Last week, a proposal to enact a severance tax on California oil production (remember Proposition 87?) that would fund public schools failed in the California Assembly. The initiative was spearheaded by outgoing Assembly Speaker Fabian Nuñez (D-Los Angeles), who explained the reasoning behind the initiative as such:

“While California is facing billions in cuts to schools, big oil companies are raking in record profits -- without paying for the oil they take from California. If red states like Texas, Colorado, and Montana tax oil production to fund the services they value, then so should we.”

AB 9xxx would set a 6 percent severance tax on oil extracted in California. The revenue would be used to mitigate teacher layoffs from the Governor's proposed cuts. AB 9xxx also responds to overall petroleum industry profiteering by placing a 2 percent windfall profits tax on oil companies.

The bill would generate $1.2 billion in yearly revenue for the state, making sure California gets its fair share from record oil company profits. Oil production is one of the most profitable industries in the world, and all 21 other oil producing states in America already levy a severance oil tax at rates ranging from 2 percent to 15 percent on oil producers. Most of those states spend more per pupil on education than California.

After reading Nuñez's press release, you'd probably come away with the impression that oil companies are just sucking all of the oil out of our state without paying a dime to the State Treasurer. While, yes, it's true that California does not impose a severance tax on oil extracted from reservoirs located in the state, the oil companies still pay a corporate income tax on profits earned within the state, as well as various regulatory fees, all of which add up to a much higher overall tax rate for California oil companies when compared to those operating in Texas, Colorado, and other states. Still, it's much easier for Nuñez and his cohorts to ignore this fact and instead stage an outlandish press conference outside an elementary school, claiming that oil companies aren't paying their fair share of taxes.

"Oil companies in this state aren't conducting bake sales so they can get by," said Assemblyman Paul Krekorian (D-Burbank). "Our schools are."

Dude, do you have any idea how many cupcakes Chevron would have to sell at a bake sale to pay those daily $300,000 rental fees for an offshore rig? That's just crazy!

In international news, Russia and Ukraine finally ended their standoff over natural gas supplies, eliminating the middlemen RosUkrEnergo and UkrGasEnergo, while granting Gazprom direct access to Ukrainian industrial customers. Starting in 2009, Gazprom will now pay "European prices" for gas from Kazakhstan, Uzbekistan and Turkmenistan, which the company resells in order to meet its supply commitments to its European customers:

Although it could result in lower revenues for Gazprom, experts say Russia has effectively bought control of Central Asian exports.

"Russia will maintain its control on gas supplies even though its profit will go down," says Sergey Smirnov, energy expert from the Expert Kazakhstan journal. "All other alternative routes that are on paper today become unreal."

Still, it is it is questionable that Gazprom will be able to meet its European commitments while satisfying the growing demand for gas at home:

But even as it notches up victories, the good times may not last. The company, which supplies 25 per cent of Europe's gas needs, has not had to make investments in bringing big fields onstream recently. But as production declines rapidly at its Soviet-era supergiant fields, the company may soon be unable to produce enough gas to meet demand in Europe and at home, experts fear.

Indeed, Gazprom is facing the biggest challenge in its history. Its next big sources of gas are locked on the Yamal Peninsula and off the Arctic coast in the Shtokman gas field. The first is a logistical nightmare because of high winds, bad soil, and icy conditions. The second is an enormous technical challenge: Shtokman is located more than 500km offshore and icebergs abound.

[...]

The estimates on how big the gas production deficit could be by 2015 vary from a few billion cubic metres to 100bcm. Calculating the potential deficit is complex and depends on how quickly demand rises in Europe and at home, how much gas Gazprom takes from independent producers and how quickly it completes export pipeline projects such as South Stream.

If Gazprom were to complete all its export projects including North and South Stream to Europe and a proposed pipeline to China, the deficit could reach 100bcm, says Vladimir Milov, a former deputy energy minister who is now head of the independent Institute of Energy Policy.

Related:
International trading faces an uncertain future
Flexibility to go where the price rises the highest
Pipeline politics: Search for alternative routes
Rising gas demand abroad pinching LNG shipments