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In addition, the rule considered a third alternative, a sliding scale royalty rate based on market prices for competing products, and we sought public comment on the appropriate parameters for the sliding scale royalty rate. The market demand for oil shale resources based on the price of competing sources e.

Additional encouragement for development may be provided through the royalty terms employed for oil shale relative to conventional oil and gas royalty terms, but we recognize that such incentives must be balanced against the objective of providing a fair return to the United States for these resources. In evaluating an appropriate royalty rate system for oil shale that meets the EP Act's dual objectives of encouraging development and ensuring a fair return to the government, the BLM also reviewed other Federal royalty rates for Federal minerals set by statute and regulations administered by Department bureaus, and royalty rates applied to oil shale production in other countries.

The royalty rates for other Federal energy minerals vary. Specifically, current royalty rates for Federal energy minerals under Department leasing programs include:. For leases issued prior to the EP Act, 10 percent on net proceeds after deductions. All of these programs allow for royalty rate relief under certain circumstances 30 U. The BLM also looked at royalty applications for oil shale and similar unconventional fuels in other countries, including:. It should be noted that Canada produces oil from oil sands, not oil shale.

The oil in the sands is the same as crude oil, but dispersed in sand. Extraction and processing is more expensive than for conventional crude oil production, but less expensive than is anticipated for oil shale. Despite their 10 percent royalty rate, the Australian oil shale project the Stuart Project was heavily subsidized by the Australian government through other means tax incentives. Even the government subsidies could not sustain oil shale operations in Australia.

The last three operators went into bankruptcy after brief operations. Suncor, the founder of the Stuart Project and a successful developer of the Canadian tar sands, exited the Australian oil shale business after losing approximately one hundred million dollars.

Australia and Brazil are the only other countries known to be producing, or to have produced, oil shale using the same technologies as in the United States. Oil shale developmental efforts in China and Estonia are owned by their respective governments. Because no other country has yet achieved successful commercial oil shale operations and because of the wide variety of oversight and revenue structures employed in each country, the BLM's review of these systems did not identify a useful model for a royalty system to be used for oil shale development on Federal lands in the United States.

The BLM's purpose for requesting comments was to solicit ideas on these royalty issues for a resource that has little or no history of commercial development. There were approximately thirty-one entities that provided comments through the ANPR process that were specific to royalty rate and royalty point of determination. The comments suggested royalty rates that ranged from a royalty rate of zero to a royalty rate of Of the royalty-related comments, three suggested that the royalty be set at It is contemplated that the primary products produced from oil shale will compete directly with those from onshore oil and gas production, which has a However, the BLM recognizes that the nature of potential oil shale operations differs from that of conventional oil and gas operations and that these differences may suggest the need for a royalty system other than the traditional flat rate of In determining the royalty rate for oil shale, it should be noted that there is a significant difference between oil shale mineral deposits and a conventional crude oil reservoir.

Currently, proposed processes to extract kerogen from an oil shale deposit are considerably different, as well as labor and capital intensive. Oil shale is a solid rock that must be mined or treated in place to release the kerogen. We received a wide range of comments on the appropriate royalty rate as a result of the ANPR. Many among the seven recommended that a 1 percent royalty rate be the starting point, and they used the Alberta oil sands royalty scheme as an example. As discussed above, the BLM looked at royalty applications for oil shale and similar unconventional fuels in other countries.

The Alberta tar sand model presents two challenges. First, because of the continual infusion of capital to acquire new equipment, the payout point is being reached only after many years of operation. Secondly, because of the complexity of determining when payout may occur, such a royalty scheme requires a more robust and costly administrative process to guard against manipulation; those costs would reduce the net return to the United States. Oil shale royalties are not designated for community and infrastructure support, but by statute are required to be split between the Federal Treasury and the states 30 U.

Presumably states could choose to direct a portion of the royalty revenues they receive to local community and infrastructure support, but that would be a state choice, and for the purpose of this rulemaking, these comments were not considered because they assume a use of royalty revenues not available under current law.

Three comments suggested that royalties should not be charged on hydrocarbons unavoidably lost or used on the lease for the benefit of the lease, but did not directly address the royalty rate issue. While the BLM acknowledges the inherent differences between an oil shale deposit and other deposits from which similar products can be produced, this suggestion was not considered because there is no known value for raw oil shale since there is no oil shale industry or an established market for raw oil shale. However, it should be noted that in the BLM proposed a rule to establish a royalty rate equivalent to The proposed rule was published on February 11, 48 FR It would also be challenging to develop a fair and transparent process to calculate the royalty equivalent in today's economic environment, and no values were assigned to the mined or unprocessed rock and tonnage in the proposed rule.

As noted, the proposed rule deferred the determination of those parameters to a later date. In addition to ANPR comments received on royalty rates, the BLM considered an initial 2 percent royalty to encourage production and a maximum 5 percent rate upon establishment of infrastructure. This method recognized the high costs involved in producing shale oil. However, we did not adopt this approach because of the difficulty involved in determining when necessary infrastructure is in place.

In the proposed rule the BLM also considered an 8 percent royalty rate established by the State of Utah for state oil shale leases. It was determined that this rate represents the historic base royalty rate for solid fuel minerals on the State of Utah School and Institutional Trust Lands Administration lands—including asphaltic sands, uranium, and coal. To date, several oil shale leases issued by the State of Utah are in the infancy stages of research and development. These leases were issued with an initial royalty rate of 5 percent for the first 5 years after production begins.

As noted previously, we did not propose a single royalty system. Based on the information the BLM reviewed, and considering the unique challenge of trying to set a royalty rate on oil shale production in light of the many uncertainties regarding the economics and technology of a potential future oil shale industry, we presented different royalty rate alternatives in the proposed rule:.

A 5 percent royalty rate on a specific volume of initial production beginning within a prescribed timeframe, with a In addition, we sought comment on the appropriate parameters for a third option: A two or three tiered sliding scale royalty based on the market price of competing products e. A further explanation of each of these proposals is presented below. Although mitigated somewhat by the much greater geographic concentration of oil shale resources, there is a significant difference between the energy value of oil shale and crude oil.

On a per-pound basis, very high quality oil shale rock generates 4, Btu, coal generates an average of 10, Btu, while crude oil generates 19, Btu. Even wood has more heating capacity than oil shale rock, generating an average of 6, Btu. Applying the relative Btu value of oil shale to crude oil would result in a 2. Using the same comparison to the royalty rate for underground coal would result in a 3.

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In other words, it would require almost 5 times as much oil shale to produce the Btu value of crude oil and more than 2 times as much oil shale to produce the equivalent Btu value of coal. This rate is similar to the rate derived by comparing production costs to royalty rates as recommended by the proposed regulations. The BLM also estimated what royalty rates for shale oil might be, based on comparisons of production costs for similar products. The cost of removing oil from shale rock is currently estimated to be two to three times higher than the current cost of producing conventional crude oil from onshore operations.

The table also estimates what royalty rates for oil shale production might be for the different production methods compared to a Adjusting royalty rates based on higher anticipated production costs for oil from oil shale is not a new concept and is similar to the situation in the coal program where underground coal operations compete with surface coal operations, which have lower production costs.

Congress addressed this disparity in production costs by allowing for different royalty rates for coal mined underground versus coal mined at the surface. This alternative assumes that oil shale will continue to be more expensive to produce for many years when compared to new conventional oil. Proposed Option 2. A 5 percent royalty on initial production, with Like the other royalty options, this option would have required oil shale lessees to pay royalties on the amount or value of all products of oil shale that are sold from or transported off of the lease. The proposal established that the standard royalty rate for the products of oil shale is However, under this option, for leases that begin production of oil shale within 12 years after the issuance of the first oil shale commercial lease, the royalty rate would have been 5 percent of the amount or value of production on the first 30 million barrels of oil equivalent BOE produced.

One potential downside to this alternative is that offering royalty incentives without regard to oil prices increases the likelihood that, if oil prices remain high, the government will sacrifice revenue without affecting actual oil shale development. We also requested comments on the 12 year timeframe for reduced royalty.

Proposed Option 3. Sliding scale royalty based on the market price of oil. Two comments on the ANPR suggested a sliding scale royalty format. One comment specifically suggested a sliding scale royalty scheme based on a royalty schedule that varies with the price of conventional crude, as follows:. Another ANPR comment suggested two approaches to calculating royalty.

The first part of the comment suggested that a simple way to accomplish royalty rates would be to index the value of barrels of oil equivalent to some percentage of the New York Mercantile Exchange NYMEX futures for instance, a 30 day average front month prices. The commenter suggested that the index should be some fraction of the price, such as 50 to 65 percent. In the second part of the comment, the commenter suggested that, as an alternative to indexing, the BLM uses a sliding royalty rate that is calculated on the difference between product price and the highest-cost production in the industry.

The BLM, in consultation with the MMS, evaluated these variable royalty options, but decided that as presented, they would be highly complex, and therefore, cumbersome to administer. With price volatility in the crude oil market, an intricate sliding scale royalty scheme could make enforcing compliance very difficult for the MMS. In addition, there is uncertainty about the types of products that would be derived from oil shale refining.

Royalties based on oil shale quality would also be difficult for the BLM to administer when attempting to verify production quantities. For instance, if oil shale is extracted in an underground heating system, it would be extremely difficult for the BLM to determine how much oil or other product came from a particular volume or area of in-place oil shale.

While the BLM and MMS are concerned about the complexity of administering some of the sliding scale royalty proposals, we recognize that there is some merit to the sliding scale concept, and in a simpler form, a sliding scale royalty may prove useful in meeting the dual goals of encouraging production and ensuring a fair return to taxpayers from future oil shale development.

One of the concerns that has been expressed regarding oil shale development is that potential oil shale Start Printed Page developers may be reluctant to make the large upfront investments required for commercial operations if they believe there is a chance that crude oil prices might drop in the future below the point at which oil shale production would be profitable i.

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A sliding scale royalty system could allow the government to at least partially mitigate this development risk by providing for a lower royalty rate if crude oil prices fall below a certain price threshold. The basic concept is that in return for the government accepting a greater share of the price risk that an operator faces when prices are low in the form of a lower royalty , the government would receive a greater share of the rewards through a higher royalty when prices are high.

At the time of the proposed rule the BLM had not yet decided on the specific parameters of a sliding scale royalty system, but considered a simplified, two-or three-tiered system based on the current royalty rates already in effect for conventional fuel minerals and with a 5 percent royalty rate Option 1 representing the first tier. The proposed rule explained that the applicable royalty rate would be determined based on market prices of competing products e. If prices are above that range for the period, a higher royalty would be charged.

In a three-tiered system, a third royalty rate would apply if prices rise above a second price threshold during the applicable period. In the proposed rule the BLM sought comment on the specific parameters that could be applied to a sliding scale royalty system. More specifically, the BLM asked for feedback on the following questions:.