CORRECTED-Asia coal export boom brings no bonus for US taxpayers

(In fourth paragraph from the bottom, please read company name

as Marathon Oil, not Marathon Petroleum, Corp)

* Taxpayers stand to miss out as Asian coal exports boom

* Changing royalty base could net billions more in future

* Former officials, taxpayer watchdog say program flawed

WASHINGTON, Dec 4 (Reuters) - U.S. miners who are booking

big profits on coal sales to Asia are enjoying an accounting

windfall to boot.

By valuing coal at low domestic prices rather than the much

higher price fetched overseas, coal producers can dodge the

larger royalty payout when mining federal land.

The practice stands to pad the bottom line for the mining

sector if Asian exports surge in coming years as the industry

hopes, a Reuters investigation has found.

Current and former regulators say their supervisory work

has lagged the mining industry as it eyed markets across the

Pacific. They say they will now give the royalty question a

close look.

"We are committed to collecting every dollar due," said

Patrick Etchart, spokesman for the Office of Natural Resources

Revenue, which collects federal royalties.

At issue is the black rock pulled from the coal-rich Powder

River Basin in Wyoming and Montana. Miners there say they abide

by the letter of royalty rules that call for the government to

get a 12.5 percent cut on coal sold under federal lease.

The question is: At what point is that coal valued?

Most Powder River Basin coal is sold domestically, where

prices have been depressed by a glut of natural gas and

regulations meant to curb pollution.

But Asian economies rely on coal to sustain growth, so the

ton worth about $13 near the Powder River Basin mines last year

fetched roughly 10 times that in China.

After deducting costs like shipping by sea and rail, that

ton of Powder River Basin coal sold in China last year would

have returned about $30 to the miners, several industry analysts

estimate.

Luther Lu, director at China-based Fenwei Energy Consulting,

said the figure was closer to half that, with miners up against

other costs that would have cut into their margin.

Whatever the take-home for miners, several royalty experts

said, the taxpayer is due a share of the final sale price

overseas.

Powder River Basin mining companies disagree and say that

they are right to pay out royalties at the low domestic prices.

"If you look at the regulations, we are not required to do a

net-back," said Karla Kimrey, a spokeswoman for Cloud Peak

Energy, referring to the return on Asian sales. The

taxpayers' bite would be based on that number.

The rules that govern Powder River Basin sales to Asia

deserve a more rigorous review, and short royalty payments will

not be tolerated, Etchart said.

The royalties question will remain an important one as Asian

coal exports look set to expand and the United States faces a

fiscal crisis.

"How do you justify paying royalties at anything less than

the true value, particularly in these times of tight budgets?"

said Autumn Hanna of the nonpartisan Taxpayers for Common Sense.

$100 MILLION SHORT?

Mining companies declined to explain how they book Asian

coal sales, and their securities filings give only a partial

picture of how miners operate in volatile energy markets.

Industry and publicly available data, though, indicates that

taxpayers stand to lose out.

Paying royalties calculated on the net-back formula for

Asian exports from Wyoming and Montana rather than on the

benchmark domestic price would have yielded around $40 million

in additional revenue for the government last year alone,

according to data from Goldman Sachs and other analysts, and

figures from the U.S. Energy Information Administration.

Extended to the last few years of increased Asian demand,

that total could exceed $100 million in forgone royalties. The

sum could balloon into billions of dollars if mining giants are

allowed to ship 150 million tons of coal a year or more through

the Pacific Northwest, as the industry wants. [ID: nL2E8JU4LQ]

Of course, if the companies are more profitable because of

lower royalty payments, they may well be paying more in

corporate taxes, though some experts dispute the point.

"A certain $1 collected on royalties is worth more than the

unsure tax take," said Tom Sanzillo, a former deputy comptroller

for New York state who has studied the economics of coal exports

with the Institute for Energy Economics and Financial Analysis.

For now, the debate over exports from the Powder River Basin

is of limited scope: Less than 4 percent of the roughly 476

million tons of coal produced in Wyoming and Montana was

exported last year, according to the EIA. Three-quarters of U.S.

coal exports are bound for Europe or other non-Asian ports, much

of that from private, not federal lands, in the Appalachian

region.

But Asian economies such as India and China cannot grow

without abundant electricity, and that demand has opened a

window for a U.S. coal sector long focused on delivering

domestic power.

'EXPORTS WERE NOT ON THE RADAR'

Several large coal companies mine the Powder River Basin -

a high, grassy plain in eastern Montana and Wyoming. Cloud Peak

exclusively works that terrain, which is chiefly on federal

land. The company was in a position to save tens of millions of

dollars in recent years by their reading of royalty rules.

Less than 5 percent of Cloud Peak coal was shipped to Asia

last year, but that accounted for nearly 19 percent of total

revenue, or about $290 million. A year earlier, Asian sales were

only 3.4 percent of the total volume but 12 percent of revenue.

Cloud Peak, Peabody Energy and Arch Coal all

declined to explain how they book their Asia business, but a

large share of Powder River Basin sales passes through traders.

Sales to brokers and traders are allowed, but royalty rules

assume that those buyers' economic interest is opposite to

miners'. Sales to in-house or affiliated traders are due more

scrutiny under the law.

"We are familiar with the rules around both arms-length and

non-arms-length transaction and fully comply with both," said

Vic Svec, a Peabody Energy spokesman, referring to the

principle that is supposed to guide such sales.

Arch Coal declined to comment on their trading

business, and Cloud Peak said it faces frequent audits from

state and federal officials to make sure they follow the rules.

"In my neighborhood, I don't stop at every block. I could.

But that's not where the stop signs are," said Cloud Peak

spokeswoman Karla Kimrey. "You can say you don't like the

regulations, but we play by the rules."

Former and current officials said the government has been

slow to understand the power of foreign markets or protect the

taxpayer's stake in those lucrative sales.

"Exports were simply not on the radar," said Bob Abbey, who

in May stepped down as head of the Bureau of Land Management,

the agency that grants federal coal leases. [ID: nL1E8L5GU0]

A PRECEDENT IN GAS

While the industry says it is acting above-board, outside

lawyers point to a natural gas precedent that they say further

indicates the issue is far from settled.

In the late 1970s, Marathon Oil Corp used a similar

accounting system to settle royalties on natural gas that was

produced in Alaska but sold to Japan.

A federal court eventually told Marathon to pay out

royalties based on the overseas value. Officials leveled a $10

million fine against Marathon.

Peter Appel, a former Justice Department attorney, said the

case shows that officials expect taxpayers to get a taste of the

true gains on exported fuel.

" This ruling should give officials confidence to give a hard

look at coal sales," said Appel, who prosecuted cases for the

DOJ's Environment and Natural Resources Division and teaches at

the University of Georgia School of Law.

(Reporting by Patrick Rucker; editing by Jonathan Leff and

Prudence Crowther)

Most Popular in Business