WASHINGTON - The Bush administration gave energy companies steep discounts in the royalties they will be required to pay as it established the groundwork Monday for commercial oil shale development on federal land.

Interior Department officials said the 5 percent royalty rate during the first five years of production was needed to spur drilling while still giving taxpayers a fair return. But that rate is much lower than the 12.5 percent to 18.8 percent the government collects from companies harvesting conventional oil and gas on public lands.

"In the short run, the American economy will continue to rely on oil and that means we need to increase supplies particularly here at home," said Stephen Allred, Assistant Secretary of Land and Minerals Management, during a call with reporters. "Public lands have a significant role to play."

The announcement by the Interior Department comes months after Congress �?pressured by the White House and Republicans to increase domestic energy �?failed to renew a ban on issuing final oil shale regulations.

In September, the Bush administration opened up approximately 1.9 million acres of federal property in Wyoming, Colorado and Utah to potential oil shale development.

Lawmakers from those Western states, which will receive half of the royalties collected, have said it is too early to issue final rules on oil shale development since so little is known about its impacts on the environment and water resources.

"These regulations are premature and flawed," said Sen. Ken Salazar, D-Colo., in a statement. "The Bush administration is rushing ahead with rules for a development process that they know little about,"

But Allred said 'rules of the road' were needed now so companies could plan investments. Leasing would not occur, he said, without further environmental review.

Up to 800 billion barrels of oil �?enough to displace oil imports for 100 years, according to the Interior Department �?is locked within fine-grained rock known as oil shale. The bulk of the resources are within a 16,000-square-mile area known as the Green River formation in Colorado, Utah and Wyoming.

Energy companies are looking into various ways of extracting the oil economically. Unlike traditional sources of oil, oil shale is costly to produce. Energy is needed to bake the rock and pump the molten oil to the surface. Shale oil can cost about $37.75 to $65.21 a barrel to produce, compared with $19.50 per barrel for conventional crude, according to Interior Department figures.

A government program to subsidize oil shale development in the 1980s was shut down when cost figures came in at several times the then-market price for oil.

Who's digging where

Companies and individuals currently working on oil-shale projects

Royal Dutch Shell: Researching an "in-situ," or in-the-ground, method of heating oil shale at the Mahogany Research Project in Rio Blanco County. Shell is putting electric heaters into drill holes to gradually heat kerogen over a period of years. A freeze wall is being constructed around the heated area to sequester ground water.

EGL Resources: Plans to also use in-situ heating of the lowest layers of oil shale in northwest Colorado. They plan to use gas-powered steam boilers or electric heaters in wells that are drilled horizontally at the bottom of oil shale deposits. Groundwater would be protected by pumping it out of the ground.

Chevron: In a method developed by teaming with Los Alamos National Laboratories, Chevron proposes to drill wells and fracture oil shale by injecting carbon dioxide gas and possibly explosives. Hot carbon dioxide would circulate through the fractured shale to decompose the kerogen. Chevron's method does not anticipate any groundwater mixing with the fractured rock.

ExxonMobil: Proposes to use fracing in horizontal wells and to hold the fractures open with electrical conductors that would work like a giant toaster to heat the kerogen. ExxonMobil was turned down for a government research and development grant and will do its research at its Colony Project site near Parachute.

Oil Shale Exploration Company: Plans to reopen the shuttered White River oil shale mine near Vernal, Utah. Shale will be mined conventionally and initially sent to Canada for a heating and processing method called retorting. Crushing and cooking the oil shale above ground would later be done on site.

Red Leaf Resources: Plans to test a method called Ecoshale on its own land outside Vernal. Shale will be mined and turned into rubble before the kerogen is melted out in a surface retort powered by gas produced in that area. The mineral-laden tailings would be contained in capsules.

Raytheon and CF Technology: Working on a process to lower radio-frequency antennas into wells to heat the kerogen. Fluids would then be pumped into the ground to dissolve the petroleum. Production would happen in months rather than years. This technology would be sold to other companies.

Brent Fryer: This former Exxon engineer was turned down for a research and demonstration permit for a surface mining method that involves an above-ground processing method he calls "black box pyrolysis." Fryer, who lives in St. George, Utah, is moving ahead but won't say what that proprietary method entails.