Federal royalty rule challenged in Wyoming courts

CASPER (WNE) — A rule requiring energy companies to pay full royalties on minerals extracted from public land will come under scrutiny again in Wyoming courts, after industry groups filed a lawsuit last month against the Interior Department over the policy, saying it hinders energy development.

On July 25, several conservation groups responded to the federal lawsuit filed by coal giant Cloud Peak Energy and other companies. As it stands, the Valuation Rule ensures industries pay their proper dues after extracting publicly owned minerals, environmental groups said in a statement.

When energy companies extract minerals from public land, they must pay royalties to the federal government. About half these funds flow back to states. But before the rule, energy companies would sometimes use affiliate companies to sell minerals at deflated prices, often skirting higher royalties associated with selling resources at market value. The revised rule required companies to pay market value price on royalties after extracting minerals on federal and tribal land.

“A fair amount has to be paid for extracting federal minerals, and (companies) are subject to these federal warranties,” said Bruce Pendery, litigation and energy policy specialist with the Wilderness Society, a conservation group supporting the reinstatement of the valuation rule. “The federal government and the people of the United States are supposed to receive some sort of payment for the taking of these minerals out of our lands and making money off of them by selling them.”

The lawsuit against the valuation rule was filed July 19 in response to an April ruling from a federal California court striking down the Trump administration’s delay and eventual repeal of the rule. The administration did not provide sufficient reasoning for the rollback of the rule, according to Judge Saundra Brown Armstrong’s decision. She declared the Office of Natural Resources’ decision to repeal the rule “arbitrary and capricious” and reinstated the rule.

In 2016, the Obama administration buffed up the royalties policy in an effort to curtail the practice of skirting full payment of minerals, by mandating companies pay royalties at full market value. The new rule went into effect in 2017. The administration estimated the change would bring in between $71.9 million and $84.9 million in additional royalties into government coffers.

Industry groups filed petitions against the new rule in the U.S. District Court for the District of Wyoming, on the grounds that the rule hindered energy development and created market uncertainty. But the groups eventually dismissed the challenges after the Office of Natural Resources repealed the rule a year later. The repeal was consequently challenged by several environmental groups in California.

“The increased costs associated with the Valuation Rule had the potential to decrease exploration and production on Federal lands, both onshore and offshore, making us rely more and more on foreign imports of oil and gas,” then-Interior Secretary Ryan Zinke said in a 2017 statement against the rule.

The Trump administration’s decision to abandon the 2016 valuation rule gave energy companies mining for coal or drilling for oil and gas on federal land a financial break.

In a 2017 annual report, coal giant Cloud Peak Energy said a reinstatement of the valuation rule’s benchmarks would harm the coal industry: “That outcome could adversely impact export sales for vertically integrated mining and logistics entities such as Cloud Peak Energy Inc. and place vertically integrated entities at a competitive disadvantage to independent coal brokers or exporters of non-federal coal.”

A spokesman for Cloud Peak Energy declined to comment on the most recent lawsuit.

“Those royalties go in large part to the states and the communities, to things like education and roads and impacts caused by the developers of the resources,” said Bob LeResche, board member of Wyoming Organization of Resource Council, a group advocating to uphold the rule.

“It’s only fair that they pay for the government services that they receive, and we’re trying to ensure that that happens,” he added.