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Government offers discount royalty rates on shale

By DAVID IVANOVICH Copyright 2008 Houston Chronicle

Nov. 17, 2008, 11:29PM

WASHINGTON — The Bush administration, hoping to unlock a domestic resource it estimated at 800 billion barrels of oil, Monday issued new rules offering discount royalty rates to companies that produce oil and natural gas from oil shale formations.

Scrambling to get pro-industry regulations in place before President George W. Bush leaves office, the Interior Department published final rules that would govern commercial development of oil shale in Colorado and other states in the West.

Companies including Shell Oil Co., Chevron Corp., Exxon Mobil Corp. and Schlumberger are trying to figure out how to extract oil and natural gas from oil shale in a cost-effective and environmentally sound fashion.

Barriers to startup

Having regulations in place would remove a major barrier that has blocked progress toward commercial production.

“This is one of the key things we needed to know in assessing future viability of a project, particularly the royalty rate,” Shell spokesman Tracy Boyd said.

But the royalty payments Interior’s Bureau of Land Management wants to assess — 5 percent during the first five years, ramping to the 12.5 percent that’s standard for conventional oil and gas leases within 13 years — is higher than what a startup industry should have to bear, Shell argues.

“We’re talking about a new industry that doesn’t exist today, with technology that’s not yet proven viable on a commercial scale in an area that lacks the necessary infrastructure for that industry,” Boyd said.

Shell had called for no royalty payments during the first five years and a 1 percent royalty thereafter.

Under the Shell proposal, royalty payments would have risen to 3 percent if oil prices on the New York Mercantile Exchange reached an average over $150 a barrel in any year, and would hit 5 percent only if oil topped $200 for a year.

Chevron spokesman Alex Yelland said company officials are reviewing the rules.

“We believe that to meet future U.S. energy needs we will need all forms of energy, including conventional oil and gas, renewables and unconventional sources such as oil shale,” Yelland said.

Exxon Mobil Corp. officials declined to comment until they had a chance to study the rule further.

Before becoming law, the regulations will be subject to review by the new Congress. And some key Democrats already are lining up in opposition.

“These regulations are premature and flawed,” argued Sen. Ken Salazar of Colorado, who described the proposed royalty rate as a “pittance.”

Attacking funding

Lawmakers could try to pass resolutions overturning the rule, but such measures are difficult to pass because they require super majority votes in both houses.

Still, lawmakers have other ways of blocking rules they don’t like, often by refusing to fund any enforcement of the regulation.

“Changing existing law is really hard, and harder still when the agency has finished writing the rule,” said Kevin Book, an oil analyst with FBR Capital Markets in Washington. “But it’s easy to unplug the bank account.”

Converting kerogen

Oil shale is a type of rock called marlstone, which contains an organic material known as kerogen. For decades, oil companies have tried to figure out how to efficiently convert kerogen into usable oil and gas.

The Green River Formation, which sprawls across portions of Colorado, Utah and Wyoming, is estimated to hold 500 billion to 1.1 trillion barrels of recoverable oil shale resources, a 2005 Rand Corp. study found.

This immense resource is “enough to meet U.S. demand for oil at current levels of consumption for 110 years,” said C. Stephen Allred, the Interior Department’s assistant secretary for land and minerals management.

Allred said Interior officials believe oil shale would be economic with oil prices in the $60 to $80 range. Light, sweet crude for January delivery settled Monday at $54.95 a barrel on the New York Mercantile Exchange.

Technology years away

Industry officials say that development of technologies to extract oil and gas from oil shale are years away.

Shell is experimenting with a plan to heat oil shale in situ — in place underground — and then extract high quality oil suitable for uses such as jet fuel.

But environmentalists argue that development of the oil shale would use large quantities of water, require vast amounts of electricity and increase carbon emissions.

“It’s an about-face on the nation’s commitment to taking positive steps to address climate change,” said Chase Huntley, a policy adviser for The Wilderness Society.

But in September, with American motorists still smarting over the summer’s record high gasoline prices and Republicans gaining political traction with their slogan “drill baby drill,” Democratic leaders allowed the oil shale ban to lapse, just as they had a moratorium barring drilling off the East and West coasts.

The Bush administration used this window to push through the oil shale rule.

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