The Great Oil Shale Rip-Off

Hidden incentives to oil companies to develop oil shale reserves in the US could amount to billions of dollars, according to a report in the LA Times. According to the paper: “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”.

There is no surprise that the sponsor of the legislation is long-time Loyal to Big Oil politician, Republican Richard W. Pombo. The bill’s amended provision would reap huge benefits to the oil industry, which is a heavy contributor to Pombo’s reelection campaign. Energy and natural resource companies provide 10 per cent of the finance for his re-election campaign.

As usual the devil is in the detail: 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%. Further, the bill could cut the reduced rate by as much as 80% if the price of oil fell.

James Bartis an analyst at the Rand Corporation, who has written a report on the shale industry believes that the royalty discounts could amount to tens of billions in 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 argues that oil companies need incentives to invest in the unproven billion-dollar technology, which squeezes oil from deep rock formations. Although Colorado, Utah and Wyoming have an estimated 2 trillion barrels of reserves, only about 800 million barrels are believed to be recoverable. This would only provide the US with 40 says worth of oil.