Oil Companies Don’t Dig Tax

0
Oil Companies Don’t Dig Tax
Hal Washburn

For years, Hal Washburn’s oil company drilled exclusively in California. But in recent years, as it’s become more expensive to do that here, BreitBurn Energy Partners LP of Los Angeles has focused more on Michigan, West Texas and Wyoming.

And if a 9.9 percent oil extraction tax passes the state Legislature, Washburn said that trend will only speed up.

“It would have significant impact on our capital spending plans,” said Washburn, BreitBurn’s chief executive. “We wouldn’t spend as much capital in California.”

The oil extraction tax bill, SB 241 by Sen. Noreen Evans, D-Santa Rosa, is the latest attempt by environmental groups and allied interests to tax oil and natural gas pumped out of the ground in California. It would generate an estimated $2 billion annually, with 93 percent of the money going to higher education and 7 percent going to the state parks system.

Past attempts to introduce an extraction tax failed. But today, Democrats have a stronger hand on the controls of the Legislature. And the state has vast oil reserves ready to be tapped for the first time.

Proponents, including education interests, say California is the only major oil-producing state without an extraction tax and that the education system needs the money.

“California is the largest – and only – oil-producing state in the nation that does not tax its vast oil resources,” Evans said in a press release. “We can and should, use (the revenue) to endow our core services of government by fulfilling our commitment to higher education.”

Tax burden

But opponents say oil companies already pay enough taxes, especially since several local cities already have extraction taxes. They say a state extraction tax would put California at the top of the heap nationally for oil taxes, forcing companies to cut back operations in the state.

“It’s already a fairly expensive state to do business here with other taxes,” said Rock Zierman, chief executive of the California Independent Petroleum Association in Sacramento. “As you’re evaluating where to invest your money, this extraction tax makes California an even less attractive place compared with Texas or North Dakota.”

Smaller companies might also decide to close down wells in California.

One such local company is Signal Hill Petroleum Inc. Most of the company’s wells are in the Signal Hill area near Long Beach. Chief Operating Officer David Slater said the tax would hit particularly hard, since it comes off the top line, before accounting for expenses.

“This is in effect a 10 percent gross receipts tax, which is equivalent to a 20 percent or 30 percent income tax,” Slater said. “No other industry is being penalized with a 10 percent tax like this.”

Slater said his company has added roughly 30 employees over the last six or seven years to bring the total to 105. That expansion would stop if the extraction tax were to pass.

“Some wells would likely have to be turned off,” he said.

In nearby Torrance, executives at family-run Drilling and Production Co. said they’ll look at shutting down wells for part of the year. Almost all its operations are in oil-rich Kern County.

“We can’t pick up production and move it easily to another state, so a higher tax here would mean some wells would be unprofitable for some months out of the year and would have to shut down production,” said President Chris Hall. “We also would have less money left over to reinvest in looking for additional reserves.”

In 2006, Hollywood film producer Stephen Bing spent $50 million in an attempt to pass a 6.6 percent oil extraction tax. Oil companies countered with $95 million of their own money and defeated the measure. Oil extraction tax proposals have since surfaced almost annually in the Legislature. A 2010 bill got the farthest along; it was killed in the last month of the session.

But this time, Democrats have more seats in the Legislature. They are very close to holding two-thirds supermajorities in both houses that are needed to unilaterally enact tax increases.

However, even a supermajority of Democrats wouldn’t guarantee passage. Several moderate Democrats from the oil-rich Central Valley have voted against extraction taxes in the past.

But with hydraulic fracturing and other new technologies, vast oil reserves in the Monterey Shale formation under the San Joaquin Valley are now within reach, making the tax more tempting.

Buoyed by these new discoveries and higher prices, oil production in California reversed a nearly two-decade decline last year and rose about 0.5 percent to 195 million barrels.

According to Tim Kustic, oil and gas supervisor at the state’s Department of Oil, Gas and Geothermal Resources, the number of wells drilled in the state rose 30 percent last year, which would likely lead to more substantial production increases over the next few years.


Excessive taxation?

But state oil industry leaders say the extraction tax could limit some of this new production.

“We should be looking for ways to encourage energy production in California and not discourage it by raising taxes,” said Tupper Hull, spokesman for the Western States Petroleum Association, which represents major oil producers, including Westwood-based Occidental Petroleum Corp.

Industry leaders say oil companies already pay property taxes on the current market value of oil estimated to be in the ground. The base property tax is 1 percent, plus parcel and other tax add-ons specific to a particular county.

Also, several cities in Los Angeles County have their own oil extraction taxes, including a 40-cent-a-barrel tax in Long Beach and a 60-cent-a-barrel tax in Signal Hill. Those taxes each amount to about 0.5 percent of the value of oil extracted at last week’s price of $93 a barrel.

When all those taxes are added to sales tax and corporate income tax, state oil industry leaders say their current total tax rates fall into the middle of the pack of other oil-producing states. A statewide extraction tax would push their total rate well above any other state.

“This (would put) the taxation of California oil companies off the chart,” said Slater at Signal Hill Petroleum.

Tax proponents disagree. They say that because California lacks an extraction tax and property taxes are kept low due to Proposition 13, the tax burden on oil companies is significantly lower than in other states.

Teala Schaff, spokeswoman for Sen. Evans, said that studies of extraction taxes in other states have shown that over time, the impact of those taxes is lessened as the overall price of oil goes up.

“At nearly $100 barrel, ‘digging deeper’ is either worth it or it’s not,” Schaff said. “This hypothetical scenario of shutting down marginal wells and moving production elsewhere is another attempt by big oil to create unsubstantiated fears in consumers.”

Previous article Analyst Upgrades Boost Obagi Shares
Next article Stocks Down This Morning
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

No posts to display