BLM's Oil Shale Management - Royalty system revisions open for comment

Posted: Mar 29, 2013

Comment deadline: May 28, 2013

The Bureau of Land Management (BLM) is proposing to amend the BLM's commercial oil shale regulations by revising these regulations in order to address concerns about the royalty system in the existing regulations and to provide more detail to the environmental protection requirements.

This proposed rule provides the BLM with an opportunity to reconsider certain portions of the 2008 regulations, which were challenged in Federal court. As part of the settlement agreement, the BLM agreed to propose specific revisions to the 2008 regulations, as presented below, to address the royalty rate and certain environmental protection requirements applicable to commercial oil shale leasing.

BLM is required by statute to establish royalties for oil shale leases. The two main components of the statutory mandate (under the Energy Policy Act of 2005) are to (1) encourage development and (2) ensure a fair return to the US. Right now, the royalty rate is 5% for the first 5 years of commercial production and increases by 1% per year after that until it maxes out at 12.5%.

BLM is revisiting the issue because federal lands open for oil shale leasing in Western states like CO have a lot of oil shale, and they want to figure out how to develop it. If the royalty rate is so low and/or technology becomes really efficient, companies could reap huge private benefits from federal leases without meeting the second requirement of the statutory mandate (a fair return to the American people). On the other hand, oil shale is generally seen as more expensive to develop than conventional oil and/or gas, so if the royalty rate is too high, that could threaten the other prong of the statute (development of the resource itself).

The main problem is there isn't really a commercially viable way to develop oil shale right now, so there is no way of knowing if the royalty rate is too high or too low. BLM wants to get rid of the current royalty rates because they are worried they aren't right (i.e. will either be too cost prohibitive or turn out to be completely useless). The BLM has not yet made a decision on what would replace the current rule's royalty rates, but rather is seeking comment on several different options as set forth below.

Option 1 says the BLM would publish a proposed notice of sale (or conversion to commercial lease), which would include the royalty rate, which would be determined by BLM on a case-by-case basis. That notice would be open for comment for at least 60 days.

Option 2 says instead of using a proposed notice of sale, BLM would ask for public comments about what the royalty should be, and then a report would be compiled based on the comments with which BLM could inform its decision.

Option 3 is the sliding scale royalty. BLM thinks this is the best way to meet the dual goals of the statute. The pros of a sliding scale royalty system is that the royalty rate would diminish if the price of oil dropped, giving developers an incentive to invest without facing as much risk. Similarly, if the price of oil increased, so would the royalty rate, which would benefit the government. BLM is accepting comments regarding whether the sliding scale system should be two- or three-tiered, as well as general concerns about how the sliding scale royalty system would work, since it has never before been implemented in this context. Option 3 makes no mention of a minimum royalty rate but that may be forthcoming as the BLM's receives public comments.

The BLM seeks comment on the specific parameters that could be applied to a sliding scale royalty system, should the BLM choose to adopt such a system in the final rule. More specifically, the BLM would like feedback on the following questions:

1. Should a sliding scale system include two or three tiers? What would be appropriate royalty rates under a two-tiered system recognizing the dual goals of encouraging production and achieving a fair return to the government? What rates would be appropriate for a three-tier system?

2. What are appropriate price thresholds to apply to each tier? Should the thresholds be fixed (in real dollar terms), or should they float relative to a published index?

3. Should the sliding scale apply to all products, or should nonfuel products pay a traditional flat rate?

4. Are there other ways to simplify a sliding scale royalty system so as to reduce the administrative costs for the BLM, the Office of Natural Resources Revenue, and producers while still providing a reasonable assurance that the public is receiving its fair share of revenue from production?

Option 4, which would set a minimum royalty of 12.5%, is basically just carrying over the corresponding rule from their oil and gas program. The Secretary of Interior could decide later this is too low and make it higher without going through a new rulemaking. This approach could be good because it allows for flexibility and adaptability, but there are a lot of differences between oil shale and the other fuels, so there are concerns that stamping the rule from the conventional system on this may not work.

The BLM also invites comments on variations of the aforementioned options, including setting a minimum royalty rate as part of options 1 and 2 or not setting a minimum royalty rate, as well as any other royalty systems rates that would meet the dual requirements of the EPAct to encourage production and ensure a fair return to the public. Comments with technical economic data and analysis would be most useful. The final rule will include a royalty provision that will be informed by public comments the BLM receives as a result of this proposed rule.

Learn more about the royalty rates options.

Comment on the proposed rule.

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