BILLINGS – Montana’s Land Board will have to reconsider its price for developing a half-billion ton reserve of state-owned coal after receiving no offers during a lease sale that ended Monday.
Critics had said the price sought by the state was set too high and suggested Land Board members undermined the sale to appease mining opponents.
The Otter Creek tracts hold an estimated 1.3 billion tons of coal, buried in a remote stream valley near Ashland. About half of those reserves are controlled by the state and the rest by Arch Coal Inc. of St. Louis.
During a six-week lease sale, the state asked mining companies for an up-front “bonus” bid of at least $143 million plus annual royalty payments that could approach $1 billion over several decades.
Only Arch responded — although not with a bid as officials initially believed but a letter saying the state’s price was too high.
The Land Board is made up of the state’s top five elected officials — all Democrats — and chaired by Gov. Brian Schweitzer. It will likely review the failed lease sale next week.
Schweitzer insisted Monday he was “encouraged” by the letter from Arch, since it demonstrated at least some interest.
“Just about everybody that’s ever bought a car knows the way this works,” Schweitzer said. “Like any good deal, it starts by working your way from the high to the middle and the low to the middle.”
In November, Arch leased rights to 731 million tons of coal at Otter Creek owned by Great Northern Properties. The bonus payment on that deal was $73.1 million, or 10 cents a ton. That’s versus the state’s request for 25 cents a ton.
Bud Clinch with the Montana Coal Council said he had expected the high upfront costs to scare off prospective bidders.
“It seems so out of the spectrum of what’s been bid by Arch on the Great Northern leases,” Clinch said.
In the letter to the Land Board, David Finnerty, president of Arch’s land subsidiary, Ark Land Company, wrote that development of Otter “creates an attractive package from an engineering/mining perspective.” But he added that the state’s high minimum bid made such a project economically unfeasible.
Finnerty wrote that if the state lowered the 12.5 percent annual royalty payments on coal from Otter Creek, prospective developers might consider a higher bonus bid.
In December, when the Land Board was setting its lease conditions, environmentalists pushed the board to set a high minimum for the bonus bid.
They argued any revenues gained by the state would come up far short of the mine’s huge environmental costs. Thousands of acres would be stripped to expose the coal, while using it to generate power would release two tons of carbon dioxide for every ton of coal burned.
If those costs were accounted for, environmental groups said the state would need a bonus bid of more than $6 per ton. That equals about $3.4 billion for the state’s coal.
“I think Arch Coal is looking for a handout,” said Mike Scott with the Sierra Club. “Demand for their product is declining and will continue to decline as more of the country moves away from dirty energy sources like coal.”
With estimates that a mine at Otter Creek could produce up to 33 million tons a year, Arch would boost its nationwide annual production by more than 25 percent if it developed the site.
But first the company would have to sink an estimated $1.7 billion into mine equipment and other startup costs, according to an appraisal done for the state last year.
Arch spokeswoman Kim Link said Monday the company was not commenting publicly on the state’s lease sale.
The company had revenues of $2.6 billion in 2009 on the sale of 125 million tons of coal from mines in Wyoming, Utah, Colorado, West Virginia, Kentucky, and Virginia. That was down from 138 million tons in 2008.