Energy Bill Is a Boon to Oil Companies

Times Staff Writer

Tucked into a massive energy bill that would open the outer continental shelf to oil drilling are provisions that would slash future royalties owed to the federal government by companies prospecting in Rocky Mountain oil shale deposits.

Sponsored by Rep. Richard W. Pombo (R-Tracy) and passed by the House earlier this year, the bill would amend an existing requirement that the federal government receive a “fair return” from oil companies that hold oil shale leases on public lands. Instead, Pombo’s bill, modeled after a Canadian law, would reduce royalties from the customary 12.5% of annual revenue to 1%.

For the record:

12:00 a.m. Oct. 22, 2006 For The Record
Los Angeles Times Tuesday October 17, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 35 words Type of Material: Correction
Oil shale: An article in Sunday’s Section A about oil shale royalties stated that the United States has about 800 million barrels of recoverable oil in shale deposits. The correct estimate is 800 billion barrels.
For The Record
Los Angeles Times Sunday October 22, 2006 Home Edition Main News Part A Page 2 National Desk 0 inches; 36 words Type of Material: Correction
Oil shale: An article in Section A on Oct. 15 about oil shale royalties said the United States had about 800 million barrels of recoverable oil in shale deposits. The correct estimate is 800 billion barrels.

Further, the bill could cut the reduced rate by as much as 80% if the price of oil fell. Over many years of oil production, the royalty discounts could amount to tens of billions in lost federal receipts, said James T. Bartis, an analyst at the Rand Corp. who wrote a widely used study of the economic prospects of the developing oil shale industry.


The provision would benefit the energy industry, which is a heavy contributor to Pombo’s reelection campaign.

Pombo and others argue that oil companies need incentives to invest in the unproven billion-dollar technology, which squeezes oil from deep rock formations. Colorado, Utah and Wyoming have the world’s largest known oil shale deposits, with estimates of up to 2 trillion barrels, although only about 800 million barrels are believed to be recoverable.

The U.S. Energy Department estimated in July that this year’s nationwide oil demand will average 20.7 million barrels a day.

The Senate is considering its own version of the House bill: expanding offshore oil drilling. But it does not address oil shale royalties. A spokeswoman for Sen. Pete V. Domenici (R-N.M.), who chairs the Senate Energy and Resources Committee, said that although Domenici strongly favors oil shale development, the senator does not support including Pombo’s provision in the Senate bill.

The Bush administration said in a statement that it had reservations about establishing oil shale royalty rates “prior to any demonstration that commercial production is feasible.” Further, the White House said, it was concerned that the provisions could lower future government revenues.

Nonetheless, Pombo, chairman of the House Resources Committee, stands by his provision, a spokesman said.


“The chairman and the majority of the members of the committee feel that it is the right thing to do because it is such a massive resource that it could provide relief for consumers and strengthen our economy,” said Pombo aide Brian Kennedy.

The fate of the legislation will be determined in the wake of government revelations that a clerical error made during the Clinton administration shortchanged the Treasury by as much $20 billion in royalties owed by companies drilling in the Gulf of Mexico.

As committee chairman, Pombo declined a request by Democrats to hold hearings into why the Bush administration has not rectified the royalty error.

This is the second time that Pombo has introduced an amendment giving royalty breaks to the oil shale industry; last year the Senate rejected an identical provision he inserted in a budget bill.

According to one of the current bill’s co-sponsors, Rep. Neil Abercrombie (D-Hawaii), the royalty amendment was added at the last minute.

“It wasn’t something that he favored putting in the bill,” said Abercrombie spokesman Dave Helfert. “Candidly, his main concern is that he doesn’t want it to complicate passage of the bill in the Senate.”

Direct contributions from energy and natural resource companies account for about 10% of donations to Pombo’s current reelection campaign -- a close second to the amount he has received from agriculture -- according to figures compiled on the nonpartisan website Exxon Mobil and Chevron have contributed $10,000 and $9,000, respectively, to Pombo’s campaign. The two firms are among several energy companies working to develop effective recovery techniques in oil shale fields.

Nearly all of the oil shale deposits are on federal land; the Interior Department must establish royalty rates. Patrick Etchart, a spokesman for Interior’s Minerals Revenue Management Service, said royalty relief is not uncommon when oil and gas production requires new technology or is made a national priority.

“In some cases, like in the ultra-deep water in the Gulf of Mexico, it can be very expensive for a company to try to drill a well in harsh conditions without any guarantees of anything,” he said.

Celia Boddington, a spokeswoman for Interior’s Bureau of Land Management, which manages the federal oil and gas leasing program, said the agency is still following the dictates of last year’s energy bill and is gathering public comment to help determine royalty rates. She said, however, that energy companies engaged purely in small-scale research projects in Colorado and elsewhere will not be required to pay royalties on any oil they extract for five years.

Bartis, author of the 2005 Rand report, said that although some concessions should be made to emerging technologies, the focus should be on lost federal revenue.

“I think the critical point here is that you want to protect the taxpayers from oversubsidizing” industry, Bartis said. “Citizens are the owner of those resources. They should be getting fair value for them. There is no evidence that they are going to get fair value.”

Pombo’s amendment directs the Interior secretary to model oil shale royalties on the system in the Canadian province of Alberta, where energy companies are extracting oil from deep deposits in sand. Established in 1997 to encourage production at a time of low oil prices, the 1% Canadian rate remains in place until companies recover all the costs of development and construction. When that occurs, producers pay a 25% royalty.

Kennedy, the Pombo spokesman, said the Canadian model is a perfect fit for oil shale.

“We don’t need to start from scratch and reinvent the wheel,” he said. “This will be put in place to stabilize the production of shale to get it off the ground until such point that it is economically sustainable. The federal government needs to have in place incentives to grow American energy production.”

But Amy Taylor, an economist with the Pembina Institute, an environmental policy research group in Alberta, said the royalty system allows companies to delay paying higher royalties long after the operations have become economically viable. According to the Alberta Department of Energy, after 10 years of production under the royalty system, half the oil companies extracting oil from the tar sands are still paying 1%.

“It’s worked very well in the sense that it has been successful in overcoming barriers to capital investment,” Taylor said. “But what royalties are designed to do is to get a fair return for people in the region. It’s supposed to be compensating the owners of the resource: Albertans.”

She said that since the royalty rates went into effect, oil production in Alberta has increased 88% while revenue from royalties has decreased 39%.

Alberta’s oil sands are producing a million barrels of oil a day, much of it exported to the United States.

Mike Ashar, executive vice president of Suncor Energy USA, Alberta’s largest oil sands producer, concurred with Taylor that the royalty structure provides a loophole for oil companies to stay in a perpetual state of expansion so as to not trigger the higher rate. “That is a fair criticism,” Ashar said.

But he argued that if not for the royalty breaks, the province might not have realized any economic benefits. “It’s a tremendous incentive to invest,” Ashar said. “The government has to say, ‘Am I better off or not?’ Suncor is spending $3 billion a year in Alberta. That would not have happened without the royalty regime.”

But Colorado Rep. Mark Udall, a Democrat, noted that royalty breaks already are permissible under federal law. “It did not make a lot of sense to me to change existing royalty formulas,” said Udall, whose district includes oil shale areas in western Colorado.

“With the price of oil, the oil industry doesn’t need any additional incentives.”