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Oil drillers look to plug tax talk; extraction levy may 'devastate' L.A. industry.

Oil companies in Los Angeles and statewide are fighting a new attempt by lawmakers to levy a hefty tax on oil production.

Democrats in the Legislature have proposed a so-called "oil severance" or "oil extraction" tax of up to 12.5 percent on the price of oil that companies pump out of the ground in the state. The tax would generate up to $1.2 billion annually for the state to help it close its $19 billion budget gap.

Supporters of the extraction tax say California is one of only a few oil producing states that do not levy such a tax and that multibillion-dollar oil companies can easily absorb it.

But the industry contends the tax would push the total state levy on oil to the highest in the nation and would halt production at so called "stripper" wells, which work largely depleted fields and account for about one-sixth of state production.


Even worse, it's claimed the tax could virtually close down oil production in Los Angeles County, where some 3,400 wells are drawing the remaining oil out of fields first tapped a century ago. All in all, some 300 small oil producers and hundreds more oil-field service providers could be put out of business statewide.

"Virtually all the wells in L.A. County are marginal. Raise the cost just a little and decisions would have to be made to shut the wells down," said Hal Washburn, chief executive of downtown L.A.-based BreitBurn Energy Partners LP, the state's 11th largest oil company. "It would devastate the industry."

BreitBurn has developed proprietary technology for tapping older well fields, but Wash burn said that many such wells owned by his and other small companies are expensive to operate and are low margin. A tax of 10 percent or more would make them money-losers.

The tax also would hit giant oil companies such as Westwood-based Occidental Petroleum Corp. hard. Last year, Occidental announced it had discovered one of the largest untapped oil fields in the continental United States in Kern County.

Occidental declined to comment for this story, bur four years ago, the company opposed a ballot measure that would have imposed a 6 percent oil extraction tax.

Tax returns

Oil companies poured nearly $100 million into a campaign and succeeded in defeating that 2006 measure, which was largely bankrolled by Hollywood film producer Stephen Bing and would have funded green energy programs.

But the oil extraction tax idea never went away. Faced with a $20 billion budget deficit, Gov. Arnold Schwarzenegger proposed a 9.9 percent oil extraction tax in his 2009-10 budget. He backed away from it amid Republican and oil industry opposition, and did not include the tax in his 2010-11 budget now on the table.

"California enacted one of the largest tax increases in recent history last year to help close a $60 billion budget gap," said H.D. Palmer, Schwarzenegger's spokesman on budget issues. "The governor believes that new taxes would only serve to slow an economy that has just begun a fragile recovery from the worst recession since the Great Depression."

This time, it's Democrats who are pushing the tax. They contend that the $1.2 billion in annual revenue it would generate would mean less draconian cuts to education and social programs. In addition, they argue that California is the only major oil producing state without an oil severance tax.

"Oil companies do very well in California, and in these difficult budget times, oil companies should not be exempt from being a part of the solution," said Assembly Speaker John Perez (D-Los Angeles). "When policymakers are placed in the position of having to close a loophole that allows oil companies to drill in California for free, or to lay off cops, firefighters and teachers, the decision is a no-brainer."

However, the reality of the tax rate is nuanced, according to Business Journal research drawn from a study produced earlier this year by the Assembly Revenue and Taxation Committee for the state's Democratic leadership.

California, the No. 3 oil producing state in the country, currently imposes taxes that equal $3.79 on a barrel of oil when all regulatory fees and other taxes are added up, based on an average price per barrel of $72, according to the study.

By comparison, No. 1 oil producer Texas, charges a far greater total of $11.36 per barrel. With a severance tax of just 4.6 percent, that state's total tax is largely driven by far higher property taxes.

However, a new 12.5 percent oil extraction tax would change the relative fax positions of the states, making California's total levies add up to $12.79 per barrel of oil, more than Texas.

The Western States Petroleum Association, which represents major oil producing companies, disputes this study, contending that the methodology is flawed and that California's relative tax burden is greater.

The association's own comparison of state tax tares puts California in the middle of the pack of major oil-producing states, slightly behind Texas. But when a new extraction tax of about 10 percent is factored in, the tax rate shoots up to the highest rate in the nation and more than double that of Texas.

Job losses?

The proposed tax is part of a complicated formula tied in with the state sales tax. The extraction tax would start at $6 per barrel for the nine months beginning Oct. 1. Then, for each subsequent fiscal year beginning July 1, the tax would be set to equal the amount of revenue loss to the state from a proposed quarter-point decrease in the basic statewide sales tax rate, which now stands at 8.25 percent. That would translate into an extraction tax rate that would likely fluctuate between 10 percent and 12.5 percent.

The formula is designed to get around a two-thirds requirement needed in the Legislature to pass a new or increased tax. By tying the extraction tax to a reduction in the sales tax, Democrats argue that the result is a revenue neutral package that can be passed on a simple majority vote.

Democrats also are counting on the expectation that cutting the sales tax would be popular with voters and Republican lawmakers, with oil companies a soft target after the oil spill in the Gulf of Mexico. However, Republican lawmakers have publicly stuck with their position that the extraction tax is a new tax and, as such, needs two-thirds legislative approval.

Meanwhile, the oil industry is hitting hard with its message that the tax would backfire, causing thousands of job losses.

"Embracing bad energy policy is not the way to solve a budget crisis. This is bad for jobs, bad for communities and bad for energy security," said Kathy Reheis-Boyd, chief executive of the Western States Petroleum Association, which represents major oil producers such as San Ramon-based Chevron Corp.

It's difficult to get precise figures on what the effect might be on the 52,144 wells that according to the state Division of Oil, Gas and Geothermal Resources were active as of the end of 2008, the latest data available.

Bur according to the California Independent Petroleum Association, which represents small producers, one-sixth of all production in the state is derived from stripper wells producing 10 barrels or less per day. In addition, the vast majority of the state's nearly 400 oil producers are small companies that either specialize in or operate many stripper wells. Since many of the businesses have profit margins of less than 10 percent, a tax of 10 percent or more would obliterate them.

"A number of our members have come to use and said we would have to shut down X number of wells," said Rock Zierman, executive director of the petroleum association.

The industry also contends big companies would shut down inefficient wells and there would be a ripple effect extending to companies that service oil wells and fields. There are an estimated 800 such companies, or about two for every producer.

"The brunt of this tax will be felt by the small oil service companies that have jobs in the field," said James Thomas, environmental compliance manager in the Bakersfield office of Nabors Industries Ltd., a Bermuda company that maintains and builds oil rigs, and which has done work for Occidental and BreitBurn. "Many small oil service companies in the Los Angeles basin would be impacted by this tax."

Despite the issues raised by the oil industry, extraction tax supporters say the concerns are overblown. They contend that the primary cause of whether to operate or close a well is driven by world oil prices and not local levies.

"We have structured the oil severance tax in such a way as to avoid causing workers to lose their jobs," Assembly Speaker Perez said. "Since oil is a global product, the demand for oil will remain unchanged regardless of what California does, so there will be virtually no impact on the way oil companies operate--or the profits they generate."

By HOWARD FINE Staff Reporter
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Title Annotation:ENERGY
Author:Fine, Howard
Publication:Los Angeles Business Journal
Date:Aug 23, 2010
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