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The Wall Street Journal: California Oil Tax

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Venture Firms Ignite Bitter Fight
With Push for California Oil Tax

By GEORGE ANDERS and REBECCA BUCKMAN
September 27, 2006; Page A1

Still smarting from California’s recent enactment of emissions caps, the oil industry is confronting another assault in the Golden State — this one bankrolled in part by Silicon Valley tycoons pushing to fund conservation and alternative-energy initiatives with a tax on oil output.

Two of the nation’s most influential constituencies are locked in an increasingly nasty battle over a ballot initiative that could squeeze an estimated $4 billion over the next decade from oil producers in California through a tax that would be as high as 6% a barrel. Energy companies already pay such levies in most other oil-producing states, but the hit in California would be especially steep, given that some 13% of the nation’s oil output is generated there.

Chevron Corp. and Aera Energy LLC, which is jointly owned by Royal Dutch Shell PLC and Exxon Mobil Corp., are California’s two largest oil producers. The California Independent Petroleum Association counts another 450 smaller companies that also extract oil or natural gas in the state.
 
Among the major backers of the campaign to pass Proposition 87 are Vinod Khosla, a wealthy venture capitalist who has contributed more than $1 million; Larry Page, a co-founder of Google Inc.; Wendy Schmidt, wife of Google Chief Executive Eric Schmidt; and John Doerr, a prominent partner at VC firm Kleiner Perkins Caufield & Byers. Voters will decide the measure’s fate in the Nov. 7 general election.

Oil companies “are ripping us off,” says Mr. Khosla, who earned much of his wealth as a Kleiner Perkins partner and now runs Khosla Ventures. “There are cheaper alternatives to oil that they don’t want us to have.”

In response, some oilmen fume that Prop 87’s supporters have invested large sums in alternative fuels and stand to benefit from any public policy that fosters their growth. This conflict of interest, rather than an altruistic concern about global warming, explains venture-capitalist support for the measure, oil companies say.

Slightly more than half the money raised by the Prop 87 tax would be earmarked to help cut gasoline and diesel use. Another 27% would be put toward alternative-energy research at California universities. The remainder would be used to help start-ups, retrain energy workers in new fields, and for administration.

Mr. Khosla has been investing in ethanol plants, while Kleiner Perkins has earmarked $100 million to alternative-energy and other “greentech” investments. Prop 87 foes also note that 9.75% of the money it raises would be steered toward alternative-energy start-ups — and they contend that Silicon Valley’s support for the measure is self-serving.

“It’s one thing if you see someone championing a cause that they believe, rightly or wrongly, will benefit a wide group of people,” says David Combs, president of Termo Co., a Long Beach, Calif., oil company. “But this is a very self-motivated bill. It’s benefiting the ethanol industry, which is already being subsidized.” Termo has contributed $60,000 to fight Prop 87.

Equally combative is Chris Van Way, president of JP Oil Co. of Lafayette, La., which does part of its business in California. Prop 87 would create a nine-member oversight board, he observes, with one seat going to a person with venture-capital expertise in alternative energy.

“It would be the ultimate conflict of interest” if venture capitalists seek state funding for their start-ups and have an active say on the board that oversees the money, Mr. Van Way asserts. His company has donated money to a “No on 87” group.

Philanthropist and environmentalist Wendy Schmidt responds that she doesn’t think there is anything wrong with venture-capital investors possibly profiting from its passage. Those who have donated money to help pass the proposition “are not the only ones that would profit from it,” says Ms. Schmidt, who has given $1 million to the cause herself. “Society broadly profits from it. The oil companies are in a position to profit from it.”

“I think that these guys investing in [alternative energy] is a way of saying, ‘I really believe in it.’ ”

Mr. Khosla, in an interview, says he wouldn’t accept the seat on the proposed California Energy Alternatives Program Authority if it were offered to him. He also says that if any energy companies he backs receive money through the initiative, he will donate his profit on those investments to charity. Mr. Khosla says he wants to focus public debate on what he believes are misleading claims by the no-on-87 camp about economic hardships the measure might cause, including higher gas prices.

More generally, Mr. Khosla, one of the founders of Silicon Valley tech giant Sun Microsystems Inc., says he became involved in the Prop 87 effort because he is worried about what he calls the global climate crisis, adding: “We need real alternatives to petroleum.”

The cost of the tax would be relatively minor for many oil companies; Chevron, San Ramon, Calif., for example, which is leading the opposition, reported $4.35 billion in profit in the second quarter. But oil companies fear Prop 87’s success could invite more government meddling that takes additional bites out of the bottom line.

Already, each side in the debate has raised more than $40 million. The largest “No on 87” backer is Chevron; Southern California movie producer Stephen Bing has committed the most to the pro-87 cause.

Mr. Page, the Google co-founder, also donated $1 million, according to financial-disclosure records. He didn’t respond, through a Google spokesman, for requests for comment. Records show Kleiner Perkins’s Mr. Doerr contributed $950,000. Mr. Doerr recently has written publicly that he believes government isn’t doing enough to combat global warming. A Kleiner Perkins spokesman declined to talk about Mr. Doerr’s contribution; Mr. Doerr was traveling and couldn’t be reached for comment.

Both sides have stepped up biting television advertising to try to sway voters. The main “no” camp, which calls itself “Californians Against Higher Taxes,” claims in ads that the initiative will create a new bureaucracy with “no requirement that [appointees] produce results.” The “yes” group, called “Californians for Clean Alternative Energy,” has on its Web site pictures of oil executives who it says are fighting the initiative and “refuse to pay their fair share” for drilling in California.

A Field Organization poll conducted in late July showed 52% of surveyed California voters in favor of Prop 87, while 31% opposed it. But political analysts say that early lead might not be sustainable.

“On most propositions, support dwindles as the election draws closer,” says John Matsusaka, president of the Initiative and Referendum Institute at the University of Southern California. “And all the opponents have to do is find one aspect of the proposition that voters won’t like — and then hammer away on that point.”

This isn’t the first time California’s electorate has considered taxing oil companies to finance alternative energy. A similar measure in 1980, Proposition 11, attracted wide interest but ultimately lost at the polls by 55%-45%.

Prop 87 would prohibit oil producers from passing along the cost of the tax to consumers at the pump. An analysis of the proposition from California’s Legislative Analyst’s office, however, says it may be difficult to enforce that provision. But the analysis also says “economic factors may also limit the extent to which the tax is passed along to consumers,” since California oil refiners could simply buy lower-priced oil from outside the state, keeping gas prices steady.

Opponents argue that the measure would choke off oil companies’ interest in developing new California fields, which could reduce property-tax revenue and lead to greater U.S. dependence on foreign oil. Mr. Khosla calls such arguments “scare-mongering.” He says the tax, which will last a maximum of 10 years, likely wouldn’t be in effect long enough to affect long-term production plans.

Mr. Khosla, who is co-chairman of the Yes on 87 campaign, says he got involved late last year after meeting several of the initiative’s early backers, including University of California Professor Daniel Kammen and Ralph Cavanaugh, an official with the Natural Resources Defense Council. He says he was struck that oil companies drilling in California don’t pay a state extraction tax, as they do elsewhere. “All of us should be really mad about that,” he says.

Mr. Khosla is an active investor in alternative-energy companies. Investments by Khosla Ventures include Mascoma Corp., a company trying to turn agricultural and forestry waste into bioethanol; Celunol Corp., another ethanol company; and GreatPoint Energy, which is commercializing a new process to turn coal into natural gas. Kleiner Perkins is another investor in GreatPoint, according to company CEO Andrew Perlman.

Write to George Anders at [email protected] and Rebecca Buckman at [email protected]

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