UPDATE 2-Obama budget cuts oil tax breaks to raise billions

* Oil tax break cuts to raise $26 bln over 10 years

* DOE 2010 budget to total $26.4 billion

* Funding for solar up 83 pct, wind up 36 pct

* Plans to fill up emergency oil reserve (Recasts lead, adds comments from Chevron, U.S. energy secretary, details of solar, wind funding)

By Tom Doggett

WASHINGTON, May 7 (Reuters) - The Obama administration on Thursday proposed cutting billions of dollars in big tax breaks for oil and natural gas companies, while boosting government spending to promote alternative energy sources.

The budget proposal, which must be approved by Congress, includes ending "unjustified tax loopholes" for oil and gas companies that would raise $26 billion over the next 10 years.

The White House rejected as "unfounded" industry claims that ending the tax breaks would take a significant toll on U.S. oil and gas production. It said oil and, to a large extent, gas are internationally traded commodities whose prices are determined on the world market.

"The oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices," the administration said in its budget.

The administration wants to repeal expensing for certain intangible drilling costs, kill the manufacturing tax deduction for oil and gas companies and repeal the deduction for a certain percentage of the depletion of oil and gas wells.

"As a result, domestic oil and gas production subsidies generally do not significantly reduce the prices that consumers pay for products such as gasoline and home heating oil, resulting primarily in higher returns to the oil industry," the White House said.

INDUSTRY WARNS OF HIGHER COSTS

John Felmy, chief economist for the American Petroleum Institute, said ending these tax breaks would hurt oil and gas companies, especially given current bad economic conditions and tight credit.

"To say it will have no impact on those companies really doesn't measure up, because clearly cash flow and credit are a really important issue right now," he said.

Felmy said "you can't make the argument that raising our costs of operations in our industry helps consumers" because removing the tax breaks will boost costs which may be passed on to consumers, and discourages investment in production.

"Certainly I think this administration or any administration has to find ways to raise taxes. The one thing I would say, though, is that the domestic oil and gas business is not the enemy," said Steve Farris, chief executive of Apache Corp (APA.N), the largest U.S. independent oil and gas producer by market capitalization.

Barry Russell, President of the Independent Petroleum Association of America, said companies "would be crippled by these new taxes" and up to 20 percent of U.S. oil and 13 percent of gas production could be wiped under Obama's proposal.

"You get less investment, declining production and more (oil) imports," Chevron Corp (CVX.N) Chief Executive David O'Reilly told reporters after giving a speech in Boston.

BUDGET SPENDING

The department's 2010 budget, which would total nearly $26.4 billion, reflects the White House's priorities for modernizing the U.S. electric grid and promoting clean energy.

The budget provides loan guarantees for renewable energy and electric transmission projects and initiatives to reduce air pollutants and greenhouse gas emissions.

Under the proposal, funding would increase 83 percent for solar energy, 36 percent for wind and 14 percent for geothermal as the budget for traditional fossil fuels like oil and gas would drop 21 percent.

U.S. Energy Secretary Steven Chu said the budget wisely cuts spending on "programs that we don't need so we can make strategic investments in our economic future."

Also included in the budget are plans to fill the U.S. Strategic Petroleum Reserve to its 727-million-barrel capacity in early 2010 and ending the government's long-time plan to create a nuclear waste dump at Yucca Mountain near Las Vegas. (Reporting by Tom Doggett; Additional reporting by Anna Driver in Houston; Scott Malone in Boston; Editing by Marguerita Choy)