By Richard Martin, Contributing Editor

The Interior Secretary executed a nice pirouette last week, ordering an investigation of last-minute oil shale leases  granted by the exiting Bush Administration earlier this year while, at the same time, instituting a second round of those leases in the Green River basin of Colorado and Utah.

Thought to contain many billions of barrels of oil trapped in shale, in the form of kerogen, the Green River leases have been the subject of controversy ever since the Interior Secretary, under George Bush, added “lease addenda” on six parcels on federal land, setting sweetheart royalty rates for the producers controlling the leases and expanding existing 160-acre research plots up to 5000 acres.

“The U.S. Justice Department is investigating the actions of Gale Norton,” the Grand Junction Sentinel reports, “who served as interior secretary in the Bush administration before going to work for Shell Oil Co., which holds three existing oil shale research leases, all in Colorado.”

Salazar has asked the Interior Dept.’s inspector general to conduct a separate review of the midnight lease addenda. At the same time, he is allowing the second round of leasing on the land to go forward, with eventual commercial parcels decreased to 640 acres, royalty rates increased, and a firm
timeline of requirements for the four companies, including Chevron Corp. and Shell, that hold the leases.

The oil and gas industry’s reaction was mixed. “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,” reported Oil & Gas Journal.  “It also expressed concern over some of the new terms, particularly the 87% reduction in total commercial lease size.”

 Looking back at the terms handed out by Interior five days before Bush left office, it’s clear that this was insider baseball. The initial royalty rate was 5% of revenues, compared to 12.5% to 18.8% for conventional oil royalties. It can be argued that a relatively low royalty rate is appropriate, given the risk of producing oil from kerogen. But the rate set by the Jan. 15 addenda is less than half of the low end of normal rates. Salazar is perfectly justified in adjusting those royalty rates.

The terms and conditions set by the new rules governing the leases are hardly onerous. Companies must submit development plans to the Bureau of Land Management within nine months of the leases being granted; obtain the necessary state and local permits within 18 months; and actually start to “deploy infrastructure” within two years. Those provisions are to prevent deep-pocketed oil majors from gaining the leases and then sitting on them, waiting for technology development and economic conditions to make drilling more attractive (and preventing more aggressive competitors from developing the resources).

As for the lease size, 640 acres seems plenty of land to develop, especially given the speculative nature of oil shale plays today – and given the locale of these sites, in the midst of some of the wildest and most scenic land in America, much of it in protected parks and wilderness areas. Billions of barrels of producible oil underlying the continental U.S. is a great story – but as I’ve written here before, many experts think that the most optimistic projections of economically recoverable oil from shale are outlandish.  

What’s more, little is going to happen in terms of commercial development of these leases in the next few years regardless of the lease terms. There are no fewer than 35 firms currently developing technology to extract oil from kerogen – a sure sign that the methods are not production-ready yet.

“Shell will not decide before 2012 if they will build a commercial pilot,” The Oil Drum pointed out last fall while the Dept. of Energy “is forecasting no oil shale production before 2030.”

 That’s a long time horizon for a resource that may or may not fulfill its promise. Giving with one hand while judiciously taking back with the other, Sec. Salazar is attempting to strike a balance between competing forces of rampant oil-and-gas development and no-drill environmentalism. That seems like a judicious strategy for the guardian of America’s federal lands.