Arch signs deal for southeast Montana coal tracts

AP News
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Posted: Nov 13, 2009 3:25 PM

Arch Coal Inc. has signed a lease agreement to mine the vast Otter Creek coal field in southeastern Montana _ ramping up pressure on Gov. Brian Schweitzer and other state officials to lease adjacent coal tracts controlled by the state.

If developed, the 731 million tons of coal would serve power plants in the northern U.S. and provide new supplies for St. Louis-based Arch to expand into coal markets in the Pacific Rim, said Arch CEO Steven Leer.

Combined with Montana's tracts, the newly leased reserves in the Powder River Basin contain more coal than the entire United States burns annually.

Yet it would be difficult for Arch to move forward without cooperation from Montana.

The private and public tracts are arranged in a checkerboard fashion _ meaning development would have to occur in tandem. And because the reserves are isolated from existing transportation routes, the long-stalled Tongue River Railroad would have to be built to get the fuel to customers.

The lease agreement with Great Northern Properties gives Arch rights to mine 9,600 acres of coal tracts near Ashland. The area is next to the Northern Cheyenne Indian Reservation near the Wyoming border.

Arch will pay a front-end bonus of $73.1 million and _ if the mine is developed _ royalty payments that could top $1 billion over the next 40 years, said Great Northern CEO Charles Kerr.

"We're ready to go and we had an opportunity and we took it," Kerr said. "It's now up to the state of Montana if development is going to go forward."

On Monday, Montana's Land Board is to consider putting up for lease its 572 million tons of Otter Creek coal. Gov. Schweitzer, a Democrat, is chairman of the five-member Land Board, which includes Montana's top statewide elected officials.

Houston-based Great Northern and the Schweitzer administration had previously agreed to jointly develop the Otter Creek tracts. But Schweitzer signaled Friday that the state is not going to be rushed into any deals.

"We may need further discussion. We want to make the best decision," he said.

Schweitzer added that the state could get a one-time bonus payment by entering into a deal, but it would lose out on any royalties if a company decided not to develop.

"If you allow somebody to hedge their bets by getting control of these assets and then not developing it, the state of Montana could lose a great deal of money," he said.

Arch, the nation's second-largest coal company, has several mines south of Otter Creek, in the Wyoming portion of the Powder River Basin. The company's holdings includes the largest coal mine in the world, Black Thunder, near Wright, Wyo.

Otter Creek is considered a potential competitor for Wyoming's coal industry.

In Montana, business interests have pressed Schweitzer to lease Montana's parcels, which could significantly boost the state's coal production.

Among the most vocal proponents have been the would-be developers of the Tongue River Railroad, a decades-old proposal that has been delayed by opposition from environmentalists and some area landowners.

The 131-mile line potentially could provide a new transportation corridor not just for Otter Creek but for billions of additional tons of coal in southeastern Montana. That includes reserves on the Northern Cheyenne Indian reservation. The tribe's elected leaders support development, but many of its members are wary of potential environmental harm.

Some members of the tribe have linked up with environmentalists to lobby against a lease sale. Sierra Club representative Mike Scott said the newly announced lease with Arch was "a clear power play" by Great Northern to force the state into a lease sale.

Great Northern owns 20 billion tons of coal, most of it acquired from Burlington Northern Santa Fe Corp. The railroad gained control of the reserves during the government land grants of the 1800s that were meant to spur development of the West.