Washington (Platts)--17Nov2008

The US Interior Department on Monday announced its final regulations to
govern the commercial leasing of pubic lands for oil production from oil shale
in three western states, a move the department estimates could result in the
equivalent of 800 billion barrels of oil.

The regulations will control development on 1.9 million acres of federal
land in Wyoming, Utah and Colorado. By issuing them before November 20, they
will be finalized before January 20, making it much more difficult for
President-elect Barack Obama to reverse the decision.

The final regulations will call for a royalty rate that changes over
time, starting at 5% for the first 5 years of production, and rising 1%/year
to a cap at 12.5%.

Production of oil from oil shale uses tremendous amounts of water, and is
more greenhouse gas intensive than traditional drilling for crude oil, and the
new regulations have been subject of tremendous controversy among lawmakers
and policymakers in Washington and western states.

Democrats in Congress, many of whom want slower development of oil shale
resources, had succeeded in holding up the final regulations by specifically
barring Interior from funding their preparation. When Congress passed the
continuing resolution for appropriations in September, however, it included no
specific ban, and Interior was free to finalize the regulations.

Proponents of oil shale development, including oil companies Shell and
Chevron, as well as the National Association of Manufacturers and the Oil
Shale Exploration Company, however, tout the area as the "Saudi Arabia of oil
shale." They argue final regulations need to be in place before industry will
have incentive to develop the technology and techniques needed to efficiently
produce oil from oil shale.

Producing that oil costs about $60/barrel, and as oil prices skyrocketed
to nearly $150/b over the summer, enthusiasm for oil shale development rose
with it. Oil has now fallen to less than $60/b, and it remains to be seen if
the enthusiasm continues.

Colorado Senator Ken Salazar, a Democrat, has been a leading voice
against finalizing the regulations, and citing potential conflicts over water
use has argued for a go-slow approach. Salazar has also warned that if
development is taken slowly, it could lead to another boom-and-bust cycle,
like his state saw in oil shale development during the high oil prices of the
1970s that went bust when energy prices fell in the early 1980s.

Colorado Democratic Governor Bill Ritter has also urged a slower
approach, saying that without more information from ongoing research and
development projects the final commercial regulation would be "premature."

Wyoming's Democratic Governor Dave Freudenthal has also said he prefers a
slow approach to oil shale development. Utah's Republican Governor Jon
Huntsman, however, has supported the final regulations and urged Interior to
finish them before President Bush leaves office.

--Derek Sands, derek_sands@platts.com