New federal oil-shale rules get chilly reception

Environmentalists, industry both skeptical of process by which royalty rates are set

The Bush administration’s oil-shale regulations handed down Monday sparked disappointment among environmentalists, proponents of a go-slow approach and the company generally considered furthest ahead in developing the resource.

Bureau of Land Management Director James Caswell approved the new regulations, which are intended to govern the development of 1.9 million acres of shale-bearing lands in Colorado, Utah and Wyoming.

The royalty rate begins at 5 percent for the first five years of commercial production. It then is to rise 1 percentage point each year thereafter until the last, when it would hit a ceiling of 12.5 percent.

The federal government would keep 51 percent of the royalties and send 49 percent to the affected states.

A coalition of environmental organizations characterized the regulations as a “gift to the oil industry” and Sen. Ken Salazar, D-Colo., said they “sell Colorado short.”

State officials said the federal government was getting ahead of itself.

“We still do not have the answers to essential questions,” said Harris Sherman, executive director of the Colorado Department of Natural Resources.

“It’s not what we were hoping to see,” said Tracy Boyd, communications and sustainability manager for Shell Oil Co.’s Mahogany Research Project in northwest Colorado.

The rules garnered some praise.

“Laying the groundwork for future oil shale development is a major victory,” said Peggy Rector, a former Rio Blanco County commissioner who heads Environmentally Conscious Consumers for Oil Shale, which supports development of shale.

“It’s a start,” said Alyson Heyrend, a spokeswoman for U.S. Rep. Jim Matheson, D-Utah, who last fall persuaded the Democrat leadership of the House to drop its insistence on a moratorium on developing rules for oil shale development.

Approving the rules was one of several “extraordinary steps” the Bureau of Land Management was taking to ensure energy security, Caswell said in a statement.

The Interior Department also amended land-use plans affecting 1.9 million acres in Utah, Colorado, and Wyoming to set them aside for potential commercial oil shale development.

Even under fast-track scenarios, however, oil shale development is at least eight years away and more likely a dozen, Boyd said.

The BLM administers five research-and-development leases on oil shale lands in Colorado and one in Utah. Shell is working on three of the Colorado leases.

The rules, including the royalty rate, will give some companies greater confidence, said Glenn Vawter, executive director of the National Oil Shale Association, but the rules seem to fall short of recognizing
the capital costs of starting the industry.

Oil shale is in the same place as the tar sands industry in Alberta, Canada, once was, Boyd said.

The Canadian government levied a 5 percent royalty and the industry languished, he said. When the royalty fell to 1 percent, companies were allowed to recoup their capital investment before paying royalties.

“We’re where they were 30 years ago,” he said. “We were hoping for more of a sliding scale that would give us the incentive and the opportunity for a good, strong, commercial, viable operation to get going.”

The rules don’t set the stage for commercial leasing and fall short of setting into motion those activities.

Any commercial operation will have to complete three levels of national environmental reviews and dozens of other permits and approvals.

A 10- to 12-year horizon for development “is kind of like a fast track,” he said. “If no one challenges it, it could go quicker.”

Among the questions that remain to be answered are the kinds of technologies that will be used, how much it will cost to extract petroleum from the shale, the environmental effects of production and its effect on groundwater, Sherman said.

Any decision also has to take into account the effect on West Slope communities.

“I don’t think you can responsibly set the royalty rate without knowing what the costs of extraction will be,” he said.

A suggestion by Club 20, the West Slope lobbying and promotional organization, that companies be allowed to make upfront investments in local communities and be able to credit them against their royalties appeared not to have been included, Executive Director Reeves Brown said.

That “would get money on the ground before impacts occur,”’ Brown said.


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