Haggling over Western oil projects

The oil industry and the Obama administration are haggling about the terms of commercial oil shale projects on federal lands in Rocky Mountain states even though oil companies still haven't come up with a profitable way to tap these resources.

Interior Secretary Ken Salazar on Tuesday invited companies seeking to tap oil shale resources in Western states to apply for a new round of research, development and demonstration leases, but on terms the industry criticized. Separately, Salazar asked the department's acting inspector general to review what he called "favorable terms and low royalty rates" handed out during the final week of the Bush administration to companies that own the six existing leases.

The announcements continue a prolonged dance about oil shale, which companies have talked about developing since the late 1970s and which a 2005 Rand study said could produce 800 billion barrels of oil, three times Saudi Arabia's reserves. But tapping the oil requires massive amounts of energy and water, incurring large economic and environmental costs.

"What we're trying to do by issuing more R&D leases is to try to answer some of those questions before we're making decisions about commercial developments," said Interior spokesman Matt Lee-Ashley.

Salazar said the new demonstration leases would allow oil companies to use 160-acre tracts on public lands in Colorado, Utah and Wyoming, with the option to expand to 640 acres later if they go ahead with commercial development. Under the earlier Bush administration lease terms, companies would have been able to expand up to 5,000 acres for commercial development.

The American Petroleum Institute said that offering new leases was a "positive step" but that it was "concerned" that "slashing the size of the potential commercial lease diminishes the incentives for investment and ignores the enormous up-front costs and risks undertaken to develop these technologically complex resources."

Salazar also drew criticism from some environmental groups. Friends of the Earth President Erich Pica lamented that Salazar's proposal "fundamentally fails to close the door on oil shale -- a dirty fuel that is destructive to the environment and local communities." Pica said that producing oil shale is expected to emit 20 to 70 percent more greenhouse gases than producing conventional gasoline and requires about three barrels of water for every barrel of oil produced.

Even companies involved in research have conceded that they still face technical obstacles. Shell, which holds three of the six existing leases, has said on its Web site that it has proven that a new method of heating the shale is technically feasible but that it still must show it can protect groundwater. Shell has been testing "freeze walls" made of a closed loop system of pipes to create a barrier for the groundwater. It said "further research tests, including testing the integrity of the freeze wall and secondary containment options are planned for the next several years."

Although commercial development may be remote, the Bush administration had issued guidelines in November 2008 for royalty payments in case commercial production someday goes ahead. On Jan. 15, just five days before the Obama administration took office, it said those royalty payment guidelines would apply to the six leases issued earlier. Those rates ranged from 5 percent to 12.5 percent.

Salazar said in a letter to Interior's acting inspector general Mary Kendall that the Bush administration changes "conveyed lucrative benefits to the leaseholders . . . without any opportunity for public review or comment." He asked that she conduct an investigation.