Interior Department officials last year allowed Amax Coal Co. to buy the rights to 143 million tons of federally owned coal reserves for half the amount the department's economists estimated it was worth.
The economists had calculated development rights to the tract, located in the coal-rich Powder River Basin in Wyoming, at $7.2 million plus royalties. The General Accounting Office, in a recent review, put them at $15.8 million.
But because of the way Interior officials in Washington drew the tract, reversing their own earlier ruling and those of senior agency engineers, Amax was able to lease it with no competing bidders for $3.6 million plus royalties.
Interior's Bureau of Land Management Director Robert F. Burford and other senior officials said the department carefully followed all laws and procedures in the matter and received a good price for the government's resources. But, as in almost every feature of the government's complex coal program, there are conflicting arguments over issues of law, economics and how best to manage the nation's coal resources.
Interior's coal leasing policies have come under criticism by two congressional inquiries that charged that Secretary James G. Watt has leased more than 1 billion tons of government coal reserves for $60 million to $100 million less than they are worth. Watt vehemently defends the lease agreements, saying there is much more at stake than dollars in developing coal resources.
Most of the debate so far has focused on Watt's policy of leasing large quantities of government coal reserves in a glutted market, an approach that generates little competition and relatively low prices. Last year, at the Powder River Basin auction, the largest in history, eight of 11 tracts leased drew one bid each.
In the case of the Amax tract, though, the slack market was not the deciding factor. Four months before the auction, the Interior Department had divided what many officials expected to be a competitive tract so that the parcel was useful only to Amax.
Burford, in an interview, said he authorized the change after becoming convinced by a U.S. Geological Survey report that no company but Amax could have afforded to develop the tract, even in its original shape. But this finding conflicted with other USGS reports, and was disputed by Interior Department mining engineers in Wyoming, the governor of Wyoming and officials of Arco Coal Co., who had announced plans to bid against Amax before the department redrew the tract.
The Duck Nest Creek tract, as originally drawn, covered 3,000 acres and 316 million tons of federally owned coal in the heart of the Powder River Basin of Montana and Wyoming. Several months before the April, 1982, auction there, Amax, the nation's third-largest coal company and the biggest producer in the Powder River region, and Arco, one of its major competitors, announced plans to bid on it.
The third-largest of 13 tracts to be auctioned, it ran between lands controlled by the rival companies. Several officials saw it as potentially one of the more lucrative properties to go on the block.
The tract was especially valuable to Amax because it lay just to the west of its Belle Ayr mine, the largest in the Powder River Basin, which produced 12 million tons of coal last year. By simple economies of scale, Amax would save money--and increase profits--by expanding Belle Ayr rather than investing millions of dollars to open a new mine.
Amax already owned a strip of coal--49 million tons--dividing Duck Nest north and south, and controlled access to a large portion of the tract. Intent on winning mining rights to the tract, Amax officials said the company would charge so much for access rights that competitors would be priced out.
Arco officials, undaunted, said they still would compete, despite access costs. Arco held a lease on 640 acres of coal-rich state land to the west, which joined both the northern and southern halves of Duck Nest and could be combined profitably with it for a major new mining operation, officials said. If Amax refused to sell the middle strip, a company spokesman said, Arco could have mined around it.
Meanwhile, Amax was seeking to win the tract through other channels. The company had an outstanding claim to government coal deposits because of a 1980 federal law that canceled a block of Amax holdings on the Northern Cheyenne Indian reservation in Montana. Invoking this law, Amax asked the Interior Department to grant the company a lease to the northern half of the Duck Nest tract before the auction, down to the strip of Amax-owned coal. The southern portion, containing 143 million tons, could be put on the block by itself, Amax argued.
The department first refused, and offered Amax another tract or credit at the next auction. The department's mining engineers in Wyoming examined the Duck Nest tract several times and concluded that splitting it would destroy chances of competition between Amax and Arco at the April auction. Arco officials made the same argument.
"Neither the northern portion of Duck Nest nor the southern portion can stand alone as a competitive tract," the deputy conservation manager of USGS in Casper, Wyo., wrote in October, 1981. "Only when the two are considered as one is this criteria met. A minable, economic, and, most importantly, a competitive coal tract does exist when the northern and southern portions are combined."
"For the BLM to consummate an exchange . . . involving the Duck Nest Creek tract would be illegal and not be in keeping with the legislation and definitely not be in the public interest," Max Lieurance, BLM director in Wyoming, who was delegated authority to decide the Amax request, wrote in a memo. The memo was obtained by The Washington Post. Lieurance was referring to a provision in the 1980 federal law that forbade the department to trade Amax any coal deposits likely to be mined "economically or efficiently" in the "forseeable future" by another company. Such deposits could draw competitive bidding and large returns for the federal treasury, officials said.
Burford concurred, and on Nov. 30, 1981, wrote Amax rejecting its request because "I cannot conclude that only Amax can mine this tract." It appeared that Duck Nest would go on the block in one piece.
Amax mounted an appeal. The company retained William T. Coleman Jr., a member of its board of directors and secretary of transportation in the Ford administration, who met with then-Undersecretary Donald P. Hodel, now secretary of energy. Other Amax lobbyists sought the support of the USGS, Solicitor William H. Coldiron and then-Assistant Interior Secretary for Energy and Minerals Daniel Miller. They also joined with attorneys for the Northern Cheyenne--eager to resolve the claims on their reservation--and recruited support from Assistant Interior Secretary for Indian Affairs Ken Smith.
Of the principals involved, only Burford and his aides agreed to be interviewed on the record. Interior Public Affairs Director Douglas Baldwin said he would not allow Coldiron, Smith and others to discuss the matter outside his presence, and said interviews could not be scheduled last week. He said he wanted all officials interviewed at once to avoid the problem of "the nine blind men and the elephant," and said he could not bring the men together before next week, if then. Miller, who has left the department, declined to comment. Hodel was out of town and did not return a reporter's telephone calls.
In its appeal to Hodel, Amax restated its position that no other company could afford to mine Duck Nest--Arco's claims notwithstanding--so the department should consider it as two tracts, divided by the Amax coal strip. Under this scenario, the Interior Department could legally award Amax a lease to the northern portion because the department's mining engineers already had ruled that it could not be developed profitably by a company other than Amax, if separated from the southern block.
Coleman cited a computerized study by USGS--a cash flow analysis produced before Burford's ruling--concluding that no other company could afford the investments needed to make a profitable mine out of the combined tracts.
A competitor would have to spend millions of dollars on transportation facilities, mining equipment and other start-up costs; Amax already had these at its Belle Ayr mine next door. Also, if Amax refused to cede the strip of coal dividing the tracts, the economic model showed, a competitor would incur prohibitive costs trying to mine around it.
In short, the model implied that Arco was either bluffing or blundering in planning to compete for the tract. An Arco spokesman, in a recent interview, disputed the study.
Several Interior Department officials questioned the USGS computer analysis in light of findings of the mining engineers and Arco's continued interest in the tract. Other computer runs using the same model but a few different variables had found the tract to have competitive appeal, these officials said.
"The computer is a red herring," said one of the officials, who asked to remain anonymous. "We got one computer run to say one thing, one to say another. Change the expected life span of a mine, inflate the cost factors, change the discount rate, redraw the tract, flip the switch, and you can come out with whatever you damned well want. Every mining engineer who looked at the tract decided it was competitive. Arco was sitting there saying they'd bid on it. What more proof do you need?" But this time, the Amax arguments took hold. Smith, Miller and Coldiron wrote a memo to Watt asking him to reverse Burford's ruling. USGS ran more computer analyses.
Burford said he never heard from Watt or Hodel, but in early December, he said, USGS official Andy Bailey brought him the cash flow analysis showing that only Amax could mine the Duck Nest tract at a profit, even in its original shape. Burford said he was not aware of this study in making his initial decision and considered it "significant new" information.
"That put an entirely different slant on it," Burford said. "I've never hesitated to admit I've been wrong if further information comes out."
Burford asked Hodel in a memo to let him reverse his earlier ruling and split Duck Nest into two tracts, awarding the northern portion to Amax. On Dec. 31, 1981, Amax was granted a lease to the northern block, containing 173 million tons of coal. In exchange, the company dropped a $5.4 million claim for its Northern Cheyenne holdings.
In April, 1982, the remaining 143 million tons were put on the block at the Powder River auction. In its diminished form, the tract drew only one bidder, Amax, and the Interior Department invoked a since-discarded policy of halving the asking price for small parcels that draw no competition because they are useful to only one company.
Instead of $7.2 million--the value of development rights as measured by Interior Department economists--the agency asked for $3.6 million. Amax, as the only bidder, leased the tract for $3.6 million, plus royalties. That brought Amax's cost for development rights on the combined tract to a total of $10 million.
Several Interior Department officials said it is impossible to calculate what the government might have received if the Duck Nest tract had been auctioned in one piece. USGS did not evaluate development rights for the undivided tract.
"Obviously, once they divided it, the tract wasn't attractive to us," said Arco spokesman Harold Craig. "Until then, we intended to bid, and had we won, we certainly intended to mine it. If you've got a tract that's competitive, obviously that drives prices up, and makes the entire bidding process more favorable from the government's point of view."
But Coleman said the government is better off under the arrangement with Amax because there is more at stake than the asking price. He said Amax believed it would have taken Arco years, perhaps decades, longer than Amax to develop it. With Amax, the state and federal treasuries will receive more royalties sooner, Coleman said. Over the life of a mine, royalties--set by law at 12.5 percent of the value of all coal mined--far surpass the bid price.
In addition, Coleman said, the Northern Cheyenne were able to regain control of their coal deposits, and the government was able to avoid a lawsuit by Amax.
"If they had not made the exchange as we requested," Coleman said, "we would have sued the government and we think we would have recovered millions more dollars than we got out of this. The government would have been worse off and the Indians would have been worse off. We felt given the law and the facts we were entitled to this property."
Asked why Amax couldn't persuade the Interior Department to take this position before he became involved, Coleman smiled and said: "Because I have a reputation of being an awfully good lawyer. I simply presented our case. Attorneys Lloyd Cutler or Clark Clifford would have done the same thing at other times. That's the reason we're able to have these major law firms and do fairly well."