The Obama administration’s proposed $30 billion tax hike on producers, coming at a time of falling prices and rising capital costs, could spell disaster for the natural gas market and impede the transition to renewable fuels, said energy analysts at Wachovia Capital Markets LLC.

“While the political motivation — go after them that’s got it — is clear, this broad-brush approach [to levying taxes] could spell disaster for the domestic natural gas sector,” said Wachovia analysts Samuel Brothwell and Jonathan Lefebvre Monday in an “equity research” report. “Despite the current economic challenges, we’ve remained positive on gas given its unique ability to solve a myriad of energy, economic and environmental challenges. [But] that thesis will be completely undermined if Washington goes hunting with a bazooka.”

The Obama budget for fiscal year 2010, which was released last Thursday, proposes to levy a new 13% excise tax on Gulf of Mexico production, impose a “drill-it-or-lose-it” rule as well as a per-acre fee on nonproducing offshore leases, and eliminate tax deductions for percentage depletion and intangible drilling costs (IDC) (see Daily GPI, Feb. 27). “That last one could do some serious damage and actually undermine both energy independence and the renewable transition,” said the Wachovia analysts.

“Natural gas is bridging the transition to renewables and the more intelligent and efficient use of energy while making positive contributions to cutting emissions of everything from sulfur to carbon…We believe losing the IDC deduction could kill the nascent reemergence of natural gas at a time that the country needs it most, costing American jobs, energy security and state and federal tax revenues as well.”

The proposed repeal of the IDC deduction — on top of sharply lower gas prices and higher capital costs — “could significantly accelerate the decline in drilling activity currently being experienced,” the analysts noted. It “could potentially deal a knockout blow for some producers at a crucial time.”

Independent producers, who produce most of the domestic natural gas, would suffer the most. “A body blow to the smaller guys would have some serious unintended consequences, including forced reliance on the major and foreign oil companies for imported liquefied natural gas, a shift in power generation economics to favor coal, and sharp increases in utility bills — three outcomes that we seriously doubt the administration wants to see.”

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