because of difficulties in developing the lease, market conditions, or the

lessee’s financial status. But an inspection of some lease records by OTA indicates that the

suspensions allowing payment of advance royalties in lieu of the minimum production obligation

were denied at times and appeals of these suspensions were also denied. The nonproducing

leases apparently continued to be held in violation of lease terms because cancellation

proceedings, the penalty for violation were not initiated. It is not known if the’ cases were ever

referred to the Attorney General for prosecution. After about 1960, however, the Department

seems to have routinely accepted nonproduction payments on all leases without making specific

approvals. The MLA does not authorize payments in lieu of the requirement of diligent

development, and the Department in the past has never adopted the interpretation of the MLA

or the lease terms that payments suspended the statutory diligence requirement. The lessee’s

obligation to diligently develop the lease continued even though he might be relieved of annual

minimum production and payment obligations. The diligent development obligation can only be

suspended for strikes, the elements, or casualties not attributable to the lessee under section 7

and under section 39 in the interests of conservation of the resource, an application for

suspension must be made to and approved by the Secretary.

According to an analysis by the Department in 1980, some leases issued between 1920

and 1946 are likely to still contain advance royalty provisions in excess of rental because they

were not subsequently readjusted. In 1956 the lease form was changed to delete the minimum

investment requirement and to require production in the sixth and succeeding years, but the

amount of production was set so that it would yield an advance yield equal to the annual rental

of $1 per acre per year. These leases were issued until the early 1970s and many of the earlier

leases were readjusted to include these more lenient terms.

In the mid- 1960s the minimum production clause no longer specified a minimum

tonnage and the advance royalty was still set equal to the rental, calculation of the minimum

tonnage was that amount that created an advance royalty of $1 per acre. Also in 1965, the lease

form was changed to provide that the lease was subject to reasonable regulations of the

Secretary hereinafter in force.

In the early 1970s, the Department began charging slightly higher rentals of $5 acre in

the sixth lease year and higher royalties and experimented with advance royalties that might

create an economic incentive to produce. Several leases were offered that contained minimum

production clauses and significant advance royalty requirements.

One of the major criticisms of the past administration of the Federal coal leasing

program in the 1970s was that the Department had failed to enforce the diligence and continued

operations requirements against nonproducing lessees by revoking such leases. This view was

shared by the Department which adopted final regulations in May 1976 interpreting the diligent

development provision of the 1920 MLA as requiring actual production of 2.5 percent of lease

reserves by June 1, 1986 under threat of cancellation.67 Under limited circumstances, extensions

of up to 5 years were allowed. These regulations were intended to supersede the unenforced

67 See 41 Fed. Reg. 21,779, May 28, 1976. The 1976 diligence regulations are discussed at length in United States Congress,

Office of Technology Assessment, An Assessment of Development and Production Potential of Federal Coal Leases,

December 1981, at 238-252.
OTA SPECIAL REPORT 107

minimum production lease obligations and gave all lessees 10 years to begin mining their

undeveloped leases. Despite assurances that the Department was embarking on a vigorous

program of enforcement and that the 1976 regulations and other mechanisms would prevent

such nonenforcement in the future, the Congress adopted a strict 10-year diligent production

provision for new leases and added section 3 to deal with any nonproducing old leases after

1986.

The 1976 regulations defined diligent development and continued operations for all

leases and were intended to assure that any future enforcement efforts would withstand court

challenge. All lessees were placed on an equal footing, the 10-year lead time before

enforcement would make it likely that a court would reject a lessees argument that the

requirement was unreasonable. The minimum production clauses of most existing leases

imposed only token production obligations on the lessees, the 1976 regulations imposed more

substantial requirements superseding the lease terms. Even if a lessee might successfully argue

that the regulations could not alter the terms of the lease, the lessee would be hard pressed to

defend an assertion that failure to develop a lease after more than 16 years was diligent

development under the MLA or the Departments regulations or even under the lease terms

calling for production beginning in year six. Moreover, the extension provisions added

additional flexibility that would also help withstand any challenges as to the reasonableness of

the regulations.

The 1976 regulations required pre-FCLAA leases to produce 2,5 percent of lease or

LMU reserves by June 1, 1986 or face cancellation for lack of diligent development. Limited

force majeure exceptions and five year extensions were allowed. Post- FCLAA leases were

bound by the statutory requirements to produce commercial quantities within 10 years of

issuance with only force majeure exceptions allowed. 68 Commercial quantities for post-FCLAA

leases was set at production of 1 percent of lease or LMU reserves. The Department’s positio n

at the time was that the regulations were of general applicability and superseded other leas e

terms. The existing leases did not specifically equate the minimum production and advanc e

royalty provisions as constituting full compliance with statutory diligent productio n

requirements . Notices were sent to lessees advising them that the regulations were full y

applicable and that leases would be explicitly readjusted to require production if due fo r

readjustment before 1986. In 1980 lessees were asked to voluntarily agree to amend their lease s

to acknowledge the 1976 diligence requirements. A few lessees complied with the request, but

following objections from lessees and coal industry trade organizations, the Department

discontinued its lease amendment efforts. The lease term used in the late 1970s provided:

Diligence: To engage in the diligent development of the coal subject to the

logical mining unit of which the lease is a part. After diligent development is

achieved, the lessee agrees to maintain continued operation of the mine or

mines on leased lands, unless consistent with the regulations advance royalty is

paid in lieu of continued operations, the terms and diligent development and

continued operations are defined in the regulations.

New leases and leases that were readjusted after August 4, 1976, were also required to file

mine plans for development of the leases within three years under the 1976 policy.

Because the 1976 regulations superseded the lease specific diligence and production

requirements, the Department was not required to treat nonproduction on a lease that provided

68The May 1976 regulations were revised to include the statutory changes made by FCLAA. See 41 Fed. Reg. 56,643, Dec.

29, 1976.
108 OTA SPECIAL REPORT

that production must begin and continue after the sixth year of the lease, as violation of the

applicable diligence deadline subjecting the lease to cancellation. The Department’s 1976

regulations, in fact, avoided an early test of the lessee’s diligent development requirement. In

1976 all but a few nonproducing leases were more than six years old. The Department might

have ceased to accept nonproduction payments and immediately sued to have leases cancelled

for nondevelopment in compliance with the express provisions of any leases with minimum

production clauses.

In 1982, the DOI significantly revised the diligence provisions for pre-FCLAA leases.69

Various explanations were given. But, in essence, the change reflected a fundamental shift in

the DOI’s interpretation of its authority to set diligence requirements for existing leases under

FCLAA, the MLA, and the lease terms. The Department cited a September 1981 Solicitor’s

Opinion reinterpreting the effect of FCLAA on existing lease diligence obligations as requiring

the changes.70 The referenced Solicitor’s opinion did not address the applicability of diligent

production requirements to pre-FCLAA leases, but rather dealt with whether the Department

must include the higher minimum royalty provisions of FCLAA in leases readjusted after

FCLAA. The Opinion concluded that the higher royalty must be applied if and when a lease is

readjusted, however, the opinion noted that by statute leases are only “subject to” readjustment

so that the Secretary was not required to readjust the leases and could by inaction allow a lease

to continue at the lower pre-FCLAA royalty.71

The Department issued regulations that extended the date by which existing leases must

produce or be cancelled (or terminated) to 10 years after the first lease readjustment after

FCLAA. The new rules reduced the amount of production required for “commercial quantities”

to 1 percent of lease or LMU reserves for both diligence and continued operations. This action

lifted the 1976 diligence requirements in force at passage of FCLAA and that were cited in

floor discussion of FCLAA. The effect of the change was to give existing leaseholders up to 30

years from FCLAA to produce 1 percent of coal reserves, before the Department would

terminate the lease rights under the readjusted lease terms.

The 1982 regulations substituted yet another diligence system for Federal leases and tied

lease production obligations to whether leases were issued or readjusted after enactment of

FCLAA. The rules create three categories of leases: pre-FCLAA leases not subject to the

regulatory diligence system; post-FCLAA leases and pre-FCLAA leases subject to the regulatory

diligence system; and leases in LMUs subject to the regulatory diligence system.

Pre-FCLAA leases not yet readjusted are subject to their specific Federal lease

conditions, including minimum production clauses, until the first lease readjustment after

FCLAA. Any production on the lease will not credited toward achievement of diligence or

continued operation under the 1982 rules until the effective date of the first lease readjustment

after August 4, 1976. Pre-FCLAA lessees were given one year, i.e., until August 1983, to elect

6gSee 47 Fed. Reg. 33,153, July 30, 1982.

70Solicitor’s Opinion M-36939, 80 I.D. 1003(1981). The Solicitor’s reinterpretation came over five years after passage of

FCLAA. The interpretation was either not shared or overlooked by two previous administrations in issuing regulations

concerning lease diligence obligations, including contemporaneous interpretations by the Department of the Interior in 1976

when it revised its may 1976 diligence rules to accommodate changes made by FCLAA.

71The Department also cited as the basis for its conclusion that Congress did not intend any production requirements to be

imposed on pre-FCLM leases until after readjustments a letter from Secretary James D. Watt to Governor Richard Larnm

of Colorado with an accompanying memorandum from the Interior Solicitor of April 21, 1981. The letter was in response to

the Western Governors’ expressed concerns over and opposition to rumored changes in the diligence requirements for

existing leases.
OTA SPECIAL REPORT 109

to become subject to the 1982 diligence system by notifying the Department in writing. Lessees

could request that production after 1976 but before approval of the election be credited toward

the diligent production requirement. (Under this system, producing leases that have not been

readjusted have not complied with the MLA diligent development obligations as defined in the

regulations, because they only receive credit for production after the lease has been readjusted

or amended to conform to the 1982 rules. Some of these lessees may have already produced

enough to satisfy the more stringent standards of the 1976 regulations).

The 1982 diligence system replaced the 1976 diligence regulations and left unadjusted or

unamended pre-FCLAA leases subject to whatever production provisions were in the individual

lease forms, and also to some as yet undefined Federal common law diligence obligation. As a

result, the Secretary could at any time decline to accept payments in lieu of continued

operations and decline to waive by inaction the lessee’s failure to diligently develop the lease

and move to have the lease cancelled in Federal court. There is not however any indication that

the Department of the Interior intends to enforce the existing minimum production lease

obligations.

Post- FCLAA leases and pre-FCLAA leases readjusted or amended after August 4, 1976,

must satisfy the diligent development obligation by producing commercial quantities of coal,

defined as 1 percent of lease reserves, within 10 years of lease issuance or readjustment. The

diligent development obligation can only be suspended by the Secretary for strikes, the

elements, or casualties not attributable to the lessee. 72 After meeting the diligent development

obligation, the lessee must maintain continuous operations by mining at an average annual rate

of 1 percent of lease reserves based on a three year average. With the approval of the

authorized officer, advance royalties can be paid in lieu of production to comply with the

continued operations requirement. Only production on the lease after it becomes subject to the

1982 diligence system will be credited toward production of commercial quantities. 73 A n y

production on the lease after 1976 can be credited towards commercial quantities if the lessee

filed a request by August 30, 1983. The lessee must also submit a resource recovery and

protection plan within three years after lease issuance or readjustment.

Any Federal coal lease in an approved LMU is subject to the separate diligent

development and continued operation requirements imposed on the LMU. The LMU

requirements replace the conditions that would apply to the Federal lease individually.

Commercial quantities is 1 percent of the total Federal and non-Federal LMU reserves. A

schedule for achievement of diligence requirements is established when the LMU is approved,

All Federal leases in the LMU are in compliance with diligent development and continued

operations requirements as long as the LMU as a whole is in compliance with its LMU

obligations. An LMU must produce a total of 1 percent of LMU reserves by the end of its

diligent development period. The length of the LMU diligent development period is determined

by the applicable diligence dates for Federal leases in the LMU. If all leases in the LMU are

already subject to the 1982 diligence system the diligence deadline is 10 years from the most

recent post-FCLAA lease issuance or readjustment of the leases in the LMU. If the LMU

contains an unreadjusted pre-FCLAA lease, the LMU diligence deadline is 10 years from the

effective date of LMU approval. A resource recovery and protection plan for the LMU must

be submitted within three years from the effective date of the LMU.74

72Note: The Secretary can also grant suspensions in the interests of conservation of the resource under section 39 of the

MLA, 30 U.S. C. 209. The 1976 rules allowed discretionary extensions of diligence dates for pre-FCLAA leases. By law,

there are no discretionary extensions for post -FCLAA lessees under section 7, 30 U.S.C. 207.

73This has the effect of delaying the attainment of diligence in some cases and thus avoiding the imposition of the

requirement to produce 1 percent annually or pay advance royalties in lieu of continued operation.

74The determination of the diligence periods and recoverable reserves for LMUS are discussed in the LMU guidelines at 50

Fed. Reg. 35,145, Aug. 29, 1985 and in 43 C.F.R. 3480.0-5. (1985).
— .—— —. . .

110 OTA SPECIAL REPORT

Under the Department’s regulations and guidelines, LMU formation can apparently be

used in some cases to extend the diligent development dates of leases in the LMU to the latest

date that would be applicable. For example, a lessee might acquire a new small bypass lease or

an unreadjusted pre-FCLAA lease in the ninth year of the diligence period of another lease

subject to the 1982 diligence system. The lessee could then petition to combine the newly

acquired lease into an LMU and thus gain an additional 10 years to achieve diligence and delay

any requirement to pay advance royalties if production falls short of the 1 percent annual

continued operations level. If the LMU contains only post-FCLAA leases and readjusted leases,

LMU formation cannot be used to extend the diligence period.

Payment Requirements for Federal Coal Leases

The payment requirements imposed on Federal coal leases are similar in many respects to

payments for non-Federal coal and currently include bonuses, rentals, advance royalties, and

production royalties.

A bonus is the amount paid for a new lease. In a competitive lease sale, a lease is

awarded to the highest bonus bid that equals or exceeds the fair market value of the coal and

can be based on a per acre or a per ton payment. The bonus bid is the primary mechanism for

recovering the difference in value of Federal coal tracts because under current policy rentals

and royalty payments are standard for all leases even though tracts may vary widely in potential

profitability y. No bonus is required at present on the issuance of noncompetitive preference

right leases, but the possibility of requiring some additional payment as a means of assuring a

fair return to the public from such leases has been under review.

Rental is the annual payment to hold a lease. For Federal leases it is currently set at

$3.00 to $5.00 acre, with an increase after the sixth or tenth year in some leases. Many old

pre-FCLAA leases allow rental payments to be offset against any royalty payments, but FCLAA

disallowed this credit. Because the setting of rentals is left to the Secretary’s discretion, the

Department could impose a different rental scheme on leases at readjustment or modification of

lease terms with a higher rental for nonproducing leases.

The production royalties for Federal coal are set by FCLAA at 12.5 percent of selling

price of surface-mined coal and a lesser amount (usually 8 percent) for underground coal.

Unreadjusted pre-1976 leases carry significantly lower production royalties than new and

readjusted leases; payments of 15 to 20 cents per ton are most common. Only about four leases

that were issued or readjusted in the early 1970s contain pre-FCLAA percentage royalties of 4

to 8 percent.75 The Secretary can temporarily reduce the statutory royalty rates for any lessee

that shows that the lease cannot be successfully operated under its terms.

75The FTC staff report used average f.o.b. mine price data to calculate the percentage royalty equivalent of the 22.5 cents

per ton royalty in 1971. The percentages were: Colorado, 3.5 percent, New Mexico, 6.9 percent, North Dakota, 11.8 percent,

Oklahoma, 3.3 percent, Wyoming, 6.6 percent. On a national baeis, a payment of 22.5 cents per ton waa equivalent to a 3.2

percent royalty in 1971. Reported f.o.b. mine prices of coal in 1971 were as low aa $1.82 in Montana, thus a 22.5 cent

royalty on Montana coal would equal a 12. S percent royalty, the current statutory level. The percent of the coal sales price

paid in Federal royalties on a cent per ton baais dropped sharply because of the significant increaees in coal prices during

the 1970s. See Federal Enern Land Policy: Efficiency, Revenue, and Competition, supra note (64),at 619.
. .

OTA SPECIAL REPORT 111

The MLA authorizes payment of advance royalties in lieu of continued operations with

the approval of the Secretary. The minimum production clauses of many leases require payment

of an advance royalty in the sixth year of the lease. However, this requirement was effectively

nullified by setting the advance royalty equal to the rental payment and fully crediting rentals

against royalties. Advance royalties are now set by regulation as payment of the production

royalty that would be due on 1 percent of the lease reserves at a minimum royalty of 12.5

percent for surface mined coal and 8 percent for underground coal. Some leases readjusted

between 1976 and the adoption of the 1982 rules changes require advance royalties on

production of 2.5 percent of reserves if the lease is not producing at a continued operations rate

of 1 percent of reserves. Advance royalties can only be accepted in lieu of production for a

total of 10 years over the life of the lease and are recoupable against production royalties. The

Secretary can not reduce or suspend payment of advance royalties.

HOLDING FEES FOR FEDERAL COAL LEASES

Holding fees for nonproducing leases are used in private leases, but only to a limited

extent in Federal coal leases. Holding fees can generate as much revenue as actual production

for private lessors and provide some additional economic incentive for the lessee to produce or

turn back the property. Holding fees can be found in various forms, delay rentals, minimum

royalties, and advance royalties, for example, and reflect the flexibility and variety that result

from lease negotiations between private parties.

A delay rental is an amount paid for the privilege of deferring development of a

property and can be avoided by relinquishing the lease, or by commencing production. A

minimum royalty requires that the lessee pay the lessor a minimum royalty annually whether or

not coal is actually produced in an amount great enough so that production royalties would

equal the minimum royalty. An advance royalty is paid before the coal is actually mined and

sold either as a deposit against future production royalties or in lieu of production under a

minimum royalty provision. In this report “holding fee” is used to refer to any type of payment

imposed on a nonproducing lease that might be avoided by producing or relinquishing the lease.

A lease may provide that the holding fee can be fully or partially recoupable against

production royalties. There do not appear to be any firm rules for formulations of these

provisions in private transactions. Many of the distinctions reflect the difference in tax

treatment of such payments. For Federal coal lessees however, the current tax code is flexible

in the treatment of delay rentals and many forms of advance royalties.76

STRUCTURING A HOLDING FEE

A holding fee can have one or more purposes that will influence how high the fee is set,

the fee base, and whether it is recoupable against production royalties. In structuring a fee, one

should consider its purpose. For example, is the the fee paid merely to extend the lease for an

additional period without production? Is the fee intended to replace production royalties that

would otherwise be paid? Is the fee intended to create an economic incentive to force

production or reversion of the lease?

76For Federal income tax purposes a minimum royalty which “requires that a substantially uniform amount of royalties be

paid at least annually either over the life of the lease or for a period of at least 20 years, in the absence of mineral

production requiring payment of aggregate royalties in a greater amount” can be expensed in the year paid, 26 C.F.R.

1.612-3, 1985. An advance royalty paid under a minimum royalty clause can be expensed in the year of production or else

capitalized and recovered through depletion at the option of the taxpayer. A delay rental is deductible in the year paid.
112 OTA SPECIAL REPORT

If a private lessor wants the fee to accomplish all of the above goals, the nonproduction

payments would be set high enough to provide a return on the property and to make it

economically disadvantageous to keep the lease without going into production shortly, but not so

high as to cause abandonment of an otherwise viable property or to unreasonably divert

resources from development. As an additional incentive the payment may be recoupable against

future production royalties. Private lessors can negotiate each lease individually and tailor the

requirements according to the characteristics of each lessee. Moreover, they can modify the

original terms if the lessee encounters unanticipated economic problems in development. Private

lessors generally do not allow their leases to be assigned without their consent.

Federal lease provisions are generally standardized for all leases. Because of the large

amount of Federal coal, it would probably be impractical for the Department to devote the same

level of effort and care as a private lessee in the crafting of individual lease production

payment arrangements. For the Federal government as a lessor, it may be better as a matter of

policy to accept a holding fee than that is lower than private leases to assure that economically

viable properties are not needlessly abandoned because of inflexible standard lease provisions.

This does not mean that the Federal payments must be set so low that no properties are

abandoned. Because the Federal government leases such large amounts of coal in excess of

demand, imposition of very high production forcing advance royalty payments may be

burdensome to lessees who have only a slim probability of successfully mining and marketing

their coal. But that imprecisely the effect such payments are intended to have. If lands are not

very close to production, they would not be leased because of the deterring effects of the fair

market value bonus payments, diligence requirements, and advance royalty payments. If leased,

it would not be economically advantageous to hold them for long periods of time without

generating income from them. This assumes that the payment to the government or an assignor

for the leases was not so low that it is still economically advantageous to hold the leases even

with high advance royalty or nonproduction payments because the cost of acquiring new

reserves would be so much higher. If lessees continue to hold old leases with higher rentals and

nonproduction payments, that is an indication that the lease is still valuable.

The holding fees need not be recoupable, although it is generally thought that

recoupability creates an incentive to produce by holding out the prospect of gaining at least

partial credit for payments against future obligations and allows higher payments to be extracted

in advance of production. Some private lessees have tempered the impact of advance payments

by making them partially recoupable over a short period of time. For example, a lessor might

include a provision that 50 percent of the advance royalty paid is recoupable against production

royalties in excess of minimum production levels for a period of five years after payment. This

provides an incentive to bring the lease into production at greater than the minimum production

rate within five years to recapture part of the advance royalty, while assuring the lessor a fairly

constant stream of revenue.

If the holding fee is not intended as a major spur to development but rather as an

additional payment for the privilege of extending a nonproducing lease, it need not be as high

as an advance royalty intended as an effective production forcing mechanism and it need not be

recoupable.

But to encourage development production, advance royalties must be high enough so that

the lessee is deterred from delaying production, assuming that he can sell any coal that is mined.

If the 10-year or other production deadline for Federal leases is maintained a modest holding

fee, such as a delay rental payment, might be an effective means of generating revenue from

nonproducing leases which provides flexibility to both the government and the lessee, but makes

the holding of such leases less economically attractive after a few years. If the fee were too low

its effects would be insignificant.
OTA SPECIAL REPORT 113

There are many decisions in setting an appropriate holding fee. Payments can be based

on acreage, reserves, or minimum production levels. A flat rate can be imposed for all leases or

varied by region and mine type or on the sales price of coal. The payment can be fully or

partially recoupable or nonrecoupable. Payments might start immediately or after the lease has

been held for 10 years, or when the lessee wishes to acquire a new lease. An additional

consideration is how long payments should be accepted instead of production. Should the

payment in lieu of production be discretionary or nondiscretionary, i.e. must the Secretary

approve it initially or every year, or will it be left to the lessee to decide when and if to pay.

OTA’s review of suggested types of holding fees revealed that different kinds of payments may

have different results on project economics depending on high they are, whether they are

recoupable and how they are handled for tax and accounting purposes.

Acreage based payments offer the advantage of ease of calculation and little margin for

error or uncertainty; but have the disadvantage (assuming a uniform acreage payment for all

leases) of not reflecting the differences in the sales price of the coal, mining costs, seam

thickness, or coal quality. Reserves-based payments can be made using either a flat cents per

ton or percent of value approach. The payment can be made on either total in-place or

recoverable reserves. Because of the uncertainties in calculating the reserves under lease, there

is more uncertainty and potential for disagreement in setting reserves payments than acreage

payments. However, OTA believes that there insufficient reliable information on leased coal

reserves for the Department and the lessees to estimate reserves within an acceptable margin of

error for the purposes of establishing reserves-based payments.

A flat rate per ton offers ease of calculation but does not distinguish between the

characteristics of coals in different regions. Unless it includes an inflation adjustment, it would

remain constant as the price of coal rises or falls. An ad valorem tonnage based payment is

more closely tied to the price of coal, and to high mining costs. It rises with inflation and

declines with a drop in coal prices. In the absence of mine specific production costs, the

Secretary would have to establish a mine mouth price of coal for some leases. The additional

calculations and information requirements of an ad valorem rate could also make the

determinations suspect if they appeared to be too low.

Lessees with thick or multiple seams (more tons per acre) generally prefer an acreage

based payment, because they effectively pay less. Lessees with thin seams would prefer a

tonnage based payment up to a certain level in comparison with an acreage payment. Lessees

who have coal with a high sales price, generally would not like an ad valorem rate. Coal sells

for a high price generally because of high mining costs primarily associated with underground

mines and the higher per ton price needed to recoup the investment and a reasonable return

than required for a larger surface mine with the same investment. Ad valorem rates would tend

to have a greater impact on them. A flat rate of, for example, 1 cent per ton would tend to

have less impact on the high cost underground mine producers than it would on the relatively

low cost surface mines. This does place greater economic pressure on low cost producers to

develop, which for many policy reasons may be a desirable result.

The ad valorem approach also has some advantages. It seems to produce more revenue.

It increases as the price of coal increases, thus could keep pace with inflation, An ad valorem

rate favors low cost producers as it tends to make high cost and underground coal even more

costly, assuming they pay the same rate. It’s major disadvantages is that it is more complex to

administer if it is done lease by lease rather than on regional basis, because the Department

must establish a selling price for coal that has not yet been sold. If the same rate is applied to

all coal, it has an uneven effect.
—

114 OTA SPECIAL REPORT

The relative advantages and disadvantages of escalating payment requirements are based

almost entirely on how such a mechanism is structured. Properly constructed, it could be quite

effective in imposing increasingly more pressure. Failing that, it seems to offer no significant

benefit over other payment approaches for the lessor.

Advantages include a low initial cost, higher later cost, which allows cost impact to be

phased in gradually. The low initial holding cost might allow flexibility and low cost extension

of time to comply. Steeper later payments may provide the effective force for lessee to develop

or divest and is similar to payments associated with a gradual scale up of mine development and

production. The approach is intuitively appealing as an increasingly more stringent

requirement. A major disadvantage is that unless the step up in payments were steep, there is

no inherent production forcing effect of graduated payments that are set at the low rates that

have been suggested. At year 10 or 11, graduated payments starting from low level would not

tend to place lessor in same position as either actual development or arguably lease turnback

with the chance or resale. Graduated payments will yield less in actual terms than an average

of the graduated payments over the same period because of the time value of higher payments

in later years. Graduated payments may actually be slower than mine scale up and might be an

incentive to delay production. Only with very large mines or unusual circumstances would

startup rate be at a tenth of a percent per year. The escalating rate yields less revenue that the

constant rate, when the constant rate is the average of the escalating rate; this is due to the time

value (discounted value) of the higher rates in later years.

A payment lower than that required to force production that was adopted as an adjunct

to the section 7 diligence provision could be useful tool and revenue option. OTA assumes that

any section 3 holding fees are intended to impose a penalty or additional financial obligation on

the lessee. The purposes of such a payment would be: for the privilege of continuing to hold

the lease without production; for maintaining the qualification for more leases; to provide an

incentive for either developing or getting rid of the lease; and to generate some income to the

government from old leases that were originally acquired at very low or no bonus payments.

The levels of payment required to satisfy each of these goals is different. The payments can

be as high as needed, in the judgment of Congress or the Secretary, to extract a fair price in

return for the benefit conferred. If the intent is to allow a lessee to buy out of the section 3

penalty and to generate some revenue, comparison with other lease obligations or the bonus to

be paid for a new lease are useful in deciding “how much is enough” for such payments. If,

however, the payment is intended primarily to spur the lessee into making a decision to produce

or give up the lease by making holding the lease without producing too costly, then the

determination becomes more complex. Production forcing payments would have to be set high

to force such action for old leases over 5 to 10 years, and even higher if recoupable.

The relationship of any new payment to existing requirements is an additional

consideration in setting a production forcing payment. Section 7(b) allows payment of advance

royalties in lieu of continuous operation, Currently these royalties are based on production of 1

percent of reserves at the 12.5 percent or 8 percent of value for new and readjusted leases.

There is no authority to reduce these payments. The continued operation payments become due

once the diligent development requirement is satisfied and the lease is not being mined. These

advance royalty payments can be quite high. A lease with a 400 million ton reserve with 4

million tons of production in the Powder River basin at a f.o.b. mine price of $7.00 per ton

would require an advance royalty of $3.5 million per year for the privilege of deferring

production. The additional new holding fee should not be so low that it actually creates a

disincentive to commercial production. Conceivably it might be less risky financially for a

lessee to stay nonproducing than to satisfy diligence and become subject to section 7 advance

royalties. Also one might consider whether a producing lessee should be allowed to make

section 3 payments in lieu of production rather than paying advance royalties under section 7(b)

or forming an LMU.
OTA SPECIAL REPORT 115

A holding fee, similar to a delay rental, a payment for extending a lease without

production, would seem to be an appropriate approach for section 3 and possibly section 7(a).

If two payments were be imposed then each might have to be set lower, or some kind of setoff

might be considered. For most leases a section 3 payment will become due well before any lease

might be subject to termination under section 7(a) or under the Department’s 1982 diligence

system. A payment that effectively resulted in paying 10, 25, or even 50 percent of what would

be paid for a new lease seems to have some merit for old leases. Value is returned to the

government, the lessee can continue to hold the lease for less than acquiring a new lease, but

there is the prospect of a significant financial loss if the lease is lost.

OTA estimated the payments to the government and the net present costs to the lessee

for a range of holding fees described in Table 30. Table 31 shows the total payments over 10

years, the net present value of the payments, the net present cost to the lessee, and the after tax

net present cost to the lessee. OTA estimated the relative costs of selected fee formulations to

show how different formulas might have different results for two model mines: a large surface

mine in the Powder River basin of Wyoming with 200 million tons of reserves and an

underground mine in Utah with over 21 million of reserves. Mine size was based on a review

of tracts with section 3 compliance problems. OTA has a computer model available that allows

the calculation of different fee structures for Federal coal leases. The appendix includes a

summary of the mine characteristics and includes more information on the assumptions used in

the analysis and the holding fees analyzed.

The fees analyzed in Table 31 are similar to some recently proposed holding fees

summarized in Table 30. Are these various holding fees reasonable? How high can they be

without creating a deterrent for developing otherwise viable operations? There are a number of

proposals and analyses that support the use of very small payments for section 3 compliance.

OTA found that some of the suggested payment levels are probably too low to have any real

impact as production incentives. (See Appendix C.) OTA found that there are several available

kinds of lease transactions that provide a useful reference for comparing the potential economic

impacts of holding fees. These include: a comparison of cumulative holding fees with the

bonuses paid to acquire new lease tracts; a comparison of annual holding fees with rentals and

royalties on existing leases; a comparison of total holding fees with the overall investment in

development of a new mine.

OTA looked at the prices per ton in the 1981-82 regional coal sales to select several

representative costs per ton in those sales assuming that the sale data reflect what lessees might

have to pay for a new tract. 77 The bonus payments ranged from a low of $ 0.0003 per ton for

a production maintenance tract in the Hanna Basin of Wyoming to as much as $0.46 for a large

new production tract in central Utah. Very large new production or production maintenance

tracts in the Powder River basin were sold at between $0.025 and $0.08 per ton in 1982. The

better quality new production tracts in Northwest Colorado sold from $0.11 to $0.33 per ton in

1981. In Utah production maintenance and new production tracts sold from $0.06 per ton to as

much as $0.68 per ton in 1981 to 1982. All new leases carry the higher 12.5 percent (or 8

percent underground) statutory royalties and ten year diligence periods. Many noncomplying

section 3 leases carry significantly lower royalties and more lenient production requirements and

so may be worth considerably more than new leases on the same lands. If one compares the net

77 Without expressing any determination of whether the prices received were truly reflective of fair market value or

represented the actual market value of the Federal reaemea in those regions at the time, or now, OTA notes that there is

substantial disagreement between the Department and its critics in Congress and elsewhere over whether the prices were

adequate.
116 OTA SPECIAL REPORT

aJ

c c

0 0

L
OTA SPECIAL REPORT 117

TABLE 31

ANALYSIS OF SELECTED HOLDING FEE PROPOSALS

HOLDING FEE ANNUAL PAYMENT TOTAL PAYMENT NET PRESENT COST

Flat Rate

1. $25 /acre

2 . $0.001/ton

of reserves

3 . $0.01/ton

of reserves

4. $0.0005/ton

of reserves

Ad Valorem on Production

5. 0.3 % reserves at

standard rate

12.5% surface

8% underground

(without adj. for

recoupment)

6. Escalating from

0.5 to 2.5 % reserves

at standard rate over

years 1-5, then at

2.5 % years 5-10

(without adj. for

recoupment)

Wyoming

50,00 0

180,000

1,800,00 0

90,00 0

513,000

Utah

50,000

21,600

216,000

10,800

134,784

855,000- 351,00 0

4,275,00 0 1,755,00 0

Wyoming Utah

500,000 500,000

1,800,00 0 210,000

18,000,000 2,160,00 0

900,000 108,000

5,130,00 0 1,347,84 0

34,200,000 14,040,000

Wyoming

250,93 8

903,37 8

9,033,78 4

451,68 9

2,477,77 4

14,923,17 0

Utah

250,938

108,405

1,084,054

54,203

648,790

6,126,354

SOURCE: Office of Technology Assessment
118 OTA SPECIAL REPORT

present

tract as

percent

present

cost of various holding fee options to what a lessee might expect to pay for a similar

a new Federal coal lease, one finds that the total holding fee payments range from five

or less of the bonus value to as much as one half of the bonus value. Using the net

cost allows the two lump sum payments to be compared

Existing leases pay from $1 to $5 per acre in annual rentals. A 2,000 acre lease would

thus generate from $2000 to $10,000 annually. Leases that are subject to continued operations

requirements can pay advance royalties of as much as 12.5 percent of the selling price on annual

production of 1 percent of reserves. For a mine with 200 million tons of reserves in the

Powder River basin, section 7(b) advance royalties, which can be used to comply with section 3,

would be $1.5 million per year on coal selling at $6.00 per ton. These advance royalties can

later be credited against production royalties.

According to testimony presented before Congress in hearings on section 3 legislation,

pre-mining capital investment costs for a large surface mine in the Powder River basin of

Wyoming can be in excess of $100 million. 78 For a large underground mine in the Uinta

Region of Colorado, capital costs were estimated at about $50 million, with total operating costs

of over $65 million during mine development and initial commercial production.

OTA’s review of various holding fees indicated that aggregate payments under some

options when compared with other types of payments on Federal coal leases and the overall

investment required for a new lease or mine, were probably not significant enough to prompt a

lessee to relinquish a lease if production were not imminent within a few years. Moreover

many holding fees have disproportionate regional impacts because of the difference in mining

costs between regions. Taking into account the various considerations in setting a holding fee,

such as ease of administration, predictability, and effectiveness, OTA found that a

nonrecoupable annual payment at a level of about 1 cent per ton of recoverable reserves, for

example, would measurably affect the economics of holding nonproducing leases in virtually all

regions and would place at least some economic pressure on lessees to develop or relinquish

leases. It would place considerably more pressure on lessees with low cost low price reserves

than on higher cost high price producers. It would provide lessees with some flexibility in

complying with section 3 and would additionally generate revenues to the Federal government

and the States from pre-1976 leases. If the payments were made to run with the lease and not

end if the lease were assigned, it would also diminish the potential for lessees to benefit from

any increase in the price of Federal reserves, because the new lessee would have to factor in the

payment of holding fees to the government in deciding how much to pay for the lease. The use

of holding fees as alternative production incentives for Federal coal leases is further discussed

in the following chapter.

78 See for example, Statement of Mobil Corporation in Hearings on H.R. 1530 Before the Subcommittee on

Management, and Bonneville Power Administration of the Committee on Interior and Insular Affaira, 98th

June 21, 1984.

Mining, Forest

Cong. 2d Seas.,
CHAPTER 5

ALTERNATIVE LEGISLATIVE OPTIONS FOR PROMOTING

TIMELY DEVELOPMENT OF FEDERAL COAL LEASES

How long and under what conditions a lessee should be allowed to hold a Federal coal

lease without producing is fundamentally a political decision. The decision largely depends on

one’s views on the relative importance of sometimes conflicting policy goals underlying the

Federal coal leasing program and on how vigorously the diligent development requirements

should be enforced for a resource that is abundant and an industry that historically suffers

chronic overcapacity. In the 1976 amendments, Congress firmly asserted a policy that Federal

coal leases are to be held for production and that production should begin within a reasonably

short period of time. New leases must produce in 10 years or they are terminated. Congress

left the production requirements imposed by the 1976 regulations and lease terms for preFCLAA leases untouched. Congress did, however, restrict future acquisition of new leases by

nonproducing lessees by adding section 3. This nonproduction penalty was aimed directly at the

old pre-FCLAA leases and particularly at the holdings of large energy companies and other

conglomerates.

In the “normal” competitive structure of western coal operations there is a significant

excess of production capacity over current production. There is simply more coal under lease

than can reasonably be mined and sold or committed under long-term contract in the next 5 to

15 years. This situation is unlikely to change because leasing policies over several

administrations have tended for various reasons to favor leasing of coal reserves well in excess

of the amounts needed to meet projected demand. For this reason there will be many Federal

leaseholders that will not be able to mine their leases despite even their most “diligent” efforts at

marketing and development. It is not surprising therefore, that Federal coal lessees, including

many major companies, are seeking legislature relief as section 3 production dates approach.

But section 3 relief raises a number of difficult issues concerning the management of Federal

mineral resources and energy competition.

In evaluating various proposals for amending the Federal coal leasing laws, the preceding

two facts should be kept in mind. Under current law a Federal coal lease has an initial term of

20 years, but any lease that is not producing after 10 years is terminated. This schedule

includes a reasonable allowance for the time and efforts necessary to market coal and to plan,

permit and construct a mine. OTA has previously testified that 10 years provides ample time to

bring a lease into production, but attaining full operating capacity can take much longer.

OTA has examined a range of possible legislative options for amending section 3. The

options, their advantages and disadvantages are discussed in this section. OTA found the

contributions of the participants at its May 1985 section 3 workshop were extremely useful in

evaluating these options. The major legislative options for amending section 3 that we have

analyzed include the following:

Option 1: Keep section 3 unchanged.

Option 2: Repeal section 3.

Option 3: Limit section 3 to new coal leases only.

Option 4: Extend the time to comply with section 3.

Option 5: Modify section 3 to allow achievement of alternative lease development

milestones to satisfy the producing in commercial quantities requirement.
120 OTA SPECIAL REPORT

Option 6: Remove the 10-year holding period for section 3 and make

disqualification applicable to anyone holding a nonproducing lease that is more than 10

years old.

Option 7: Allow noncomplying lessees to make annual payments in lieu of

production on old leases to qualify for new leases.

Option 8: Impose a surcharge on all new leases acquired by a noncomplying lessee.

Option 9: Require turnback of an equivalent amount of noncomplying lease reserves

or acreage to qualify for each new lease.

Option 10: Allow relinquishment of all noncomplying old leases in exchange for

section 3 relief and a preferential option to purchase a new lease for the same lands if

they are reoffered after being subject to land use planning, environmental screening, and

surface owner consent requirements for new leases.

Several options have parallels in legislation that has been introduced in the 99th

Congress. OTA’s discussion of the options does not deal with the specifics of individual bills,

but rather seeks to contrast different generic approaches. In evaluating each option, OTA

considered several factors: 1 ) how well each option provides relief from section 3

disqualification for the different classes of noncomplying lessees; 2) how well the option

advanced the policies inherent in section 3 of encouraging production, deterring speculation,

and discouraging the extensive holding of nonproducing coal leases by large energy

conglomerates; and 3) how easily and predictably the option can be implemented and

administered. (See Table 32.)

Several options are more or less likely to promote the various goals of section 3

legislation depending on which goal is given priority. Several options would assist nonproducing

lessees in complying with the producing in commercial quantities requirement, while at the same

time maintaining the policy that leases are to be held for development and production, but the

balance between these two goals is struck differently in each. For example, if a major goal is

providing flexibility for section 3 compliance, holding fees would offer this benefit to all

lessees, while maintaining an economic incentive for development. It would also be possible to

combine several options, such as a holding fee or lease surcharge and a turnback requirement to

give lessees a choice of alternative compliance mechanisms.

Option 1 - keeping and enforcing section 3 unchanged - is most consistent with the

purposes for which section 3 was enacted, particularly since the Department of the Interior has

substantially relaxed, or even nullified, most production requirements for pre-FCLAA leases.

OTA’s analysis in Chapter 4 shows that the Department has ample discretion to resolve most

compliance difficulties for those lessees that are producing or have produced coal from their

leases or that have experienced unusual delays in mine development. Keeping section 3 would

maintain fairness for lessees who have already relinquished or sold leases or made substantial

investments in mining operations in order to comply.

Option 1 and Option 10 appear likely to return a significant number of nonproducing

leases to the government so that environmentally unsuitable lands are removed from the threat

of mining and the remaining valuable coal tracts may be reoffered for lease at fair market

value. Option 10, the lease rollover option, would give the relinquishing leaseholder priority in

obtaining the new lease for fair market value.

Option 7 maintains the underlying policies of section 3 but gives the greatest degree of

flexibility to lessees and the Department in avoiding the section 3 disqualification. Option 7

holding fees would allow a lessee to make qualifying annual payments on all noncomplying

leases in order to retain eligibility for new leases. An economic penalty would be imposed for

nonproduction, but lessees would be allowed to keep old leases and acquire new ones. This
OTA SPECIAL REPORT 121

option could be reinforced by an additional amendment that would apply similar nonproduction

payments to all old leases on the next lease readjustment. Substantial holding fees would force

some leases to be relinquished and would lessen the assignment value of others, thus

discouraging speculation. In addition, the qualifying payments would provide some preproduction revenues to the Federal and state governments.

Repeal of section 3 (Option 2) or limiting it to coal leases only (Option 3) would provide

the greatest relief from the effects of section 3 enforcement. These two options also remove or

lessen the only statutory incentive for the major nonproducing lessees to begin mining coal

from their leases or get rid of them before the mid-1990s when current diligence requirements

might be enforced. Given the uncertainty over what diligence requirements are applicable to

pre-FCLAA leases and when, if ever, they must be enforced, these options may effectively

remove the only restraint on continued holding of these leases. These two options therefore

appear to be inconsistent with some of the fundamental policies underlying section 3 and the

rest of FCLAA.

The lease turnback approach (Option 9) offers the greatest benefit to leaseholders that

have large amounts of nonproducing acreage or reserves (that is, next to repeal). These lessees

could hold nonproducing reserves until and unless a new coal lease is sought. Turnback is only

workable if section 3 is applied to coal leases only.

Option 8, would impose a surcharge on new coal leases sought by a noncomplying

leaseholder and would also be attractive to some major noncomplying lessees, particularly if

only a small amount of additional acreage or reserves is needed.

Lessees that for some reason cannot satisfy the section 3 commercial quantities test as

currently structured by the Department, but that are producing or close to production would be

aided by three options: Option 4, an extension of the section 3 holding period; Option 7,

qualifying payments on any noncomplying leases; and Option 5, acceptance of achievement of

alternative mine development milestones to comply with section 3.

Option 6 would magnify the impact of section 3 by making it apply to all nonproducing

leases by removing the ten year holding period. This would

section 3 to encourage production and deter speculation, and

relaxation of diligent production rules. A more stringent

however, would mean continued pressure for legislative relief,

allowed.

These options were evaluated primarily as alternatives

advance the original purposes of

reverse in part the Department’s

disqualification penalty would,

unless additional exceptions were

for section 3, but several options

could also be used to provide an alternative compliance mechanism for the MLA’s section 7

diligence requirement for new and readjusted leases. Among alternative options for the existing

section 7 diligence requirements are: 1) an extension of the 10-year period, 2) the use of

alternative development milestones to satisfy the initial diligent production obligations, 3) the use

of a holding fee to extend the 10-year diligence period for nonproducing leases.
.. . —.—. - . . -. . . . . .— — ——.—..—.— ——— ..—. —

122 OTA SPECIAL REPORT

II II II II
OTA SPECIAL REPORT 123

Option 1:

No Action - Keep Section 3 Unchanged.

This option maintains the status quo. Section 3 would be left unchanged. After August

4, 1986 the Secretary could not issue new onshore Federal mineral leases for coal, oil and gas, oil

shale, gilsonite, sodium, phosphate, sulfur and potash to any Federal coal lessee (or its affiliates)

if the lessee has held a coal lease for 10 years and is not producing coal in commercial

quantities. OTA assumes that the Interior Department will follow the Solicitor’s opinion of

February 12, 1985 in implementing section 3. 1 It is not known how the Department will

exercise any of its residual discretion in interpreting key terms such as: “producing in

commercial quantities, “ “affiliate” or “controlled by or under common control with,” or “except

as provided for in section 7(b).” These interpretations could be used to reduce the potential

impacts of section 3 enforcement. Third parties will aid section 3 enforcement for oil and gas

leases by protesting or appealing any lease awards or issuances to possible noncomplying

leaseholders and related entities.

The noncomplying lessee, its parent company and any affiliates and subsidiaries, will be

foreclosed from onshore mineral leasing as long as they hold the nonproducing leases. The

MLA permits a noncomplying lessee to obtain additional Federal coal through lease

modifications and assignments; however, DOI has decided that it will also apply the section 3

disqualification to coal lease assignments. Oil and gas activities will be limited to assignments

of leases or operating interests. It is unlikely that the Department would extend the section 3

disqualification to oil and gas lease assignments because of the different statutory and lease

provisions on such assignments.

The section 3 penalty could force the sale or relinquishment of nonproducing coal

leases. However, many pre-FCLAA leases were originally acquired at very low cost and the

investments in them have been minimal compared to cost of opening a new mine or acquiring

new leases. For these lessees, any loss due to relinquishment would largely be of a competitive

advantage rather than of past expenditures. It is likely that some of the better quality

noncomplying leases could be sold for substantially more than the Federal Government was

originally paid for them, even taking into account the effects of inflation in intervening years.

The section 3 disqualification could reduce the number of potential bidders for Federal

coal leases and other onshore competitive mineral leases. The impacts of these disqualifications

may not be as significant as the section 3 noncompliance figures suggest.

Several factors limit potential impacts on coal leasing. There are normally few bidders

for any given coal tract because interest in individual tracts is usually limited to only a few

firms. The fair market value requirement, if strongly administered, can assure that the

acceptable bid reflects a fair return to the public for coal leases. Reduction in the number of

potential bidders could have little or no effect on lease sales or revenues unless the lessee was a

likely bidder for a particular tract. On the other hind, it is possible that the additional bonus

premiums might be reduced on tracts where there would have been intensively competitive

bidding between parties that might drive up the auction price of the coal over its fair market

1 Solicitor’s Opinions are generally binding on the Department, however Solicitor’s Opinions can be changed or modified.

There is recent precedent for revisions and even reversals of Solicitor’s conclusions of law concerning the interpretation of

various provisions of the governing coal leases. Among the most notable were the 1981 opinion on applicability of the 1976

diligence regulations, and an earlier series of opinions on the effects of mining claims on the validity of coal prospecting

permits. See the discussion of the later issue in chapter 9 of OTA’s 1981 coal leasing report.
124 OTA SPECIAL REPORT

value if the disqualified bidder could compete. In these cases, reliance on sale competition as

an indicator or guarantee that the highest bid is fair market value becomes even less tenable

than previously. Moreover, fewer tracts might be leased if the most likely or only bidders are

disqualified. The currently available excess production capacity in mines held by complying

lessees also makes it unlikely that coal supplies to consumers will be affected or that Federal

production royalties would be lost.

Overall impacts on competition for Federal oil and gas leases also should be minimal.

Most onshore oil and gas leases are not awarded by competitive bidding, but are awarded

through the lottery system or over the counter noncompetitive leasing. Many competitors for oil

and gas leases are unlikely to have any involvement in coal leasing and would be unaffected by

section 3. It is also doubtful that a major oil and gas producer would abandon participation in

Federal onshore oil and gas leasing to preserve nonproducing coal reserves, particularly since

coal operations typically contribute only a minor share of corporate revenues. One major

avenue of lease acquisition remains unaffected; noncomplying coal lessees and their affiliates

can secure onshore mineral leases by assignments.

Advantages:

1. No legislative action is required.

2. Congressional inaction would be interpreted as reaffirming FCLAA’s policy that

Federal coal leases are to be held for timely production.

3. Keeping section 3 preserves the only remaining FCLAA-era requirement that might

force development, turnback, or divestiture of nonproducing old leases in 1985-90s rather than

20 or more years after passage of FCLAA. Moreover, the firms most affected by potential

section 3 disqualification are large energy companies with other coal and mineral leasing

interests which were the particular targets of Congress in passing section 3.

4. Section 3 enforcement maintains fairness for lessees who have already brought leases

into production, or relinquished, or traded old nonproducing leases to comply.

5. Assignments, or sales of new leases on relinquished tracts could make leases available

for development by new parties.

6. Relinquished leases can be subjected to land use planning and screening and surface

owner consent requirements before reoffering for sale by competitive bid. Resale could

generate revenues for State and Federal government. Surface owners of lands leased before

FCLAA without surface over consent might be eventually freed from the threat of dispossession

if leases are relinquished.

7. The quality of the leased reserves inventory could be improved through

relinquishment of leases with poor development potential. The accompanying reduction in the

total amount of leased reserves might make future new lease sales easier to justify politically.

Disadvantages:

1. Disqualification could be imposed for only one old nonproducing lease. Companies

with many noncomplying leases would be treated the same as a company with one.

2. Delays by the Department in issuing guidelines interpreting section 3 and specifying

procedures for qualifying for exceptions to it have left many lessees with producing mines with
OTA SPECIAL REPORT 125

uncertain prospects for obtaining approvals of LMUs or changes in operations before August 4,

1986.

3. Lack of flexibility in interpreting commercial quantities under existing rules could

lead to a harsh disqualification for lessees with large tracts that have begun lease development

and production but have not yet reached a production rate of 1 percent of reserves. Some

parent companies have threatened that they might sell or abandon a subsidiary’s developed coal

property rather than risk section 3 impacts on oil and gas activities.

4. Administrative uncertainties and delays in leasing coal and other minerals would be

created if effective procedures are not introduced to determine section 3 compliance status of

lease applicants and bidders.

5. Section 3 can prevent issuance of coal and other preference right lease applications

(PRLA’s) to prospectors who had invested time, effort, and money in discovering commercially

valuable deposits.

6. Companies could turn back leases on which some preparation for development has

occurred, possibly increasing the development time for the same tract if it is later resold and

reissued to same or different company.

7. The inventory of existing leased reserves available to be mined could be reduced at a

time when the potential for additional future leasing is highly uncertain because of delays, and

reorganization of the coal program. This impact could negligible if the Federal coal program

resumes operations with more predictability and greater public confidence.

8. Some operators might prematurely mine areas of existing mines at added cost or

stockpile coal with no purchasers to comply with section 3 guidelines. (If a mine is producing or

near to production, the potential period during which section 3 would apply may be very short

—. a couple of months or a year or two at most. The disqualification could nevertheless be

disruptive and restrictive of other mineral leasing activities, particularly oil and gas operations.

9. States would lose annual rental payments through relinquishment of leases with poor

development potential, For States with significant acreage under lease but little production, the

loss of one source of annual revenue would be small but nevertheless significant.

10. Many nonproducing lessees are left unaffected by section 3 because it creates a

penalty only for those noncomplying lessees seeking new leases directly from the Government.

11. Disqualifications could reduce the number of coal tracts leased and the

competitive bonus revenues where the noncomplying lessee is the most likely or only bidder.

Option 2:

Repeal Section 3

Repeal of section 3 in its entirety would eliminate most of the future impacts of section

3 if passed on before August 4, 1986. The other production-forcing provisions of the MLA

would remain in effect. New leases would still have to produce in 10 years or be terminated.

Existing leases would continue to be subject to the diligence provisions of the MLA, specific

lease terms, and the 1982 diligence regulations (or whatever requirements the DOI may in the

future apply to such leases. ) (Changes to the diligence requirements of section 7 of the M L A
126 OTA SPECIAL REPORT

imposed by section 6 of FCLAA are not considered here; see the discussion in Chapter 4.) The

fairness issue would be raised by lessees who have already moved to bring operations into

compliance with section 3 by relinquishing, developing or selling nonproducing reserves.

Repeal of section 3 might make old leases even more valuable than new leases because

the old leases would no longer carry the potential for lease disqualification. To a very large

extent, the 1982 changes in diligence regulations which gave lessees an additional 2 to 20 years

to comply with the diligent production requirement have already widened the disparity between

old and new leases. Market conditions may have partially offset any increase in value.

Advantages:

1. Repeal provides maximum relief from section 3 penalty for all lessees.

2. The potential administrative burden in ascertaining qualifications of lessees and

applicants is lifted from coal and other leasing programs

3. The need for accelerated review and approval of LMU applications for producing

mines is reduced because it is no longer necessary to satisfy section 3 production requirement.

Some lessees can avoid additional production requirements imposed with LMU approval that

would otherwise be needed to comply with section 3.

4. Penalties on noncoal leasing activities resulting from noncompliance with coal

program requirements are eliminated.

5. Lessees could continue holding most nonproducing leases as an inventory to meet

potential increases in future demand until diligence provisions might be enforced.

6. Lease readjustment to include the 1982 diligent production requirements (assuming it

is timely and effective) and subsequent enforcement will gradually force old leases to begin

producing or be terminated in the mid-to late-1990s.

7. The overhang of old lease reserves could dampen demand for additional large scale

leasing in many areas and would allow the coal management program to resume leasing at low

levels and to devote more time, and resources to tract evaluation and environmental review for

the few lands that are leased.

Disadvantages:

1. Repeal would be interpreted as congressional approval of 1982 changes in diligence

requirements for existing leases and as a reversal of the FCLAA policies against nonproductive

holding of old leases, particularly by large energy companies and conglomerates.

2. Repeal effectively would remove last reform of the mid- 1970s aimed at a resolution

of the overhang of nonproducing old leases.

3. Action on section 3 relief does not aid new and readjusted leases with 10-year

diligent production deadlines. Pressure for legislative relief from these provisions would

continue. Other critics of the leasing program would press for legislative action to deal with old

leases because simple repeal of section 3 does not address the problems with arguably inadequate

diligence provisions and enforcement mechanisms for existing nonproducing leases.
OTA SPECIAL REPORT 127

4. Repeal would eliminate an early opportunity to bring more old leases under th e

production requirements of FCLAA and 1982 diligence system by requiring modification o f

lease terms as a condition of LMU approval to comply with section 3 .

5. Repeal would preserve until the 1990s and beyond the competitive advantage of ol d

leases carrying minimal royalty and production requirements and few, if any, discretionar y

environmental protection stipulations.

6. Repeal would be viewed by some as ’’rewarding” noncomplying, nonproducing lessee s

over lessees that brought leases into production or sold or relinquished nonproducing leases i n

anticipation of section 3 enforcement .

Option 3:

Limit Section 3 to Issuance of Coal Leases.

Section 3 would be amended to provide that the Secretary shall not issue a coal lease to a

noncomplying lessee or any related entities.

2

This option would eliminate the impacts on oi l

and gas and other mineral leases, but would retain many of the other advantages an d

disadvantages of option 1 . Limiting section 3 to coal leases substantially undercuts th e

effectiveness of the provision as an incentive for the few major lessees with many nonproducin g

leases to develop, sell or relinquish their noncomplying leases if the threat to the companies oi l

and gas operations are removed . Disqualification would then have very little impact unless th e

noncomplying lessee needed more coal for an existing mine (in excess of the 160 acres per leas e

available through noncompetitive lease modification. )

Advantages:

1. Limiting the provision to coal leases only removes the harsh noncoal impacts o f

section 3 penalties while ‘ - -

. .

timely production .

2. Nonproducin g

operations are exempted .

lessees.

still preserving the basic policy that coal leases are to be held fo r

coal lessees continue under the section 3 penalty, but other minera l

This provides full relief for some, but not all of the noncomplyin g

3. The nonproduction penalty is tied more directly tied to the activity that is bein g

punished by the limitation to coal leases.

Disadvantages:

1. The limitation would effectively remove the force of section 3 as a tool for

promoting development or divestiture of old nonproducing leases by many large leaseholders.

2. Option would not provide relief for a coal lessee that has not yet produced

commercial quantities of 1 percent of reserves from a mine that is under development, if the

lessee needs additional reserves for other mines during disqualification.

2 A variation of this option would be to limit section 3 to the issuance of competitive coal leases. This alternate option

would have all the same advantages and disadvantages of the coal only option, however it would allow the issuance of

pending preference right lease applications if the required showings were made entitling the lessee to a noncompetitive coal

lease.
128 OTA SPECIAL REPORT

3. A larger group of lessees would be unaffected by section 3 than under option 1.

Nonproducing lessees with large amounts of reserves might remain unaffected for years, if at

all, because they would not need to acquire any additional coal reserves in order to compete for

new contracts.

4. Companies that prepared to comply with section 3 by divestiture of nonproducing

leases would complain of unfairness and competitive disadvantage. The companies would argue

that noncomplying leaseholders had been “rewarded” by waiting.

Option 4:

Extend the Time to Comply with Section 3.

There are two ways to extend the section 3 production deadlines. One approach would

be to modify section 3 to lengthen the 10-year section 3 holding period, for example by two or

five years, giving the lessees more time to bring leases into production. As reported from

committee section 3 originally provided 15 years for a lease to go into production but this was

shortened by a floor amendment. In the alternative, a noncomplying lessee might be given an

extension if some progress toward development were demonstrated, such as, for example, a

substantial investment in mine construction and development, or execution of a contract for

delivery of coal from the mine. An extension would delay disqualification and would allow

lessees even more time to find buyers, develop mines, produce enough to satisfy the commercial

quantities test, or to stockpile coal reserves and other leases against eventual application of

section 3. An extension might delay and diminish the effects of eventual section 3 enforcement.

The conditional extension would be similar to option 5 which expands exceptions to the

producing in commercial quantities requirement, but lease would still have to be producing at

end of any extended period.

Advantages:

1. Extension delays imposition of the penalty while giving Congress and the Department

more time to consider changes to section 3 and diligence provisions of coal leasing laws.

2. Extension would provide relief from the immediate impacts of section 3 enforcement

in 1986 while maintaining the principle that Federal leases are to be held for development.

3. An extension would shift the section 3 penalty impacts forward in time to begin to

coincide with the end of diligent development periods under the Department’s 1982 diligence

policy for readjusted leases.

4. A conditional extension could provide some additional flexibility in compliance for a

mine close to commercial operations or that had not yet produced coal in commercial quantities.

Such extensions would be discretionary with the Secretary and based on a finding that the lessee

has demonstrated reasonable efforts at developing the lease. The lessee would still be faced

with a production deadline.

Disadvantages:

1. Delay merely prolongs the eventual penalty for many leaseholders if a short extension

is used. Current market conditions in some areas show little prospect of substantially increased

demand for coal.
OTA SPECIAL REPORT 129

2. Extension would be similar to repeal in that it would effectively remove perhaps the

last remaining mechanism adopted in the mid-1970s to force development or divestiture of old

leases that had been held without production. Extensions of five years or more would defer the

impacts into the 1990s on leases that already have been held idle for 10 to 20 years or more.

3. Pressure for legislative relief from section 3 would continue, although it might abate

somewhat during initial period of extension.

4. Public and industry confidence in the Department’s administration of any provision

for discretionary extensions may be low. Unless the coal management program and its image

are dramatically altered, any conditional extensions would be subject to criticism that they were

the results of political pressure, or favoritism. The Fair Market Value Commission (2 members)

recommended against discretionary extensions of the 10-year diligence period for this reason.

5. Review of requests for discretionary extensions would place additional administrative

burdens on the Department given the large number of leases involved.

Option 5:

Modify the Producing in Commercial Quantities Requirement to

Allow Additional Exceptions.

This option would preserve section 3, but address the concerns of producing lessees or

lessees who have made significant investments and progress in bringing leases into production.

This option would allow an exception to section 3 for a lessee who demonstrated that it

achieved one or more milestones in mine development. These milestones might include a

minimum investment in equipment and facilities, mine plan development and permitting, or a

contract for sale of coal from the mine. Milestones can be a range of actions that provide

demonstrable evidence of lessee commitments and investment in development of the lease.

However, mine plans have been submitted and construction commenced on mines that do not

operate at capacity or that were later closed because of poor market conditions. The key in

setting effective milestone is when the decision to commit resources for compliance must be

made. The later in a lease term that a milestone must be achieved, the more costly the

provision reasonably should be. These types of diligence and production requirements do not

guarantee the success of the venture, but only that lessee has made efforts to generate revenues

for lessor thus fulfilling the supposed intent of parties.

This option could also legislatively “correct” the Department’s restrictive definition of

producing in commercial quantities and its conclusions concerning the availability of exceptions.

In making such an amendment, commercial quantities might be defined as 1 percent of lease

reserves. Some lessees would like to see this regulatory definition locked into law because they

view it as the most favorable interpretation they would be likely to get. Other lessees, although

agreeing that such a definition of commercial quantities is lenient, oppose any definition that

sets an inflexible production goal without some allowance for the normal uncertainties in mine

construction and operation. A large operation in its early years may find it difficult to satisfy a

one percent production level and would look for alternative ways to demonstrate its commercial

operation.
—-—

130 OTA SPECIAL REPORT

Advantages:

1. Option 4 provides additional flexibility in meeting the producing in commercial

quantities requirement and thus could relieve lessees who are producing or are almost producing

from a potential penalty for noncompliance.

2. The distinction is preserved between operators that are producing or actively

developing a mine and those that are not. The section 3 penalty is maintained for the

“undiligent” lessees.

3. Additional exceptions for nonproducing leases could obviate the need for LMU

approvals for section 3 compliance for many mines.

Disadvantages:

1. Expanding exceptions to section 3 could be viewed by as weakening section 3 (and

section 7 diligence provisions) if what is required to qualify is so minimal as to be viewed as

frivolous. Because of the reduced public confidence in the coal leasing program, vesting

extensive discretion in the Department to grant exceptions could continue the suspicion and

controversy over coal lease management decisions.

2. The option provides little relief for lessees with many undeveloped leases, even

though they may have one or more producing mines, or for leases with some leases are in later

stages of development.

3. The substantial investment and supply contract exceptions would involve the

Department in reviewing financial arrangements and contractual terms of lessees. The

Department may not have enough competent professionals to perform these tasks adequately.

4. Granting too many exceptions would nullify section 3’s effectiveness.

5. Early opportunities for applying 1982 diligence regulations and FCLAA requirements

for existing leases on LMU approval would be reduced.

Option 6:

Make the Section 3 Producing in Commercial Quantities Requirement

Applicable to All Pre-FCLAA Leases in 1986.

Under this option section 3 would be amended to remove the 10-year holding period

before the producing in commercial quantities requirement applied. The section 3 penalty

would attach to leases and not to leaseholders. Congress would amend section 3 to remove the

“holds and has held a lease.. for ten years” language making the restriction applicable to any

lessee who holds a lease that is not producing after, for example, August 4, 1986. An example

of such a provision would be:

After August 4, 1986, the Secretary shall not issue a lease under the provisions of

this act to any lessee which holds a noncompliance lease. As used in this section,

lessee means any person, association, corporation or other entity that holds actual

or beneficial title to a Federal coal lease and any association, subsidiary, affiliate,

or other entity that controls or is controlled by or is under common control with
OTA SPECIAL REPORT 131

such lessee. Noncompliance lease means a Federal coal lease that has been in

effect for ten or more years and which is not, except as provided for in section

7(b) of this act, producing coal in commercial quantities.”

Such an amendment would indisputably expand the section 3 sanction to all

nonproducing pre-FCLAA leases. (It is assumed that Congress would not use language that

would apply this requirement to post -FCLAA leases or to exchange leases that have preFCLAA effective dates during the first 10 years of their terms,)

The action avoids any constitutional or contractual issues since it restricts the authority of

the Secretary of the Interior and limits the entities that can acquire new leases which are

property rights that have not yet been created.

Advantages:

1. This option provides an additional penalty for all old nonproducing leases that, unlike

the diligent development requirements, is independent of any lease terms, regulations, or

discretionary enforcement decisions.

2. No section 3 relief is provided. This Congressional action would be seen as

reaffirming and strengthening penalties for nonproduction independent of diligence enforcement

by DOI.

3. The obligation to bring a lease into production could not be avoided by assignment.

The section 3 production obligation would more closely track lease diligence obligation; the

development clock would not be restarted with a change in owner.

4. This option would relieve some of administrative burden on the Department in

tracking ownership changes since the producing status of a lease can be readily determined.

5. This provision limits in part the effect of the Department’s 1982 rules changes for

some classes of leaseholders without affecting the terms of old or readjusted leases.

6. Lessees could still retain old leases under the same terms as previously, but could not

get new leases.

Disadvantages:

1. This option magnifies the impacts of section 3 enforcement,

leases would be affected.

2. Pressure for legislative relief would continue.

all nonproducing old

3. This change would disrupt the expectations of assignees who acquired old leases after

1976 assuming that they would have 10 years before disqualification was imposed. The

unfairness issue would be raised,

4. The compliance status of all lease applicants would still have to be determined before

issuing coal or other mineral leases and a larger number of leases would be initially affected.

5. This option would make nonproducing leases less marketable and more likely to be

relinquished and would make it less likely that leases would move into the hands of those who

would mine them more quickly than their current owners.
132 OTA SPECIAL REPORT

6. Major coal producers and oil and gas companies and their affiliates would be

pressured to produce or give up their coal leases.

7. Lack of flexibility in defining producing in commercial quantities could have same

harsh consequences for some lessees as section 3 as it is now.

8. No additional relief is provided from section 3 penalties.

9. Administrative burdens on the Department to approve LMU formations, lease

assignments, suspensions, and relinquishments would be increased because all lessees seeking

such relief to avoid a section 3 penalty would be applying and expecting necessary action before

the same deadline.

10. Lessees that have no immediate need for additional coal leases and that are not

active in other mineral leasing areas would be relatively unaffected and could continue to hold

old nonproducing lease until diligence provisions might be enforced.

Options, 7, 8, 9 and 10:

Adopt New Exceptions to Section 3

Options 7, 8, 9, and 10 would keep and enforce section 3 but allow nonproducing

leaseholders the opportunity to qualify for additional leases. These approaches would add some

flexibility to the administration of section 3. These options include:

Option 7: Addition of a qualifying payment requirement for noncomplying lessees

through voluntary modification of lease terms.

Option 8: Requiring noncomplying lessees to pay a surcharge on any new coal leases.

Option 9: Requiring noncomplying lessees to relinquish equivalent amounts of

noncomplying leased acres or reserves to qualify for new leases, also known as the “lease

turnback” approach.

Option 10: Allowing noncomplying lessees to relinquish old nonproducing leases in

exchange for a preferential option to purchase a new lease on the same lands if it

survives the new lease screening process. This is also known as the “Lease Rollover”

option.

For various reasons, many of these changes could most easily be implemented as

legislative exceptions to section 3. Because of the uncertainty and controversy over the extent

to which Congress can alter the financial obligations of Federal leases before the current lease

term expires, it is probably more practicable to implement the Option 7 payment provisions as a
OTA SPECIAL REPORT 133

voluntary election by the lessee thus avoiding the legal issues.3 The Department took a similar

approach in requiring the amendment of pre-FCLAA leases to include the 1982 regulatory

diligence system as a precondition for LMU approval. The other options do not involve similar

contractual issues because the existing leases are unaffected and the lessee would need to

negotiate with the Department only for a new lease that the Department is under no obligation

to grant. The noncomplying lessee would not be forced to relinquish any leases. Any lessee

who wishes to endure disqualification and forego additional leases is under no obligation to use

any of the available exceptions.

OTA has assumed here that these provisions would be in addition to any diligence

requirements or production incentives imposed in section 7. OTA has also assumed that they

would apply to post-FCLAA leases that were not terminated for nonproduction after 10 years.

For some of these options we have added an additional condition requiring that the option must

be elected within a specified election period (e.g., by August 4, 1986) whether or not a new

lease is sought at that time. Lessees who did not elect the exception would not be able to take

future advantage of the relief provision. (This approach is particularly important for the holding

fee option so that revenues would accrue from the date of noncompliance.)

These exceptions would allow noncomplying lessees with many nonproducing leases to

take maintain their reserves position, but at a cost. Because a few major lessees hold a large

portion of the noncomplying leases, Congress may wish to consider adding further qualifications

for these exceptions. For example S. 382 limits the availability of an option to lessees with no

more than two noncomplying leases. There is some inherent regional inequity in conditioning

an exception on the number of leases held. A viable mining property might consist of one

lease or eight (or more) depending on the peculiar history of the leases and the State or region

in which they are located. Consider, for example, two hypothetical coal mines under

development but which are not yet under contract or being mined. Lessee A in the Powder

River basin has one lease, which like many leases in the Powder River basin of Wyoming issued

in the late 1960s and early 1970s is very large (over 2000 acres) and contains several hundred

million tons of reserves -- enough to sustain a large surface mine for many years. Lessee B has

a mine under development in Central Utah that consists of five leases, the smallest 80 acres

and the largest 2200 acres, and reserves that would sustain a large underground mine for 40

years. For geological and engineering reasons, the Utah leases would be mined in sequence over

3By noting the existence of such objections to direct modification of lease obligations, we are not suggesting that Congress

cannot lawfully alter existing leases, including payment obligations, before expiration of the current lease terms without

impermissible abrogating contract rights or incurring an obligation to compensate the lessee. We have not researched the

precedent for such legislation. However it is arguable such action might be sustained by the courts if Congress was asserting

its constitutional authority over disposition of the public lands and correcting what it perceived as errors or abuses of

discretion on the part of the Secretary in the administration of his responsibilities which resulted in detriment to the public

interest and unjust enrichment of lessees. Lessees have an obligation to develop leases diligently and to pay for use of

public resources, the Secretary cannot relieve them of that responsibility either directly or through inaction or inadvertence.

The past history of disregard of the MLA’s statutory diligence requirements by the Department and lessees may be one

circumstance where, direct Congressional action would be sustained. Congress might be more successful and on firmer legal

ground in enacting legislation that terminates nonproducing leases by operation of law for failure to satisfy the diligence

obligation within a reasonable period of time. The Supreme Court recently sustained a provision of the Federal Land Policy

and Management Act of 1976 creating a presumptive abandonment and forfeiture of mining claims for failure to file annual

assessment reports on time. See U.S. v. Locke, U.S.—, No.83-1394, Apr. 1, 1986. See also these legal memoranda by the

American Law Division of the Congressional Research Service, Library of Congress: “Constitutional Issues Raised by

Proposal to Impose New Obligations upon Leaseholders on the Outer Continental Shelf”, Jan. 23, 1980: “Legal Analysis of

Legislative Cancellation of Existing Oil and Gas Leases”, Mar. 20, 1980; and “The Federal Coal Leasing Amendments Act of

1976 and ‘Diligent Development’ Requirements”, Mar. 1,1982.
134 OTA SPECIAL REPORT

many years. The Powder River nonproducing lessee would not be much affected by a

qualification that limited availability of an option to those lessees with two or fewer leases,

while the Utah lessee B would be faced with the prospect of disqualification or, perhaps

irreversibly, dismantling a minable property through assignment or relinquishment. The Utah

lessee B might try to have the leases consolidated into two leases to qualify for the exception,

but it is not certain that the Department would approve such a request. The two lessees are

arguably in similar positions with respect to compliance with section 3, but they would not be

equally helped by relief conditioned on the number of nonproducing leases that they hold.

Limiting an exception to any lessee with no more than two noncomplying leases or o n e

noncomplying logical mining unit including any number of qualifying leases would treat both

lessees more equitably.

OPTION 7:

Payment of Holding Fees on Nonproducing Leases as a Qualification for

Additional New Leases.

Under this option a lessee would make annual payments on all noncomplying leases in

order to qualify for new leases. The lease terms would be modified to include an annual

payment for nonproducing leases. This obligation would run with the lease and would transfer

to the new owner if the lease were assigned. The payments would begin on August 4, 1986 for

most nonproducing pre-FCLAA leases and would cease when the lease was brought into

compliance with section 3 (or relinquished). The payments would begin 10 years after lease

issuance for all other coal leases. The lessee would have a limited period in which to elect to

have the lease modified to qualify for new leases. Lessees who did not make an election by the

end of the period would not be allowed to use this mechanism to avoid section 3. Leases that

were not modified to contain the section 3 nonproduction payment could be made subject to a

similar nonproduction payment on the next readjustment date. To create an incentive to make

an early election, these nonproduction payments incurred on readjustment could not be used by

the current lessee to avoid section 3 disqualification. The payment scheme could allow a partial

credit for any production that occurs in that year to assist lessees who are producing but have

not yet reached the commercial quantities threshold.

One way of implementing such an approach would be to amend section 3 so that the

Secretary may (or shall) accept annual payments in lieu of producing in commercial quantities if

the lessee agrees to modify the lease to include such a provision by August 4, 1986 or 10 years

after lease issuance, whichever is later.3 By conditioning the availability of this relief on the

lessee’s election to be governed by its terms, the legislation does not amend existing leases

without the consent of the lessee. Any lessee who chooses to be subject to the section 3

disqualification in the future is free to do so. Setting an immediate time limit on the

3An example of this formulation might provide:

The disqualification provisions of section 3 shall not apply if qualifying payments in the amount of (insert basis for

payment) are made in lieu of production in commercial quantities. A lessee may elect to amend the lease

terms to include a qualifying payments provision by notifying the Secretary in writing by August 4, 1986 (or

alternatively before the end of his ten year holding period). All such elections shall be approved by the

Secretary but the effective date of the election shall be the date on which it was filed. Within 60 days of the

date of enactment of this act, the Secretary shall propose regulations specifying the information required to

be filed for an election. and one might also partially address problem of old leases that were not readjusted

to conform to FCLM by making such readjustment a further condition of section 3 relief.
OTA SPECIAL REPORT 135

availability of the election forces an early decision by the lessee about a commitment to

develop and provides some certainty that a section 3 disqualification can be avoided. One might

also partially address problem of old leases that were not readjusted to conform the FCLAA by

making such readjustment a further condition of section 3 relief. The payment election also

assures an early stream of revenues to government.

For purposes of this discussion, OTA assumes that the annual payment requirement is

similar to a delay rental and is initially paid for the privilege of maintaining one’s qualification

for new leases. A relatively simple payment formula should be used since it is expected that

many lessees would seek to comply. A flat cents per ton or dollars per acre payment would

probably provide the most predictability for lessees and be the easiest to administer, despite

some of the inherent inequities in any such uniform approach. The payments should be

substantial enough to affect the economics of holding the property without production. OTA’s

review of various holding fees suggests that an annual payment of 1 cent or more per ton of

recoverable reserves under lease would begin to have a measurable impact in almost all regions.

(See Chapter 4.) The fee is still less than would be paid in royalties if the lease were producing

even at the pre-FCLAA royalty rate of 20 cents per ton and is significantly less than what a

lessee would probably have to pay for a new lease with marketable coal.

This payment option is similar in effect to the proposals for advance royalties or delay

rental in lieu of production after 10 years under section 7. However here it is primarily viewed

as supplementary to the production-forcing provisions of section 7. (If additional payments

were relied upon to spur production or relinquishment of existing lease or to provide a stream

of royalty income in lieu of production in the absence of any section 3 requirements, one would

expect that the such payments would have to be higher than those extracted as a qualification

for new leases under section 3, although there is no economic requirement that it be so.)

One might also use the option to correct some of the problems with tardy or ineffective

lease readjustments by limiting the availability of the payment option to leases that have been

readjusted or modified to contain the post- FCLAA terms on royalties, diligence, and other

require merits.* This will also help to overcome the advantage gained by some lessees as the

result of the Department’s failure to conform the leases to the new terms by timely and

effective readjustments. These unadjusted leases will be required to be made subject to higher

royalties and the 1982 diligence requirements as a further condition for avoiding section 3.

Advantages:

1. A qualifying payment would provide some relief from section 3 by allowing all

noncomplying lessees to pay to keep a nonproducing lease to avoid the section 3 disqualification.

2. The payment option makes the decision of whether to keep a lease or acquire a new

one an economic choice for lessee. Such an approach would be more in keeping with private

sector practices than the current section 3.

3. Some view the payment option as essentially neutral with respect to different classes

of lessees by making it an economic decision.

4 Such a condition might provide, for example, that such election shall not be granted for to any lessee or parent or afilliate,

etc., that holds any lease issued (or with an effective date) before August 4, 1976 which waa subject to readjustment after

August 4, 1986 and haa not been so adjusted to conform to the requirements of post -FCLAA diligence and continued

operations provisions, unlem the lessee consents to amend the leaae to include all terma and conditions required by FCLAA,

and the leaae form and regulations that were or are in force at the firat 20-year anniversary date of the leaae after August 4,

1986.
136 OTA SPECIAL REPORT

4. This option allows section 3 to apply to issuance of all onshore mineral leases, thus

keeping the pressure on nonproducing coal lessees with noncoal leasing operations, particularly

oil and gas companies. The penalties for nonproducing coal leases are incurred by coal lessee

and not by the noncoal resource divisions or affiliates. (That is assuming that the coal division

will pay (or be forced to pay) for the ability of the other divisions or affiliates to obtain

noncoal leases.

5. The payment option offers relief primarily to coal lessees who are actively involved

in coal and other leasing activities. Individuals, and other passive lease-holding companies

would be probably be unlikely to elect payments unless they were seeking more leases.

6. The payment would generate some revenues for the States and the Federal

Government in the absence of production royalties. (OTA assumes that the payments would be

subject to the MLA’s revenue distribution scheme. )

7. Additional payments would increase the lessee’s financial stake in the lease, thus

making later relinquishment, termination, cancellation through eventual enforcement of

diligence requirements a greater economic penalty. This might tend to provide an additional

incentive to make an earlier decision about developing the lease than under the 1982 diligence

system.

8. Substantial payments may make some old leases uneconomic to mine. (It is arguable

that many such leases probably are noncompetitive even without such payments. In such cases

the lessee would (if he has any sense) relinquish the lease. If the lease has not yet been

reclaimed, it might force the lessee to take the necessary actions to restore the surface so that

the lease may be relinquished. )

9. Substantial payments should force lessees to reevaluate their reserves holdings and get

rid of those leases not likely to be mined. This weeding out of leases with poor development

potential might generally improve the quality of the reserves under lease, while reducing the

amount of such inventory. The reduction in the lease reserves “overhang” might make it easier

politically to justify additional new leasing.

10. A continuing payment obligation that ran with the nonproducing lease might

diminish the resale value of old leases because of the future payments that the purchaser must

make to the Federal government. The government, rather than the nonproducing leaseholder

would, however, at least receive a share of any resale value of the reserves.

Disadvantages:

1. The payment option continues to tie noncoal operations to the actions of coal lessee

affiliates as a mechanism to force production, but unlike the current section 3, it does allow

escape, assuming the coal lessee will pay to avoid corporate disqualification.

2. This option may impose administrative problems on the Department in determining

the payments for each lease if it is not a flat dollar per acre or cents per ton rate, but rather an

ad valorem calculation tied to the lease reserves, production rate and regional selling price of

coal. Lessees also would have an increased burden in providing the necessary information for

calculating the payment, but presumably they would be willing to incur it to avoid

disqualification.
OTA SPECIAL REPORT 137

3. The economic impacts of this option are greatest on lessees with large acreages and

reserves and little production. They could face substantial payments if the nonproduction fee

were set high and they wished to keep all or most of their nonproducing leases.

4. High payments might make some tracts less economic to mine. Payments increase the

lessee’s stake in lease and may make later relinquishment or diligence enforcement more costly

and lead to renewed efforts for changes in lease diligence provisions.

5. Payments might increase the compensable value of leases that might later be

exchanged for environmental or other reasons. (Although DOI has not tended to base such

transactions on how much the lessee paid the Government for the lease rights but on the value

of the coal in place. )

6. Large corporate lessees could continue to hold reserves and maintain their dominant

reserves position through payments. Modest qualifications payments are unlikely to alter the

concentration of holdings by these lessees. A high payment would be a disincentive for them to

continue to hold nonproducing reserves.

7. Lessees that have already turned back or traded potentially noncomplying leases

might argue that the option is unfair because they did not have opportunity to pay to keep their

lease qualification status and their inventory of leased reserves.

8. Not all nonproducing lessees would elect to make qualifications payments, but similar

annual nonproduction payments requirements could be imposed at the next lease readjustment.

Option 8:

Surcharge on New Leases

Under this option, a lessee would make an additional payment on any new MLA leases

obtained while under disqualification. The provisions of the noncomplying leases would be

unchanged. This qualification surcharge would be in addition to payment of a fair market

value bonus, rentals, and royalties on the new lease. This option could theoretically work while

continuing the section 3 applicability to all MLA leases, however, structuring of an appropriate

surcharge for oil, gas and other minerals on anything other than an acreage basis would appear

to be a complicated process. Because the payment is applicable to the new lease, a payment

obligation would not arise until and unless a new lease is sought. The payment obligation would

end when the lessee is no longer in noncompliance because the old leases are producing,

transferred or relinquished. One consequence that must be considered is the possibility that the

lessee may initially agree to the surcharge and win the competitive bidding for a new coal lease

and then later petition for a royalty reduction on the grounds that the surcharge make the

operation of the new lease uneconomic under its terms. If a later royalty reduction were

granted, the surcharge effect might be reduced to only a nominal level.

Advantages:

1. The section 3 penalty is maintained, but the noncomplying lessee can escape

disqualification by paying more for new leases.

2. The surcharge is conditioned on and applicable to acquisition of new leases, no

economic penalty is applied to the old nonproducing lease.
138 OTA SPECIAL REPORT

3. The payment obligation extends to any new lease. Depending on how the surcharge

is structured, this approach may be less costly than Option 7 holding fees for a noncomplying

lessee with many noncomplying leases if only a few additional coal leases are needed.

4. The additional payment requirement could place a noncomplying lessee at a

disadvantage with complying lessees in competitive lease bidding, since the surcharge would be

added to other lease payments.

5. The surcharge option could require qualifying payments for the issuance of new

preference right coal leases that might otherwise be issued without any initial payment

obligation.

6. This option assists all lessees interested in acquiring new leases while under section 3

disqualification.

Disadvantages:

1. This option is easiest to administer if section 3 is limited to new coal leases only,

however, much of incentive to produce on old leases is lost.

2. If the noncomplying lessee has little need for additional coal, this option is unlikely

to generate much revenue and will have little impact on nonproducing leases.

3. The royalty reduction authority for coal leases might allow the lessee to escape full

impact of the payment requirement for lease, if the Secretary later lowers production royalties

to offset the economic impacts of the surcharge.

Option 9:

Lease Turnback

Under this option and its variations, a lessee would agree to relinquish an equivalent

amount of noncomplying coal acreage or reserves as a precondition for acquiring a new lease.

The turnback might be on an acre-for-acre or ton-for-ton basis or based on some formula

adjusted for regional differences in the quality and value of the coal. The relinquishment

requirement would be in addition to payment of fair market value for the new leases.

A turnback is not an exchange, but could have many of the administrative problems and

controversies that have plagued lease exchanges in determining the equivalence of reserves

between different tracts. Because of this aspect, many have advocated that a straight ton-forton formula or some variation be used, and that it not be based on the coal quality or fair

market value of the coal in place. Acreage-based tradeins also would be straightforward but

regional equity issues would be raised. For example, there is generally more coal per acre in the

Powder River basin than in the Fort Union or Uinta Regions. A relinquished Fort Union Tract

might be considerably less valuable than one of similar size in the Powder River basin.

Among the problems that can be anticipated in establishing equivalence for turnbacks

include:

o Setting a monetary value or other equivalency basis for coal from different regions

(This could be dealt with administratively or legislatively by establishing a schedule of

values for different regions.);
OTA SPECIAL REPORT 139

0 Determining the adequacy of geologic information to be used to determine the

amount of reserves for tradein equivalence (This problem exists for all reserves based

options.); and

o The administrative time and resources required to conduct the necessary analyses of

tracts to be relinquished.

A lease turnback approach might provide create a secondary market in nonproducing

leases with poor development potential that might otherwise be relinquished early. The low

development potential tracts could be used to qualify for new leases through turnbacks while

protecting other tracts with high development potential. The Department policy limiting

assignments to noncomplying lessees could limit this potential somewhat.

Companies with a few high development potential leases within development delays

would not be helped by the turnback option. They and their affiliates would be disqualified and

would be faced with giving Up all or part of mines that were very near or in production. If the

turnback were paired with a qualification payment option, companies with many noncomplying

leases could avoid payments while companies with only a few noncomplying leases might

actually have to pay more for new leases. This would tend to reward noncompliance.

Lessees who had already turned in nonproducing leases and still had minor problems

with compliance would complain of the unfairness of allowing competitors to preserve their

dominant reserves position, even with payment or additional conditions.

This option only works well if section 3 is limited to coal leases only and thus also

carries the advantages and disadvantages of Option 3. Attempts to apply this option to

qualifications for other mineral leases are not likely to be very successful since they would

require establishing a monetary value as a basis for equivalence. The initial amounts paid for

most onshore oil and gas leases are relatively low, so not much coal would be turned in as

equivalent value. Moreover, the Department has experienced difficulties in assessing the value

of both coal and oil and gas tracts for competitive bidding purposes. The additional burdens in

determining an equivalent monetary value for turnback purposes would only add to the

difficulty and controversy attendant on these determinations.

Turnback provides some relief from section 3 disqualification. The lessee could continue

to hold any nonproducing leases in excess of those needed to qualify for new leases.

Advantages:

1. The turnback option provides some relief from section 3 for companies desiring new

coal leases that have large amounts of noncomplying leases or reserves.

2. A nonproducing lessee can acquire more leases but cannot enhance its reserve

position except, perhaps, to improve the quality of coal in its inventory with more marketable

coal.

3. Turnback creates a more orderly, phased mechanism for the relinquishment of leases

with little development potential than under the current approach because lessees would keep

noncomplying leases until new leases were needed instead of relinquishing them all before

August 4, 1986 or the applicable section 3 date.

4. Turnback creates an additional incentive to relinquish old leases rather than assign

them to any available purchaser if the lessee wants more Federal coal.
140 OTA SPECIAL REPORT

5. Leases most likely to be turned back first are those with poor development potential

or where mine development is likely to be controversial or difficult for environmental reasons.

6. As under existing law, lessees would not have to give up any leases unless they

wished to acquire new leases.

Disadvantages:

1. The turnback option would only be workable if section 3 were limited to coal leases

only. Lifting of its applicability to other minerals would remove the most effective incentive for

most of the major noncomplying leaseholders to turn back their old leases.

2. Leases most likely to be turned back under this option are the least marketable coal

properties under lease, i.e. those with poor development potential and or serious environmental

conflicts, and also are the leases most likely to be relinquished under other options

3. Turnback creates an incentive to keep or trade leases that might otherwise be

relinquished.

4. The turnback option is most favorable to lessees with either large numbers of leases

or large reserves that are not in compliance with section 3.

5. Turnback imposes additional administrative burdens on the Department in reviewing

tracts for equivalence in addition to determining the appropriateness of tract for relinquishment.

Difficulties and controversies can be expected to be similar to those encountered in exchanges.

Option 10:

Relinquishment and Reissuance of Noncomplying Leases

or Lease Rollover

Under this option, a noncomplying lessee could avoid section 3 by entering into a

special relinquishment agreement with the Secretary. The lessee would agree to relinquish all

of its noncomplying old leases in exchange for section 3 relief and a noncompetitive preferential

right to purchase a new post-FCLAA lease for the same lands when and if the relinquished

lands pass the new lease screening process.

The lessee would have to comply with all relinquishment conditions under current law

and regulations. The relinquishment must be unconditional. The section 3 disqualification

would be lifted on approval of the special relinquishment agreement. The relinquished lease

areas would then be subject to the complete land use planning, environmental screening, surface

owner consent, and tract evaluation process for new leases. Any new leases would contain the

post-FCLAA royalty and diligence provisions. If the tracts are reoffered, the lessee would have

a noncompetitive or preferential right to acquire the tracts on payment of a fair market value

bonus. Some credit might be allowed for any prior bonus payment.

This option could improve the quality of the inventory of leased reserves. It is likely

that the better quality tracts would survive this process and still be economically attractive

prospects. The lessees would be assured of reobtaining the leases that survived the screening,

and any investments in surface rights, environmental baseline studies, reserves assessment, and
OTA SPECIAL REPORT 141

engineering and mine design studies might be preserved. Areas that were environmentally

unsuitable could be eliminated, areas that were environmentally sensitive would be identified so

that protective lease stipulations could be developed to address such concerns during mining.

The review period would not be chargeable against the new lease’s primary term or initial

diligence period.

This option surfaced in informal discussions among DOI, congressional staff,

conservation groups, and oil and gas company lessees. It would require legislative authorization

because it involves granting future preferential lease rights or options to section 3 leaseholders

in exchange for lease relinquishments. Such transactions are not now possible because of the

requirement that all new coal leases be offered by competitive bidding. Legislation would have

to allow the government to grant the lessee the option of reacquiring the old leases. Legislation

would also give the lessee the security that the Department could honor its agreement. It would

be important for the success of this option to avoid creating any right to compensation or

exchanges for leased areas that did not survive the screening process. However, since submittal

of leases to this process would be voluntary, there need be no legal requirement to compensate

for lands that may legally be prevented from mining anyway or for terms that could be imposed

on readjustment. The major benefit to the lessee would be eligibility for additional coal and

noncoal leasing and an option to purchase new lease on the relinquished lands should the

Department reoffer them. The agreement could specify that a decision on lease review and

reissuance must be accomplished within a certain period of time. Legislation might require the

lessee to pay any administrative costs associated with the requalification process to defray the

cost impacts on the Department. Such purely administrative fees would not be credited against

payment of fair market value, and would not be revenues that must be shared with the States.

Advantages:

1. The rollover option provides relief from section 3 and addresses many environmental

and other concerns about letting old nonproducing leases continue in effect beyond 1986.

2. Old leases are converted into post-FCLAA leases with post-FCLAA environmental,

financial, surface owner consent, and production requirements.

3. Rollover would have the same effect as an early lease readjustment for imposition of

discretionary environmental protection and socioeconomic impact stipulations. Areas that would

be unsuitable or environmentally difficult to mine and reclaim would be identified and

unsuitability designations or protective stipulations applied.

4. Valuable tracts would likely survive the review process. A lessee who acquired the

tract initially at a low price would probably still have an incentive to hold on to it longer,

assuming that payment of fair market value did not wipe out all of the tract’s profitability. The

government would receive a fair return on the tract.

5. For multi-lease tracts with different diligence deadlines, relinquishment and

conversion into new leases would allow the tract to be maintained intact and perhaps receive an

extended diligence period.

6. Leases with little near term chance of development would probably not be reissued if

costs of maintaining or of reprocessing were high enough and the current 10-year post- FCLAA

diligent production requirements were kept.
142 OTA SPECIAL REPORT

Disadvantages:

1. Only lessees with valuable tracts they wish to keep and no other options would elect

this exception. Many lessees with old leases would do nothing, or relinquish or sell their leases.

2. Converting old leases into post-FCLAA leases without significantly favorable trade

offs in addition to section 3 relief, such as a longer diligence period, might be too

disadvantageous for some lessees.

3. Rollover would not help a lessee with only a few nonproducing leases that were close

to commercial production if there were no other section 3 relief available. The time necessary

to review and reoffer relinquished leases could delay opening of the mine for several years

possibly resulting in loss of market opportunities.

4. A preferential right to reacquire relinquished lease areas as new leases might bring

less bonus revenue than resale of the leases by competitive bidding if other companies are

interested in acquiring the reserves.

5. The Department might reissue leases with environmental conflicts identified during

the lease review in an effort to avoid litigation and defer a decision over minability of tract to

mine plan permitting. Later, the Department might needlessly be faced with the pressure to seek

an exchange of the unminable new leases for valuable Federal coal leases elsewhere.

Section 3 Options and

Modification of Section 7 Diligence Requirements

The options discussed above were primarily designed as alternatives for the section 3

producing in commercial quantities requirement under existing law. OTA notes that several

section 3 options also are similar to suggested reforms for the section 7 diligent development

and continued operations requirements and most specifically the 10-year diligence period for

new leases imposed by statute, and by regulation for readjusted leases. These options are:

extensions (Option 4); use of alternative lease development milestones (Option 5); and payment

of holding fees in lieu of production (Option 7). Under certain unusual circumstances the lease

rollover option might also be an alternative for extending the 10-year diligence period.

Many of the advantages and disadvantages of these approaches as modifications to the

diligence provisions are similar, but the underlying policy question is different. Section 3 was

originally an adjunct to the basic diligence requirements. As a result of administrative policy

changes, section 3 is now the major production requirement for most old leases. Modifications

to section 7 involve direct alteration of a fundamental policy of Federal coal leasing. Without

some form of diligence requirement, private interests could tie up Federal coal reserves

indefinitely without production while remaining eligible to compete for even more Federal coal.

A dynamic Federal leasing system that strove to offer Federal coal leases to create opportunities

to the private sector to compete for coal supply contracts and thus keep fuel costs low for

consumers is highly dependent on a diligence mechanism. Without some means of returning

undeveloped tracts to the system, the government might soon exhaust its supply of marketable

tracts and lose its ability to affect the price or supply of coal to consumers.
APPENDIX A

BACKGROUND: FEDERAL COAL LEASE OWNERSHIP AN D

SECTION 3 COMPLIANCE STATUS

BY INDUSTRY

METHODOLOGY AND INFORMATION SOURCES

OTA’s analysis of coal lease ownership and section 3 compliance status is based on the

information assembled for our 1981 report, An Assessment of Development and Production

Potential of Federal Coal Leases. Since publication of that report, OTA’s coal lease data and

conclusions have been updated periodically using information from the Department of the

Interior, State agencies, coal lessees, coal industry trade publications, and other sources.

Aggregate information was generated from OTA’s computerized coal lease data base which was

created for this special report.

Coal lease ownership data for 1975 and 1980 were obtained from the 1981 OTA

technical memorandum, Patterns and Trends in Federal Coal Lease Ownership 1950-80. The

1984 ownership information was assembled by OTA for this project. Corporate relationships

for parent corporations, subsidiaries, and joint ventures were obtained from the lessee

qualifications statements filed by lessees. Where that information was not sufficient, OTA

consulted industry manuals and trade magazines, and contacted State corporation commissions

and the lessees themselves to identify the controlling parties.

OTA determined the section 3 production deadlines for all pre-FCLAA coal leases using

information on coal lease assignments and corporate ownership from OTA’s coal lease data base

and the coal lease ownership data base maintained by Western Network in Santa Fe, New

Mexico. Information on lease assignments and ownership was gathered from Bureau of Land

Management’s coal lease records and corporate qualifications files and from State corporation

commissioners and various business publications. In determining the production status of the

pre-FCLAA leases, OTA relied on production and royalty information reports filed with the

Interior Department and States and information from lessees.

FEDERAL COAL LEASE OWNERSHIP 1985 BY INDUSTRY

OTA’s industry categories were originally defined in 1980. Coal lessees are grouped into

categories according to the principal business activity of the lessee’s parent company. Each

major industry category controlled a total of five percent or more of the land under lease at any

time between 1950-80. This appendix provides an update of changes in leaseholdings by

industry categories since publication of our 1981 report. These findings are summarized in

Chapter 3.

Utilities. Electric utility companies continue to be the largest leaseholding category as they

were in 1975. There has been little assignment activity and no corporate acquisitions involving

utilities since passage of FCLAA. However, several utilities have transferred leases among

subsidiaries or reorganized joint venture relationships.

In the mid- 1970’s nearly half of all coal mined from Federal lease

by electric utilities even though they controlled only about one-fifth of all

Although utility coal production has jumped five fold in the past decade,

output accounted for just 20 percent of all Federal coal production.

tracts was produced

acreage under lease.

in 1983, utility coal
144 OTA SPECIAL REPORT

“Other” Companies. Marking a longstanding trend toward the entry of more widely diversified

companies into the western coal industry, companies classified in the “other” category now form

the second largest lease holding business category. These companies represent a wide-ranging

assortment of businesses such as: construction companies, railroads, as well as banks and a

property management corporation owned by The Church of Jesus Christ of the Latter Day

Saints.

Most of the leases in this category acquired during the last decade were obtained by

their current owners through lease assignments. The largest assignment involved the transfer of

16 Utah leases from El Paso Natural Gas Company to Swanton Energy Resources Co., a

subsidiary of a New York company, Swanton Corporation.

Companies in the “other” category produced only 10 percent of the coal mined from

Federal lands in 1983, although they controlled about 20 percent of the acreage under lease.

(See Tables 18 to 21 in Chapter 3.)

Major Oil Companies. Oil majors are now the third largest business largest category of Federal

coal lessees; they were the second largest category in 1975. The drop in rank occurred despite

the fact that total oil major lease holdings increased from 138,409 acres to 141,157 acres during

the decade. If the holdings of another oil major CONOCO, now a subsidiary of DuPont, were

included in this category rather than under non-resource related diversified companies, the oil

majors would still be the second largest lease holding category in 1985.

Oil majors have been involved in 7 of the 16 corporate acquisitions completed since

FCLAA. (See Table 17. ) Four of these acquisitions increased the holdings of oil majors, one

resulted in a decrease, and two entailed no change.

Federal coal production by major oil companies has risen from 500,000 tons in 1972 to

45.1 million tons in 1983. Major oil companies produced over 40 percent of all Federal coal

produced in 1983, more than twice as much Federal coal as any other industry group.

Nonresource-Related Diversified Companies Since 1975 nonresource-related diversified

companies have more than quintupled their leaseholdings. This category consists mainly of large

chemical and electrical equipment companies. Most of the increase in lease acreage resulted

from the acquisition of Conoco, Inc. (with its subsidiary Consolidation Coal Co.) by DuPont.

That acquisition more than offset the loss of leases from this industry category from the

acquisition of Utah International, Inc. and most of its Federal coal lease holdings from General

Electric Co. by Broken Hill Proprietary, Ltd., an Australian mining company. About 9 percent

of all leased acreage is controlled by nonresource-related diversified companies.

Despite the major increase in lease acreage held by nonresource-related diversified

companies during the last decade, these companies mined about 2 percent of the coal extracted

from Federal land in 1983.

Oil and Gas Companies. Oil and gas companies held 70,365 acres of Federal land in 1984

compared to 42,193 acres in 1975. Its rank jumped from the ninth to the fifth largest lease

holding business category. Coal production by oil and gas companies has increased from 200,000

tons in 1972 to 12.2 million tons in 1983, or about 11 percent of all the coal mined from leased

lands.

Steel Companies. Steel companies holdings have increased their coal lease holdings only

modestly since 1975. Two pending acquisitions, however, would greatly reduce steel company
APPENDIX A 145

holdings if they are completed. Perma Resources Corp. is currently in the process of acquiring

Kaiser Steel Corp’s western coal operations and Armco Steel Corp. has reportedly found a buyer

for its subsidiary, Evans Coal Co.

Federal coal production by steel companies has been about 1.0 million tons per year

during the past decade, but their share of total production has dropped from 7 percent in 1972

to 1 percent in 1983.

Independent Coal Companies. The amount of Federal leased acreage held by independent coal

companies fell by 40 percent between 1975 and 1984. Coal companies have fallen in rank from

the third to the seventh largest lease holding group. During the past decade, Energy Fuels,

Swisher Coal, and Cambridge Mining have been acquired and many other independents have

assigned their leases, thereby contributing to the decline of independent coal companies in the

Federal coal leasing program.

Although production by independent coal companies has increased from 2.0 million tons

in 1972 to 3.6 million tons in 1983, the percentage of total Federal coal production from

independent coal operators fell from 20 percent to 3 percent. This pattern, too, is part of a

long-term trend toward domination of the western coal industry by companies that are not

primarily engaged in mining coal.

Metals and Mining Companies. The leased acreage held by metals and mining companies fell

dramatically between 1975 and 1980 and then increased between 1980 and 1984. Both of these

changes were largely the result of acquisitions involving Utah International, Inc. The first was

Utah International’s acquisition by General Electric Co. in 1976 and the second was the 1984

purchase of Utah International by Broken Hill Proprietary, Ltd., an Australian based mining

company. Another addition came as a result of the acquisition of Midcontinent Limestone Co.

by Pitkin Iron Corp.

Metals and mining companies have consistently produced more Federal coal than

predicted by the size of their holdings. In 1983, they contributed 11 percent of the total

Federal coal production, although they held only 4 percent of the acreage under lease.

Natural Gas Companies. Among the major changes in this category during the past decade

were Internorth Corp. ’s acquisition of Belco Petroleum Corp. Lease assignments more than

offset the marked decrease that resulted from the transfer of 16 Utah leases from El Paso

Natural Gas Co. to Swanton Energy Resources Corp. following El Paso’s acquisition by

Burlington Northern, a railroad company prohibited from holding Federal coal leases by section

2(c) of the MLA.

Natural gas companies lessees began producing coal in the late 1970’s. In 1983, natural

gas company mines contributed about 2 percent of the total Federal coal production.

Peabody Coal Company. Peabody Coal Company was acquired in July 1977 by the Peabody

Holding Company from Kennecott Corp. Peabody Holding Company is currently owned by five

companies. The companies and their ownership percent are:

Newmont Mining Corp. 32.5 percent

The Williams Companies 32.5 percent

Bechtel Corp. 15.0 percent

The Boeing Company 15.0 percent

Equitable Life Assurance 5.0 percent
146 OTA SPECIAL REPORT

In 1984, Fluor Corp. one of the six original participants in the Holding Company sold its

10 percent share to the others and dropped out of the venture.

In 1975 Peabody controlled 68,923 acres of Federal coal land, about 9 percent of all

acreage under lease. Peabody has been actively selling off Federal coal leases for the past

decade. In addition, the company has relinquished four pre-FCLAA leases and has applied to

relinquish about one dozen more. As a result of these transactions Peabody now holds 20,382

acres or 2 percent of all Federal land under lease. In 1983, Peabody produced 1 percent of the

coal mined on Federal land.

Individuals. Another longstanding trend that has continued during the past decade has been the

decline in leaseholdings by unincorporated individuals. The leaseholdings have declined 70

percent since 1975. About 2 percent of Federal acreage under lease is now controlled by

individuals. Individuals fell from the sixth to the eleventh largest lease holding group during

the past decade.

Historically individuals were active in coal leasing in two ways. Some individuals

acquired lands for small mining operations (many of the leases now held by individuals were

mined in the past either by the lessee or a member of his/her family.) Other individuals acted

as land agents, brokers, or speculators and acquired Federal leases for resale to others, often

retaining an overriding royalty interest in the Federal coal lease. Many of the leases acquired

by this latter group of individuals have been assigned to coal producing companies since 1975.

Coal production from Federal lease tracts held by individuals in 1983 was less than

100,000 tons, a negligible amount; in 1972, these leases contributed 3 percent of total Federal

coal output.
APPENDIX B

THE TOP 20 FEDERAL COAL RESERVES HOLDERS AND

AND THEIR SECTION 3 COMPLIANCE STATUS

OTA used the recoverable reserves holdings of Federal lessees to identify the 20 major

coal lessees. For purposes of this ranking OTA attributed the full acreage and reserves in which

a lessee has an interest (which may be ownership of 100 percent or less of the lease or

participation in a joint venture which owns a lease) to the lessee’s parent corporation. Because

the number of leases, acreage and reserves are not prorated, the totals can not be used to

calculate the total number of leases, acres and reserves involved. OTA’s rankings differ from

those used by others, most notably the rankings published by the Department of the Interior,

because we use reserves and do not prorate interests. OTA believes that prorating tends to

obscure the extent of “control” or involvement of companies in the leasing program and what is

at stake for them in any changes to the laws regarding coal leasing.

This section assesses the susceptibility of the individual parent companies to section 3

sanctions from nonproducing leases under their control. OTA assumes that “control” exists when

a company is owned in whole, or in part as a result of participation in a joint venture, by

another company. OTA has not attributed control through investments in stock of publicly

traded companies or in holding companies. We note that for some purposes ownership of 10

percent or less of a corporation’s stock is sufficient to be considered a “controlling” interest.

There is some participation in the corporate affairs of some coal lessees through stock ownership

by other coal lessees. For example, Chevron, which now owns Gulf, holds over 20 percent of

the stock in Amax, another major Federal coal producer. Peabody Coal Company is owned by

the Peabody Holding Company, which is in turn owned by five companies, including The

Williams Companies which also owns Western Slope Carbon, a Federal coal lessee. OTA has not

in this report attributed section 3 compliance status to the stockholding companies in these

cases. However, the Department of the Interior might elect to do so in enforcing section 3.

OTA’s definition and conclusions may not coincide with the Department’s eventual position on

this matter.

Table A-1 lists the top 20 Federal Reserve Holders, the number of Federal leases in

which they have an interest, the total recoverable reserves in those leases, the percentage of

recoverable reserves in leases that are not likely to meet section 3 production deadlines.

Together these lessees control approximately 65 percent of all Federal coal reserves under lease,

or about 12.6 billion tons of coal. Approximately 47 percent of the reserves held by the top 20

leaseholders are not likely to be in production by the section 3 deadlines applicable to them.

About 53 percent of the reserves held by the top 20 leaseholders are in lease tracts likely to

meet section 3 production deadlines. The remainder of this report discusses briefly the holdings

of each of the top 20 lessees and their section 3 status.

EXXON CORP.

Exxon Corp. controls 1.6 billion tons of Federal coal in 5 leases in the Powder River

basin of Wyoming through its subsidiary Exxon Coal Resources, USA Inc. The lease tracts are

part of the Caballo and Rawhide mines operated by another subsidiary, Carter Mining Co.

Despite its position as the largest Federal reserves holder, Exxon is one of only four

companies among the top 20 lessees that are not endangered by section 3 sanctions. Both of its

mines have approved mine permits and are in production. Logical mining unit applications are

pending for the mines that would combine Federal coal leases and non-Federal reserves to

comply with section 3 and diligence requirements.
148 OTA SPECIAL REPORT

Exxon Corp. is extensively involved in oil and gas exploration and production

worldwide. It is also involved in minerals and chemical production. Its principal subsidiaries in

these fields in the United States include Exxon Company, U.S.A., Exxon Minerals Co., and

Exxon Chemical Co.

PACIFIC CORP. (Pacific Power & Light Co.)

Pacific Corp. controls 31 leases including over 1.4 billion tons of recoverable coal. Some

of the leases are held in the name of the holding company’s principal subsidiary, Pacific Power

& Light Co. Most leases, however, are held by various subsidiaries of Nerco, Inc., a coal and

mineral development company owned by Pacific Corp. Nerco leaseholding subsidiaries include

Resource Development Co., Eden Ridge Coal Co., Spring Creek Coal Co., and Antelope Coal

Co. In addition, Nerco subsidiaries hold at least a 50 percent interest in Decker Coal Co., a

joint venture with Peter Kiewit and Sons, Inc., and Bridger Coal Co., a joint venture with Idaho

Power Co.

Pacific Corp.’s leases form 10 mine units - six in Wyoming, three in Montana, and one

in Washington. Six of the mining units are likely to meet the section 3 deadlines. These

include five active mines - Dave Johnston, Jim Bridger, East and West Decker, and Spring

Creek. The undeveloped Phillips Creek tract is likely to meet section 3 deadlines because it is

to be developed as part of the Dave Johnston mine. The Antelope, Cherokee, Phillips Creek

#2, and Eden Ridge tracts are not likely to comply with their section 3 deadlines. Nerco has

told OTA that it does not plan to relinquish or assign noncomplying leases because of section 3,

as it has no immediate need for additional Federal coal reserves.

Several Pacific Corp. subsidiaries, such as Nerco Oil & Gas Inc. and Nerco Minerals Co.,

are involved in non-coal mineral development in the western United States. According to

Nerco, they are not currently involved in Federal oil and gas leasing.

AMAX, INC.

The third largest Federal leaseholder is Amax, Inc. which holds 6 Wyoming leases

covering over 1.2 billion tons of coal. The lease tracts are part of two producing mines, Eagle

Butte and Belle Ayr mines.

Because Amax’s lease tracts are in production, the company will not face section 3

sanctions against new lease acquisitions. Amax acquired over 400 million tons of in new coal

lease reserves since 1981 through the 1982 Powder River lease sale and the Northern Cheyenne

lease exchanges.

ATLANTIC RICHFIELD COMPANY

Atlantic Richfield Co. (ARCO) has 13 Federal coal leases in Colorado, Utah, and

Wyoming. The leases, which cover 1.2 billion tons of coal reserves, are held in the name of the

parent company or its subsidiaries: Beaver Creek Coal Co., Thunder Basin Coal Co., or West

Elk Coal Co.

The 13 leases are part of eight mining units. Six of the eight, are likely to comply with

section 3: the Black Thunder and Coal Creek mines in Wyoming; Gordon Creek #2,

Huntington Canyon, and Pinnacle tracts in Utah; and the Mount Gunnison tract in Colorado.

The two noncomplying tracts include three leases and cover 51 million tons of Utah coal

reserves, only 4 percent of the company’s holdings.
APPENDIX B 149

As a major oil company, Atlantic Richfield Co. is involved in oil and gas production

worldwide. It also produces a variety of metals and minerals through its ownership of

Anaconda Corp. Other subsidiaries potentially affected by Section 3 sanctions are Arco

Chemical Co., Arco Oil & Gas Co., Arco Exploration Co., and Arco Metals Co. In 1985 ARCO

announced its intention to divest its Anaconda Minerals copper and molybdenum operations.

E.I. DUPONT DE NEMOURS & CO. (Consolidation Coal Company)

Dupont obtained the ultimate control of more than 30 Federal coal leases when it

acquired Conoco, Inc. and its subsidiary Consolidation Coal Co. It currently holds 35 leases

through Consolidation Coal Co. and Consol Land Development Co. These include 14 leases

jointly held with subsidiaries of Chevron Corp. Consolidation’s lease holdings cover 1.1 billion

tons of Federal coal reserves.

Consolidation’s lease holdings are part of 8 mining units in Utah, Colorado, North

Dakota, and Montana. Only the Velva tract in North Dakota is part of a recently active mining

project. The single 40 acre tract was mined out before passage of FCLAA (or SMCRA) and,

according to OTA’s 1981 North Dakota Report, has not yet been reclaimed and thus can not yet

be relinquished. Nonproducing Consolidation tracts include leases in the Danforth Hills and

North Park fields of Colorado, the CX Ranch tract in Montana, and the Emery, Kingston, and

Kaiparowits tracts in Utah. With the possible exception of part of the Emery tract in Utah,

these leases will not be producing by Consol’s August 4, 1986, section 3 production deadline.

Consol has been producing coal from non-Federal reserves in its Emery mine and could through

LMU formation protect some of its nearby Federal leases.

In addition to its Federal leases, Consol operates mines on private and Indian lands in

the West and is a contract mine operator for another mine in North Dakota.

Dupont is involved in the production of oil, gas, and a variety of minerals as part of its

global chemical operations and, due to its ownership of Conoco, Inc., is itself a major oil

company.

PEABODY HOLDING CO.

Peabody Holding Co. has 11 Federal coal leases in Colorado, Montana, New Mexico, and

Wyoming. The lease tracts cover about 1.0 billion tons of Federal coal reserves in six distinct

mining units. Most of the leases are held in the name of the Holding Company’s subsidiary,

Peabody Coal Co. In addition, Peabody Coal Co. is a member of the North Antelope Coal Co.,

a joint venture with Panhandle Eastern Pipeline Corporation, that company holds a Wyoming

lease.

About 21 percent of Peabody leases are part of four mines that are likely to be

producing in compliance with section 3: the Rawhide and North Antelope mines in Wyoming,

the Big Sky mine in Montana, and the Seneca operation in Colorado. Peabody may have

compliance difficulties with one of the leases in the Seneca 2W operation because the lease

cannot be made a part of an approved LMU because it is not contiguous. The company holds

properties, one each in New Mexico and Wyoming, that are not likely to achieve commercial

production by their section 3 deadline. The non-producing properties include only three leases,

but these leases contain 79 percent of the leased reserves the company now controls. Peabody

Coal Co. has relinquished four leases in the Denver basin in recent years and has applied to

relinquish or assign a number of other non-producing leases, including its leases on the

Kaiparowits Plateau. Peabody’s half interest in the Star Lake, New Mexico lease has been
150 OTA SPECIAL REPORT

assigned to Texas Utilities, however, final approval of that assignment has been held up because

of litigation involving the property. Upon approval of its pending relinquishments and

assignments, Peabody will have significantly reduced its number of non-producing leases that

could create a section 3 disqualification.

Although Peabody Coal Co. itself is not involved in the leasing of other minerals, several

of the Holding Company’s members are extensively involved in coal and non-coal mineral

development. Newmont Mining Co. develops a number of minerals and its subsidiary,

Newmont Oil Co., is involved in oil and gas production. Also, the Williams Company has a

number of subsidiaries involved in mineral and oil and gas development, including Northwest

Energy Corp. (which holds several Federal coal leases), Williams Natural Gas Co., Williams

Exploration Co., and Agrico Chemical Co.

BROKEN HILL PROPRIETARY, LTD.

The Australian company, Broken Hill Proprietary, Ltd., (BHP) purchased Utah

International, Inc. from General Electric Corp in 1984. Utah International currently holds 30

leases covering 930 million tons of coal in the name of Utah International or Utah’s

International’s subsidiary, the San Juan Coal Co. BHP also acquired Energy Reserves Group

which holds four Federal coal bases in Utah.

Utah International holds leases in seven mining units in New Mexico, Colorado, and

Utah. Only two, the recently acquired La Plata property in New Mexico and one lease that is

part of the Trapper mining operation in Colorado, are likely to comply with section 3. Several

mining tracts within the Danforth Hills property in Colorado and the large 20-lease East Alton

tract in Utah are not likely to meet the section 3 production deadlines. These properties contain

about 86 percent of the company’s leased Federal reserves. Both the Danforth Hills and Alton

tracts are very attractive mining properties should market conditions improve. Utah

International has added to its Danforth Hills reserves through the acquisition of several new

leases in the area since 1981. Energy Reserve Group’s two Utah mining properties, Skumpah

Canyon and Rock Canyon, are currently nonproducing and are also unlikely to comply with

section 3.

Utah International is also the contract operator for the Trapper Mine in Utah and the

San Juan Mine in New Mexico, but the Federal leases in these mines are owned by others.

The 1983 and 1984 Moody’s Industrial Manuals listed no oil or natural gas exploration or

production activities on the part of Utah International or its subsidiaries. The company,

however, is involved in a range of non-energy mineral production projects. Energy Reserve

Group, however, is actively involved in onshore oil and gas exploration and development in the

western United States.

TEXACO, INC.

Texaco, Inc. holds five Wyoming Federal coal leases that it originally acquired in its own

name. It also controls 12 leases as a result of its acquisition of Getty Oil Corp. Getty originally

acquired most of its leases through its acquisition of Energy Fuels Corp. of Colorado (now

Colorado-Yampa Coal Co.) and Plateau Mining Co. of Utah. Texaco’s leaseholding total about

927 million tons of coal.

The Lake DeSmet tract was reserved for possible exchange under provisions of the 1978

Federal Coal Leasing amendments. The exchange proposal was rejected as not in the public

interest and the tract remains undeveloped.
APPENDIX B 151

Over 85 percent of Texaco’s leased coal is located in the Lake DeSmet tract in Wyoming

and will not be producing on August 4, 1986. Two other tracts containing 11 leases -- the

Colorado-Yampa Energy Fuels mine in northwest Colorado and the Star Point mine in Utah --

are currently in production. Getty also owns a share of the Skyline mine operated by Coastal

States Energy Co. In 1985, Texaco sold most of Getty’s coal operations, including the Federal

leases, to Cyprus Mining. As far as OTA can determine, Texaco still retains the Lake DeSmett

leases.

CHEVRON CORP.

Until 1984, Chevron Corp.'s only Federal coal lease was an interest the undeveloped CX

Ranch lease in Montana. But in 1984 it acquired Gulf Oil Corp. and Gulf’s subsidiary,

Pittsburgh& Midway Coal Co. Chevron currently holds or controls part or all of 38 coal leases,

more than any other company, in the names of Gulf Oil Corp. and Pittsburgh & Midway.

Ownership of 14 leases in Colorado and Utah acquired by Gulf when it absorbed the Kemmerer

Coal Company leases is shared with DuPont’s subsidiary, Consolidation Coal Co. Chevron’s

holdings include 803 million tons of coal reserves.

Chevron controls leases in Colorado, New Mexico, and Wyoming. Of the 12 mining

units into which its 38 leases fall, only four are likely to be producing by August 4, 1986,

Chevron’s anticipated section 3 compliance date. These 3 mines are: the Edna Mine in

Northwest Colorado, the McKinley mine in New Mexico, and the Elkol-Sorenson mine in

Wyoming which includes the North Block as well as the Elkol-Sorenson mining units. Seven

tracts in Wyoming, Utah, and Colorado, totalling 90 percent of the company’s leased Federal

reserves, are not likely to be in production soon. They are the North Park, Tongue Mesa, Gulf

#3, Wildcat, North North Block, Danforth Hills #12, and Emery Field tracts. According to

Gulf, one of these, the North North block, might be combined into an LMU with the ElkolSorenson operation as part of the Kemmerer Mine. Two other Wyoming tracts in the Powder

River basin are under consideration for coal lease exchanges under the 1-90 provisions of the

1978 Amendments.

Both Chevron and Gulf Oil are extensively involved in oil and natural gas production.

Other subsidiaries, such as Chevron Resources Co., are involved in the production of non-coal

minerals.

KERR MCGEE CORP.

The Kerr McGee Corp. controls only five leases, but the lease tracts involved cover 736

million tons of coal reserves. Two of the leases are in the producing Jacob’s Ranch mine in

Wyoming. The other three leases are also in Wyoming and are part of the East Gillette tract.

About half of the company’s leased reserves are part of the East Gillette property; it is unlikely

that this tract will achieve commercial production by the anticipated section 3 deadline because

of market conditions. The tract is, however, near other Kerr McGee operations and part of it

will be exchanged for unleased Federal coal, under the 1-90 lease exchange.

Kerr McGee Corp. is involved in oil and gas exploration and production through its

subsidiaries Kerr McGee Refining Corp. and Kerr McGee Chemical Corp.

THE SUN COMPANY, INC.

The Sun Company controls six Utah leases, one lease in Wyoming, and one in Kentucky,

with a total of 643 million tons of coal. The western leases are held by Sun’s subsidiary Sunoco
152 OTA SPECIAL REPORT

Energy Development Co. (SUNEDCO) and the eastern lease is owned by Greenwood Land &

Mining Co.

Only one pre-FCLAA lease tract controlled by Sun Company is in a producing mine,

but this lease, part of the Cordero Mine in Wyoming, includes 85 percent of the company’s

leased reserves. Six Utah leases are part of the Sage Point-Dugout Canyon mine which was

recently permitted. However, because of market conditions, it is uncertain whether the mine

will open in time to keep its permit or to produce in commercial quantities for section 3.

Recently, Sun announced the purchase of the producing Soldier Canyon mine nearby. It may be

possible in the future to form an LMU with the Sage Point property and obtain credit for

Soldier Canyon production. The Sage Point lands are also part of the lands selected by the State

of Utah and could be transferred to State ownership. The Kentucky lease was issued after

passage of FCLAA and therefore has a 10-year section 7 diligence deadline.

The Sun Company, Inc. is extensively involved in exploration and production of oil and

natural gas. Many divisions and subsidiaries, including Sun Exploration & Production Co.,

engage in oil and gas related business activities.

SHELL OIL COMPANY

Shell Oil Company controls three leases in Wyoming and one in Montana, with a total of

641 million tons of reserves. All are held in the name of the parent company, Shell Oil Corp.

The lease tracts form three mining units, one of which - the Buckskin tract, is likely to

comply with the section 3. The North Rochelle tract in Wyoming and the Pearl tract in

Montana are not likely to produce. Shell withdrew its permit application for the Pearl mine in

1980 and focused its efforts on the better quality Wyoming properties. Shell was able to acquire

additional new lease reserves for the Buckskin mine in the 1982 Powder River lease sale.

Shell Oil Company is extensively active in oil and natural gas exploration and

production. Subsidiaries including Shell Mining Co. and Shell Energy Resources, Inc. are also

involved in other mineral production activities.

PETER KIEWIT SONS, INC.

Peter Kiewit Sons, Inc. (PKS), a Nebraska based mining and construction company

controls 13 Federal coal leases, including its holdings as part of joint ventures. The leases are

located in Wyoming and Montana and contain about 582 million tons of reserves.

PKS holds one lease, the Wolf Mountain property in Montana, in the name of the parent

company. Its three wholly owned subsidiaries, Montana Royalty Co., Rosebud Coal Sales and

Big Horn Coal Co. hold a total of six leases. PKS is also involved in several joint ventures:

Decker Coal Company with Pacific Power & Light Co.; Cumberland Coal Co. and Black Butte

Coal Co. with Rocky Mountain Energy Co., a subsidiary of the Union Pacific Corp. Three PKS

leases have section 3 compliance problems; two tracts, the South Haystack Mine and the Wolf

Mountain Property have no contracts for planned production. One 80 acre lease, in Wyoming is

unlikely to comply with section 3 because it has unfavorable development potential.

KANEB SERVICES, INC.

NORTHWEST MUTUAL LIFE INSURANCE CO.

Texas Energy Services, Inc., a subsidiary of Kaneb Services, Inc. and Northwest Mutual

Life Insurance Company jointly obtained a single Wyoming coal lease in 1983 that was big
APPENDIX B 153

enough to place these companies the 14th largest Federal leaseholder. The Rocky Butte leas e

covers 4,856 acres and 445 million tons of coal. Because the lease was issued after passage of

FCLAA, Kaneb and Northwest Mutual face a section 7 diligence deadline in 1993 rather than a

section 3 development timetable. Development of the lease is uncertain as it was reportedly

acquired to supply the planned Hampshire Synfuels plant which has now been abandoned.

Kaneb also controls a single Alabama lease through a subsidiary, Leeco, Inc.

U.S. STEEL CORP .

U.S. Steel Corp. owns 19 Federal western leases. The leases are located in Utah,

Colorado, and Montana and they cover 438 million tons of reserves. Only one mine, the

Somerset Mine in Colorado, is currently in production. U.S. Steel’s Geneva Mine in Utah which

supplied coal to its steel making operations there was recently shut down. The undeveloped

reserves include two leases south of Paonia Colorado, eight leases in the Coal Basin field of

Colorado, and two leases in the Fort Union Region of Montana. U.S. Steel has no current plans

for mining these leases.

The Resource Development Division within U.S Steel is involved in a variety of nonenergy mineral production projects. In addition, the company owns Marathon Oil Co. which

has extensive oil and natural gas operations and be actively involved in Federal oil and gas

leasing.

MOBIL CORP .

Mobil Corp. controls one Wyoming lease in the name of its principal subsidiary, Mobil

Oil Corp. The lease covers 3,959 acres and 424 million tons of coal reserves. The lease was

previously divided into two leases but was recently reconsolidated into a single lease. The lease

is part of the Rojo Caballo mine that is currently in production. Based on its production status,

Mobil will not face section 3 sanctions. However, Mobil has expressed concern that it would

not have enough production on its newly opened mine to satisfy the producing in commercial

quantities test. At its current production rate, it should be able to comply. Mobil currently has

the earliest diligent production deadline of any major coal lessee as a result of the settlement of

a lawsuit over the 1976 diligence regulations. Mobil must produce 2.5 percent of its lease

reserves by 1987.

SWANTON CORP.

Swanton Corp. obtained 16 Utah coal leases in 1984 in the name of its subsidiary,

Swanton Energy Resources Co. The leases cover 361 million tons of coal. The lease tracts are

all part of the proposed Red & Blue and El Paso mining units on the Kaiparowits Plateau in

southern Utah. The leases were acquired from El Paso Energy Company after that Corporation

was taken over by the Burlington Northern Railroad, which cannot own Federal coal leases.

Mining on this block is unlikely to be achieved before the leases’ section 3 deadlines in 1994.

With the exception of coal, Swanton Corp. is not involved in the leasing of minerals,

including oil and natural gas, in the western United States. It major lines of business activity

include financial and investment services and retail appliance stores in the New York City area.

ARIZONA PUBLIC SERVICE CO.

SAN DIEGO GAS & ELECTRIC CO.

SOUTHERN CALIFORNIA EDISON CO.

These three southwestern utility companies each own one third of 21 Utah leases

covering 40,276 acres and 345 million tons of coal. Title to the leases is held in the names of
154 OTA SPECIAL REPORT

Malapai Resources, New Albion Resources Co., and Mono Power Co., respectively. The lease

tracts are all part of the proposed Kaiparowits Nos. 1-5 mines. The leases will not be

producing by August 4, 1986, if ever. The leases were acquired in the 1960’s to assure an

independent coal supply for these utilities for proposed powerplants in the Southwest.

All three utilities are involved in the development of a variety of energy resources, but,

with the exception of Mono Power Company’s oil exploration activities, the Moody’s Industrial

Manual does not indicate any involvement in noncoal mineral leasing.

IDAHO POWER CO.

Idaho Power Co. has an interest

the Bridger Coal Co., a joint venture

Bridger Mine. The mine is currently

in three Wyoming leases through its one third interest in

with Pacific Power & Light Co. that operates the Jim

producing well in excess of the amounts required for

commercial quantities and all leases are expected to be in compliance with section 3. Idaho

Power Co. holds no other Federal coal leases.

MONTANA POWER CO.

Montana Power Co. holds nine Federal coal leases with over 287 million tons of reserves.

It’s wholly owned subsidiary Western Energy Co. holds eight leases that are part of or associated

with its Colstrip Mine. It is expected that all the Montana leases will be able to comply with

the section 3 requirements through LMU formation, although according to the company, one of

its leases has already been mined out and is under reclamation.

Another Montana Power Co. subsidiary, Northwestern Resources Co., owns a lease in

Wyoming that has abandoned mine workings left by previous owners. An application has been

filed for relinquishment of this single nonproducing lease, but final approval has been delayed

pending a determination that all required surface restoration work has been successfully

completed. The Wyoming lease is the company’s only lease with section 3 compliance problems.
APPENDIX B 155

Table A-1

The Top 20 Federal Reserve Holders

Section 3 Compliance Status

PARENT COMPANY OF TOTAL NUMBER RECOVERABLE POTENTIALLY

LESSEES OF LEASES RESERVES UNDER NONCOMPLYING

LEASE (m.t.) LEASES RESERVES*

1

2

3 .

4 .

5 .

6 .

7 .

8 .

9 .

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

Exxon Corp.

Pacific Power & Light Co.

Amax, Inc.

Atlantic Richfield Co.

DuPont 1

b

Peabody Holding Co. c

Broken Hill Prop. Ltd. d

Texaco, Inc. e

Chevron Corp. f

Kerr-McGee Corp. g

The Sun Co.

Shell Oil Corp .

Peter Kiewit Sons, Inc. i

Kaneb Services, Inc. &

Northwest Life Insurance

United States Steel Corp.

Mobil Corp. J

Swanton Corp.

Arizona Public Service

San Diego Gas & Electric

Southern Ca. Edison

Idaho Power Co.

Montana Power Co.

TOTAL**

NOTES

5

a 31

6

13

35

11

30

17

38

5

8

4

13

2

19

1

16

21

3

9

264

*

All reserves in millions of tons.

● * Totals have been adjusted to avoid

Includes joint ventures.

b.: Includes 14 leases in which CONOCO,

1,49 0

1,45 3

1,261

1,24 2

1,135

1,01 9

930

927

803

736

643

641

582

445

438

424

361

345

329

287

12,593

0

10

0

3

31

4

25

5

24

3

6

2

3

0

12

0

16

21

0

1

150

double counting of joint

subsidiary Consolidation

Chevron’s Gulf Oil subsidiary each own 50%. The leases total

with 241 million tons of reserves.

o o%

427 27%

o o%

51 4%

1,049 93%

800 79%

624 67%

800 86%

725 90%

398 54%

97 15%

240 37%

70 12%

o o%

339 83%

o o%

361 100%

345 100%

o o%

o o%

5,976 47 %

ly heal

Coal

d reserves.

Co., and

23,890 acres

c . Totals exclude leases and reserves on which relinquishments and assignments

have been approved or are currently pending.

d . Includes subsidiaries Utah International, Inc. and Energy Reserves Group, Inc.

e. Includes Texaco’s Lake DeSmet holdings and leases held by Getty Minerals, but

does not reflect recently announced sale of Getty's coal operations to Cyprus

Mining or sale of Getty’s 50% share of the Skyline Mine in Utah to Coastal

States Energy Co.

f . Includes 14 leases in which Chevron’s Gulf Oil subsidiary and DuPont’s

Consolidation Coal Company subsidiary each own 50%. The leases total

23,890 acres with 241 million tons of reserves.

9 . Does not include adjustments for pending 1-90 lease exchange of part of the

East Gillette tract in Wyoming.

h. Does not include Sun's recently announced purchase of Soldier Canyon mine

in Utah from California Portland Cement.

i . Includes joint ventures.

j . Total leases reflect two Mobil leases in the Rojo Caballo Mine now

reconsolidated into a single lease.

k. Includes joint venture Bridger Coal Co. with Pacific Power & Light Co.

SOURCE: Office of Technology Assessment
APPENDIX C

Assessment of Coal Lease Payment

OTA examined a range of options that require payments as

section 3 disqualification from a noncomplying leaseholder. OTA

Options

a precondition for lifting the

used a standard engineeringaccounting method to calculate the after tax net present cost of each option for two model lease

tracts, an underground mine in Utah and a surface mine in the Powder River Basin of

Wyoming. The tract characteristics were chosen to be representative of a lease tracts that could

be used to sustain new mining operations in these regions. The trait characteristics are

summarized below. The options were originally selected in May 1985, based upon various

proposals that were then circulating: additional holding fees were analyzed in Fall 1985 to

include the more significant payment requirements of later proposals. The revised analysis is

included in Chapter 4.

The payment options are summarized below.

Delay Rental: A non-recoupable annual payment for the privilege of deferring development of

the property which could be avoided by relinquishing the lease or beginning production. This

payment would begin immediately and stop upon production. (These payments can be expensed

or capitalized at the payor’s option for tax purposes.)

Several variations of delay rental payments were costed out:

Option 1:

(a)

(b)

Option 2:

(a)

(b)

(c)

Option 3:

(a)

(b)

Acreage-based delay rental

$1 per acre

$5 per acre

Reserves-based delay rental, fixed rate

$0.0001 per ton on l% of reserves

$0.001 per ton on 1% of reserves

$0.0001 per ton increasing annually by $0.0001 to a cap of $0.001

Reserves-based delay rental, ad valorem rate

0.5% of value on 1% of recoverable reserves, constant Price

0.5% of value on 1% of reserves with 4% annual price increase

Minimum Royalty: A substantially uniform annual payment in the absence of mineral

production. The payment is imposed on readjustment which is assumed to occur in year 5. The

payment is recoupable. For tax purposes it can be expensed in the year paid.

Option 4: Minimum Royalty, Reserves-based, Fixed rate

(a) $.0.0001 per ton on l% of recoverable reserves

(b) $0.001 per ton on l% of recoverable reserves

Option 5: Minimum royalty, Reserves-based, ad valorem rate

(a) 0.5% of value, 1% reserves, constant price

(b) 0.5% of value, 1% reserves, 4% annual price increase

Advance Royalty: Payment begins immediately and ends on production. The payment is

nonrecoupable. For tax purposes, we assume it is capitalized and that cost depletion is used.

(We note that it is more likely that percentage depletion might be used, it is not used here as it

would not directly reflect the impact of the holding fee. )
APPENDIX C 157

Option 6: Advance Royalty- Reserves based - fixed rate

(a) $0.0001 per ton on 1% of reserves

(b) $0.001 per ton on l% of reserves

(c)$0.0001 escalating annually by$0.0001 to a cap of $0.001

Option 7: Advance Royalty - Reserves based - ad valorem rate

(a) $0.5% of value on 1% of reserves, constant price

(b) $0.5% of value on 1% of reserves, 4% annual price increase

Several additional options have since been analyzed using the programs

developed for this study.

Characteristics of Tracts Used in OTA Analysis of Holding Fees

Wyoming Lease:

Powder River Basin

Surface mine

2000 acres

200 million tons of reserves

60 foot seam

8500 BTU/lb., 0.58% sulfur, 6%ash

5 million tons per year

Recovery rate 90%

Mine life 40 years

F.O.B. mine price $7.60 (contract)

Readjustment in year 5

Federal royalty 12.5%

Production begins in year 10

Utah Lease

Uinta Region

Underground Mine

2000 acres

21.6 million tons of reserves

12 foot seam

11,500 BTU/lb., 0.5% sulfur, 9% ash

500,000 tons per year

Recovery rate 50%

Mine life 40 years

F.O.B. mine price $26.00 (contract)

Readjustment in year 5

Federal royalty 8%

Production begins in year 10
158 OTA SPECIAL REPORT

TABLE A-2

ANALYSIS OF HOLDING FEE OPTIONS

After Tax Net Present Cost to Lessee

WYOMING UTAH

Delay Rental

l(a) $1/ac

l(b) $5/ac

2(a) $0.0001/ton

on 1% reserves

2(b) $0.001/ton

on 1% reserves

2(c) escalating

$0.0001-0.001

on 1% reserves

3(a) 0.5% value

on 1% reserves

constant pric e

3(b) 0.5% value

on 1% reserves

4% Annual increase

Minimum Royalty

4(a) $0.0001/ton

on 1% reserves

4(b) $0.001/ton

on 1% reserves

5(a) 0.5% value

on 1% reserves

constant price

5(b) 0.5% value

on 1% reserves

4% Annual increase

Advance Royalty

6(a) $0.0001/ton

on 1% reserves

6(b) $0.001/ton

on 1% reserves

6(c) escalating

$0.0001-0.001

on 1% reserves

7(a) 0.5% value

on 1% reserves

constant price

7(b) 0.5% value

on 1% reserves

4% Annual increase

Mining SubComn Draft

(a) $0.001/ton/yr

(b) $0.01/ton/yr

$7,030 $7,030

$35,100 $35,100

$632 $76

$6,320 $760

$2,140 $255

$240,000 $98,700

$276,000 $113,000

$54

$540

$20,700

$27,100

$839

$8,390

$2,704

$319,000

$381,000

$632,365

$6,323,654

$6

$60

$8,480

$11,100

$104

$1,040

$342

$135,000

$137,000

%75,883

$758,83 7
APPENDIX D 159
160 OTA SPECIAL REPORT

c1

G

.

N
APPENDIX D 161

(Y

1-

a

v

L

U’)
162 OTA SPECIAL REPORT
APPENDIX D 163
164 OTA SPECIAL REPORT
APPENDIX D 165

N
166 OTA SPECIAL REPORT

(n
APPENDIX D 167
168 OTA SPECIAL REPORT
APPENDIX D 169

L
— .——

170 OTA SPECIAL REPORT
Page No. 3

02/03/8 6

STATE SERIAL

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

co

c069942

C25079

c27432

c3721O

C078049

C19885

C088199

C086654

C033301

c033302

D052504

c36446

C25948

c07518

C07519

C079641

c813

C0127833

C0127832

c0127834

C081251

c081258

C0114093

c0112685

C0112686

c0112687

C0126477

D057166

c012765

C012894

C028875

C0125485

C030344

c12638

C12639

c1894

C7852

c030346

c7853

c037277

C059420

BLOCK OR MINE NAME

Ohio Creek No.2

Orchard Valley

Orchard Valley

Orchard Valley

Roadside

Seneca 2

Seneca 2

Seneca 2 (##7)

Somerset

Somerset

Somerset

Somerset

Trapper

Trapper

Trapper

Trapper

Trapper

Fruit a

Fruit a

Fruit a

Seneca 2W

Seneca 2W

Seneca 2W

Denver Basin

Denver Basin

Denver Basin

Denver Basin

Jackson Co.

Thompson Creek

Cardinal

Chapman & Riebo(d

Coal

Coal

Coal

Coal

Coal

Coal

Coal

Coal

Coal

Coal

Basin West(#28)

Basin West(#28)

Basin West(#28)

Basin West(#28)

Basin West(#28)

Basin West(#28)

Basin West(#28)

Basin West(#28)

Canyon

Canyon

DATE

ISSUED

04/01/62

03/01/78

09/01/79

05/01/84

08/01/66

06/01/79

07/01/63

07/01/63

01/07/60

07/01/64

08/19/44

05/01/84

06/01/80

06/01/58

06/01/58

10/01/62

04/01/70

07/01/81

07/01/81

07/01/81

05/01/65

05/01/65

05/01/64

12/01/67

12/01/67

12/01/67

12/01/67

06/21/51

06/01/60

02/01/56

11/01/31

01/01/65

05/01/60

01/01/65

12/01/66

12/01/66

12/01/66

05/01/60

01/01/65

10/01/62

10/01/65

DEVELOPMENT STATUS OF FEDERAL COAL LEASES

ACRES DEV. LESSEE #1

STATUS

80 AA

310 AA

854 AA

4999 AA

810 AA

125 AA

2280 AA

160 AA

625 AA

1548 AA

3470 AA

79 AA

85 AA

2566 AA

1372 AA

1352 AA

160 AA

5087 PN

4522 PN

5120 PN

2519 PN

2323 PN

1320 PN

640 R

640 R

644 R

760 R

173 R

498 R

634 UP

1675 UN

200 UN

517 U N

315 UN

800 UN

120 U N

160 UN

640 UN

717 UN

1471 UP

308 UN

Weaver, H. & O.

Colorado Westmoreland, Inc.

Colorado Westmoreland, Inc.

Colorado Westmoreland, Inc.

Powderhorn Properties Co.

Peabody Coal Co.

Peabody Coal Co.

Peabody Coal Co.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

Utah International, Inc.

General Electric Holdings, Inc

General Electric Holdings, Inc

General Electric Holdings, Inc

Utah International, Inc.

Dorchester Coal Co.

Dorchester Coal Co.

Dorchester Coal Co.

Material Service Corp.

Material Service Corp.

Peabody Coal Co.

Peabody Coal Co.

Peabody Coal Co.

Peabody Coal Co.

Peabody Coal Co.

Monolith Portland Cement Co.

Garland Coal & Mining Co.

Franklin Real Estate Co.

Riebold, P.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

U.S. Steel Corp.

Mid-Continent Limestone Co.

Mid-Continent Limestone Co.

PCT NO. DATE HOW SEC. 3 SEC. 3

LESSEES ACQUIRED ACQUIRED DATE STATUS

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

50 2

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

100 1

05/01/76 ind

03/01/78 den

09/01/79 den

05/01/84 den

12/01/84 ind

06/01/79 den

07/01/63 den

07/01/63 den

07/01/60 den

03/15/60 den

03/01/56 ind

05/01/84 den

06/01/80 den

06/01/58 den

06/01/58 den

10/01/62 den

03/01/70 den

07/01/81 den

07/01/81 den

07/01/81 den

05/01/65 den

05/01/65 den

05/01/64 den

/ / r e l

/ / r e l

/ / r e l

/ / r e l

/ / r e l

/ / r e l

06/01/75 ind

06/01/74 par

07/01/65 seg

05/01/60 d e n

05/01/71 den

05/01/71 den

06/01/67 seg

11/01/68 seg

05/01/60 den

11/01/68 seg

10/01/62 den

01/01/69 den

08/04/86 YM

03/01/880 0

09/01/89 0 0

05/01/94 0 0

12/01/94 YM

06/01/89 YM

08/04/86 YM

08/04/86 YM

08/04/86 YM

08/04/86 YM

08/04/86 YM

05/01/94 0 0

06/01/90 YM

08/04/86 YM

08/04/86 YM

08/04/86 YM

08/04/86 YM

07/01/91 0 0

07/01/91 0 0

07/01/91 0 0

08/04/86 QM

08/04/86 QM

08/04/86 QM

//0 0

//0 0

//0 0

//0 0

//0 0

//0 0

08/04/86 NU

08/04/86 NM

08/04/86 NM

08/04/86 NM

08/04/86 NM

08/04/86 NM

08/04/86 NM

08/04/86 NM

08/04/86 NM

08/04/86 N M

08/04/86 NM

08/04/86 NM
172 OTA SPECIAL REPORT
APPENDIX D 173
174 OTA SPECIAL REPORT
APPENDIX D 175
176 OTA SPECIAL REPORT
APPENDIX D 177
178 OTA SPECIAL REPORT
APPENDIX D 179
180 OTA SPECIAL REPORT
APPENDIX D 181

d
182 OTA SPECIAL REPORT
APPENDIX D 183
184 OTA SPECIAL REPORT
APPENDIX D 185

FIELD

STATE

SERIAL

BLOCK OR

MINE NAME

DATE ISSUED

ACRES

DEV. STATUS

LESSEE #1

PCT

NO. LESSEES

DATE

ACQUIRED

HOW

ACQUIRED

SEC. 3 DATE

KEY TO ABBREVIATIONS AND ENTRIES IN

OTA COAL LEASE DATA BASE

CONTENTS

State where lease is located

Lease serial number in DOI records

Name of Mine or Lease Block used in OTA reports

Date lease was originally issued

Acres in Lease (current as of 1982)

Development Status 1985

The-first letter is the development status of the lease or the associated

mine or lease block, the second letter is the current production status

Ratings:

AA = Approved SMCRA permit, mine is actively producing.

AI = Approved permit, past production, mine is currently idle.

AS = Approved permit, mine scheduled to begin producing under

contracts.

AN = Approved permit, no scheduled production, no contracts.

AM = Approved permit, lease reserves mined out.

PS = Pending permit, mine scheduled to produce under contract

PN = Pending permit, no scheduled production, no contracts.

UN = Undeveloped no active permit review.

UP = Undeveloped, past coal production (before SMCRA).

R = Undeveloped, relinquishment approved.

RP = Undeveloped, relinquishment pending.

RE = Relinquished in exchange for another lease.

First lessee in DOI lease records

Percent owned by Lessee #1

Number of lease owners

Date lease acquired by lessee #1 or corporate predecessor

Method of acquisition by lessee #1 or corporate predecessor

DEN = lease issued by DOI to lessee; IND = lease assigned to lessee by

unrelated entity; SEG = lease transferred by segregation of an existing

lease; PAR = partial interest in lease transferred to lessee by

assignment

Earliest section 3 deadline applicable to lease: generally 10 years after

lease acquired by lessee or corporate predecessor in arm’s-length
186 OTA SPECIAL REPORT

transaction between unrelated parties (Corporate acquisitions do not

restart section 3 clock).

SEC. 3

STATUS Estimated section 3 Compliance Status as of section 3 date

First letter is general rating, second letter provides reason for rating.

YA = Lease likely to comply with section 3, actively producing >1%

reserves.

YS = Lease likely to comply because of scheduled production and

contracts.

YD = Lease likely to comply, reserves depleted.

YL = Lease likely to comply by LMU formation with other federal

leases.

QM = Uncertain compliance status because of market conditions,

existing regional capacity between 100 and 150% of projected demand.

QC = Uncertain compliance status because of LMU formation with

nonfederal coal and lack of contracts to sustain LMU production level

of 2.5%/yr.

QT = Uncertain compliance status because of lack of transportation to

move coal to customers.

NM = Lease unlikely to comply because of market conditions, existing

regional capacity exceeds 150% of projected demand.

NU = Lease unlikely to comply because of unfavorable development

potential.

00 = Lease not rated (post-FCLAA lease, insufficient information,

relinquished lease).

u. s. GOVERNMENT PRINTING OFFICE : 1986 0 - 57-883 : QL 3