Washington (Platts)--30Mar2009

US exploration and production companies may find that the Obama
administration's proposed oil and gas taxes in the 2010 budget have a silver
lining -- higher commodity prices as domestic output is reduced, investment
bank Raymond James' energy analyst Marshall Adkins said Monday.

In fact, Adkins thinks the most controversial "tax" -- the elimination of
the favorable tax treatment of intangible drilling costs (wages, materials,
transportation) -- has only a 30% chance of making it through a budget process
that he, like others, has compared to a sausage maker.

Those costs won't be completely absorbed by operators, Adkins said, they
will just be capitalized and then recouped via depreciation, which takes
longer than the immediate deduction of the IDC.

Adkins said E&P executives have told him that repealing the IDC might
result in another 25% to 30% cut in drilling budgets.

Trade groups such as the American Petroleum Institute and the Independent
Petroleum Association of America are already lobbying intensely against any
repeal that would hit independent producers the hardest, Adkins said, and
gas-and-oil state Democrats such as Louisiana Senator Mary Landrieu could very
likely break from her party's president and side with industry.

Several of the nine other gas and oil tax provisions Adkins identified
also have less than a 50% chance of making it into the budget, he said, such
as the repeal of the 15% deduction for depletion for oil and gas wells. This
would hit companies with mature wells harder than others, stripper wells
account for about 8% of US gas production and 18% of US oil production.

Eliminating the deduction would have producers shutting in the no longer
profitable marginal wells, resulting in the loss of royalty revenue from that
production stream.

"As a result, it is likely that the Treasury would lose tax revenue with
this policy (can somebody please give these guys a calculator?)" Adkins said.

Two of the 10 proposed measures--repealing the marginal well tax credit
and repealing the enhanced oil recovery credit--stand a 90% chance of being
enacted, Adkins said, but their effect will be muted.

The Office of Management and Budget projects zero tax revenue over the
next decade from the repeal of those two provisions, presumably because OMB
predicts commodity prices will be higher than the prices that trigger the tax
breaks, Adkins said.

The most high profile new tax, the Gulf of Mexico excise tax would be a
"non-event for most Gulf of Mexico producers," Adkins said. The intent of the
tax is to eliminate the loophole written into the 1998 and 1999 Gulf leases
because bureaucratic bungling at the US Minerals Management Service left out
any price threshold language, creating royalty free leases. He gives it a 90%
chance of making it into law.

"While Congress cannot unilaterally change those contracts, it can get
rid of the loophole by imposing this excise tax," Adkins said. "Acreage
covered by the normal royalty will get a tax credit for the new excise tax,
i.e., companies will continue to pay what they are currently paying."

Overall, Adkins crunched the numbers for the possibility that all 10
provisions were enacted, a mix of new taxes and the repeal of previous tax
credits and deductions, and found that in total they would take an average of
$3.3 billion/year out of the profits of the US oil and gas industry.

Using his forecast price deck of $65/barrel and $6/Mcf for natural gas
and assuming 65 Bcf/d of gas production and 7.5 million barrels/day of crude
output, Adkins estimated total US revenues of $327 billion, meaning the new
taxes would be about 1% of anticipated revenue.

Adkins says that some producers are going to be hit harder than others.
The majors, because of their global footprint and the fact that they are
liable for fewer of these new taxes will hardly feel the pain, whereas an
aggressive growing small explorer and producer whose drilling budget is a
large portion of its revenue will be hit hard by the repeal of the IDC.

"The industry would rather not see higher oil and gas taxes," Adkins
said. "But, in the grand scheme of things, it's not a catastrophe (assuming
IDCs are left untouched)."

"Our fundamentally bullish long-term thesis on the energy complex is
based on the long-term structural imbalance between rising oil demand and
constrained oil supply. This imbalance is not something that governments can
eliminate," Adkins said.

"Governments can, and often do, make things worse through short-sighted
energy policy," Adkins said. "History would suggest that energy prices often
move higher under Democratic administrations due to supply-constraining
policies such as those proposed in Obama's fiscal year 2010 budget."