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Wednesday, September 15, 2010

API / Blogger Conference Call 091310

API / Blogger Conference Call 091310

API hosted bloggers for a conference call with ExxonMobil on Monday, September 13, 2010, to discuss energy tax policies. Kenneth P. Cohen, VP public affairs for ExxonMobil, and Jaime Spellings, the VP and General Tax Counsel of ExxonMobil, API Tax Issues Manager Stephen Comstock, were present for questions.

The bloggers on the call included:
Brian Westenhaus,
New Energy and Fuel
Bruce McQuain, Questions and Observations
Gail Tverberg, The Oil Drum
Geoff Styles,
Energy Outlook
James Taylor,
The Heartland Institute
Jazz Shaw,
The Moderate Voice
Lee Doren, Right Wing News
Robert Rapier, R-Squared
Steve Kijak,
Rightside VA

The studies discussed on the call included:
API Wood-Mackenzie Report
CBO Renewable Report
Direct Link to Biofuels
CRS Report Energy Tax Policy History
Paper by Dr. Joe Mason of Louisiana State University

MODERATOR: Jane Van Ryan,
API SPEAKERS: Kenneth P. Cohen, Vice President, Public Affairs, ExxonMobil
Jaime Spellings, Vice President, Gen. Tax Counsel, ExxonMobil
Stephen Comstock, Tax Issues Manager, API
Transcript by Federal News Service Washington, D.C.

00:13 JANE VAN RYAN: Hello, everybody. It’s Jane Van Ryan here from API. I hope everybody’s having a good day. Before we get started, first of all since we have our main speakers calling in on the telephone, I want to make sure that they’re available. Ken Cohen, are you there?

00:28 KENNETH P. COHEN: I’m here.

00:29 MS. VAN RYAN: Good. Jaime Spellings, are you there?

00:30 JAIME SPELLINGS: I’m here.

00:31 MS. VAN RYAN: Terrific. It sounds like we’re about ready to go. Before we get started then, let me find out who else we have on the phone today. Bloggers, can you all tell me who we have on the phone?

00:44 JAZZ SHAW: Hey, Jane, Jazz is here.

00:45 MS. VAN RYAN: Hey, Jazz. Thank you.

00:46 GAIL TVERBERG: This is Gail.

00:47 MS. VAN RYAN: Hi, Gail. Who else do we have?

00:51 ROBERT RAPIER: Robert Rapier.

00:53 MS. VAN RYAN: Robert, glad you could join us.

00:56 JAMES TAYLOR: James Taylor.

00:59 MS. VAN RYAN: Great. Thanks, James.

01:01 STEVE KIJAK: Steve Kijak, from Rightside.

01:03 MS. VAN RYAN: Steve, I’m glad you’re able to get away to do this today. Anyone else?

01:06 BRUCE MCQUAIN: Yeah, Bruce McQuain, QandO.

01:08 MS. VAN RYAN: Hey, McQ, nice to hear your voice. Who else do we have?

01:14 GEOFF STYLES: Hello, Jane, it’s Geoff Styles.

01:16 MS. VAN RYAN: Hi, Geoff. I know we had more that said they wanted to attend. Anyone else? Someone just joined us. May I ask who that is?

01:27 BRIAN WESTENHAUS: Brian Westenhaus, Jane.

01:28 MS. VAN RYAN: Hey, Brian, nice to hear your voice.

01:31 MR. WESTENHAUS: Yours too.

01:32 MS. VAN RYAN: And who else do we – I’m sorry?

01:33 MR. WESTENHAUS: Yours too.

01:34 MS. VAN RYAN: Oh, thank you, sir. Who else do we have? All right, well, maybe some people aren’t either on the call yet or prefer not to identify themselves. So let’s move forward. First of all, let me just remind you what the rules of engagement are when we do blogger calls. When you ask a question, please give us your name first. That will help us when we put together the transcript, and as you know we record all of this. Everything is on the record.

We’ll create an audio file and a transcript and both will be posted online, we’re hoping as early as tomorrow afternoon around this time. With that, why don’t we get started and I understand that Ken Cohen and Jaime Spellings, I think you – everyone else on the call knows what their titles are. I think one of you or both of you have a brief opening statement. Is that correct?

02:27 MR. SPELLINGS: This is Jaime and I was going to say just a brief few words to get us started.

02:32 MS. VAN RYAN: Great. Please, go right ahead, Jaime.

02:34 MR. SPELLINGS: Okay. Well, I don’t need to tell this group that our industry plays an essential role in meeting America’s energy needs. Oil and gas production, refining and marketing activities support over 9 million American jobs and contribute more than $1 trillion to the U.S. economy each year. We stand ready to work with Congress and the administration on energy policy that could allow us to make an even greater contribution to our economy in the years ahead.
But having said that, I want to turn to a couple of areas that are troubling for our industry. At a time of historic economic weakness in this country, we are concerned by how the administration is unfairly portraying the oil and gas industry as the recipient of special tax subsidies. This feeds into proposals to impose punitive new taxes on one of the few industries that has been contributing to the U.S. economy rather than receiving a bailout.

Instead of supporting an industry that is an engine of growth, they’re pushing $80 billion in new taxes. Let me just give you a couple of examples of what the administration and some in Congress are calling subsidies which then feed into the proposals for new taxes. The first example involves something called Section 199 of the Internal Revenue Code, which was enacted by Congress to encourage all U.S. manufacturers and producers to invest, expand and create jobs in the United States.

The oil and natural gas industry creates high paying professional and union positions held by geologists, refinery workers, rig builders and others. The administration and some in Congress want to take away Section 199 just for oil and natural gas companies and sometimes just for the five largest oil and natural gas companies. How is that fair and defensible tax policy? Why is a refinery worker’s job less important than an auto worker’s job?

04:43 The second example involves double taxation of earnings outside the U.S. The U.S. wins when its businesses can compete and the U.S. oil and gas – sorry – can compete in the global marketplace. Currently the foreign tax credit enables all U.S. companies to operate and produce goods and services in other countries without taxing profits twice – once by the host country and once again by the home country. This allows U.S. companies to have a level playing field among foreign competitors.

The administration, however, wants to force U.S. oil and gas companies to pay a double tax on income from our foreign operations, creating a huge competitive disadvantage. These changes would shut us out of competition against foreign companies like BP, Shell and Total, not to mention Gazprom and CNOOC. It defies common sense to favor companies from Europe and elsewhere in the world since these foreign companies would continue to incur only one level of taxation in almost all cases.

A look at some large American oil and gas companies show that while almost 80 percent of our 2009 net profits are from sources outside the U.S., 50 percent of our workforce is in the U.S. Many of these jobs will be at risk if the companies were to lose market share to foreign competitors. Many don’t realize that ExxonMobil’s U.S. tax burden is already very large. Over the last five years, our U.S. tax bill was $63 billion and that exceeded our U.S. earnings by $19 billion.

The industry as a whole pays considerably more in taxes than the average manufacturing company or the average Fortune 500 company. The industry’s 2009 income tax expense averaged 48 percent, compared to 28 percent for the S&P Industrial companies.

The proposed tax increases in the budget would discourage domestic oil and natural gas production and could lead to a greater reliance on foreign imports, fewer well-paying American jobs and higher energy cost to consumers. Let me stop there and open it up for questions.

07:16 MS. VAN RYAN: Jaime, thank you very much. Let me say a couple of other things here before we get the first question. Number one, I have my Blackberry with me. If you prefer to simply submit a question by e-mail, please let me know, and number two, don’t forget that if you’re not going to speak you can put your phone on mute by hitting *6. You can unmute by hitting #6. All right, let’s get started. Who’d like to start? Don’t be bashful.

07:50 MR. RAPIER: Yeah, hi, this is Robert Rapier. I’ll start. Is your sense that the administration does not understand the implications or they just disagree with the implications you’ve laid out here?

08:05 MR. COHEN: This is Ken Cohen. I believe that at the highest level there is an understanding of the implications but that there is a view that there need to be pay-fors for many of the proposals that have – that are other key components of the administration’s policy package and when one looks around for potential sources to fill the need for pay-fors.

But there’s an answer, but the rationale for the answer is lacking. So it’s very discouraging when the facts are known – what Jaime just went through are known – and then either the facts are not stated accurately or they’re ignored.

08:57 MR. RAPIER: Okay, thank you.

09:02 MS. VAN RYAN: Other questions?

09:11 MR. MCQUAIN: Yeah, Bruce McQuain, QandO. What’s the downstream effect on all this, I mean, jobs and on all the other stuff that are going to be impacted by the taxation?

09:21 MR. COHEN: Let me give you an example of the 199. This is Ken again. In Sen. Baucus’ home state, there are four refineries. If one of the proposals, which is contained I believe it is in the Nelson amendment to the Small Business Act, that proposal which is currently pending before Sen. Baucus’ committee, of those four refineries, two would retain their deduction under Section 199 and two would not.

There are actually two that are contiguous to one another. So the refinery across the street would lose that deduction. That then puts that refinery at a competitive disadvantage and that has a very serious impact on the economics facing the owner of that particular facility. So that’s a very current and real risk. That’s just in one state.

10:35 MR. RAPIER: Yeah, hi, this is Robert Rapier again. By the way, I used to work for one of those refineries in Sen. Baucus’ home state.

10:43 MR. COHEN: Hope it was ours.

10:45 MR. RAPIER: No, actually it was ConocoPhillips but I did know the refinery manager there at the Exxon refinery as well, had friends at three of the refineries.
10:55 MR. COHEN: And that refinery would get cut – your former employer would get – they would be put at risk because they would lose that deduction.

11:03 MR. RAPIER: Okay. My question also is on the – I’m assuming that somebody is modeling the financial impact on jobs. Do you have a sense for number of jobs lost, amount of profits lost and so forth?

11:24 MR. COHEN: Yeah, hang on.

11:25 MR. SPELLINGS: Yeah, there’s actually been some work by a fellow at Louisiana State University and this is actually come out in some reports today. This fellow’s name is Joe Mason and he modeled this as 154,000 jobs in 2011, $341 billion.

We can make the link I think available afterwards. But this was a study that he just came out with called “The Regional and National Economic Impact of Repealing Section 199” and 154,000 jobs was the analysis here.

12:14 MR. RAPIER: Okay, thank you.

12:15 MR. STYLES: This is Geoff Styles from Energy Outlook. Could I just follow up on the example that Ken provided a moment ago? It seems to be a great example of just how nontransparent this whole process is.

For those of us who try to follow this but don’t have a staff of paid legislative analysts, is there any way that you guys could provide some transparency around where these provisions are contained and how they’re progressing through various committees because they don’t seem to be headline features of bills that turn up routinely in the news.

12:53 MR. COHEN: Yes, yes we certainly can do that. I will just tell you now, I can give you the bills and then we will make sure you get a link. But the small business jobs act, which is currently pending in the Senate, sponsored by Mike Johanns from Nebraska, would provide a number of assists to small businesses. It’s actually a bill that we would support.

But what was tacked onto that bill was this Nelson amendment that I’m referring to which has the effect – well, it’s not the effect. What it specifically does is it strips the Section 199 deduction completely from the five largest companies.

Those are the – so that’s the current action on that. It’s pending in the Senate. In addition though, the administration has said that they would support repeal of Section 199 for the oil and gas industry, leave it in effect for other manufacturers but take it away from the oil and gas industry.

14:19 MR. SPELLINGS: This is Jaime. Let me just give a little bit more background on that small business bill. This amendment that we’re talking about is designed to soften the requirements for businesses to send each other 1099s.

This was a provision in the health-care act that drastically increased the number of 1099s that have to be sent business to business. You have to send someone a 1099 if you pay them more than $600 in a year.

So this has generated a lot of consternation in small and large businesses but in this small business bill, there’s been bipartisan support to soften the rules for these 1099s just because it’s a ton of paperwork flying back and forth. One of the amendments to soften the 1099 requirements has pay-fors coming out of the health-care act, which is where the original provision came from.

One of them, the Nelson amendment, which is the one Ken referenced, pays for it on the back of five domestic oil and gas companies with the repeal of Section 199. It is like a couple other provisions in the code which specifically address large integrated oil and gas companies. So you have to produce more than a certain amount and you have to have refineries. The provision hits ExxonMobil, Shell, Chevron Texaco, BP and ConocoPhilips and that’s it.

Now, one thing that’s important to remember about Section 199 is that the oil and gas industry already gets relief under section 199 at a lower rate than any other manufacturing business out there. So coal mines, farmers, fishers, newspapers, film producers, video game developers all get the equivalent of a 3-percent reduction in their effective tax rate.

Oil and gas companies alone get a 2 percent reduction already and that’s one of the things that drives us up the wall is that folks claim that we get a subsidy because of Section 199 when in fact we’re already paying a higher rate of tax than other similarly situated taxpayers because of this provision.

16:58 MR. COHEN: Jaime knows that I just start bouncing off the walls. But The New York Times two weeks ago published their lead editorial supporting the removal of the 199 deduction for oil and gas companies and failed to point out that they themselves received a higher deduction under that very provision than we do. They labeled it a subsidy for oil and gas.

When someone asked me a moment ago is this something that people are – do they know the facts? Here obviously the Times for whatever reason was pushing – labeling something a subsidy that they themselves were receiving a higher deduction than we or any other manufacturer in the United States was receiving.

17:52 MR. RAPIER: They’ve probably been losing too much money to take advantage of a deduction.

17:58 MR. COHEN: (Chuckles.) Well, that could be. I guess you have to have revenue.

18:02 MR. RAPIER: What is the politics of this thing in terms of the Democrat votes? I saw where several of them are rebelling against Pelosi on the Bush tax extensions. Are any of them on our side on this?

18:25 MR. COHEN: The answer to that is yes. We’re working hard with the representatives from the oil producing areas of the country. But obviously we have a real communications challenge once we move away from areas that traditionally have a large preponderance of oil and gas activity in their states. It does tend to be a party split on the issue once you move out of the oil-producing regions.

19:04 MR. SPELLINGS: This is Jaime. I think the other thing I’d say – in our conversations with a lot of them – suffer from exactly the same thing that one of the other callers explained. It’s hard to keep track of all this. When people call these subsidies and say, well, we’re just taking away subsidies, that’s an easy vote.

So that’s why we think it’s so important to try to get out the facts about this is not a subsidy. This is treating us more harshly already than any other similarly situated production activity and just trying to make it a little – I mean, it’s a tougher vote when someone has to say, we want to raise taxes just for five companies. That’s a tougher vote than taking away subsidies.

19:42 MR. COHEN: To build on your comment, Jaime, the double taxation issue too is also labeled as a subsidy that we get when in fact it’s a commonsense, very pragmatic application to keep U.S. companies competitive with non-U.S. companies and to call that a subsidy to me is just ridiculous.

20:03 MR. SPELLINGS: Jane, this is Jaime again. That’s a very good point. What I’d say on that too, kind of bridging back to somebody asked about the precise bills that these are in, this is an issue that is broader than the small business bill. It’s broader than the challenge we face in the next three weeks.

These provisions have been in the first Obama budget for fiscal year 2010. They’ve been in the second Obama budget for fiscal year 2011. I feel confident that they will be in the third Obama budget and the way the politics of this work, they’re on a list of pay-fors and we are at risk of these things being pulled down for anything that comes down the road that needs a pay-for.

That’s why we are not going to breathe a sigh of relief if we get through the vote that happens tomorrow on the small business bill because it’s important for us to try to get the facts out on this over a much larger – sorry, much longer timescale than just the next week or two.

21: 13 MR. SHAW: Could you guys possibly speak to the direct effect of taxes like this on new exploration for natural gas because my candidate is getting ready on Wednesday to go in front of an EPA meeting out here and talk about how that will affect drilling in the Marcellus Shale and we have a lot of landowners that are waiting to see what the various different government movements are going to be regarding their viability in terms of making a profit off of this.

21:40 MR. SPELLINGS: That’s a great point and it’s one that we make too because in fact this would make natural gas taxed more harshly than coal. It would make natural gas taxed more harshly than –

21:54 MR. SHAW: Really?

21:55 MR. SPELLINGS: Yes, because coal qualifies for Section 199 and natural gas would not.

22:02 MR. COHEN: And explain that under any policy, whether it’s environmental or economic, fiscal.

22:12 MR. SPELLINGS: One of the things we may get into later in the call is that renewables get a very large amount of subsidies both in absolute terms but also in per unit of energy terms. Coal gets some subsidies. Those have come down recently with the end of the production tax credit for the synthetic fuels.

But this provision just by itself would affect the competitive balance between coal and natural gas, which is probably one of the most important competitive balances that speaks to what the carbon intensity of energy in the U.S. is going to be going forward.

22:58 MR. COHEN: I think most people on the call know that gas – natural gas when used for power generation has about a 60 percent emissions benefit versus coal.

23:11 MR. STYLES: This is Geoff Styles again. That one definitely rings my bell. Any time that I write about this issue, and I’ve written a number of times comparing the relative magnitude of these, quote, unquote, “subsidies” for different forms of energy.

But the response that I get consistently from the more environmentally oriented of my readership is that in effect reducing these tax incentives for oil and gas is a proxy for the unmonetized externalities associated with greenhouse gas emissions, health effects, et cetera, et cetera, et cetera. Do you have any comment about that?

23:51 MR. COHEN: Well, I would say that the market already does monetize the differences and we would look at just the physics involved. That is, when you look at the BTU output from various energy sources and look at the environmental footprint in terms of power generation, the comparison between coal and gas is quite dramatic.

That is, natural gas has a very potent BTU content. So it is a very good substitute for coal and of course cost is cost. It depends on what the cost per BTU for coal versus gas, but certainly in today’s market natural gas is very affordable and its environmental footprint is far favorable to coal.

24:48 MR. SPELLINGS: And you certainly don’t want to be advantaging coal versus natural gas with a 1 or 2 percent lower effective tax rate through 199. There’s no policy at all that would say that makes sense.

25:06 MR. COHEN: I think the externality issue, that’s a piece that both we are a highly regulated industry, the energy industry, and those – to call them externalities, they are factored into regulatory policy.

25:26 MR. STYLES: Well, I think the coal versus gas comparison is really an important one because the environmental folks would tend to see the renewables versus gas comparison and feel that at the moment with gas so cheap, gas is pushing out renewables. So looking at the whole spectrum I think is critical.

25:46 MR. COHEN: Yeah. Of course, when you look at the IEA or the EIA studies as well as Cambridge Energy or our own Energy Outlook or any of the serious looks at potential contributors here to power generation, the fact of the matter is you cannot generate – the locations for wind and the cost of solar do not make them adequate substitutes. They just don’t generate the BTUs.

Wind is becoming much more cost competitive but you still need backup power for wind and you also need good locations for wind power. So it’s not that we’re anti-wind. We’re all in favor of all economic sources of energy. But we need to make sure we’re looking at the facts.

26:35 MR. STYLES: Thank you.

26:37 MS. TVERBERG: This is Gail. I was thinking – I think part of the problem is just that the government has been overspending its revenue so terribly badly and of course taxes against individual payers is now very unpopular with the voters.

So then they start looking around for somebody who might have some money and there are so many that are doing so terribly poorly, like the newspapers we talked about earlier, so you can’t really get any money from them.

So it’s sort of trying to go after who they can go after. But I think also what happens is you’re not really in a position where you can pass through any of these taxes. Well, you maybe can pass through a little bit but you can’t pass them back through to the buyers as well because you’re dealing with a world market and you’re competing against coal and you’ve got various competitive pressures of different sorts that limit your ability on the pass-through mechanism.

27:38 MR. COHEN: That’s true. All of what you said is true. But in addition, if the industry is singled out as a primary pay-for, it will though – even though imperfect as it is – if our costs rise, then there will need – if we’re going to stay viable and in business, that will have to be reflected in the – if it’s in our cost structure, we’ll then have to find its way into the price structure to the extent that the market allows us to recapture and you’re further hurting the U.S. economy because the economy is built on energy use.

We’re one of those essential industries and if we’re increasing one of the base ingredients to this economic engine and we’re increasing that cost, it’s going to make the U.S. economy less competitive.

28:36 MR. ____: I must have been – we must have been an afterthought.

28:38 MR. COHEN: Hello?

28:40 MS. VAN RYAN: Is that you, McQ?

28:45 MS. VAN RYAN: Bruce, is that you? I don’t know. Ken, if there was another thought you wanted to add, please do.

28:59 MR. COHEN: We may have some technical difficulty here. I’m done talking but there’s a real echo now on the line.

29:06 MS. VAN RYAN: Let me remind everybody that if you’re not asking a question, please mute your phone, *6 to mute and #6 to unmute. I’m not hearing much of an echo here. There’s a bit of an echo, but it’s not bad here.

29:23 MR. COHEN: We are hearing an echo.

29:28 MS. VAN RYAN: Is that better now?

29:30 MR. COHEN: Yeah, that’s a lot better.

29:31 MS. VAN RYAN: All right, somebody muted their phone. Good, thank you very much, whoever that was. Does someone else have a question or Gail, did you have a follow-up?

29:40 MS. TVERBERG: Well, let’s see. I was thinking. What was it? I forget.

29:48 MS. VAN RYAN: No problem.

29:49 MR. COHEN: I’m sorry if I got you off your point.

29:50 MS. VAN RYAN: (Inaudible.)

29:51 MS. TVERBERG: Oh no, I know what I was thinking. What I would do if I were an oil company is the ones that were – if there were some sources that were high cost and I was barely making a profit to begin with and these taxes raised my costs further, those particular sources I would probably cut off. I would stop producing the ones that were closest to unprofitable to begin with. So it would probably cut back my production.

30:22 MR. SPELLINGS: Well, Gail, this is Jaime and that’s exactly that kind of calculations that all of us would make. That’s the kind of calculations that underlie the study that I referenced earlier by Joe Mason that explained that this would cost over 100,000 jobs.

30:42 MS. TVERBERG: Did he also estimate what it would do in terms of oil production or gas production?

30:50 MR. SPELLINGS: He did. It’s going to take me a second to locate that. While we’re looking for that figure though, one other point I need to make about the U.S. tax system that feeds into a couple of the comments people make is we already have the second highest corporate tax rate in the world. There’s only one country, which is Japan, which has a higher corporate tax rate than we do.

Now, the manufacturing deduction helps soften that somewhat; still doesn’t make us competitive. I mean, the U.K. is a good example. The U.K. right now, while they’re in the midst of an economic crisis that’s every bit as bad as our crisis, has responded to that by lowering their corporate tax rate by a couple more points to something like I think their corporate tax rate is going to be 24 percent by the time all the dust settles in the U.K.

So they are seeing that even in a difficult economic situation, the better policy response to encourage industrial activity is to lower the corporate tax rate, not raise the corporate tax rate. 199, if you take 199 away, it’s going in the wrong direction.

32:09 MS. VAN RYAN: We’ve got a few other people that have joined us here in the room from API. One of them is Stephen Comstock, who I think has some additional thoughts he can offer and he’s our manager for tax policy. Stephen?

32:20 STEPHEN COMSTOCK: Yes, in furtherance of some of the points that Jaime was making and also the study that you referenced, API has posted a study from Woods Mackenzie that looked at the impact of 199, the repeal of 199, as well as the repeal of intangible drilling cost deduction on production in the United States as well as investment in the United States and then we have some impacts, some job impacts as well.

We can include that and make that – we’ve issued earlier releases on that but we can also make that available to people on the call to supplement some of the points that Jaime and Ken have been making.

33:04 MR. STYLES: This is Geoff Styles again and I apologize for asking so many questions today. But along those lines, given that the ultimate problem here is not these individual tax credits or incentives, the ultimate problem, as you described, is that we have a tax rate that’s too high. Is there any thought of pushing for broader tax reform that in exchange for lower marginal tax rates would actually close some of these, for lack of a better word, loopholes?

33:36 MR. SPELLINGS: I think that’s a very good point and a lot of people are thinking exactly the same thing. I mean, if you look at the longer history of the Internal Revenue Code, going all the way back to the mid-’80s, Congress made a substantial reduction in the rate in exchange for broadening the base in 1986.

The history since 1986 has been gradual increases – or gradual decreases in the tax base which meant that our corporate tax system, while having a very high nominal rate, actually raises relatively little income – relatively little revenue as a fraction of our U.S. GDP. So we’ve got kind of the worst of all worlds. We’ve got a narrow base. We’ve got a high marginal rate. We’ve got a system that doesn’t work very well and leaves us uncompetitive against other corporate tax regimes around the world.

So a lot of other companies – we’ve had these conversations – are interested in fundamental reform of the corporate tax system; not saying that’s going to be easy. But it’s time and a lot of other companies see it the same way.

34:57 MR. STYLES: Thanks.

35:02 MS. VAN RYAN: Any other questions, perhaps from Lee who just joined us?

35:06 LEE DOREN: Thanks, Jane, for offering that. I was just here to listen so I appreciate giving me an opportunity to ask a question.

35:12 MS. VAN RYAN: Okay, great. Anyone else at this point? I know this is somewhat of a complicated issue. But having said that, it has a huge impact on the economy, on consumers, on jobs, on everyone certainly sitting here around the table here at API but I’m assuming everybody on the phone as well. I wonder if there are any other examples that perhaps the folks from ExxonMobil can cite about the inequities involved in the 199 issue or the foreign tax credit issue.

36:00 MR. SPELLINGS: Well, this is Jaime. I think the point I made already in the context of 199, I’d go ahead and extend it to the foreign tax credit. 199 is already harsher, less favorable to oil and gas companies than any other similarly situated industry. We get a 2 percentage point reduction in our effective tax rate compared to 3 for every other industry that’s covered by Section 199.

Now, the foreign tax credit is another area of the code where far from being a subsidy, oil and gas actually has a more restrictive set of rules and our foreign tax credits are less valuable and more restricted and more fenced in with different restrictions that don’t apply to any other industry.

So it’s one of the things that’s really frustrating for us in terms of trying to get the information out that we’re fine with a level playing field. We’re fine with a tax code that applies to us just like it applies to everyone else. But the impression you get from reading some of the mainstream media is oil and gas is the recipient of all these special tax breaks when in reality we’re subject to harsher rules in most of these areas than other industries.

37:24 MS. TVERBERG: This is Gail. Is there someplace that they put out what the actual taxes collected, say for oil and gas companies versus coal versus newspapers versus whatever and how they actually come out on a year-by-year basis? I’m guessing the oil and gas industry pays a disproportionate share of the dollars, partly just because they’ve been making money while some of the others have been losing money so badly.

37:54 MR. SPELLINGS: Well, this is Jaime. Stephen may be able to add to this. But let me just throw out two bits of data. I’ve already talked about the fact at the beginning that the effect for U.S. oil and gas companies was 20 points higher than the S&P industrials. That’s 48 versus 28 percent for the effective tax rate.

But according to the government’s own statistics on this, from the Energy Information Administration, if you take the five-year period, from 2004 to 2008 inclusive, 27 companies – 27 American oil and gas companies, which make up about half of U.S. oil and gas production, paid $150 billion U.S. in income taxes; so average of $30 billion a year for just those companies; if you include other non-income taxes, more than $300 billion; so for a total contribution in taxes from those companies over the five-year period of $450 billion.

39:09 MR. COMSTOCK: Yeah, this is Stephen. In relation to those numbers to other industries, we only have – we don’t have it matched up with specific industries. We just have it matched up against, say, all other major manufacturing or the S&P Industrials without a specific breakout by industry.

39:33 MS. VAN RYAN: Does that help you Gail?

39:36 MS. TVERBERG: Yeah, I think so. If I had looked at the numbers, I could see what the difference was or what percentage. I mean, if you have all of the numbers written down, then one can subtract and say, okay, all other industries together contributed so many dollars and come up with a ratio for what they got.

39: 56 MR. COMSTOCK: Yeah, I don’t think there’s sort of a total tax collected. We have kind of a number with total S&P, then S&P X oil and natural gas companies to help generate the ratios. But I guess you wouldn’t have anything broken out by any other particular industry, or we don’t have that.

40: 27 MR. RAPIER: This is Robert Rapier again. I would assume that renewable energy companies qualify for Section 199, an ethanol company like POET for instance?

40: 37 MR. COHEN: Yes, plus all of the many true subsidies that they do enjoy, but yes, they do qualify for the full 199.

40: 47 MR. RAPIER: Right. I was just thinking that what we normally call subsidies for them are the tax credits and so forth. But when the oil industry is painted as being subsidized under 199, that’s not something we generally consider a subsidy for renewable energy. I was just thinking about that.

41: 05 MR. COHEN: No, you’re right. The S word is used for us but not for others.

41: 10 MR. SPELLINGS: That’s right. Ethanol, you know we could go on for a long time about subsidies for ethanol and we have in the past. But on ethanol, what I’d really like to point you to, there’s a very good CBO study that came out in July of 2010 and the title is “Using Biofuel Tax Credits to Achieve Energy and Environmental Policy Goals.” I think if you stick that – any of those words into Google and look for something that came out in July of 2010 by the CBO, you’ll find it.

It’s a very good explanation of all the different subsidies that go into ethanol and what they achieve and then how much those subsidies cost per unit of what you’ve achieved. So for example, it takes the 45 cents per gallon credit that you get for blending ethanol into gasoline and says how much do I get in the way of reduced imports of oil and how much do I get in the form of reduced emissions of carbon dioxide?

I’m going to get these wrong. But the cost for every gallon of oil that you avoid importing was something like $1.70 and the cost for very ton of CO2 that you avoided was over $270 a ton. So when you think of an emissions trading scheme in Europe or politically acceptable price for CO2 that you’re using here of maybe $20 or $30 a ton of CO2, this is more than 10 times that kind of price. And it just shows what happens when these subsidies get a hold. Ethanol is even crazier than that because now you have mandates layered on top of subsidies.

43: 17 MR. RAPIER: I’ve written quite a bit about that actually, the redundant nature of the blenders’ credit with the mandate. But I’m curious as to your view on that. The industry often paints that as an oil industry subsidy since the oil industry or the gasoline blender receives the blender’s credit.

What is your position then on the expiration of the credit at the end of the year? You know it’s scheduled to expire. Do you object to that expiring? Would you be happy to see that expire? What’s your view?

43: 49 MR. SPELLINGS: I think we would be content for it to expire. We do not see ourselves as the beneficiary of that subsidy. We think in the marketplace today, that subsidy probably flows through to the consumer. We do not see how it’s a subsidy that benefits us or a subsidy that benefits ethanol refiners or farmers that produce the corn, although some folks continue to think that this is a subsidy that benefits either ethanol producers or corn producers. We have a hard time seeing how in a world where you have a mandate, that the subsidy ends up flowing through to those folks.

44: 39 MR. RAPIER: I agree with that.

44: 41 MR. SPELLINGS: It sounds like you’ve reached the same conclusion.

44: 43 MR. RAPIER: Yeah, I’ve been writing about that since they put the mandate in place. It’s completely redundant. So the headline here is ExxonMobil ready to give up subsidies. They will allow the blender’s credit to expire without protesting it.

44: 59 MR. COHEN: As long as it’s uniform and applies across the board and doesn’t create the distortion of only being eliminated for a few large blenders. There’s enough distortion in the market. This is Ken speaking. As long as it’s a rational, across the board, industry-wide –

45: 20 MR. SPELLINGS: And the one thing – this is Jaime. The one thing I’d want to add is I’d want to make sure the headline did not characterize this as our subsidy because in a pre-mandate world, I would have seen this as a subsidy that flowed through to corn producers or ethanol producers.

In a post-mandate world, I would say it flowed – probably flows through to consumers. But in neither one of those worlds was it a subsidy that actually benefited the oil and gas refiners who were buying the ethanol to blend into gasoline.

45: 51 MR. COHEN: The technology’s mature. The industry is well-known. It really doesn’t – it’s hard to understand the rationale.

46: 02 MR. SPELLINGS: One of my colleagues has actually pointed out that I got the number for the CO2 cost wrong on the ethanol subsidy. It wasn’t $200-and-something. It was $750 per ton of CO2 equivalent. So that’s a pretty expensive way. I mean, I think that’s even more expensive than solar energy as a way to avoid CO2 emissions.

46: 30 MR. COMSTOCK: Jaime, this is Stephen. Just to let you and I guess the people on the phone know, we’ll be happy to post the link to the study and also I know that there are questions about links to the pending bills and legislation. We’d be happy to do that and of course we can also post links to the Mason study as well as the Woods Mackenzie study for folks.

46: 54 MR. SPELLINGS: Hey, Steve, one more study I’d like you to try to post to that material, and we’ve got it too, is one that came out of the Congressional Research Service in May of 2010 (Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures.) This was at one of the senator’s request. It may have been Sen. Bingaman. I’m not sure.

47: 13 MR. COHEN: Alexander, I think.

47: 14 MR. SPELLINGS: Maybe Sander.

47: 15 MR. COHEN: Alexander.

47: 16 MR. SPELLINGS: Alexander. But it goes through the history going all the way back to the ’70s for all forms of energy tax policy subsidies.

47: 27 MR. COMSTOCK: Yeah, they do that on an updated basis I think. So that’s probably a good thing just for people to get a sense as to how energy policy and tax policy has changed over time. 47: 42 MR. COHEN: That would be – this is Ken – now that Jaime points out – that would be a good one to post in addition.

47: 49 MR. COMSTOCK: Okay.

47: 51 MS. VAN RYAN: I’ll be sure and send links to those things to everybody on the call as well.

47: 57 MS. TVERBERG: Yeah, it’s always a lot easier to use as a reference something from the Congressional Research Service than from an organization that says, you know, reduce taxes for oil companies now or something that comes across as very one-sided in its research.

48: 15 MS. VAN RYAN: Yeah, thank you, Gail. Other questions? There are a few people we haven’t heard from today. I’m going to check my Blackberry and see if I have anything that’s been sent to me that I might have missed. No, I’m not seeing anything. Anything else from anybody? 48: 40 MR. WESTENHAUS: Brian Westenhaus, Jane?

48: 42 MS. VAN RYAN: Sure, hi, Brian.

48: 44 MR. WESTENHAUS: I’m just wondering when everyone in the energy industry is going to realize that energy is first of all a political marketplace. Some people have a positive sales pitch and some have a negative sales pitch. Oil is behind the ball with the negative pitch. This tax issue is way too complex to talk to Joe Average.

49: 06 MR. COHEN: I would agree. I certainly would agree and would also welcome any assistance in terms of how to make it more readily accessible. The fact is, we’re put behind the eight ball on the issue. But we would welcome any offers of assistance in terms of how best to explain these complicated issues.

49: 30 MR. WESTENHAUS: Sorry, have to let you down on that one today.

49: 33 MR. COHEN: Yeah, they always look at me that way.

49: 37 MS. VAN RYAN: Brian, you’ve always got an opinion. I’m sure you’ve got some good thoughts you can share with ExxonMobil.

49: 42 MR. WESTENHAUS: Oh well, I admire the company. I’m impressed with the reservoir the found. They got it away and then they got it capped and the oil’s disappeared. I’m smug pleased with you all. But you’re a big target and you’re in everybody’s mind. Everybody buys gasoline. You’ve got – it seems to me I would fight back one-to-one with the customer.

I’d take a Ronald Reagan point of view and talk to the people. Talking to all of us is wonderful but there’s nothing I can say that anybody’s going to read that’s going to make any sense to the guy that pays between $100 and $300 to file his tax return. You see my point? You’re just way outside 300 million voters and taxpayers.

50: 30 MR. COHEN: Yeah.

50: 31 MR. WESTENHAUS: I just worry about job counts. I would worry about daily production from the U.S. of oil. You know, how much do we pump per day and what impact is that going to have directly? I wouldn’t even talk about the money. I wouldn’t even talk about the taxes. The Congress and the Democrats are out to get you and I would make it a point to go out and get them back.

50: 51 MR. SPELLINGS: Well, I think that’s a good point because when we’re most successful about this, we’re talking about why our refinery workers in Billings are less valuable than the refinery workers down the road who Congress wants to continue to favor or the folks in the auto plant or the newspaper or any of the other industries that continue to receive the benefits of Section 199.

51: 20 MR. WESTENHAUS: Yeah. There’s got to be some way to compare the folks in Billings, some of them which I’ve met, with the folks working at the Abu Dhabi plant. Why should they get the jobs and the guys in Billings lose theirs? Explain that. Just ask the question and leave people hanging.

That’s what gets commentary in a Web blog post is ask a question and leave them hanging. People do think about questions. I’d better shut up because I’m giving too much advice here that may not be worth nothing.

51: 52 MR. RAPIER: When Jon Tester first ran for Senate, I was living in Billings and one of his campaign workers came knocking on my door and they had been demagoging the issue. I opened the door and he said who he was and he said, can I count on your vote? I said, I work for ConocoPhillips down the road. I said, what do you think?

I cited all the things that they’d said and I said, you know you’re going to destroy jobs here. You’ve got all these refineries here and you are proposing some very harsh legislation against the oil companies. So what do you think? He said, you know, it’s not personal. It’s just politics. Those positions sell. The voters like them.

52: 34 MR. WESTENHAUS: Yeah, he’s right. That’s why I’m trying to thump you on the head and say it’s a political marketplace first. Then you get to sell gasoline for a profit, or maybe not. It seems to me in the past 15 years it’s just become a war and you all ain’t winning.

52: 52 MR. COHEN: Well, I can’t argue with you.

52: 55 MR. WESTENHAUS: I need you. I’m willing to fight with you some and as much as I’ve got something to fight with.

53: 00 MR. COHEN: Yeah, and so we’re trying to make the point that while we hopefully make a profit on this, we’re also big employers and return that money back through paychecks and dividends and all our vendors.

53: 13 MR. WESTENHAUS: Oh yeah, you think about – just take Billings. It’s a tiny refinery. All that payroll – most of all that payroll gets spent in town. The multiplier effect of the trillion dollars you mentioned earlier is quite significant. Bite the hand that feeds you doesn’t strike me as smart politics. If you point that out to people, they might realize that too.

53: 35 MR. COHEN: Well, appreciate the views and that’s in fact – Stephen and API, that’s what the industry is trying to do, show the economic contribution as a whole that the industry makes and then our own company, we try in the right settings to point out what we do in terms of employment and salaries and hiring smaller companies as contractors and what have you.

We are an economic engine in the communities where we operate and certainly given our size we’re an economic engine that helps this country. That’s the core of our message.

54: 14 MR. WESTENHAUS: Yeah, it worries me that the renewables and all that stuff is never going to catch what oil and gas can produce in raw BTUs for use.

54: 28 MS. VAN RYAN: Excellent point.

54: 30 MR. STYLES: This is Geoff Styles again. Isn’t the problem that relatively few people understand that? A perception has been created in the last couple of years particularly that in fact this is an industry that is not only mature but it’s essentially past its sell-by date, that these other things are about to arrive and push it out of the way and you throw in what happened in the Gulf this summer and it’s more grief than it’s worth. We know that’s not true but that’s a growing perception out there.

55: 01 MR. COHEN: You’re right and that’s why every year our corporate economists work on an outlook on energy, both in North America and globally and we do it from the ground up. We look at 100 different countries. We look at all of the inputs, economic inputs, population drivers, economic growth, and today oil and gas supplies about 60 percent of the world’s energy.

And if you look out over the next two decades, all experts agree it’s going to be about 60 percent of the world’s energy is supplied by oil and gas. So those are your facts. But you’re right. Getting that fact ingrained in the majority of the population is proving difficult.

55: 55 MR. SPELLINGS: Well, I think an even better kind of immediate counterexample to that idea about being past sell-by date is the amazing transformation of the natural gas fundamentals in the U.S. over the last five years through the technology of producing natural gas from shale, dramatically increased the reserves that we know we now have in the U.S. and dramatically changed the economics of that business in just five years through the application of technology.

56: 29 MR. WESTENHAUS: That might be your strongest point. Point out to people that unlike a car manufacturer that builds the factory where the building is there and stays and gets roofed once in a while and plants and robots – facilities inside like robots and such – you guys continually have to reinvest and when you overtax it, you cut back its productivity and its growth. That’s the scary thing. You want an oil crisis? Overtax oil and gas.

56: 58 MS. VAN RYAN: Everybody on the call, we’re going to have to close here in a minute. It’s almost been an hour and I know that Jaime and Ken have another appointment that they have to go to. A couple of things I would like to mention to you is first of all ExxonMobil now has the Perspectives blog. Ken Cohen is the primary author for the Perspectives blog.

You can find it on their website. And I’ve been reminded by e-mail to tell all of you to be sure and send your comments in. Read the blog. Tell ExxonMobil what you think, and of course I’m blogging here at So send your comments in there. I know some of you do from time to time and I’m grateful for that. Do we have time perhaps for a last question? I think maybe we’re done.

All right, Ken, Jaime, thank you ever so much. We appreciate your help and to all the bloggers who agreed to join us today, thank you. We’ll try to get the audio file and the transcript up for you about this time tomorrow afternoon. And I’ll be sending out e-mails to everybody with a link to the audio file and the transcript and to all these other documents that we’ve talked about here today.

Thank you, everybody.

59: 12 MR. COHEN: Thank you, Jane.

58: 13 MR. SPELLINGS: Thanks a lot.

58: 14 MS. TVERBERG: Thank you, Jane.

58: 14 MS. VAN RYAN: Thanks, everybody.

NOTE: Senate failed to approve Senator Bill Nelson’s Amendment, which sought to rescind a job-creating tax provision (Section 199). The Nelson Amendment that they were discussing FAILED in the Senate. This is API's response.

API Tax Manager Stephen Comstock:

“We are pleased the Senate failed to approve this shortsighted amendment that sought to unfairly repeal a job-creating tax provision for a handful of oil and natural gas companies. Had it passed, the provision would have raised taxes and killed jobs, something the nation cannot afford, especially when so many Americans are out of work.

“While we are disappointed that the Senate was unable to fix the 1099 reporting requirements in the small business bill with an amendment offered by Senator Mike Johanns, we are pleased the majority turned back the effort to increase taxes on the oil and natural gas industry, which ultimately could have cost American jobs.”

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