ANALYSIS-Fears grow for US natural gas in Obama tax squeeze
03 March, 2009
Reuters News
* Independents fear loss of drilling cost deduction
* Big Oil won't feel tax changes as much as smaller rivals
* Analysts say beware unintended impact on natural gas
By Braden Reddall and Joshua Schneyer
SAN FRANCISCO/NEW YORK, March 3 (Reuters) - Oil and gas executives and experts fear that President Barack Obama's push for renewables could shrink U.S. output and drive drillers away from vast reserves of relatively clean-burning natural gas.
Obama's budget proposal would remove tax breaks for oil and gas production and institute new fees in the Gulf of Mexico, moves that could unintentionally hurt the mid-sized companies focused heavily on the United States and push the largest companies to shift their investments to other countries.
Of particular concern is the loss of intangible drilling cost (IDC) tax deductions, which independent energy company Devon Energy Corp , a leading U.S. natural gas producer, said represents a quarter of its exploration budget.
"The elimination of the ability to expense drilling costs is just huge," said Bill Whitsitt, vice president for public affairs at Devon, one of the top U.S. independents along with Apache Corp , XTO Energy and Anadarko .
The kinds of companies that will be hurt most by Obama. Bigger companies do most of their business overseas where US policies don't matter.
Obama has the political wind at his back in targeting energy companies, even though that was the wrong policy at this time, according to Bill O'Grady, chief markets strategist at Confluence Investment Management in St Louis.
"If you're going to stick it to someone, the only guys more hated than the oil industry these days are bankers," O'Grady said. "These (budget measures) would have hardly been noticed with oil at $150 a barrel, but doing them now is not helpful."
Public ire at energy producers has not abated after last year's jump to record U.S. retail gasoline prices, but analysts said tax policy inspired by Big Oil's eye-popping 2008 profits would be out of date as energy prices have plummeted since July and companies are slashing spending on projects in response.
"With Exxon Mobil and Chevron reporting 2008 profits that exceeded the gross domestic product of many nations, public sentiment at the moment probably resembles that of a plundering mob," Wachovia analysts wrote on Monday.
"So we're not surprised that the oil and gas industry is being targeted to foot some of the bill."
But Wachovia's analysts said yanking IDC deductions could "kill the nascent re-emergence of natural gas at a time that the country needs it most" since most gas is produced by independents, not the majors.
This year, because of weak energy prices, Devon might spend only half the $7 billion it spent last year on drilling and field development.
U.S. natural gas production rose about 6 percent in 2008 as high prices prompted producers to ramp up output from fields that were once too difficult or expensive to tap. Prices have since collapsed about 70 percent from July due to that glut of production, coupled with shrinking industrial demand.
IDC reform could not only lead to more natural gas imports, but also drive utilities to rely on even more power generated by coal -- another abundant, if far dirtier, U.S. resource.
REAL IMPACT
Drillers have worried about losing IDC deductions for some time. Devon President John Richels told an industry conference in San Francisco in October, before Obama's election, that its elimination would cost it $750 million in the first year.
This would have a real impact on a company like Devon, which made a 2008 loss of more than $2 billion after a $7.1 billion charge to write down the value of oil and gas assets.
"We view these as business expenses and that's how it's been (treated) in the tax code since 1913," Whitsitt said.
IDCs are "anything but intangible," including labor, drilling contractors and fuel, and making up a quarter of its exploration and development budget, he said.
Edward Jones analyst Brian Youngberg fears that the tax measures will push investment abroad at a time when energy independence is a goal and more U.S. jobs are needed -- a concern echoed by Mark Kibbe, a tax expert at the American Petroleum Institute.
"Just intuitively, if you increase the cost of doing something here in the United States, at some point it's going to make foreign projects look more attractive," Kibbe said.
He worried about missing out on vast potential gas reserves in U.S. shale formations -- which are more expensive to drill and complete because they require cutting-edge technology to develop -- as well as ultra-deepwater Gulf of Mexico areas.
NO OFFSHORE ESCAPE
Obama's plan, which Congress must approve, would levy excise tax on flows from the Gulf of Mexico, the source of 23 percent of U.S. crude oil and 11 percent of U.S. natural gas production. The U.S. tax policy for the Gulf has long been seen as one of the most attractive on the globe.
Tina Vital, oil and gas analyst at S&P equity research, said the measure, which could raise $5.3 billion for government coffers from 2011 to 2019, would have a minimal impact on the majors such as Exxon, ConocoPhillips and Chevron.
But that picture would be far different for mid-sized players such as Hess Corp , Marathon Oil Corp , Murphy Oil Corp and Occidental Petroleum Corp .
The budget proposal would also place a $4-per-acre annual fee on Gulf of Mexico leases designated as non-producing. "Just because some of the acreage isn't being used yet doesn't mean the areas aren't of interest for development," Vital said.
Obama's plan envisions a tenth of U.S. electricity coming from clean energy sources by 2012, but industry players are clearly still largely concerned with the other 90 percent.
Asked about the budget, Hans Helmerich, chief executive of U.S. land-rig contractor Helmerich & Payne Inc , would only say: "I hope that natural gas becomes, in their policy thinking, a go-to fuel, because it has tremendous advantages."
Confluence's O'Grady said Obama's taxes on producers would only end up being paid by consumers anyway. "He should consider a tax on carbon output," he added. "Unfortunately, what's economically efficient is politically suicidal." (Reporting by Braden Reddall in San Francisco, Joshua Schneyer in New York and Ayesha Rascoe in Washington; Editing by Gary Hill) |
