The Arkansas Oil and Gas Commission voted 8-0 Tuesday afternoon to reject a lithium royalty proposed by five publicly traded companies working to establish a commercial lithium industry in south Arkansas.
Commissioners found that a proposal to pay brine mineral owners 1.82% royalty tied to a spot market value of lithium carbonate, a battery ingredient, wouldn’t be fair to Arkansas rights owners.
The five co-applicants in the case had argued over a day and a half of testimony in El Dorado that a higher rate would complicate investment decisions and perhaps endanger plans to build billions of dollars’ worth of lithium extraction plants and brine infrastructure in Lafayette, Columbia and Union counties.
Objectors in the royalty case, including the South Arkansas Minerals Association, had proposed a royalty rate of 12.5%. In his closing statement, Alan Perkins, the association’s lawyer, had suggested sliding royalty rates based on the price of lithium carbonate equivalents.
That price has nosedived in the past year from about $30,000 per ton to just above $10,000.
Geologists estimate that the Smackover formation in south Arkansas holds more than enough lithium to meet global demand. But before companies can begin profitable extraction, Arkansas law requires the Oil and Gas Commission to set a royalty rate.
‘Fair and Reasonable’
The co-applicants, primarily through attorney Thomas Dailey of Fort Smith and representatives of Exxon Mobil and Standard Lithium Ltd., had argued that the 1.82% rate was fair and equitable under Arkansas’ Brine Conservation Act of 1977.
Commissioners, however, found the proposed rate too low.
The co-applicants are Saltwerx, a wholly owned subsidiary of Exxon Mobil; Standard Lithium; Tetra Technologies; Lanxess; and Albemarle of Charlotte, North Carolina. Lanxess and Albemarle have vast operations in the brine fields of south Arkansas, where they have produced bromine for years. Albemarle is also the world’s largest producer of lithium, most from hard-rock mining operations in Australia.
Hearing officer Charles Moulton, an administrative law judge, presided over hours of testimony, cross-examination, rebuttal and closing arguments. After a lunch break Tuesday, he gave the commissioners time to deliberate.
Commissioner Charles Wohford of Fort Smith spoke against the application. “From my standpoint, I do not believe that the royalty as proposed is fair and equitable. The way I arrive at that is multifaceted.”
He said the 2007 commission order on which the 1.82% rate is based, which applied to products beyond bromine that could be profitably produced from brine, was “locked in time,” but the in-lieu-of royalty paid to mineral owners had risen with inflation over time. “Further in their testimony, [the co-applicants] provided testimony that several other similarly situated companies to the U.S. … had a royalty rate in the two-and-a-half percent range.”
He also found suggestions in testimony that the 1.82% rate, combined with the $65-per-acre in-lieu-of brine royalty now in place, would bring the effective royalty rate up to about 2.5%.
“Since owners within existing units are already receiving the in-lieu-of royalty, that is kind of an erroneous calculation there. I believe that [Commission Director Lawrence Bengal], when he made his presentation earlier in deriving a volumetric share, came up with about a 2.35% royalty.”
‘What a Day’
Commission Chair Jerry Langley of Smackover, who had chastised the lithium producers’ refusal to supply the commission with “hard numbers” about their anticipated costs in lithium production throughout the case, moved to deny the application.
“What a day,” Langley said. “Gentlemen, I feel we hadn’t had enough information.”
That position aligned with the position of attorneys for the objecting parties, including Perkins and Patrick Hickey, representing Simmons Bank of Pine Bluff and its mineral-owning trusts in the region. The aspiring lithium producers steadfastly refused to disclose costs and other information that they considered proprietary, confidential and competitive.
“How is an individual or a body supposed to sit down and make a determination without all the information?” Hickey said in his closing statement. “I believe that it’s the co-applicants’ burden to prove that the proposed royalty rate is fair and equitable, and in this case today, I do not believe they have met that burden.”
Dailey, arguing in favor of the application, took testimony from Standard Lithium President and COO Andy Robinson suggesting that higher royalty rates could undermine investment and financing in Arkansas projects. Standard has announced plans to build a billion-dollar direct lithium extraction facility near Lewisville. For four years, it has been producing battery-quality lithium products at a test plant at Lanxess’ South Plant in El Dorado.
Robinson said plans for the Lewisville site changed drastically after Standard partnered with Equinor, of Stavanger, Norway, on the project. The project and its processes are different, and “we’ve moved from a hydroxide product to a carbonate project,” he said.
“As we move forward, there are several things that we have to do to get a project actually financed and built. If we think about the southwest Arkansas project again as an example, we have to complete offtake agreements. Offtake agreements are basically forward sales contracts which exist for many, many years. We have to negotiate those with potential customers. We then effectively have to get project debt on the project, and that’s effectively a billion-dollar mortgage that we have to take against that project, and the people who are going to hopefully lend us the money for that, they will test the economics of the project at the very lowest level that they think is reasonable to expect.”
Several commissioners voiced skepticism about the application’s pegging the 1.82% royalty to the price of a ton of lithium carbonate as valued by a market reporting service Fastmarkets.
In his closing argument, Dailey called it reliable and transparent.
“Fastmarkets is going to send a report every three months to the commissioners, or to the commission staff, that is, and to the individual producers, telling them what the average price or [lithium carbonate] was over that period. Totally transparent. You can put it on the stub of a royalty check.”
History Lesson
But Perkins’ closing remarks seemed to reverberate with the commission. Perkins read from a 1976 Arkansas Gazette editorial calling for bromine producers to disclose to the legislature “what the cost of the actual extraction of the bromine was from the brine.”
Perkins continued, reading from a review of the governor’s brine study committee as the brine act of 1977 was being drafted: ”The producers, plants and the companies steadfastly refused to divulge this information. Much pressure came to bear on the companies to release the information. And on Tuesday, July 13, 1976 the Arkansas Gazette published an editorial calling on the companies to divulge their cost figures in the interest of fairness to the landowners.”
Perkins said that by the same token, “every company here has steadfastly refused to provide to you the economic information on their particular units, with one exception, Standard Lithium, [which did so] because, as I understand it, Canadian securities laws [require it] to issue certain reports and pronounce publicly what those are.”
Standard Lithium is based in Vancouver, British Columbia. The company issued a statement after the ruling.
“We are disappointed in the decision today, and at a minimum this delays our development plans in Arkansas,” the statement said. “Arkansas is quickly losing its first mover advantage to other projects domestically and in particular, the Smackover opportunities in East Texas. We appreciate the time and consideration given to this complex issue by the Commissioners, and are still sincerely optimistic we can find a path forward in Arkansas in the very near future that is fair to both mineral owners and producers.”
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