Obama Budget Proposal Could Squeeze Small Energy Producers

HOUSTON (Dow Jones Newswires), Mar. 16, 2009

A U.S. budget proposal repealing long-standing tax breaks for oil and natural-gas companies is troubling small producers who fear that key investment sources may dry up.

In late February, the Obama administration proposed a new 2010 budget that would eliminate tax breaks on intangible drilling costs such as fuel, labor and repair costs, which help attract capital to high-risk oil and gas drilling. Removing these incentives would bring the U.S. Treasury at least $31.5 billion in extra revenue, but could thin the ranks of small, independent energy producers and stymie drilling activity.

"I think the administration was tying to aim their shot at Big Oil but what they did was hit independents right between the eyes," said Mike Terry, president of the Oklahoma Independent Petroleum Association, adding that the proposal could force some small independents out of business.

The OIPA membership is made up of mostly small oil and gas companies but includes larger independents such as Chesapeake Energy Corp. and Devon Energy Corp.

Firms like these,which account for most of the oil and gas output in the U.S., are already pinched by tight credit markets and low commodity prices. Natural gas prices have fallen to their lowest in more than six years, with the front-month contract on the New York Mercantile Exchange falling more than 70% since peaking in July at $13.694 a million British thermal units. The price of oil has dropped about 68% since hitting an all-time high above $145 a barrel last summer.

Drilling activity has plunged in response to lower prices. The number of rigs exploring for oil and natural gas in the U.S. has declined by 45% since peaking in September at 2,031 rigs.

Erasing tax breaks could make an eventual return to oil and gas fields more difficult, perhaps threatening a spike in energy prices when the economy comes back, saidDave Pursell, an energy analyst with Houston-based Tudor, Pickering, Holt & Co. Securities.

"If the economics of a well are impacted by a regulatory tax change, higher commodity prices are needed to offset that change," Pursell said.

Pinched Producers

Independent energy companies explore for and produce oil and gas, but don't own refining or retail operations. These firms, often small, drill 90% of U.S. oil and gas wells, and account for nearly two-thirds of domestic oil and 82% of domestic natural-gas supplies.

Small privately held independents can't access credit as easily as larger, publicly traded companies and often rely on each other or individual investors to finance the cost of multi-million-dollar wells. For these firms, new taxes would compound the problem of low energy prices.

Bob Sullivan, owner of the Tulsa, Okla.-based independent oil and gas producer Sullivan and Co., said the company drilled 36 wells last year and has no plans to drill in 2009 because of the decline in commodity prices.

Still, Sullivan, a former secretary of energy for Oklahoma, made a recent trip to Washington, D.C., to meet with democratic lawmakers and to protest the budget proposal.

"In order to ramp up production, we need to take the risk," Sullivan said, adding that if the budget proposal passes the energy industry will not be as aggressive in finding new reserves.

Jeffrey McDougall, owner of Oklahoma City-based JMA Energy Co., said his company has cut drilling because of lower commodity prices but the proposed change could reduce his company's output.

"It is a survival decision to slow down. It is an economic decision to start back up," he said.

Bigger independents also see the tax-break repeal as a major problem.

Devon, the nation's largest U.S. independent oil and gas producer, said repealing the tax breaks would utlimately lead to less supply across the energy industry.

"A consequence of reduced drilling is lower production," Chip Minty, a Devon spokesman, said.  

Copyright (c) 2009 Dow Jones & Company, Inc.


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Daniel W Gilbert | Mar. 22, 2009
Hello Everyone, all of you have very good opinions, I am a DD in southeastern Oklahoma and have been seeing the affects for the year. What we need to do is stand up to the government, as we the people, like it says in the constitution. People, we are the backbone of this country, it is time we stand up for what is ours.

Fred Schneider | Mar. 20, 2009
Mr Obama has shown over and over that he doesn't understand economics, and certainly congress doesn't. This will be a failed attempt to increase revenue to the govt when the result will be falling govt revenue and ultimately increased energy prices. Our country is in big trouble !!

TJ Eulberg | Mar. 20, 2009
First of all, thanks for the article! It's very important that we all keep informed of these issues because they affect EVERY American not just those of us who make our living in this industry!

I wish to say that any time our taxes are increased, it is another shot to the basic ideals that formed this great country. Especially when the affects are so damaging to our presently fragile economy. After all, isn't freedom from unfair taxes what our founding fathers fought and died for?

TJ Eulberg

Art Vandeley | Mar. 17, 2009
Maybe if we make oil field equipment a little more esthetically pleasing, chairman obama will put us on his photo op circuit and thus ease up on our industry a bit...

Foreign oil is here to stay, period. This administration is obviously clueless on how to fix the economy. Can anyone really be surprised this administration is hammering nails into the US oil and gas coffin?

Shane Sessions | Mar. 17, 2009
The one industry that pays its taxes & helps fuel the country is the one industry that Obama is going to tax out of business. Poor decision on Presidents part.

Larry | Mar. 17, 2009
Seems to me that Obama has many other severe crisis to worry about before he tries to destroy what little there is of Domestic Exploration/Production that exists, and continues to force the American People to fund our enemies by spending $700B+ to fund their pleasures!!

Herman | Mar. 17, 2009
Please leave the oil and gas industry alone and pay more attention to other things like the screwed up Economy. I keep wondering why would you bite the hand that feeds you, when you want things to get better economically. The oil and gas industry did not cause the economy to be screwed up; the Demon-crates did it with all the foolish bills and earmarks. Don't put the country in turmoil because you can't handle your business right. It started to get really bad when they took over the legislation; so you need to look in the mirror to see who is at fault. It was not the oil and gas industry cause we want to help. Oh for sure we did not ask for a "BAILOUT". DRILL, DRILL, DRILL is the best plan for your green project plan to work. Not Taxes, you will loose that way. The United States will suffer because of this plan to tax oil and gas more, then we will pay more at the pump and in other oil and gas areas.

James Butler | Mar. 17, 2009
I agree with Jason, this administration is about as far off target as they can get. I worked for a service company here in Oklahoma until last month when I was laid off. I was a MWD for five years, and was told by the company that they had no work or prospects until the independents could secure financing to drill. If our new leadership pulled the tax incentive plug, we can say goodbye to US drilling and hello to foreign supply at a higher price. This is truly a sad mess we are in...

Skyler | Mar. 16, 2009
Maybe we should all inquire for jobs overseas, being that's where all the work is going to be. I do believe OBAMA will soon be taking control of Banking, which will give him the authority to make the calls on what happens in the industry. I do believe we are ALL IN FOR SOME SERIOUS CHANGE!!

Jason Kilchrist | Mar. 16, 2009
I think the current administration in Washington has no clue as to what they're doing. This proposal will definitely hurt far more than it will ever help, and the smaller independents aren't the only ones that will suffer as a result of this ridiculous decision.

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