Big Oil Could See Leaner Times if Democrats Take US House

WASHINGTON, Nov 6, 2006 (Dow Jones Newswires)

The oil and gas industry is preparing to tighten the belt for the next couple of years with Democrats threatening to take control of the U.S. House of Representatives this week.

Given the party's rhetoric tapping Big Oil to fund a raft of alternative energy sources, the wealth of political capital they hope to gain for taking aim at an industry that's seen a doubling and tripling of profits on high oil prices and previously-floated Democrat plans to squeeze more taxes from the industry, some believe leaner years are ahead.

Nancy Pelosi, D-CA - likely head of the new majority in the House should the Democrats win as political punters are widely forecasting - hopes to repeal what she calculates as nearly $33 billion in tax breaks and subsidies.

Pelosi spokesman Drew Hammill said the Democrats propose to repeal $4 billion in tax breaks and subsidies from the Energy Policy Act, repeal royalty relief, "saving tax payers $20 billion over the next 25 years," and "repeal $8.6 billion in tax loopholes for energy and large oil companies."

That's not to say the industry has had an easy time under a Republican Congress. Big Oil has faced threats of a windfall tax on its blockbuster profits, with calls coming from both sides of the aisle. Oil executives have appeared several times on Capitol Hill, most notably with the heads of Exxon Mobil Corp (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), Shell Oil and BP America Inc. testifying last November to vigorously defend their business and reject accusations of price gouging in the wake of the 2005 hurricane season.

And even in the event of a Democrat House, many political analysts, such as resident fellow at the conservative American Enterprise Institute Jim Glassman, think the bigger ticket items like the windfall tax and repeal of royalty relief are likely to be vetoed by President George W. Bush.

Bob McIntyre, Director of Citizens for Tax Justice, said that may be part of the plan: "Bush has been kind to the energy industry before...The Democrats may want to invite a veto" ahead of the presidential elections in 2008.

Smaller items, such as extensions on existing renewable energy and alternative energy source tax credits and a repeal of foreign tax credits, could make it through.

"If we see a flip in the House, the difference would be like night and day," said a lobbyist at a large environmental agency. "You would see a revival in the House for renewable energy," particularly as many of the credits are expiring next year, he said.

Energy Efficiency To Get More Play

The American Wind Association is pushing for extension of its tax credits for five to ten years, and the solar energy industry wants an eight-year extension, arguing that the previous two-year extensions have been causing boom-and-bust cycles. Also, environmental groups would likely push for more generous credits to improve energy efficiency.

National bi-partisan rhetoric in support of weaning the U.S. off energy imports from politically unstable areas may help to give the Democrats political momentum to create such extensions and new credits.

But some in the oil and gas industry are concerned about how the credits will be funded. Near the end of the last session, Senator Ron Wyden, D-OR, and Republican Bob Bennett introduced a proposal for a new credit to encourage growth of a hybrid car industry. Estimating that it would cost $7 billion over the next five years, Wyden said funding could come from a current tax break oil and gas companies get for drilling costs.

Also, Hazen Marshal a partner with the Nickles Group which lobbies Congress for some of the largest private oil companies in the world, thinks a Democrat-controlled House would go after two other "low hanging fruit" that the Senate passed in the last year, but died in conference.

He said the Democrats would deny oil and gas companies claims for foreign tax credits and change the way the companies account for their inventories, a charge that would hit the industry with a one-time cost of an estimated $4.3 billion.

On the foreign tax credit front, the cost was originally estimated at around $776 million a year, but industry sources said "based on discussion on some of the affected companies, that's pretty low, and they think it would have been much more painful that that," especially given the significant rise in oil prices in the past several years.

On both of those issues, though Marshall thinks the Republicans would oppose them, the strength of their resistance would depend on the sort of legislation the proposals were tied to. "Most likely they'll be very small parts of a much bigger bill, depending on what they're coupled with or how they're matched up with other things," he said. "I don't think they rise to the level that they would veto it."

Deep Offshore Drilling Could Be Hit

Guy Caruso, head of the U.S. Energy Information Administration, said a rollback of tax breaks for the oil and gas industry would likely hit deep offshore drilling first, as they're often the most expensive projects to develop per barrel of production.

Tax break roll outs, he said, "would make some projects less viable...and there are some projects that I'm sure would drop off the table." Drilling in deepwater - such as the Gulf of Mexico, where companies say some of the country's last best conventional oil resources lie - "have benefited from the tax incentives," he said.

Beyond the tax issue, Marshall said the oil industry is also worried that the Democrats might reverse some of the progress the industry had made on opening up access to new exploration acreage as well as much stronger environmental legislation. "Climate change policy is something that would be a big priority for them as well as the Endangered Species Act," he said.

And although Glassman believes any tax increases would face a veto, he's more worried about the extension of almost $500 billion in current personal income rates, state taxes, dividends and capital gains tax breaks that expire 2010.

"The problem is what is on Congress' plate is avoiding tax increases which are automatic by extending the cuts, and the chances of that happening with (Charlie) Rangel, D-NY, or Pelosi are quite low," says Glassman.

Glassman reckons that the 2010 tax break expiry will have a two-pronged effect. "The result will be tremendous uncertainty only two years before the expiration of the cuts, leading to instability in the capital markets," he said.

Secondly, he believes it may create a "grand compromise" between the Republicans and the Democrats. The Democrats may be willing to extend many of the tax breaks for a move towards taxes based on consumption.

"I guarantee you if there's talk about that, you'd hear about a tax on gasoline or carbon (dioxide emissions)," Glassman said. He adds, however, that any action next year on such a compromise is unlikely, though he predicts discussions will begin.

Copyright (c) 2006 Dow Jones & Company, Inc.