The Obama Interior Department is reviewing a decision made by the Bush administration in its final days that attempted to lock in lucrative royalty rates and favorable regulations for oil companies holding leases for oil-shale development on public lands.

The decision, which came in the form of amendments to existing leases, drew little public notice at the end of the Bush administration in January. But since then, congressional watchdogs, environmental groups and state officials in Colorado, where most of the leases are located, have denounced the amendments as a massive giveaway to the oil industry.

Obama Interior Secretary Ken Salazar has ordered the review “given the timing and circumstances of the execution of the lease addenda,” Interior spokeswoman Kendra Barkoff said Thursday.

Previously undisclosed internal e-mails from the Bush Interior Department and Royal Dutch Shell PLC -- which held three leases and stood to benefit more from the amendments than any firm -- show a concerted if uncoordinated effort to deal with the expected blowback to the amendments. The e-mails were obtained by The Times’ Washington bureau.


One Interior official sent an e-mail to colleagues describing the amendments as a “nuclear bomb” that would spark a hostile reaction from Colorado leaders and at the highest levels of the incoming Obama administration, which had already pledged to overhaul Bush administration energy development programs.

Executives at Shell hoped that Salazar, a critic of oil-shale development plans as a Democratic senator from Colorado, could nevertheless be swayed on the amendments, which analysts say could be worth billions of dollars to Shell and its fellow leaseholders if the companies eventually tap the full potential of shale on their leases.

One of the suggestions for approaching Salazar came from Gale Norton, who joined Shell as an attorney in its oil-shale division nine months after she resigned as Bush’s Interior secretary. The Justice Department is investigating her for possible conflicts of interest involving her handling of Shell leases while she was Interior secretary.

In a Jan. 15 e-mail to colleagues, Norton suggested that environmentalists’ legal challenge to Interior’s shale plans “provides an external reason for locking in change as opposed to [the previous administration] being motivated by fears of how a new administration might alter” the regulations. Salazar, she reasoned, might be persuaded that the department needed to defend its own contracts in court.


Asked about e-mails from Norton and other executives, Shell released a statement Thursday saying that there was “nothing unusual about weighing and communicating the pros and cons of any business decision. This is responsible business behavior.”

The leases Shell and three other companies hold are for researching and developing technology to heat Western rock to extreme temperatures, yielding petroleum. If the companies demonstrate their techniques, they can ask the government to allow them to extract that petroleum on a commercial scale.

Last November, Interior officials finalized regulations and royalties, which the companies would pay the government, as a way to guide that commercial production. The agency set royalty rates that started at 5% of production revenue, well below the federal average for oil and gas royalties. A coalition of environmental groups complained that the regulations did not address the likely environmental impacts of shale production, including greenhouse gas emissions and extensive water use in an arid region, and they sued to overturn the regulations.

A sense of urgency


As the clock was running out on the Bush administration, Interior employees say, an edict came down from top Interior officials to amend the original oil-shale leases to explicitly give the leaseholders the ability to abide by the Bush-era royalty rates and rules. One senior former Interior Department official said that the amendments were in keeping with the Bush administration’s push to make oil-shale research and development as attractive as possible in the face of high costs and uncertain payoffs.

That official, speaking on the condition of anonymity given the confidential policy deliberations, also said that there was a sense of urgency to push through the amendments, because the incoming administration was already advocating a shift from fossil fuels to renewable energy sources.

Another official, C. Stephen Allred, assistant secretary of the Interior for Land and Minerals Management in the last years of the Bush White House, said that the administration was simply embedding existing regulatory and royalty language in the leases themselves. The regulations were the result of a long and “transparent” public process, he said.

“We worked on these for two years. How . . . can that be a last-minute action?,” Allred, now retired, said in an interview. He also said the 5% royalty rate was fair, based on prevailing conditions at the time.


A congressional investigator, speaking on condition of anonymity, said that the amendments raised eyebrows because of their “last-minute timing” and, perhaps because of the speculative nature of oil-shale development, they included “rates that are lower than any other oil and gas leasing rates on federal lands.”

The amendments “shortcut any semblance of due process and shortchanged American taxpayers, all to benefit an industry whose technologies have not been proven commercially viable, environmentally sustainable, or good for local communities,” said Chase Huntley, a policy advisor for the Wilderness Society, a conservation group.

Concerns discussed

In their internal e-mails, Shell officials discussed the need for increased certainty to help shale development move ahead, concerns over the environmentalists’ litigation, and how to boost Shell’s “competitive position” in the energy industry.


Frits Eulderink, Shell’s vice president for unconventional oil, opposed Norton’s suggestion of bringing up the lawsuit challenging the shale development regulations, because it “sounds like we admit it might well be wrong but we now quickly lock in on it, before it is ‘corrected.’ ”

Terry O’Connor, a Shell vice president who works on oil shale, suggested that the company exclude technical experts from the initial discussions with government officials, so that Shell staff could “beg off of tough questions.” O’Connor and Norton did not return phone messages seeking comment this week.

Eulderink said in a brief phone interview that he did not specifically remember the e-mails, but that “it’s not unusual to think, OK, what’s the best way to represent the issue?” in a case such as the lease addenda. “That happens all the time,” he said.

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jtankersley@latimes.com

josh.meyer@latimes.com