With massive multinational corporations racing to extract lithium from the Smackover Basin in south Arkansas, you can bet we’re in for some disagreements over the royalty rates landowners can collect for allowing these companies to extract the brine beneath their land.
Albemarle Corporation, ExxonMobil, Standard Lithium, Lanxess and Tetra Technologies Inc. filed a joint application July 26 to set a royalty rate of 1.82%. The joint proposal comes after owners of large parcels of land in south Arkansas, represented by the South Arkansas Minerals Association, protested the initial royalty proposed by Lanxess and Standard Lithium. They demanded a 12.5% royalty instead.
“This application offers a clear and transparent framework for compensating brine royalty owners and provides a consistent approach for the lithium industry in South Arkansas. The application proposes a rate that incentivizes investment while also fairly compensating royalty owners,” Albemarle Corporation said in an emailed statement to Arkansas Times. “We look forward to discussing this proposal with the Arkansas Oil and Gas Commission in September.”
After objections from landowners last fall, Lanxess and SWA Lithium LLC (Standard Lithium) withdrew their application to the Oil and Gas Commission that proposed a royalty rate of 1.25-1.67% on sales of lithium. The first application would have set a minimum payout of $400 per ton of lithium and effectively lowered the royalty rate when lithium prices were higher.
That first application by Standard Lithium and Lanxess would have set the royalty rate for their specific project; the joint application filed in July would set a royalty rate for all operators and leased lands.
The Oil and Gas Commission, which regulates the developing lithium extraction industry in Arkansas, will consider the latest application at a meeting on September 24. Companies will not be able to commercially scale and sell lithium until the nine commissioners approve a royalty rate.
“The newly proposed royalty structure takes into account the feedback received from mineral owners, state officials, and other local stakeholders,” Jesse Edmondson, Director of Governmental Relations with Standard Lithium, told Arkansas Times. “We aligned with our industry peers to provide a royalty structure for Arkansas mineral owners that is fair, transparent, and allows the industry to be competitive with other projects both domestically and globally.”
But some south Arkansas landowners aren’t won over. On July 31, five days after the joint application was submitted, the South Arkansas Minerals Association once again informed the Oil and Gas Commission that they would object to the royalty application.
“The Association intends to submit a formal objection to Applicant’s request at a later date and will participate with testimony and argument at any hearing,” says the letter by lawyer G. Alan Perkins, who represents South Arkansas Mineral Association.
The South Arkansas Minerals Association is a nonprofit corporation that mostly represents large-landowning companies. Including longtime Arkansas businesses like Murphy Oil Corporation, which was based in El Dorado until 2020, Mahony Corporation, Triangle Industries, and others.
“My clients and most of Arkansas are in favor of developing lithium in South Arkansas,” Perkins told the Arkansas Times. “It’s not that we object to lithium development. But all of the individuals who own the mineral rights should be treated fairly in the process. My sole purpose is to give the mineral owners a voice in the process. The operators obviously have a self-interest in making the royalty rate as low as possible.”
Perkins said that collectively, members of South Arkansas Minerals Association own several thousand acres of leased mineral rights by the lithium companies.
Gearing up
Right now, lithium is not being extracted commercially in Arkansas. But Albemarle and Standard Lithium, which operates in Arkansas as SWA Lithium LLC, have been approved by the Arkansas Oil and Gas Commission to test their Direct Lithium Extraction (DLE) technology. This method of extracting lithium directly from brine has not been tried yet on a large commercial scale.
According to Standard Lithium’s pre-feasibility study on extracting lithium in south Arkansas, the company aims to pump lithium-rich brine from ground and then a solution will be applied to the brine to extract the mineral. Then the company will reinject the brine into the ground, minimizing environmental damage. A 2022 report by the University of California, Los Angeles says this method appears to offer the lowest environmental impacts of available extraction technologies.
The heart of the royalty conflict is whether rates will look more like a traditional brine royalty of 1-2%,or if it will be closer to a traditional oil and gas royalty of 11-12%. Standard Lithium has argued to the Oil and Gas Commission that risks associated with the new industry and expensive technology used for lithium extraction mean the company cannot afford high royalties to landowners.
In the new joint application, the companies provided a hypothetical example of how much a landowner would earn at the royalty rate of 1.82%. An owner leasing 160 acres of land to one of the companies could expect a royalty of $5,352 annually if the price of lithium is low, and $30,052 annually if the market price of lithium was very high that year.
Perkins notes the 1.82% royalty rate is significantly lower than the 12.5% rate landowners proposed.
Economic promise for south Arkansas
The lithium extraction projects sprawl across southwest Arkansas, covering hundreds of thousands of acres of Union, Lafayette, and Columbia counties. All three of the counties have a higher poverty rate than the average in Arkansas, according to the Census Bureau. The lithium companies have been working to lease mineral rights in the Smackover Formation from landowners to pump lithium-rich brine from beneath their lands for years.
Standard Lithium made a deal with Tetra Technologies to use Tetra’s leased lands after Tetra began acquiring brine leases in the early 1990s. Tetra currently has over 40,000 acres of brine leasing rights. Exxon acquired the rights to 120,000 acres of the Smackover formation in early 2023, and aims to be commercially producing lithium in a joint venture with Tetra Technologies in 2026.
The federal government made securing a domestic supply chain for lithium a priority when it included the mineral on the 2022 Critical Minerals List. The list defines critical minerals as essential to the economic and national security of the United States and vulnerable to supply chain disruption. China controls much of the lithium supply chain, and the mineral is considered to be in supply risk by the Department of Interior.
“A clear, consistent, globally competitive royalty structure that leverages Arkansas’ strong regulatory precedent is fundamental for the state’s emerging lithium industry — helping drive positive economic growth and a stronger American EV supply chain,” said a statement from ExxonMobil, which operates as Saltwerx in South Arkansas, underscoring the push by the United States to create a domestic supply chain for lithium.
Arkansas politicians and industry leaders have been trumpeting the economic benefits to southern Arkansas that could emerge from the lithium boom, including at the Arkansas Lithium Innovation Summit held by the industry in February. In July, Governor Sanders visited Albemarle in Germany to discuss lithium. Royalties from lithium extraction are seen as a key potential benefit for a region in economic stagnation.
The South Arkansas Minerals Association is a nonprofit corporation that mostly represents large-landowning companies. Including longtime Arkansas businesses like Murphy Oil Corporation, which was based in El Dorado until 2020, Mahony Corporation, Triangle Industries, and others.
History of conflict
The lithium companies want the Oil and Gas Commission to agree that the royalty should be set on the value of brine rather than lithium, because of their insistence that significant capital will need to be invested to extract valuable lithium from the brine and “developers will also take on significant risk and uncertainty.”
“Adopting a 12-and-a-half-percent royalty rate on gross proceeds instead can create the environment where lithium will continue to be sourced from other parts of the world to meet our nation’s new energy demands and leave Arkansas’ mineral and landowners on the sidelines,” a representative from Tetra Technologies said at the December Oil and Gas Commission meeting.
But the South Arkansas Minerals Association pointed out that Tetra is expecting a huge return on investment.
When the South Arkansas Minerals Association objected to the initial royalty proposal in November of 2023, they commissioned an economic analysis that found the initial royalty proposal by just Lanxess and Standard Lithium to not be reasonably “fair and equitable.”
South Arkansas Minerals Association hired the Applied Economics Group to assess Standard Lithium’s application and whether the company could afford to pay landowners a higher royalty of 12.5%. Their analysis showed that under the initial proposed royalty rate for lithium, Standard Lithium and Lanxess would receive more than double the return on their investment for the lithium project than the return on most other metals and mining operations receive, according to S&P Global Ratings.
The same analysis concluded that if the royalty rate was set at 12.5%, Standard Lithium’s South Arkansas Lithium Project would still deliver a 20%return on investment after taxes.
In Standard Lithium’s own pre-feasibility study, they predicted a return of 32.8-35.4% after taxes. In that study outlining their South Arkansas Lithium Project, Standard Lithium writes that royalty rates are one of the company’s main concerns about risk to the project.
In the new joint application, the companies argue that brine itself has little value, and that the royalty rate should reflect that.
“Therefore, it is inappropriate to impose oil and gas like royalty rates of 12.5% on finished products. Rather, such royalty must be adjusted to reflect the value of the raw produced brine at-the-wellhead, and must recognize the significant additions required to develop a marketable product of ultimate value,” the application states.
Lanxess and Albemarle were pumping brine from wells in south Arkansas for years before Standard Lithium developed its South Arkansas Lithium Project and the lithium rush hit the state. The companies were extracting bromine out of the brine for flame retardants and other industrial uses.
Standard Lithium teamed up with Lanxess in 2020 to test Direct Lithium Extraction just south of El Dorado. Albemarle was approved by the Oil and Gas Commission to begin testing the extraction method at its facility in Magnolia last month.
Standard Lithium pointed to a California law establishing a baseline royalty of $400 per ton of lithium as a good guideline to follow as Arkansas rates are set. Notably, that California royalty law also requires royalties to accommodate landowners with no less than 10% of the value of mineral production.
“The rub is that you have this embryonic industry that everyone seems to want to take hold in south Arkansas, and south Arkansas is where the raw materials and resources are located,” Perkins said. “And they want to come in there and produce them and make money from them. But they really don’t want to pay the royalty owners very much for it. And so that’s what we want to make sure that the Oil and Gas Commission considers both sides of the equation and not just what operators want them to hear, so we can develop a fair royalty rate that gives them a good profit but also provides fair remuneration to people who own the minerals in the first place.”
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Publish date : 2024-08-07 05:29:00
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