Western States Look To Oil Industry For Extra Cash

Cash-strapped Western states are increasingly looking at oil companies as a potential source of new revenue.

In California, which is groaning under a $20 billion budget deficit, two bills have been introduced to impose a new extraction tax on oil production, on top of fees producers currently pay. In Washington state, legislators are considering a proposal to double taxes paid by refiners. And in Alaska, where the government greatly increased oil taxes three years ago, proposals to roll back those levies face a tough road. The oil industry has been lobbying lawmakers in all three states, arguing that higher taxes bring lower levels of investment and fewer jobs.

One of the California proposals, if made law, would establish a 12.5% extraction fee on oil production to raise an estimated $2 billion a year for the state's colleges and universities. A separate measure would establish a 10% oil extraction tax to raise an estimated $1.5 billion for education and other programs. That bill's author argues that California's oil taxes are far below other oil heavyweights such as Texas and that the state should get its fair share of compensation from the industry.

"Compared to other states, California oil companies are getting a free ride," said Assemblyman Pedro Nava, the author of the 10% tax proposal. Nava, like many California officials, also opposes expanded offshore drilling.

The energy industry counters by saying an oil-tax hike in California could lead to the loss of 10,000 jobs and a decline in production that would make the state more heavily dependent on foreign supplies, which can be volatile.

"Energy companies operate in a global arena, and we're concerned that we're making it less and less attractive to invest needed resource and infrastructure dollars in California," said Tupper Hull, a spokesman at the industry group Western States Petroleum Association.

California oil producers that would be affected include Chevron Corp. (CVX), Occidental Petroleum Corp. (OXY), Plains Exploration & Production Co. (PXP), and Aera Energy, a joint venture owned by Royal Dutch Shell PLC (RDSA, RDSB) and Exxon Mobil Corp. (XOM).

In Washington, which faces a $2.8 billion budget deficit, legislators are considering a proposal that would double the state's tax on petroleum and hazardous substances to raise $100 million a year to clean up polluted stormwater. As Washington's five refineries pay the lion's share of the tax, the increase could result in higher wholesale and retail gasoline prices.

Gas station owners and refiners including Shell, Tesoro Corp. (TSO), BP PLC (BP) and ConocoPhillips (COP) oppose the measure, saying it unfairly targets refiners and would lead to higher retail prices at a time when consumers can least afford it.

"The tax is unnecessary," said David Fisher, a spokesman for a group backed by refineries called Stop Washington Hidden Gas Taxes. Fisher said the state legislature has diverted money collected from the existing hazardous-substances tax to the state's general fund, rather than spending it on environmental projects.

"If [stormwater cleanup] is the No. 1 priority, then use the existing resources you have," he said.

As in California, environmentalists strongly support the Washington proposal, saying the oil industry should pay its fair share to clean up the environment.

At Tesoro's 120,000-barrel-a-day refinery in Anacortes, Wash., five employees were killed and two others were injured in an explosion Friday. It was unclear how the accident might affect the proposed legislation.

In Alaska, lawmakers recently shelved a bill that would cut the state's oil taxes, over concerns that the cuts could cost the state more than $1 billion in lost revenue. The bill's supporters have argued that an oil-tax hike established during former Gov. Sarah Palin's administration has led the oil industry to cut back on investment in Alaska, where oil production has declined over the years.

A similar bill by Gov. Sean Parnell that would provide tax credits to oil producers to stimulate job creation is still active, although Alaska oil producers say the measure doesn't go far enough to create incentives for investment.

Alaska's oil tax is designed to rise along with the price of oil, potentially hitting a rate as high as 80%, said Steve Rinehart, a spokesman for BP's Alaska unit.

"The way to increase production is to increase investment, and [Alaska's oil tax] discourages investment," Rinehart said.

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

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