Decisions Sides With Both Obama And Trump Administrations In Valuing Royalties

Oct 9, 2019

A map of all federally owned land in the United States (from 2005)
Credit U.S. Bureau of Land Management

Judge Scott Skavdahl for the United States District Court, District of Wyoming has placed an injunction on part of the Obama-era valuation rule. That rule was intended to update how royalties are calculated from energy production on federal and native land with the goal of giving a fair price to taxpayers.

Skavdahl interprets the 2016 rule on how to calculate the value of mineral royalties. The decision is a win for both the Obama and the Trump administrations. The immediate consequences will benefit coal companies.

On June 30, 2016, former Interior Department Secretary Sally Jewell said the old 1980s calculations haven't kept up with market changes. The valuation rule attempted to change that.

In 2017, the Interior Department attempted to repeal the rule, but was rebuffed by a federal court in California.

Petitioners, which include several members of the energy industry, argued in a federal court in Wyoming that the valuation rule would be costly, cause irreparable harm, and is not within the federal government's authority.

First and foremost, University of Wyoming law professor Sam Kalen said Judge Skavdahl's order does reaffirm the authority of the government to implement the valuation rule.

"It confirmed that there's a wide deal of discretion that the government enjoys when it exercises that authority so long as it's not arbitrary and capricious and does a good job of explaining its decision," he said.

The order also sides with the Obama administration in the updated valuations of oil and gas royalties. That means companies will have to go back and recalculate their royalties starting January 1, 2017; something the International Petroleum Association of America said will cost each company upwards of $100,000 in compliance.

The order sides with the Trump Administration, however, in how the valuation rule applies to the coal industry.

Skavdahl found coal royalties should not be valued based on electricity prices, but on the initial sale price; that's a significant and cost-saving benefit to coal companies. Kalen said the rationale makes sense. Electricity prices are valued based on multiple sources of energy, not just coal.

"At this stage in the proceeding, what the judge said was, 'hey, look, given what their understanding is right now, that's a fairly complicated process,'" Kalen said.

Skavdahl wrote in his order that using the gross proceeds of electricity sales to calculate coal royalties is akin to, "valuing wheat based on the sale of a cake." So, he decided that application of the valuation rule is contrary to law and arbitrary and capricious. For now, coal companies will follow the pre-2016 valuation technique.

Have a question about this story? Contact the reporter, Cooper McKim, at cmckim5@uwyo.edu.