Salazar announces oil shale lease round, addenda inquiry

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Oct. 21 -- US Interior Secretary Ken Salazar announced a second round of federal oil shale leases on Oct. 20 with substantially different terms than the first round. He also said he will ask his department’s inspector general to investigate favorable addenda offered to holders of existing leases 5 days before the end of the previous administration.

“If we are to succeed in unlocking oil shale’s great potential, we must first answer fundamental questions about water use, power use, and environmental and social impacts of commercial development,” Salazar said at a press conference. “With this new round of [research, development, and demonstration] leases, we hope to move closer to responsibly and sustainably developing our oil shale resources.” An estimated 800 billion bbl of shale oil is believed to exist on federal land in Colorado, Utah, and Wyoming.

Applicants will have 60 days after publication of the lease sale’s notice in the Federal Register to submit nominations of up to 160 acres each to the US Bureau of Land Management. Salazar said that an interdisciplinary team of BLM professionals and representatives from Colorado, Utah, and Wyoming (as appropriate) and the Defense and Energy departments will evaluate the nominations.

Like the first round, the latest leases will be 160 acres each. They will run for 10 years. And nominations will be evaluated according to their potential to advance technologies, their economic viability, and their environmental impacts.

But they also will have a smaller preference right area (480 acres instead of 4,960 acres), a higher application fee ($6,500 instead of $2,000), and additional questions concerning water use, energy use, water quality impacts, socioeconomic impacts, and other factors.

Many questions
Salazar said many oil shale development questions still need to be answered. “How much water would be required for commercial oil shale development and where it would come from is obviously important in Colorado and Utah, which are arid states with limited water supplies and where commercial oil shale development would have major impacts on agriculture and other uses?” he observed.

BLM and the Department of the Interior also will consider whether technologies being developed can become commercial, how much electricity will be needed to pry the kerogen from the rock, and what impacts commercial oil shale development would have on nearby communities, water, wildlife, and climate, Salazar said.

“These are central questions to which answers are needed before we plunge forward in the full-scale endorsement of any commercial oil shale development,” he said. “That’s why it is so essential for us in our reform agenda as we look to developing a comprehensive energy plan, that we have honest straightforward answers to these central questions.”

New oil shale leases also will contain diligence milestones that were not a part of the first round in 2007, Salazar said. These will include submitting a development plan within the first 9 months. Once BLM approves that plan, lessees will be required to obtain state and local permits within 18 months and deploy infrastructure within 24 months, as well as submit quarterly progress reports.

If an RD&D lease’s conversion to commercial status is approved, a minimum of 10,000 b/d of commercial production would be required, and the royalty rate would be determined by either the secretary or new regulations. Salazar said that the changes reflect specific parts of a broader reform effort which are aimed directly at the nation’s oil shale resource.

Addenda inquiry
The secretary also said he will ask Mary L. Kendall, DOI’s acting inspector general, to invest a set of lease addenda that the administration of President George W. Bush entered into with holders of the six existing oil shale RD&D leases on Jan. 15—just 5 days before its tenure ended.

BLM issued these Colorado and Utah leases in January 2007. On Jan. 15 of this year, it granted the leaseholders the right, at the time of conversion to commercial development, to elect to have their leases government by a set of favorable conditions and low royalty rates, including an initial royalty rate of 5% which Salazar considered premature.

“There are serious questions about whether those lease addenda in fact are legal or whether or not they should be rescinded. I have decided that before taking final action on those lease addenda that it’s important for me as secretary of Interior to get to the facts about the circumstances surrounding the issuance of those lease addenda,” he said.

Salazar withdrew the Bush administration’s proposal to expand offerings in a second oil shale leasing round on Feb. 25 because he said that it made the parcels four times the size of the earlier leases and locked in low royalty rates and a premature regulatory framework. “I said then and I still will say today that I think there is a question about how those royalty rates could actually be set when these very important fundamental questions have not yet been answered,” he told reporters on Oct. 20.

Responding to his announcement, the American Petroleum Institute said in a statement that it considered Salazar’s decision to proceed with a second oil shale leasing round a positive step. It also expressed concern over some of the new terms, particularly the 87% reduction in total commercial lease size. “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,” API said.

Contact Nick Snow at nicks@pennwell.com.

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