The Interior Department this week sent a proposed rule to the White House governing future royalty rates for oil shale, a proposal sure to stir debate among industry, environmentalists and Western communities.

The department's Bureau of Land Management today also released a draft environmental review of two proposals to conduct new oil shale research in western Colorado.

The royalty proposal, which is now under review at the Office of Management and Budget, springs from a lawsuit filed by environmentalists challenging the George W. Bush administration's decision to offer reduced royalty rates to incentivize development on federal lands in Colorado, Utah and Wyoming.

OMB declared the Interior proposal not economically significant, meaning it could be finalized quickly. A settlement struck with the environmental groups required a draft rule to be published by mid-May.

Under the Bush plan, companies that demonstrate a commercially viable project would be initially required to pay a 5 percent royalty on production, far less than the 12.5 percent that is owed on conventional oil and natural gas.

In a February 2011 settlement with more than a dozen environmental groups, Interior agreed to set a royalty rate that will balance the needs of industry while ensuring a fair return to the American taxpayer. The agency must also consider withdrawing the royalty rate altogether until more is understood about the costs of oil shale development.

"We need to move forward, but we need to do it in a wise way and a smart way that addresses key issues such as water and gets a fair return back to taxpayers," Interior Secretary Ken Salazar said at the time, adding that commercial development appeared several years away. "We have time to update the oil shale development rules and get them right."

Oil shale, not to be confused with shale oil being produced in places such as North Dakota's Bakken field, contains a tremendous amount of energy but is yet to be economically developed.

David Abelson, oil shale policy adviser at Western Resource Advocates in Boulder, Colo., said the Bush royalty provides an unnecessary subsidy to industry and could end up robbing local governments that depend on the revenue to fund infrastructure and public safety.

"What we have to make sure is that local governments don't get caught again holding the bag," he said, referring to Exxon Mobil Corp.'s decision in 1982 to shut down its oil shale project near Parachute, Colo., putting 2,000 people out of work in a single day.

But industry proponents warned that raising the royalty rate for oil shale could actually decrease revenue to local governments if it discourages companies from investing in the research and development of the fuel in the first place.

"If you figure out a new mousetrap, we all get rich," said Dan Kish, senior vice president for policy at the Institute for Energy Research, who helped craft the 2005 law that established BLM's oil shale program.

"I thought it was probably too high, at least initially going in," he said of the Bush royalty rate, noting that it was far less lucrative than a rate offered in Alberta to encourage development of oil sands.

The American Petroleum Institute and Shell Frontier Oil & Gas Inc. in a March 2011 filing to a federal court in Colorado argued that the settlement with environmentalists violates the 2005 Energy Policy Act, which required BLM to set a royalty rate that would encourage oil shale development.

Colo. leases

BLM today also announced the availability of a draft environmental assessment for two oil shale research and development proposals in western Colorado.

Exxon Mobil Exploration Co. and Natural Soda Holdings Inc. said they plan to develop oil shale using in-situ technologies that would heat the rocks underground in hopes of coaxing crude from a material known as kerogen.

Each proposal involves 160 acres and could be expanded to a square mile pending additional environmental review.

Research and development and demonstration leases "provide the opportunity for industry to test and develop technologies to determine whether they can be viable on a commercial scale," Kent Walter, field manager for the BLM's White River Field Office, said in a statement. "This critical research, development and demonstration work will also help us answer important questions about the water demands and potential impacts of commercial-scale development, so that we can forge a responsible and orderly path forward if the technology proves viable."

The two leases follow an initial round of leasing in 2007 in which six RD&D leases were issued. Those leases could potentially be expanded to more than 5,000 acres if they prove commercially viable.

Environmentalists view new oil shale leases with caution.

"Just 30 years ago, Exxon Mobil pulled out of the oil shale business and left the regional economy of western Colorado in ruins," said Matt Garrington, the Denver-based co-director of the left-leaning Checks and Balances Project. "Today's announcement shows that oil companies have more than enough access to move forward with oil shale research and are doing just that."