Obama to scrap Bush-era oil shale royalty rule

Posted: Mar 25, 2013

Written by

Phil Taylor, Greenwire
Oil shale

The Obama administration today will propose withdrawing a George W. Bush administration royalty rule designed to encourage the development of oil shale reserves in Colorado, Wyoming and Utah, a move that is likely to draw support from conservationists and some local officials who feared the rate did not provide a fair return to American taxpayers.

Also today, Interior will announce a record of decision finalizing a plan unveiled in November to make nearly 700,000 acres available for oil shale development in the three states, reducing by 66 percent the lands available under a 2008 Bush administration plan (E&ENews PM, Nov. 9, 2012).

The newly proposed Bureau of Land Management royalty rule follows a legal settlement struck with environmental groups in early 2011 that required the agency to revisit the Bush administration's 2008 rule.

The Bush rule currently in effect would allow oil shale developers to pay 5 percent royalties over the first five years of production, but that would increase by 1 percentage point each year after that until it reached 12.5 percent, which is the current rate for conventional oil and gas production on federal lands.

The Obama rule would scrap that, though it does not specify what new regulation would take its place.

The administration is contemplating a range of options, including establishing a sliding royalty rate tied to the price of oil, setting royalty rates at the time oil shale leases are offered, modeling royalties after a provision in federal coal leasing regulations, or establishing a minimum royalty of 12.5 percent and giving the Interior secretary flexibility to increase it.

The new oil shale rule was prompted, in part, by concerns that too little is known about the kinds of technologies that would be used to develop the resource, which must be heated to extremely high temperatures for sustained periods of time in order to be refined like conventional crude.

Oil shale is different from the shale oil that is being commercially produced in North Dakota, Texas and northeast Colorado, among other places. In several decades, no company has developed a commercially viable production process, though that could change.

"If the royalty rates were set too low and the industry were to develop a highly efficient technology, then there could be immense private profits from federal oil shale leases without a fair return to the American people," said BLM's proposed rule, which is set to be published on the agency's website this afternoon. "On the other hand ... if the royalty rates are set too high, they could discourage development of the oil shale resources."

The agency is hoping to thread the needle, assuaging the concerns of local communities that stand to receive a cut of royalty revenues while still providing incentives for industry to invest in a resource believed to contain more than 1 trillion barrels of oil equivalent.

Full development of the U.S. oil shale resource would create thousands of jobs and offer a huge step toward energy independence, though many environmentalists -- and outgoing Interior Secretary Ken Salazar, a former Democratic senator from Colorado -- have expressed grave concerns over the water demands and carbon dioxide emissions from oil shale development.

"The BLM recognizes the importance of taking a balanced approach to exploring the potential of our oil shale resources," said Neil Kornze, BLM's principal deputy director, who is leading the agency in the absence of an acting director. "This is a smart approach that will not only support companies as they work to determine if development is commercially and technically viable, but also yield the necessary information upon which broader scale commercial leasing could be based."

BLM's proposed rule, which is subject to 60 days of public comment, discusses four options for addressing future royalty rates.

Under one option, the agency would propose royalty rates when it publishes a lease sale notice or when a research lease is ready to convert to commercial production, and the public would have a chance to comment.

Another option would employ a sliding scale under which the government would collect more royalties if the price of crude rises and less royalties if the price falls. While complex, the option would alleviate persistent concerns from industry that projects could become uneconomical if the price of oil drops.

Other options would put oil shale on equal footing with conventional oil and gas or adopt certain provisions of how BLM leases coal on federal lands.

Salazar today will also sign a record of decision finalizing resource management plans that make nearly 700,000 acres in Colorado, Utah and Wyoming available for potential oil shale leasing and about 130,000 acres available for potential oil sands leasing in Utah.

"This plan maintains a strong focus on research and development to promote new technologies that may eventually lead to safe and responsible commercial development of these domestic energy resources," Salazar said in a statement. "It will help ensure that we acquire critically important information about these technologies and their potential effects on the landscape, especially our scarce water resources in the West."

The revisions to the land use plans -- which stemmed from a separate settlement with environmental groups -- drew an expected mixture of praise from Democrats and conservation groups and criticism from oil industry backers when announced last November. Only minor changes were made in the record of decision.

The agency said it received about an equal number of protests from environmental groups, industry and local governments in response to the final plan -- a sign, it said, that the final plan balances competing interests.

In contrast to the Bush plan, lands would first be made open through research and development leases, which could become commercial leases after a developer meets BLM's conditions.

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