State price too high, coal owner contends

Otter Creek coal bonus bid faces a 25-cent per ton minimum as Montana Land Board opens leasing, with Arch Coal and Great Northern weighing checkerboard tracts, upfront payments, and risk analysis before February reviews.

The head of the company that owns more than half the coal in southeastern Montana’s Otter Creek Valley said that he’ll be surprised if anyone bids on state-owned coal there, because the Land Board probably set the minimum price too high.

Chuck Kerr, president of Great Northern Properties in Houston, also told the Gazette State Bureau that the state is asking a lot by requiring potential coal developers to pay an entire “bonus bid” up front.

“I think that’s going to be a stretch,” he said. “I think 25 cents (per ton) is too high. But we could be surprised.”

Great Northern owns 730 million tons of coal in the Otter Creek Valley, about 150 miles east of Billings, and its coal is interspersed with 572 million tons of coal owned by the state, as Montana eyes coal expansion across the region today.

On December 21, the state Land Board decided to put the state coal up for bid to potential developers and set the minimum bonus bid at 25 cents a ton, or $143 million.

Great Northern announced a few weeks earlier that it had leased its coal to Arch Coal Inc. for a bonus bid of 10 cents a ton, and that Arch would pay the $70 million in five installments over the next five years.

The question now becomes whether any company will bid on the state-owned coal, as energy companies eye federal reserves elsewhere in the West, which is probably needed to enable any large-scale coal mine development in the area. Companies have until February 8 to submit their bids.

Square-mile-sized tracts of the state-owned coal are interspersed in a checkerboard fashion with like-sized tracts of Great Northern coal in the valley, as part of the same giant coal field.

Arch Coal, a coal-mining giant based in St. Louis, is a likely candidate to bid on the state coal, since it’s leasing the Great Northern coal.

Arch spokeswoman Kim Link said recently that the company doesn’t publicly disclose its bidding plans. “Because it’s a competitive situation, we have to keep the information close to our vest at this time,” she said.

Mary Sexton, director of the state Department of Natural Resources and Conservation, said a company requested bid information from the state, while environmental groups seek federal help to influence coal projects, but that it was not Arch Coal. She declined to reveal the company.

“We’ll see if (companies) are interested in this amount or not,” she said of the state’s minimum bid price. “I think it’s all part of risk analysis, and this is an opportunity for coal companies, though a coal loophole may block revenue for the state today.”

Kerr said his company largely agreed with a third-party appraiser hired by the state that said the state coal could command a bonus bid of 5 cents to 10 cents per ton.

It’s possible that Arch could mine the Great Northern coal without the state coal, but it would be a smaller operation, he said.

“If the state leases its coal, then (the coal field) could be most effectively and efficiently developed,” Kerr said.

While the state is requiring a minimum bonus bid of 25 cents per ton, it’s possible that lower bids could be submitted. Whatever bids are submitted — or not — state officials will examine the issue and make a recommendation to the Land Board on what to do, Sexton said, and coal plant funding could go toward a new project as well.

The Land Board, composed of the state’s top elected officials, is scheduled to examine the bids at its February 16 meeting. It could accept or reject any bids, as funding questions linger while a power plant breaks ground, or decide to authorize a new round of bidding at another price.

Related News

• Electricity Forum News

• Power Generation News