Interior proposes lower royalties on oil shale extraction |

Interior proposes lower royalties on oil shale extraction

Dina Cappiello
The Associated Press
Aspen, CO Colorado

WASHINGTON ” The Bush administration on Tuesday proposed charging energy companies wanting to squeeze oil out of vast shale deposits in the West lower royalties than they pay for drilling on other federal lands, including offshore in the Gulf of Mexico and Alaska.

In draft rules issued Tuesday, the Interior Department recommended a range of royalty rates for the extraction of oil from shale on 2 million acres of public property in Colorado, Utah and Wyoming. All would be less ” at least for a time ” than the 12.5 percent to 18.8 percent the government currently collects from companies producing oil on and offshore.

Interior officials said the discounted rate, which would be fixed at 5 percent in one proposal, would offer an incentive for companies to develop oil shale, which can cost up to three times more to produce than traditional oil. Shale oil also contains less energy than oil, coal and wood, the Interior Department said.

“For years, the cost of extracting oil from shale exceeded the benefit, but today that calculus is changing,” Interior Secretary Dirk Kempthorne told reporters Tuesday. “This makes oil shale a highly promising resource.”

The Bush administration’s action comes as Congress debates expanding domestic oil production to respond to high gasoline prices. Among the proposals being pushed are opening up more federal lands to energy production, including offshore areas currently off-limits, and forcing companies with active leases to produce on them now.

Last year, however, Congress decided in a spending bill to prohibit the Interior Department from issuing final regulations for commercial development of oil shale.

Kempthorne said the administration could not wait for that prohibition to be lifted to issue proposed rules. “Any delay would discourage investment in research and development,” he said.

Oil shale is one of the largest untapped sources of energy in the U.S. An estimated 800 billion barrels is locked up in rock in the West beneath land that is more than 70 percent publicly owned.

Environmentalists, along with Colorado’s Democratic governor, Bill Ritter, accused the Bush administration of rushing to develop oil shale at “bargain basement” rates, without accounting for its various impacts. High oil and natural gas prices have already caused a black gold rush in the West, with more than 100,000 traditional oil and gas wells approved in recent years.

Ritter said Tuesday that oil shale, which would not be produce oil until 2015 or 2016, would do nothing to help with high gasoline prices.

“This is a last-ditch, irresponsible attempt by the White House to issue commercial oil-shale leases, at Colorado’s expense,” Ritter said. “These regulations would send bargain basement royalty rates that could cost Coloradans billions of dollars.”

Kate Zimmerman, a senior policy specialist with the National Wildlife Federation, said Interior’s proposal did not represent a fair market value to the public.

“It’s a lowball number in terms of the potential profits these guys are going to reap from oil shale,” she said.

The current estimated production cost for shale oil ranges from about $37.75 to $65.21 a barrel, according to the Interior Department, whereas conventional onshore crude costs approximately $19.50 per barrel to harvest. The difference is that oil shale requires energy to bake the rock and pump the molten oil to the surface.

The Interior Department offered other alternatives to a fixed 5 percent royalty, which is charged as a percentage of the cost of a barrel of oil. Other suggestions included a sliding scale based on the market price of conventional oil and gas, as well as a royalty rate that would start at 5 percent and increase to 12.5 percent, depending on the level of production.

Industry representatives, who pushed for initial royalties to be lower than 12.5 percent, said that while commercial-scale production of oil shale is a decade off or more, companies need to know what to expect before investing.

“It is basically recognition that in the beginning there has to be a lower royalty to recognize the pioneering nature of this business,” said Glenn Vawter, executive director of the National Oil Shale Association.

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