oversight

Federal Land Management: Estimates of Mineral Values and of the Economic Effects of Developing Minerals in the Grand Staircase-Escalante National Monument

Published by the Government Accountability Office on 1997-10-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

GAO       United States
          General Accounting
          Washington,
                               Office
                      D.C. 20548                             15
                                                                  1111/
                                                                  159558

          Resources, Community, and
          Economic Development Division


         B-278137


         October 31, 1997


        The Honorable Frank H. Murkowski
        Chairman, Committee on Energy
         and Natural Resources
        United States Senate

        The Honorable Don Young
        Chairman, Committee on Resources
        House of Representatives

        Subject: Federal Land Management: Estimates of Mineral Values
                                                                        and of the
                 Economic Effects of Developing Minerals in the Grand Staircase-
                 Escalante National Monument

        On September 18, 1996, President Clinton designated about 1.7 million
                                                                                acres of
        federal land in southern Utah as the Grand Staircase-Escalante National
        Monument. The monument, which is administered by the Department
                                                                                of the
        Interior's Bureau of Land Management (BLM), contains energy and
                                                                            mineral
        resources. Although new mineral leases and claims are prohibited
                                                                            on land
        within the monument, the oil and gas, coal, and other mineral leases
                                                                              and
        claims that predated the monument's designation remain valid.',2
                                                                           Within the
        monument, approximately 176,000 acres are owned by the state of
                                                                            Utah and
        are managed by the School and Institutional Trust Lands Administration.
        These lands-referred to as "school trust lands"-are scattered throughout
                                                                                  the

      'Federal Land Management: Authorized Uses in the Grand Staircase-
      Escalante National Monument (GAO/RCED-97-117R, Apr. 17, 1997).
      2 Mineral
               leases for oil, gas, and coal production have finite terms and
      eventually expire unless they are suspended or developed. According
                                                                              to
      BLM's interim management guidance for the monument, existing
                                                                         mineral
      leases are governed by valid existing rights, and plans of operation
                                                                           may be
      approved for mining claims determined to be valid.

                                              GAO/RCED-98-5R Grand Staircase-Escalante
B-278137

 monument. Revenues generated from the school trust lands are paid into a
 permanent school trust fund; income from the fund is used to finance public
 education in Utah. The Secretary of the Interior has been directed by the
 President and congressional appropriation conferees to exchange these lands
 for other federal lands or resources within Utah that are of comparable value.
 Controversy has surrounded the monument's designation, in part because of
                                                             3
 concern over its effect on mineral development in the area

 To respond to your request that we obtain available estimates of the value of
 the energy and mineral resources associated with the Grand Staircase-
 Escalante National Monument and of the jobs, payrolls, taxes, and permanent
 school trust fund revenues that could be anticipated if these resources were to
 be developed, we contacted federal land management agencies, state agencies
 in Utah, major mineral developers, and environmental groups. Only two of
 these contacts-both of which were Utah state agencies-had estimated the
 value of the monument's mineral resources: (1) the Utah Geological Survey
 had prepared a preliminary assessment in 1997 that included estimates of the
 value of energy and mineral resources in the monument, including coal, coal-
 bed methane, oil and gas, tar sand deposits (from which oil is extracted), and
                                                                     4
 nonfuel minerals, including gold, copper, titanium, and zirconium, and (2) the
 Utah Governor's Office of Planning and Budget had reported value estimates in
  1993 (which it updated 1996) of the coal that would be developed within the
  monument's boundaries at a mine proposed by a coal development company,
  Andalex Resources, Inc. (Andalex). 5'6 Estimates of the effects of mineral
  development in the monument on employment, payrolls, taxes, and permanent

3The  Utah School and Institutional Trust Lands Administration and the Utah
Association of Counties have filed lawsuits against the federal government
alleging, among other things, that the President exceeded his authority in his
designation of the monument.

4M. Lee Allison et al., A Preliminary Assessment of Energy and Mineral
Resources within the Grand Staircase-Escalante National Monument,
Circular 93, Utah Geological Survey, Utah Department of Natural Resources
(Jan. 1997).
5 Andalex Resources and the Proposed Smoky Hollow Mine: A Fiscal Impact
Analysis and Economic Overview, Governor's Office of Planning and Budget,
Demographic and Economic Analysis (Oct. 1993).
6 SchoolTrust Land Payments and the Proposed Andalex Mine in Smoky
Hollow, Governor's Office of Planning and Budget (Oct. 16, 1996).

  2                                      GAO/RCED-98-5R Grand Staircase-Escalante
     B-278137
     school trust fund revenues were available only for potential coal
     in the monument and were prepared by three Utah state agencies-thedevelopment
                                                                            Utah
     Geological Survey, the Governor's Office of Planning and Budget,
                                                                       and the Utah
     Energy Office.

      Estimating the value of a mineral resource involves a number
                                                                      of variables,
      including the amount of the resource to be developed, the price
                                                                         of the
     resource, the accessibility of the minable reserves, the time required
                                                                              to develop
     the resource, the costs to develop and transport the resource,
                                                                      and the method
     of computing the value of the resource. Because assumptions
                                                                      about these
     variables can vary widely, the resulting estimates of value can
                                                                      also
     Of the two estimates we obtained, one is based on the assumption vary widely.
                                                                            that all coal
     that could be recovered in the monument would be mined and
                                                                       sold at current
     prices; it also projects amounts of other mineral resources that
                                                                        could be
     developed and their associated current sales value. The other
                                                                      estimate is
     based on a specific mining proposal and assumes that the coal
                                                                       from that mine
     would be sold at current prices over a 30-year period. Neither
                                                                       estimate
     addresses the economic feasibility of developing the resources.
                                                                         We did not
     evaluate the appropriateness or reasonableness of the assumptions
                                                                           and
     methodologies used in computing the estimates of resource value.

  In brief, the Utah Geological Survey estimated in 1997 that the
                                                                  value of all
  energy and mineral resources within the monument ranges from
  $331 billion. These values, which were computed on the basis $223 billion to
                                                                   of the Survey's
  estimates of mineral resource reserves and their values, are not
                                                                    discounted to a
  net present value. The Governor's Office of Planning and Budget
                                                                      estimated in
  1996 that the cumulative value of the coal that would be mined
                                                                   at Andalex's
  proposed Smoky Hollow project over 30 years is about $1.4 billion,
                                                                        which has
  a present value of about $574 million (in 1993 dollars).

 We obtained two estimates of total employment in the state of
                                                                    Utah resulting
 from coal development at Andalex's proposed Smoky Hollow
                                                                  mine.
 Energy Office's 1989 estimate included 378 jobs, with a total payroll The Utah
                                                                         of about
 $10.1 million annually.7 The Governor's Office of Planning and
 estimate included about 599 jobs in Utah, with a total annual      Budget's  1993
                                                                  payroll of about
 $16.7 million. The Governor's Office of Planning and Budget provided
                                                                           the only
 estimate of taxes; it estimated that a total of about $108.4 million
                                                                      (in 1993


'Report to the Energy Conservation and Development Council
                                                           on
Underground Coal Mining on the Kaiparowits Plateau, Utah Energy
                                                                Office
(May 1989).

 3                                           GAO/RCED-98-5R Grand Staircase-Escalante
 B-278137

  dollars) in state and local taxes and state fees would result from the proposed
  mine over 30 years.

 The Utah Geological Survey estimated that coal development in the monument
 would provide up to $2 billion in royalty payments to Utah's permanent school
 trust fund. The Governor's Office of Planning and Budget estimated that the
 proposed Smoky Hollow coal mine would provide a total of $18.0 million in
 coal royalties to the trust fund over the life of the mine. 8 The Office also
 estimated that the Smoky Hollow mine would generate a total of about $43.9
 million in royalties to the federal government, and $40.6 million to the state,
 from federal land. 9

 BACKGROUND

 According to the Utah Geological Survey, the Kaiparowits Plateau, which
 covers approximately 1,650 square miles and lies mostly within the monument,
 contains the largest reserve of high-quality coal in Utah. In its preliminary
 assessment, the Survey estimated about 11.4 billion to 16.0 billion tons of the
 coal in the Kaiparowits Plateau could be recovered, and recommended that a
 detailed, combined geologic-engineering evaluation of the coal and other
 resources be conducted. This estimate uses information from an assessment
 prepared by the U. S. Geological Survey, which estimated that the coal field
 contained within the Kaiparowits Plateau contains over 62 billion tons of coal.'0
 The Utah Geological Survey assumed a recovery rate of more than 18 percent

8 Revenue from state lands in the monument is paid to the permanent school
trust fund to finance public education in Utah. Only the income on the trust
fund may be spent. According to the Governor's Office of Planning and
Budget, the cumulative royalties from Andalex's proposed mine would
generate a total of about $15.4 million in expendable income over the mine's
coal production period. Subsequently, this revenue would annually generate
$1 million in interest in perpetuity.
9The Governor's Office of Planning and Budget estimated that the royalties
that Utah would receive from this subsurface coal development on federally
managed land would be reduced by a federal administrative fee of 7.5
percent, or $3.3 million.

' 0R. D. Hettinger et al., Preliminary Investigations of the Distribution and
Resources of Coal in the Kaiparowits Plateau. Southern Utah, U.S.
Department of the Interior, U.S. Geological Survey Open-File Report 96-539
(1996).

 4                                       GAO/RCED-98-5R Grand Staircase-Escalante
     B-278137

     of the coal resource, whereas the U.S. Geological Survey
                                                              suggested a recovery
     rate of less than 10 percent.

     The Department of the Interior disputes the Survey's estimate,
                                                                        stating that
     proprietary drill-hole information suggests that a significant
                                                                    amount of the coal
     in the monument is not of high quality because it is high
                                                                 in sulfur, relatively
     low in heating value, and does not comply with air quality
     Furthermore, BLM estimates that over 25 percent of the standards.
                                                                coal field contained in
     the plateau may lie outside the monument."

     The Utah Geological Survey estimated that about 876 million
     of coal are located on school trust lands within the monument.to 1.3 billion tons
                                                                          In addition to
     coal, the Survey estimated, the coal beds within the Kaiparowits
     contain between 2.6 trillion and 10.5 trillion cubic feet             Plateau
                                                                of methane, 67 percent
     of which could be recoverable. These estimates of coal-bed
     were made on the basis of data extrapolated from another methane volumes
                                                                    Utah coal field. The
     Survey also reported that the monument contains all
                                                              of the elements necessary
     for major oil and gas accumulations, based on geologic
                                                                 evidence and the
     production history of a nearby oil field, as well as tar
                                                              sand deposits and
     nonfuel minerals.

   According to the Department of the Interior, the Survey's
                                                              estimates of coal-bed
   methane and oil and gas reserves are speculative and
                                                         have not been supported
  by exploration, and the potential for nonfuel minerals
                                                         in the monument is low.
  Eighteen coal leases lie within the monument, none of
                                                          which has been
  developed. These leases had all been suspended before
                                                           the monument was
  designated because of ongoing reviews of environmental
                                                             issues or potential
  designations of wilderness areas. Seventeen of the leases-covering
  35,000 acres-are held by Andalex Resources, Inc., which               almost
  federal government to exchange the leases for federal     is negotiating with the
                                                         property   outside the
  monument.' 2 The other lease-covering over 18,000 acres-is
                                                                held by PacifiCorp,
  which had begun negotiations with BLM to exchange the
                                                             lease
  used in bidding for federal coal leases before the monument for credits to be
                                                                 was designated.
  PacifiCorp may use these bidding credits to acquire other
                                                              federal coal leases or

"The Kaiparowits Plateau extends into the Dixie National
                                                         Forest, which is
not included in the monument.
2lThePresident's proclamation and BLM's regulations provide
                                                            that federal
land within the monument may be exchanged for land
                                                     outside the
monument if such an exchange would protect the monument's
                                                             values.
 5                                         GAO/RCED-98-5R Grand Staircase-Escalante
 B-278137

  may transfer the credits to another coal developer.

 According to the Department of the Interior, appraisals of the fair market value
 of these leased properties are under way, and any exchanges that will occur
 for property and interests within the monument must be based on equal value
 and use nationally recognized appraisal standards. Federal appraisal standards
 provide for several methods of determining fair market value, including
 analyses of comparable sales or prior sales of the identical property. If such
 analyses are not available, the value could be estimated from the present value
 of the future income anticipated from production, such as the income from
 royalties.

 In 1989, Andalex approached the state of Utah, proposing to develop and mine
 coal in the Smoky Hollow area, which lies within what is now the monument.' 3
 The mine was expected to begin operating in 1996 after a 3-year construction
 period; the proposed underground mine was expected to produce about 75
 million tons of coal over 30 years from state and federal leases within the
 mining area.'4 The mine site was to include office and warehouse buildings,
 coal storage and truck-loading facilities, and a sediment pond. Average
 production of about 2.5 million tons per year would have required an average
 of about 155 trucks per day to be loaded and dispatched from the mine. The
 coal was to be transported to a railroad facility and conveyed by train to its
 final destinations. BLM initiated an environmental impact statement for the
 mine proposal, but the process was discontinued after the monument was
 designated and the Department of the Interior and Andalex began discussing a
 possible property exchange. The company withdrew its application for a
 permit from the state in January 1997.

 In addition to the coal leases, the monument contains 89 oil and gas leases; 6
 of these leases have operating oil wells.' 5 One lessee, Conoco, received
 approval from BLM in September 1997 to drill an exploratory well on one of its
 leases within the monument. The monument also contains claims for minerals
 such as gold and silver, as well as mineral material sites for producing sand


'3According to an official with the Utah Division of Oil, Gas, and Mining, the
company's application was complete in 1992.
'"Information on Andalex's proposed project was obtained from the Utah
Governor's Office of Planning and Budget's reports.

'5 These oil wells may continue to operate in the monument because existing
authorizations continue to be valid.

 6                                       GAO/RCED-98-5R Grand Staircase-Escalante
    B-278137

     and gravel, boulders, and building stone.

     ESTIMATES OF COAL VALUES FOR THE MONUMENT AND FOR
                                                       THE
     PROPOSED MINE

     The Utah Geological Survey estimated a range of total
     to $312 billion for all coal within the monument. This values from $221 billion
                                                              estimate of the value of
     coal in the monument is based on the quantity of coal
                                                              the Survey estimated
     could be recovered, multiplied by its current market
    Survey estimated that from 11.4 billion to 16 billion value. Specifically, the
                                                          tons
    recoverable and then multiplied this estimated recoverableof coal are
                                                                   tonnage by a price
    of $19.50 per ton to compute the range of value for         6
                                                          coal.' The Utah
    Geological Survey also estimated ranges of total values
    billion to $17.5 billion for coal-bed methane, $20 millionfor other resources-$2
                                                                to $1.1 billion for oil
    and gas, and $4.5 million or more for nonfuel minerals.
    The Governor's Office of Planning and Budget estimated
                                                               a total value of $1.4
    billion for the coal that was to be mined at Andalex's
                                                            Smoky Hollow mine.
    This estimate was based on several key assumptions,
    assumptions that about 72 million tons of coal would   including  the
                                                           be mined over 30 years
    and sold for an average price of $19.50 per ton.'7 This
    not reflect the expected costs to operate the mine.      estimate of value does
                                                         Enclosure I presents
    specific information about the estimated values of mineral
                                                                 resources at the
    proposed Smoky Hollow mine and in the monument.

    ESTIMATES OF THE EFFECT OF MINERAL RESOURCE
                                                 DEVELOPMENT IN
    THE MONUMENT ON JOBS. PAYROLLS. AND TAXES
                                               WERE AVAILABLE
    ONLY FOR THE PROPOSED SMOKY HOLLOW COAL
                                              MINE
The two estimates we obtained of the total employment
that would be associated with coal development at         in the state of Utah
                                                     Andalex's proposed Smoky
Hollow mine were 378 and 599 jobs, with associated
                                                       payrolls of about $10.1
million and $16.7 million annually.8'"9 In 1989, the Utah
                                                          Energy Office


16Estimates prepared by the Utah Geological Survey
                                                   are not discounted to a net
present value.
'7 The coal would have a present value of about $574.4
                                                        million, computed on the
basis of a 3 0-year revenue stream and a real discount
                                                       rate of 5.29 percent.
'8 Other jobs are assumed to be held by Arizona residents.
7                                         GAO/RCED-98-5R Grand Staircase-Escalante
B-278137

estimated a total of 561 jobs associated with the proposed mine, including
about 378 in Utah; the total annual payroll would be about $15.2 million, of
which about $10.1 million would be for jobs in Utah.20 Of the 561 jobs, 395
would be directly related to the mine and 166 would be indirect employment. 2 '

In 1993, the Governor's Office of Planning and Budget estimated a total of 599
jobs in Utah associated with the proposed mine, with a total annual payroll of
about $16.7 million. Of the total Utah employment, 303 jobs would be direct,
with an estimated annual payroll of about $12.3 million, and 296 jobs would be
indirect, with an estimated annual payroll of about $4.4 million. The Office's
report defines direct employment to include mine workers, truckers, and rail
workers who work on the mine and coal transportation operations, and
indirect employment to include workers who supply goods and services to the
mine's suppliers. Specific information about these employment and payroll
estimates is presented in enclosures II and IIm.

The Governor's Office of Planning and Budget estimated that state and local
tax revenues from the proposed mine would total about $108.4 million over the
life of the mine. Of this amount, about $52.3 million was estimated to be for
state taxes and fees and $56.1 million for local taxes.

ESTIMATES OF THE EFFECT OF COAL DEVELOPMENT ON UTAH'S
PERMANENT SCHOOL TRUST FUND AND OTHER STATE AND FEDERAL
REVENUES FOR THE MONUMENT AND THE PROPOSED MINE

The Utah Geological Survey estimated that revenues to the permanent school
trust fund would range from $1.4 billion to over $2 billion if all recoverable
coal contained on school trust lands in the monument were developed. This
estimate was based on the assumption that from 876 million to 1.3 billion tons


'9 These may or may not be "new" jobs in the economy.
20The  1989 report assumes that the mine's production of coal would increase
over time, from a total of 400,000 tons in 1993 (initial production) to an annual
total of 2 million tons in 1995 (full production).
21Inthis report, we use the term "indirect employment" to include both indirect
and induced employment. The Governor's Office of Planning and Budget
defines indirect employment to include the work of those who supply goods
and services to the mine's suppliers. It defines induced employment to include
the work of those, such as supermarket and other employees, whose services
are needed to support an area's increased economic activity.

8                                      GAO/RCED-98-5R Grand Staircase-Escalante
    B-278137

    of coal would be mined from school trust lands within the monument.
    mined coal, the Survey assumed that the permanent school trust           For the
                                                                      fund would
    receive a royalty of 8 percent on the value of production. Specific
    about permanent school trust fund revenues is presented in enclosureinformation
                                                                            IV.
    The Governor's Office of Planning and Budget estimated that
                                                                   the permanent
    school trust fund would receive royalty payments totaling $18.0
                                                                       million over
    the 3 0-year life of the mine if the Smoky Hollow mine were developed. "
                                                                                 This
    estimate of permanent school trust fund revenues is based on
                                                                    the assumptions
    that 16 percent of the approximately 72 million tons of coal in
                                                                     the proposed
    Smoky Hollow mine is on state lands and that the coal's development
                                                                             would
    generate royalties to the state at the rate of 8 percent.

     Coal development on federal land in the monument would have
                                                                        generated
    royalty revenue to both the federal and the state governments.
                                                                       The Utah
    Geological Survey reported that the federal and state governments
                                                                           each would
    receive a total of $9.25 billion in royalties from coal within the
                                                                       monument.23
    The Governor's Office of Planning and Budget estimated that
                                                                     the federal
    government would receive a total of $43.9 million in royalties over
                                                                           the
    the proposed Smoky Hollow coal mine and that Utah would receive life of
    royalties of $40.6 million; the Utah Energy Office estimated that        net
                                                                        $1 million in
    royalties would be paid to Utah each year. Specific information
                                                                        about
    estimates of federal and state royalty revenue is presented in
                                                                     enclosure V.
AGENCY COMMENTS

 We provided a draft of this report to the Department of the
                                                              Interior and to the
 Forest Service for their review and comment. In written comments,
                                                                        the
 Department of the Interior objected to our reliance on the two
                                                                 estimates of
resource values prepared by the Utah Geological Survey and the
                                                                   Governor's
Office of Planning and Budget. In particular, Interior commented
                                                                     that it takes
strong exception to the state's estimates, which it described as
                                                                 significantly
inflated and as overstating the economic effects of developing
                                                                 minerals in the
monument.

As agreed with our congressional requesters, we are presenting
                                                               the available

22The $18.0 million would have had a present value of $7.4 million
                                                                     in 1993
dollars, given a real discount rate of 5.29 percent and 30 years'
                                                                  production.
23 This
        estimate was prepared by the Utah Office of Energy
                                                             and Resource
Planning and was included in the Utah Geological Survey's report.

9                                         GAO/RCED-98-5R Grand Staircase-Escalante
B-278137

estimates of the mineral resource values and are not evaluating the
appropriateness of the assumptions or the methodologies used in computing
these estimates. As we state in our scope and methodology section, we
approached federal, state, and local government officials; resource developers;
and environmental groups for available estimates of the mineral resource
values in the monument. The estimates that we discuss in this report are the
only published values that were provided. Interior also provided technical
clarifications, which we incorporated as appropriate. Interior's comments
(without technical enclosures) and our responses appear in enclosure VI. The
Forest Service had no comments on the draft.

SCOPE AND METHODOLOGY

To obtain estimates of the value of the energy and mineral resources and of
the economic effects of mineral development in the Grand Staircase-Escalante
National Monument, we contacted federal, state, and local government
officials; representatives of several mineral development companies; and
representatives of environmental groups. Specifically, we sought estimates
from (1) BLM's headquarters in Washington, D.C., and state office in Utah; (2)
the Forest Service's headquarters in Washington, D.C., and the Manti-La Sal
National Forest in Price, Utah; and (3) the Department of the Interior's Office
of the Solicitor. We also contacted officials with the Utah Governor's Office of
Planning and Budget, the Utah School and Institutional Trust Lands
Administration, and the Utah Geological Survey; a county commissioner with
Garfield County, Utah, and a representative of Kane County, Utah; and officials
with Andalex Resources, Inc., PacifiCorp, Conoco Oil Company, Citation Oil
Company, and 3R Minerals; and representatives of the Grand Canyon Trust and
the Southern Utah Wilderness Alliance. We also contacted officials at the
Department of Justice and the Council on Environmental Quality to ascertain
whether they could provide other valuation or economic estimates.

From our contacts with these sources, we obtained estimates of mineral values
from (1) a 1997 study on minerals (primarily coal) in the monument, prepared
by the Utah Geological Survey and (2) a 1993 study on Andalex's proposed
Smoky Hollow coal mine, together with a 1996 update to that study, prepared
by the Governor's Office of Planning and Budget. For these resource value
estimates, we did not ascertain the appropriateness or reasonableness of the
assumptions and methodologies. We also did not address other potential
economic and social effects of not developing the energy and mineral
resources in the monument.

We obtained projections of employment, annual payrolls, taxes, permanent

10                                     GAO/RCED-98-5R Grand Staircase-Escalante
B-278137
 school trust fund revenues, and state and federal royalties associated
 Smoky Hollow coal mine from the report by the Governor's Office of with the
                                                                        Planning
 and Budget. We also obtained employment and payroll estimates from
                                                                          a 1989
 report by the Utah Energy Office. As with the estimates of value,
                                                                     we did not
 ascertain the appropriateness or reasonableness of the assumptions
                                                                      and
 methods used to compute these estimates.

We performed our review from April through October 1997 in accordance
                                                                      with
generally accepted government auditing standards.



As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report for 14 days. At
                                                                        that time
we will make copies available to the Secretaries of the Interior and of
Agriculture and to other interested parties. We will also make copies
                                                                         available
to others on request.

If you or your staff have any questions, please call me at (202) 512-3841.
                                                                            Major
contributors to this report were Jennifer L. Duncan, Diane S. Lund, Sue
                                                                           Ellen
Naiberk, and Victor S. Rezendes.




Barry T. Hill
Associate Director, Energy,
 Resources, and Science Issues




                                       GAO/RCED-98-5R Grand Staircase-Escalante
                ENCLOSURE I                                                                      ENCLOSURE I

          UTAH'S ESTIMATES OF ENERGY AND MINERAL RESOURCE VALUES
           FOR THE GRAND STAIRCASE-ESCALANTE NATIONAL MONUMENT


                                   Energy and mineral resource values for       Energy and mineral resource values
                                  Andalex's proposed Smoky Hollow mine                     for the entire monument
                                  Governor's Office of Planning and Budget's
                                                                    estimate     Utah Geological Survey's estimate
  Resource                                     1993'                   1996b                                 1997 '.d

  Coal                                  $1.3 billions           $1.4 billion'        $221 billion to $312 billions
  Net present value of coal         $585.5 millionh"        $574.4 millionh

  Coal-bed methane                                                                     $2 billion to $17.5 billionk
  Oil and gas                                                                          $20 million to $1.1 billion'
  Nonfuel minerals                                  J                                        At least $4.5 million
  Total                                                                                 $223 billion to $331 billion

Note: These estimates assumed that the minerals would be developed.

aAndalex Resources and the Proposed Smoky Hollow Mine: A Fiscal Impact Analysis and Economic
Overview, Governor's Office of Planning and Budget, Demographic and Economic Analysis (Oct. 1993).
Commissioned by the Five County Association of Governments, which consists of Utah's Beaver,
Garfield, Iron, Kane, and Washington counties.

bSchool Trust Land Payments and the Proposed Andalex Mine in Smoky Hollow, Govemor's Office of
Planning and Budget (Oct. 16, 1996).

CM. Lee Allison, et al., A Preliminary Assessment of Energy and Mineral Resources within the Grand
Staircase-Escalante National Monument, Circular 93, Utah Geological Survey, Utah Department of
Natural Resources (Jan. 1997).

dReport does not state whether estimated amounts are in current dollars.

eCumulative value of about 67 million tons of coal over 28 years of production, sold for $19.50 per ton
(in 1993 dollars).

'Cumulative value of about 72 million tons of coal over 30 years of production, sold for $19.50 per ton
(in 1993 dollars).

gAssumed that 11.4 billion to 16.0 billion tons of coal were recoverable and would be sold for $19.50
per ton.

hNet present value of a 30-year revenue stream using a real 5.29-percent discount rate.


12                                                             GAO/RCED-98-5R Grand Staircase-Escalante
                    ENCLOSURE I
                                                                                                     ENCLOSURE I
     'Not computed.
     'Not applicable.
     kAssumed that coal in the monument might contain from 2.6
                                                                trillion to 10.5 trillion cubic feet of coal-bed
     methane gas, assuming 100 to 400 cubic feet of gas per ton
                                                                 of coal. Given a recovery factor of 67
     percent and market prices of $1.20 to $2.50 per thousand cubic
     $17.5 billion.                                                   feet, estimated value is $2 billion to

     'Range is based on calculations applied to published estimates
                                                                    of oil in a group of geologic formations
     within the monument. Applying a 20-percent recovery rate to
     place, the Utah Geological Survey estimated that 1million to the oil it projected would be trapped in
     and sold for $20 per barrel.                                 54 million barrels of oil could be recovered




13                                                               GAO/RCED-98-5R Grand Staircase-Escalante
ENCLOSURE II                                                                                ENCLOSURE II

                    UTAH'S ESTIMATES OF DIRECT AND INDIRECT EMPLOYMENT
                     ASSOCIATED WITH THE PROPOSED SMOKY HOLLOW MINE

                                                                    Number of jobs
                                          Utah Energy Office's estimate,       Governor's Office of Planning and
                                                     1989'                         Budget's estimate, 199 3b

                                                   Total                                   Total
     Type of employment                 (including Utah)c            Utahd     (including Utah)'            Utah

     Direct

      Mine/loadout                                   165               83                  170e               95
      Trucking                                      230               184                   260              195
                                                           f               f
      Rail                                                                                   25               13
     Total direct                                    395               267                  455              303
     Indirect and induced                           1669            111g'"                  445             296
    Total                                            561               378                  900'             599

Note: These estimates assumed that the coal would be developed.

aReDort to the Energy Conservation and Development Council on Underground Coal Mining on the
Kaiparowits Plateau, Utah Energy Office (May 1989).

bAndalex Resources and the Proposed Smoky Hollow Mine: A Fiscal Impact Analysis and Economic
Overview, Governor's Office of Planning and Budget, Demographic and Economic Analysis (Oct. 1993).

cOther jobs would be held by Arizona residents.

dThese figures were not shown in the 1989 report, but estimates were provided in support of payroll
calculations.

eBased on Andalex's "most-case" scenario, according to which the operation, at full capacity, would
employ 150 people at the mine and 20 people at the rail loadout.

'Not computed.
9
 The Utah Energy Office's report uses the terms "secondary" and "induced" employment. We
categorize these figures as "indirect and induced" in this report to facilitate comparison.
hA multiplier of 1.42 (developed in a 1983 study) was used in the 1993 report to estimate the number of
induced jobs.
This figure was not in the 1993 report; it was derived by applying the multiplier for the number of Utah
jobs. The 1993 estimate of the number of direct jobs was based on an economic model developed in
1990; a multiplier of 1.98 was used to estimate the number of indirect and induced jobs.

14                                                             GAO/RCED-98-5R Grand Staircase-Escalante
     ENCLOSURE mI
                                                                                             ENCLOSURE mIII
                           UTAH'S ESTIMATES OF ANNUAL PAYROLLS
                    ASSOCIATED WITH THE PROPOSED SMOKY HOLLOW MINE
     Dollars in millions


                                                                 Annual payroll
                                                                            Governor's Office of Planning and
                               Utah Energy Office's estimate, 1989'               Budget's estimate,   19 93 b
                                           Total                                    Total
      Type of employment        (including Utah)'                Utah    (including Utah)'                        Utah
      Direct
        Mine/loadout                       $ 5.8               $ 2.9                                             $ 5.4
       Trucking                             $6.9                $5.5                                             $ 6.3
       Rail                                                                                                      $0.6
     Total direct                          $12.7'               $8.4'                $18.5                       $12.2
      Indirect and induced                $ 2.5                 $1.7                     d                       $4 .49
     Total                                 $15.2               $10.1                     d                       $16.7
Note: These estimates assumed that the coal would be developed.
                                                                Numbers may not add up to the
total because of rounding.
aReport to theEnergy Conservation and Development Council onUnderground
                                                                        Coal Mining on the
KaiDarowits Plateau, Utah Energy Office (May 1989).
bAndalex Resources and the Proposed Smoky Hollow Mine: A Fiscal
                                                                  Impact Analysis and Economic
Overview, Governor's Office of Planning and Budget, Demographic
                                                                and Economic Analysis (Oct. 1993).
cOther jobs would be held by Arizona residents.

dNot available.

eNot computed.
'These figures were not shown in the cited report but were computed
                                                                    by GAO and are included here to
facilitate comparisons.
9This
        figure was not shown in the cited report but was computed by GAO
                                                                         and is included here to
facilitate comparisons.




15
                                                              GAO/RCED-98-5R Grand Staircase-Escalante
    ENCLOSURE IV                                                                            ENCLOSURE IV

                UTAH'S ESTIMATES OF THE EFFECTS OF COAL DEVELOPMENT
                IN THE GRAND STAIRCASE-ESCALANTE NATIONAL MONUMENT
                       ON UTAH'S PERMANENT SCHOOL TRUST FUND


                                    Development inAndalex's proposed Smoky Hollow          Development inthe entire
                                                        mine                                      monument
                                       Governor's Office of Planning and Budget's           Utah Geological Survey's
                                                        estimate                                   estimate
Effect                                             1 99 3a b                   1996                                 1997d

Volume of coal produced on              10.7 million tonse         11.5 million tonse    876 million to 1.3 billion tonsf
state lands in monument
Total value of coal produced                 $209 million               $225 million          $17 billion to $25 billion
on state lands in monument
Net present value of coal                    $94 millions                $92 millionh
produced
Total royalty payments to trust             $16.7 million               $18.0 million          $1.4 billion to $2 billion'
fund
Net present value of royalty                $7.5 millions               $7.4 million h
payments to trust fund

   aAndalex Resources and the Proposed Smoky Hollow Mine: A Fiscal Impact Analysis and Economic
   Overview, Governor's Office of Planning and Budget, Demographic and Economic Analysis (Oct. 1993).

   bin 1993 dollars.

   CSchool Trust Land Payments and the Proposed Andalex Mine in Smoky Hollow, Govemor's Office of
   Planning and Budget (Oct. 16, 1996).
   dM.   Lee Allison, et al., A Preliminary Assessment of Energy and Mineral Resources within the Grand
   Staircase-Escalante National Monument, Circular 93, Utah Geological Survey, Utah Department of
   Natural Resources (Jan. 1997).
   'Computed by GAO on the basis of Andalex's estimate that 16 percent of the mine's total production
   would come from state lands.
   fEstimate of recoverable coal on school trust lands in the monument.
   gNet present value computed assuming 28 years of coal production and a real discount rate of 5.29
   percent.
   hNet present value computed assuming 30 years of coal production, an 8-percent royalty rate, and a
   real discount rate of 5.29 percent.


   16                                                             GAO/RCED-98-5R Grand Staircase-Escalante
     ENCLOSURE IV
                                                                                     ENCLOSURE IV
     'Not computed.
 JAssumed that the permanent school trust fund would receive an 8-percent
                                                                          royalty on the value of
 production.




17                                                        GAO/RCED-98-5R Grand Staircase-Escalante
ENCLOSURE V                                                                          ENCLOSURE V

            UTAH'S ESTIMATES OF THE EFFECTS OF COAL DEVELOPMENT
            IN THE GRAND STAIRCASE-ESCALANTE NATIONAL MONUMENT
                   ON ROYALTY REVENUE FROM FEDERAL LAND

                                     Development in Andalex's proposed
                                                   Smoky Hollow mine          Development in the entire monument
                                      Governor's Office of Planning and                  Utah Geological Survey's
  Royalty revenue                            Budget's estimate, 1993"                            estimate, 1997C'd
  Federal share                                          $43.9 million                                $9.3 billion
  State share                                             40.6 million                                9.3 billione

Note: These estimates assumed that the minerals would be developed.

aAndalex Resources and the Proposed Smoky Hollow Mine: A Fiscal Impact Analysis and Economic
Overview, Governor's Office of Planning and Budget, Demographic and Economic Analysis (Oct. 1993).

bAssumed that production would yield royalties of 8 percent and that the federal and state governments
would each receive half of the royalties from subsurface coal development on federally managed land.
Royalties to the state were reduced by an administrative fee of $3.3 million, based on the 7.5-percent
average rate for administrative fees charged over the preceding 2 years.

CM. Lee Allison, et al., A Preliminary Assessment of Energy and Mineral Resources within the Grand
Staircase-Escalante National Monument, Circular 93, Utah Geological Survey, Utah Department of
Natural Resources (Jan. 1997).

dAssumed that production would yield royalties of 8 percent and that the federal and state governments
would each receive half of the royalties from subsurface coal development on federally managed land.

eThe Utah Geological Survey did not compute the administrative fee that would be deducted from the
state's portion of the royalties but stated that the fee was 5.9 percent in 1995.




18                                                          GAO/RCED-98-5R Grand Staircase-Escalante
          ENCLOSURE VI
                                                                                                                ENCLOSURE VI
                   COMMENTS FROM THE DEPARTMENT OF THE INTERIOR
                                AND OUR RESPONSE
      Note: GAO's comments
      supplementing those in the
      report's text appear at the
      end of this enclosure.


                                         United States Department of the Interior
                                                         OFFICE OF THE SECRETARY
                                                          WASHINGTON, D.C. 20240


                                                                  OCT 2 3 997

                       Mr. Victor S. Rezendes
                       Director, Energy. Resources.
                         and Science Issues
                       General Accounting Office
                       Washington. D.C. 20548

                       Dear Mr. Rezendes:

                      Thank you for the opportunity to respond to the draft
                      Management: Estimates of Mineral Values and Economic  report entitled "Federal Land
                                                                                 Effects of Developing Minerals in
                      the Grand Staircase-Escalante National Monument"
                                                                          (GAO/RCED-98-5R).
See comment 1.        The Department of the Interior is concerned over
                                                                       the General Accounting Office's        apparently
                     exclusive reliance on two estimates prepared by the
                                                                            State of Utah. one by the Utah Geological
                     Survey and the other by the Governor's Office of Planning
                                                                                    and Budget, for the value
                     estimates of mineral resources in the Monument.
                                                                          Although the General Accounting Office
                     does not endorse the appropriateness or reasonableness
                                                                               of the assumptions and methodologies
                     used in preparation of the State estimates, the data
                                                                          in the report appear to be derived
                     primarily from those estimates. The Department
                                                                        takes strong exception to the State estimates.
                     which are significantly inflated and overstate the economic
                                                                                   effects of developing minerals in
                     the Monument. We believe the General Accounting
                                                                            Office has erred by using this flawed
                     information. and object to the General Accounting Office
                                                                                  using it as a basis for its report.
See comment 2.       We a cocered thatthe report does not discuss relevant
                                                                                    information about markets and
                     standard appraisal methods that would place the State's
                                                                                estimates in proper perspective.
                     Among other things, the report does not reflect available
                                                                                  information on mineral commodity
                     markets. This calls into serious question the validity
                                                                             of the State of Utah's value estimates
                     presented in your report. Further, the report does
                                                                        not assess the State's estimates in light of
                     accepted and standard valuation methods. For these
                                                                            reasons, merely presenting the State's
                     estimates gives the reader a highly inaccurate and
                                                                        overly optimistic expectation of future
                     mineral development.

See comment 2.       To take perhaps the most obvious example, the State's
                                                                              estimates assume that all minable coal
                     in the Monument can be produced and sold today
                                                                         at today's prices. This method of valuation
                     is simplistic, inaccurate. and unacceptable for mineral
                                                                             appraisal purposes. The Utah
                     Geological Survey estimate completely neglects to
                                                                          consider the many factors that determine
                     mineral values. These include:




     19
                                                                           GAO/RCED-98-5R Grand Staircase-Escalante
          ENCLOSURE VI                                                                              ENCLOSURE VI




                   *      quality of the coal;
                          extent and technical accessibility of minable reserves;
                   *      market needs;
                   *      distances to markets;
                   *      transportation costs;
                   *      period of time required to establish a mine and produce the minerals; and
                   *      exploration, permitting, mining, and reclamation costs.

See comment 3.    The Utah Geological Survey describes the Monument coal resource as having the highest
                  quality and assumes that all the minable coal would be in compliance with air quality
                  standards for clean burning coal. Proprietary drill hole information suggests, however, that a
                  significant amount of Monument coal is, in fact, high in sulfur and relatively low in Btu
                  content and, thus, would not be in compliance with air quality standards. Noncompliance
                  coal is economically disadvantaged in the coal market. Available information also suggests
                  that much of the coal in the Monument is of higher sulfur and lower heating value than most
                  central Utah coal currently being mined.

See comment 3.    Transportation costs particularly would be high because of the extremely remote location of
                  the Kaiparowits Plateau and the lack of an established infrastructure. Recently published
                  information on the marketability of the coal resources in the Monument (Kai2arowits Coal
                  Supplv and Demand. BXG, Inc. (1997)) shows that those resources could not begin to
                  compete in the coal market until at least the year 2020. This drastically reduces the present
                  value of the coal in the Monument.

See comment 2.    In addition, the uncertainty of the coal export market, a lack of long-term contractual
                  commitments by existing and planned power-generating facilities, and the distance and cost of
                  moving coal to market, all suggest Kaiparowits coal will continue to be uneconomic in the
                  foreseeable future (i.e., before 2020), especially given its high delivery cost and generally
                  lower quality.

See comment 3.    Regarding oil and gas, available estimates are highly speculative. Yet, the Utah Geological
                  Survey values those potential resources as though they were guaranteed to exist, were being
                  produced today, and every drop could be extracted and sold. In fact, 47 oil and gas test
                  holes drilled in the Monument have not identified any producible resources, other than at
                  Upper Valley. Moreover, the Utah Geological Survey estimate is based on unproven
                  Precambrian source rocks. To date, no commercial oil has been produced from this source in
                  any Monument location, including Upper Valley.

See comment 2.    Since the Utah Geological Survey estimate does not utilize any widely accepted valuation
                  method, its estimate of value bears no relation to an appraised fair market value. A fair
                  market value appraisal, by contrast, is determined either on the basis of the sale value of
                  comparable properties or on the net present value of the future income from the property.




         20                                                            GAO/RCED-98-5R Grand Staircase-Escalante
           ENCLOSURE VI
                                                                                                        ENCLOSURE VI




                                                                                                                         3
See comment 4.      Any exchanges that will occur for Monument property and
                                                                                interests must be based on equal
                    value and the use of nationally recognized appraisal standards
                                                                                    as required by Section 206 of
                    the Federal Land Policy and Management Act, 43 U.S.C. 1716.
See comment 2.      The State's estimates are not based on standard valuation practices.
                                                                                              Without discussing those
                    practices in this report, the reader is not presented with sufficient
                                                                                          relevant information to
                    judge the reliability or accuracy of such estimates. To provide
                                                                                        Congress with reliable
                    estimates of mineral values and economic effects of developing
                                                                                        minerals
                    the General Accounting Office would need to address the appropriateness in the Monument,
                    of any estimates brought forward.                                              or reasonableness

                    Please refer to the enclosures to this letter for specific comments
                                                                                        concerning the report
                    (Enclosure 1), analyses of the Utah Geological Survey estimate
                                                                                      (Enclosure 2), and a summary
                    of the BXG study (Enclosure 3). If you have any questions
                                                                                   of a technical nature, please
                    contact Doug Koza, Deputy State Director, Natural Resources,
                    Utah State Office at (801) 539-4034. Other questions should Bureau of Land Management
                                                                                    be referred to Gwen Midgette,
                    the Bureau's Audit Liaison Officer, at (202) 452-7739.

                                                                         Sincerely,




                                                                       tbpob Armstrong
                                                                 .      Assistant Secretary, Land and
                                                                          Minerals Management
                   Enclosures




      21                                                                GAO/RCED-98-5R Grand Staircase-Escalante
ENCLOSURE VI                                                             ENCLOSURE VI
The following are GAO's comments on the Department of the Interior's letter dated
October 23, 1997.

1. The Department of the Interior objected to our reliance on the two estimates of
resource values prepared by the Utah Geological Survey and the Governor's Office of
Planning and Budget. Specifically, Interior took strong exception to the state's
estimates, characterizing them as "significantly inflated" and as overstating the
economic effects of developing minerals in the monument.

We agreed with our congressional requesters to present the available estimates of the
values of mineral resources in the monument, together with the assumptions and
methodologies used, and not evaluate the appropriateness of these assumptions and
methodologies. As stated in our scope and methodology section, we approached
federal, state, and local government officials; resource developers; and environmental
groups for available estimates of the mineral resource values in the monument. The
reports we discuss here are the only estimates of value that were provided. While the
Department of the Interior's comments present a number of arguments against the
estimates we obtained, at no time during our fieldwork did Interior provide its own
estimates.

2. Interior expressed concern that we do not discuss relevant information about
markets and standard appraisal methods that would "place the State's estimates in
proper perspective." Interior also remarked upon the state's assumption that all
minable coal in the monument could be produced and sold today at today's prices. To
address these concerns, we discuss in greater detail (p. 3) some of the factors that
would affect mineral resource values. We also clarify the assumptions and methods
used by the Utah Geological Survey and the Governor's Office of Planning and Budget.
Furthermore, as we indicate on page 4, the Survey's preliminary assessment of the
monument's resources recommends that a detailed, combined geologic-engineering
evaluation of the energy and mineral resources be conducted. Interior provided us
with two studies that raise questions about the marketability of coal in the
Kaiparowits Plateau and at Andalex's proposed Smoky Hollow mine; however, we do
not discuss the studies in this report because they did not include estimates of the
coal's value.

Interior also commented that we do not assess the state's estimates in light of
accepted and standard valuation practices and that merely presenting these estimates
gives the reader a "highly inaccurate and overly optimistic expectation of future
mineral development." Additionally, Interior commented that the Survey's estimate
bears no relation to "an appraised fair market value." We do not represent the state's
estimates as an appraised fair market value; furthermore, it was not our intention to
give the reader expectations, optimistic or otherwise, of future mineral development in

22                                                GAO/RCED-98-5R Grand Staircase-Escalante
 ENCLOSURE VI
                                                                            ENCLOSURE VI
 the monument. As agreed with our congressional requesters, we presented
                                                                             the
 estimates of mineral values that were provided to us during our fieldwork;
                                                                             we did not
 assess the appropriateness of the assumptions in light of "accepted and standard
 valuation practices".

  3. According to Interior, the Survey's report incorrectly describes the monument's
  coal resources as having "the highest quality," and it does not consider the
                                                                               effect of
 high transportation costs on the coal's value. Interior also characterized
                                                                             available oil
 and gas estimates as "highly speculative." We did not assess the appropriateness
 the Survey's assumptions because such an assessment was not within the               of
                                                                              scope of this
 work. Furthermore, Interior did not provide an alternative estimate of the
                                                                               values of
 the monument's mineral resources.

 Interior also commented that recently published information on the marketability
                                                                                     of
 the monument's coal resources states that these resources could not begin
                                                                             to compete
 in the coal market until at least the year 2020. Interior further commented
                                                                             in an
 enclosure that the coal resources would never be considered for development
                                                                                until
 approximately that year. However, according to an official in the Utah Office
                                                                                of Oil,
 Gas, and Mining, Andalex requested permission in 1991 to mine coal in the
                                                                             monument,
 and its application was recognized as complete in 1992. The company withdrew
                                                                                   its
 application in January 1997, after the monument's designation.

4. Interior commented that any exchanges that will occur for monument
                                                                        property
must be based on equal value and the use of nationally recognized appraisal
                                                                            standards.
We incorporated this comment and added a brief discussion of federal
                                                                      appraisal
standards on page 6.




(141105)

23                                                  GAO/RCED-98-5R Grand Staircase-Escalante