2006 State Lands Year in Review

Introduction

As the year draws to a close we look back on a busy and interesting year in the management of Montana's 5.2 million acres of state lands. High energy prices have set new records for revenue produced, resulting in significant contributions to both the Trust and available funding for public schools. Meanwhile, Montana's changing demographics and economy have precipitated new programs, new management goals, and new approaches to old problems. From land banking to logging, real estate to restoration, the Land Board and the Department of Natural Resources and Conservation (DNRC) are wrestling with the quickly changing landscape - sometimes with outstanding success, sometimes falling short of the hoped-for outcomes. It's all here to provide a quick and easy overview of 2006 and what it meant to Montana.

Year-end Review

The Land Board traditionally receives its year-end review at the December meeting, and Tom Schultz, the administrator for the Trust Lands Division, did so again this year. Summaries of the activities in each of the Trust Land Division's four major bureaus are below. For those seeking more detail, information can be found online at www.dnrc.mt.gov/trust/.

Mineral Management Bureau

Thanks to high prices for energy, mineral exploration and development activities outpaced all other sources for revenue generation with a whopping total of $42,716,187 in 2006, topping last year's total by $18.9 million.

Oil & Gas

Not surprisingly, oil and gas activities produced the lion's share of revenue at $38,039,308, thanks to high oil prices and gas prices that jumped from $5.09 in 2005 to $ 6 . 6 4 p e r million cubic feet (Mcf) this year. Although the Board had been cautioned by oil and gas producers that the new 16.7 percent royalty rate approved by the Board late last year would render exploration and production on state lands non-competitive, that fear proved baseless. In fact, oil and gas revenues doubled in the last year from their 2005 levels and are expected to grow further in the coming year.

Coal

Coal mining produced $4,221,027 in revenue in '06 - and that was without any commercial development at the controversial Otter Creek Tracts. DNRC completed a new comprehensive investigation of those tracts, however, which uses previously unavailable technical information that includes geologic modeling of the coal resources, structural maps and cross-sections, analysis of key coal parameters such as moisture content, ash content, sulfur, sodium, btu (thermal) content, as well as evaluating mine costs, transportation, and market reviews. This report is available on a compact disk from DNRC or on the department's website at http://www.dnrc.mt.gov.

The Otter Creek Tracts were obtained from the federal government in a settlement that stopped the New World gold mine on the borders of Yellowstone Park in the 1990s. Despite a tremendous push to develop the coal by former Governor Judy Martz, a number of concerns - from the impacts it might have on the Northern Cheyenne Tribe to the environmental consequences of large-scale mining and energy generation - have left this huge deposit undeveloped. Late in 2005, conservationists were encouraged when one of the major partners in the private group which owns sections of the coal deposits in a checkerboard fashion with the state told the Board that transportation costs and other problems - notably the sodium content of the coal – could make development unlikely at this time. However, Superintendent of Public Instruction Linda McCulloch's last words to the Board at its December meeting were "Otter Creek, Otter Creek, Otter Creek" - which would tend to indicate that she is pushing for development to increase funding available for schools.

Aggregate

Mining aggregates produced $418,044 in '06, with another $37,808 coming from all other sources of mineral development.

Agriculture and Grazing Management

Agricultural activities produced a total of $9.8 million in 2006 with $3.3 million of that coming from Farm Program Payments. Hay production was up from last year to about 54,000 tons while both barley and wheat production also increased, bringing about a $15/ac return to the Trust compared to about $1.25/ac earned on grazing lands.

Grazing

Approximately 1,110,000 AUMs (Animal Unit Monthly) were grazed on Montana's trust lands last year, which means there were considerably more cows than people living in Montana. The new grazing rate of $6.99 per AUM, which is calculated using Montana beef cattle prices, generated $6.9 million in revenues.

Given the Board's discussions of weed control on state lands - and a 2003 Legislative Auditor's report that found significant percentages of state lands to have infestations of noxious weeds, DNRC initiated what it terms a "fairly aggressive" program to collect and redistribute biological control agents (alias: bugs) last year. According to Schultz, the agency is "very invested" in the program and now collects weed-eating insects a couple times a year for distribution on state lands. The agency also completed 56 county weed management biennial performance reports for the Department of Agriculture and is "working toward a more integrated DNRC weed management plan" that is expected to be completed next year.

Forest Management Bureau

Despite a softening market for timber products, logging activity on state lands produced some $15,875,615 in 2006 on a volume of 56.5 million board feet (MMBF). Harvests were conducted on 24 timber sales and 55 timber sale permits.

Of particular interest to conservationists is the progress made on the Habitat Conservation Program for which the agency received a $554,000 grant and which is expected to be released for public review in late spring next year as the Draft Habitat Conservation Environmental Impact Statement.

In a new activity for trust lands management, DNRC, the Department of Environmental Quality (DEQ), and the federal Environmental Protection Agency (EPA) undertook a coordinated effort to remove sunken logs downstream of the Old Bonner Dam, which was removed in 2006. The logs, which had been on the river bottom since the 1920s, were thought to be a potential risk to the gates on the Milltown Dam, which the EPA is removing as part of its Clark Fork River Superfund activities. Hundreds of logs were hauled out of the river, waiting to be sorted and sold to offset the salvage costs, which were paid for by the EPA.

The Board also approved a Reciprocal Access Policy this year to ensure that easements the state grants to private parties carry a reciprocal right for the state to cross private lands. In 2006, some 4,719 acres of trust lands were accessed via reciprocal easements granting the public the right to access an additional 1,990 acres of state trust lands.

Restoration

Restoration took a higher profile in trust lands management in '06, including the installation of a headgate on Beaver Creek (near Phillipsburg) which was dewatered by irrigation diversions. Through negotiations with the irrigator and in cooperation with the Department of Fish, Wildlife and Parks, minimal flows at critical times now remain in the creek, which contains both Bull Trout and Cutthroat Trout. Additional restoration activities, which were associated with the Phoenix Timber Sale project, included stabilizing an irrigation ditch and surrounding slopes to reduce sedimentation to the Bear Creek.

The agency also obliterated more than 6 miles of roads in Stream Management Zones (within 50 ft of waterways) to reduce or eliminate sediment loading while replacing or removing 19 stream crossings to improve fish passage. Meanwhile, about 232,727 new trees were planted on the Sula Forest on 850 acres, bringing the total reforestation efforts to more than half a million trees on 2,215 acres since 2002.

In other restoration activities, DNRC worked with local landowners to collect willows for use in the Big Hole Grayling Restoration Project and Red Rock Grayling Stream Enhancement Project.

The agency also undertook a massive effort in conjunction with DEQ to clean up 3,000 tons of shredded tires and 5,200 tons of burned soil, tires and debris after a huge fire near Columbus burned thousands of tires that were illegally dumped on state lands. After struggling for 10 years with the problem, DNRC finally got grants and legislative appropriations for the cleanup and now hopes the site can be put back into pasture and other beneficial uses.

Real Estate Management Bureau

Changing times in Montana bring the management of state lands for real estate purposes a new and higher profile, generating about $4,210,017 in '06 from a broad mixture of leases, rights-of-way, and recreational uses.

A new and encouraging direction for the real estate bureau is in wind energy. The most well-known of the projects is the Judith Gap wind farm with 90 1.5 megawatt towers, 13 of which are located on state lands. The Judith Gap project generated $19,500 for the trust in a one-time installation fee as well as about $52,000 annually depending on power production.

New wind projects expected to be coming online in the years ahead include the Springdale project, about 95 miles from Billings, that will have seven large turbines, and the massive Valley County project near Glasgow that envisions 334 turbines of which 43 will be located on state lands. Projected revenues are approximately $175,000 annually when the project is completed. The environmental review of this project is complete and the first phase of construction is slated for early 2008.

As Schultz told the Land Board, the nice thing about the wind projects is that they can still lease out the land underneath the towers for grazing or agricultural use, thus benefiting the trust by "multiple use."

Other topics of note in 2006:

Land Banking

The fledgling land banking program has had its ups and downs this year. In response to legislation passed in 2003 creating the program, the details of when, how, and for what price state lands would be sold were developed through a negotiated rule-making process. It's safe to say that, as with virtually all new legislative programs, when the theoretical world of lawmaking meets the real world, there are some unanticipated reactions.

The Board approved the sale of 19,189 acres of state lands this year which produced $10,660,498. As of December, 3,931 acres of replacement lands had been purchased for $3,008,627. Additional purchases expected to be completed in January of '07 include an additional 20,384 acres for $6,090,000.

Dam Suit

Attorney General Mike McGrath also briefed the Board on the pending lawsuit by the state against owners of hydroelectric dams located in the state's major rivers. The state contends that the riverbeds are state lands and thus, the dam owners owe the state damages for occupying those lands as well as the other lands flooded by the reservoirs. McGrath said the discovery process is continuing and the state presented testimony in a District Court hearing in early December. "One of major issues is whether or not streams where the dams are located are navigable streams," said McGrath. "Our position is that these guys Lewis and Clark came up here and pretty much established that they were navigable. But PPL and other guys are not so sure about that." McGrath said he thinks the state will have the motion for summary judgment "settled in our favor" and added that the trial is scheduled for next fall. "I anticipate we'll go to trial and the issue will be damages - on how much is owed to state." McGrath expects that the state will win the case and concluded: "A year from now we'll have some other pretty good information on how much revenue will be coming in from that litigation."