2nd UPDATE: Interior Dept To Probe Bush Administration Oil-Shale Leases

U.S. Interior Secretary Ken Salazar on Tuesday called for an investigation into last-minute changes the Bush administration made to six leases that are part of an oil-shale development program in Colorado, Utah and Wyoming.

On Jan. 15 - days before President Barack Obama took office - the Interior Department offered exclusive "lucrative benefits" to six oil-shale lease holders in a way that raised "serious concerns," Salazar wrote in a letter to the Interior Department's inspector general.

Among the benefits offered was a 5% royalty rate on oil or gas produced in the event the projects were upgraded to commercial operation, the agency said.

Three of those leases are held by a unit of Royal Dutch Shell PLC (RDSA, RDSB.LN) for parcels in Colorado. Chevron Corp. (CVX) and American Shale Oil LLC, a joint venture owned by French oil giant Total SA (TOT) and telecom IDT Corp. (IDT), hold one lease each in Colorado, and privately held Oil Shale Exploration Co. holds a lease in Utah. That firm has Utah oil-shale development agreements with Brazilian oil producer Petroleo Brasileiro SA (PBR) and Japanese conglomerate Mitsui & Co. Ltd. (MITSY, 8031.TO).

"There are questions about the lease (changes) that I want the inspector general to look into," Salazar said during a telephone call with reporters. He added that if the investigation finds that the changes were made in a legal and appropriate manner the department will keep them, but if they weren't, the agency will "take an alternative course."

The six leases in question were issued for research purposes only and haven't been approved for commercial operation, which means the options that were offered to the companies in January aren't "operative," said agency spokesman Frank Quimby.

A Shell spokeswoman declined to comment on the Interior Department's request for a probe into the leases. But the company has asked the agency to set an oil-shale royalty rate of 5% or less, arguing that high production costs and state and federal income taxes make developing oil shale more expensive than developing conventional oil resources.

The oil-shale lease probe is separate from an investigation the Interior Department has asked the Justice Department to pursue into whether former Interior Secretary Gale Norton broke the law when she spoke to Shell about a job when she was still in office.

The Interior Department said it is now accepting applications for a second round of oil-shale leases in the three Rocky Mountain states. In February, the department shut down a second-round solicitation issued Jan. 15 by the Bush administration, citing concerns about some of the terms the previous administration had offered.

Oil shale is sedimentary rock that contains solid bitumen that releases petroleum-like liquids when the rock is heated. The world's largest known oil shale deposits are in the Green River Formation in Colorado, Utah and Wyoming, according to a report by the Rand Corp. The area holds an estimated 1.5 trillion to 1.8 trillion barrels of oil, the company said in the report, which was prepared for the U.S. Energy Department.

The Interior Department's Bureau of Land Management will review oil-shale research and development applications with an eye toward proposals that will advance knowledge about how much energy and water commercial-scale oil-shale development would require, Salazar said.

- By Cassandra Sweet, Dow Jones Newswires; 415-439-6468; cassandra.sweet@dowjones.com

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