UPDATE 2-Obama budget seeks to end oil, gas subsidies

Mon Feb 1, 2010 4:14pm EST

* White House says ending subsidies cuts CO2 emissions

* Nations agreed to phase out fossil fuel subsidies

* Obama budget boosts funding for renewable energy (Adds comments from interior secretary, industry reaction)

By Tom Doggett

WASHINGTON, Feb 1 (Reuters) - The Obama administration on Monday asked Congress for a second time to end some $36.5 billion in subsidies for oil and gas companies, saying it would help fight global warming.

In its proposed budget for the government's 2011 spending year that starts Oct. 1, the administration said eliminating the subsidies would "foster the clean energy economy of the future and reduce our reliance on fossil fuels that contribute to climate change."

The industry tax breaks that would be lost include: deductions for certain drilling costs, tax credits for low-volume oil and gas wells and a manufacturing tax deduction for oil and gas companies.

"We will not continue costly tax cuts for oil companies," President Obama said.

The changes would take effect on Jan. 1, 2011, and save $36.5 billion over 10 years, according to the budget proposal.

This is the second year the administration has sought to end the subsidies. The move has been strongly condemned by oil and gas companies, which argue that abolishing the tax breaks would reduce domestic drilling, cost jobs and increase U.S. reliance on foreign energy suppliers.

"With America still recovering from recession and one in 10 Americans out of work, now is not the time to impose new taxes on the nation's oil and natural gas industry," said Jack Gerard, president of the American Petroleum Institute.

Devon Energy Corp (DVN.N) spokesman Bill Whitsitt said repealing the tax breaks would "slow down a real revolution" in growing natural gas exploration.

"We applauded the president last week during his State of the Union address for stating his desire to increase domestic energy production," said Charles Drevna, president of the oil refiners trade group. "The additional taxes on our businesses run counter to those stated objectives, however, and will do nothing to stimulate increased investment."

U.S. Interior Secretary Ken Salazar disputed the oil and gas industry's contention that removing the subsidies will slow domestic oil and gas production.

"All you have to do is to look at record profits in the oil and gas world over last several years and, in my view, you're going to continue to see a great interest in oil and gas because it's an essential part of our economy today," Salazar said. "I think the oil and gas industry will do just fine."

The White House justified its action by pointing out that the United States and other industrialized countries agreed last year to phase out fossil fuel subsidies, which could reduce global greenhouse gas emissions by 10 percent.

It also said ending the subsidies would not have much of a financial impact on energy companies, as $36.5 billion represents about 1 percent of expected domestic oil and gas revenues over the coming decade.

While the Obama administration slammed the oil and gas industry in its budget, renewable energy got a funding boost.

Research and development for solar energy was given $302 million, up 22 percent; wind energy received $123 million, a 53 percent increase, and geothermal energy was given $55 million, up 25 percent. (Additional reporting by Ayesha Rascoe and Joshua Schneyer; Editing by Walter Bagley)