By Anna Driver
HOUSTON (Reuters) - The Obama administration's plan to do away with billions in tax breaks for U.S. oil and natural gas companies faces a tough and expensive fight from the industry, which says the proposals would threaten energy security and raise costs for everyone.
The budget proposal, which would have to be approved by Congress, aims to repeal rules that allow oil and natural gas companies to expense some intangible drilling costs.
During last year's presidential campaign, Barack Obama had called for a windfall profits tax on energy producers, which were reaping record profits as oil and gas prices soared. But those prices have since eased, squeezing spending budgets for new energy development.
"This has to be the only government in the world that is trying to stop the production of any source of energy," Larry Nichols, chief executive officer of Devon Energy Corp (DVN.N: Quote, Profile, Research, Stock Buzz), told the Reuters Global Energy Summit.
Recent developments in drilling technology have given exploration and production companies the tools needed to tap vast reserves on natural gas locked up in shale formations. Experts estimate those supplies are enough to meet the U.S. demand for 100 years.
And energy companies argue Obama's tax plans would rob them of the cash they need to produce a plentiful domestic source of clean-burning energy.
"If the Administration's budget were to pass as it is presented, it would take 25 percent to 33 percent of the cash that oil and gas companies have for drilling for natural gas," Nichols said.
In particular, intangible drilling costs -- which include labor, drilling contractors, geologists' services and fuel -- make up 75 percent of the cost of drilling a shale well, the companies say.
U.S. natural gas producers are spending heavily to get their message heard in Washington. About 30 companies have banded together to form a lobbying arm called the American Natural Gas Alliance.
Putting their money where there mouths are, the companies have committed $100 million to fund their lobbying arm.
COSTLY
Removing tax breaks for intangible drilling costs would slow development of new fields, which would increase costs for electricity generation and industrial production, Nichols and others said.
"You are really going to force gas prices up," Steven Farris, chief executive officer of independent oil and gas company Apache Corp (APA.N: Quote, Profile, Research, Stock Buzz), said at the summit. "You're going to have to have higher gas prices in order to run the same rate of return."
President Obama has also proposed tightening tax-code provisions that allow companies to defer paying taxes on profits they make in other countries as long as those profits are put back into foreign subsidiaries.
While that plan would take the biggest bite out of multinational corporations with vast operations abroad, it would also hurt smaller energy companies that do business with Canada. Continued...
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