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BLOGGER CONFERENCE CALL MODERATOR: Jane Van Ryan, API SPEAKERS: Ken Cohen, Vice President of Public and Governmental Affairs, ExxonMobil Jaime Spellings, Vice President and General Tax Counsel, ExxonMobil John Felmy, Chief Economist, API Stephen Comstock, Tax Policy Manager, API
MONDAY, MAY 9, 2011
Transcript by Federal News Service Washington, D.C.
Bloggers on the call included Bear from The Absurd Report, Ben Domenech from Heartland, Bob McCarty from Bob McCarty Writes, Bruce McQuain from Questions & Observations, Byron King from Agora Financial, Carter Wood from NAM: Shopfloor.org, Jazz Shaw from Hot Air, Jim Hoeft from Bearing Drift, Joy McCann from Little Miss Attila, Lee Doren from Competitive Enterprise Institute, Lew Waters from Right in a Left World, Mark Perry from Carpe Diem, Meghan Gordon from Platts: The Barrel, and Merv Benson from Prairie Pundit, Pejman Yousefzadeh from The New Ledger, and Steve Kijak from Rideside VA. (Music intro.) 00:02 ANNOUNCER: You’re listening to Energy Conversations with API, brought to you by the people of America’s oil and natural gas industry. 00:14 JANE VAN RYAN: (In progress) – get more people on line, but that’s fine. And there may be some more [bloggers]that will join us in progress. So why don’t we get started? Ken, I understand that you would like to start with a brief opening statement. 00:24 KEN COHEN: Good morning, Jane. And thank – and everyone, thank you for joining us this morning. What Jaime and I would like to do is to spend some time with you this morning addressing a subject that appears to be at the top of the agenda, certainly, in Washington right now, and that is the tax policy, tax treatment for our industry, and specifically tax treatment for the largest companies in our industry. And we seem to be back in the situation that occurs when we have very high earnings quarters, and I think as everyone on the call knows, that in our industry we are in a cyclical business; our earnings – we experience periods of very high earnings, and then periods of low, which tend to follow things in commodity markets that follow – earnings are pretty much tied to the price of crude oil globally. Our earnings are the result of our operations in over a hundred different countries; 75 percent roughly of our income is generated from operations outside the United States, and that certainly was the case in the first quarter of this year. So with that, why don’t we just get right to your questions? 01:53 MS. VAN RYAN: Terrific. And please remember to identify yourselves before you ask a question. Who’d like to go first? 01:59 BYRON KING: This is Byron King with Agora Financial. Thank you for hosting the call. One question that I’ve had from people when I talk about this is, what is the impact of the weak dollar on earnings? Does a weak dollar, caused by the Federal Reserve, of course, somehow inflate your earnings in terms of overseas operations? 02:20 MR. COHEN: Well, you know, the biggest impact of a weak dollar is what it does to the price of crude oil. Most commodities, and crude oil being no exception, are priced in U.S. dollars. So what that means right now with the dollar at historically low levels is that with the
value of the dollar as low as it is now, the price of the commodity is high. And so this gets played out in terms of what we pay for crude oil. I don’t think many people are aware that our – just take the United States: Our equity crude production in the U.S. is about 425 (thousand) to 428,000 barrels a day. Our U.S. refining throughput is about 1.7 billion barrels a day, which means that on a given day, we are out in the market buying crude oil to run through our refineries. And we’re paying market prices for that production that we’re purchasing. So yes, when the dollar is low, that means the absolute numbers, our costs – because the commodity, the basic commodity crude oil is more expensive to us, our costs are going up. 03:49 MS. VAN RYAN: Do you have a follow-up, Byron? 03:51 MR. KING: No. I’ll let somebody else talk. Thanks. 03:52 MS. VAN RYAN: OK, very good. 03:57 MARK PERRY: Mark Perry – I’ve got a question. Could you address the issue of whether or not the oil companies and gas companies get any kind of special tax breaks or subsidies, and also whether they are also subject to kind of special taxes that other industries or companies are not exposed to? 04:18 JAIME SPELLINGS: Well, that’s a great question. That’s the one we were hoping to spend a lot of time talking about today. So let me start with – the overall picture is that the oil companies, and the big oil companies in particular, are subject to less-favorable treatment than other similarly situated industries. And that’s where you got to start from. Now, if you look at what the Obama administration talks about, is oil company subsidies. Let’s take them one at a time. There’s $4 billion that he continues to talk – $4 billion annually of tax breaks for the oil industry that he talks about. The very first one is something called the manufacturing deduction. It’s in code section 199; it came in in 2004 or ’05. And the oil companies get that at a lower rate than any other industrial activity. If you look at the structure of 199, it has a general provision that applies to all manufacturing, including farming, mining, fishing, video game development, Hollywood movie production. And so it has a very general provision. And inside that general provision, oil and gas obviously qualifies as an extraction activity. There is a provision much later in the details of Section 199 that for oil and gas only – this is the only activity that’s singled out in Section 199 – it actually reduces the value of the manufacturing deduction by a third. So if everyone else gets a 9-percent manufacturing deduction, we get a 6-percent manufacturing deduction. And one of the proposals that’s currently being talked about on the Hill – this was the press release from Senator Baucus – would take away the 199 deduction entirely for just five
companies. So now 199 already discriminates against oil and gas compared to all other industrial activities. The proposal currently being floated on the Hill in the Senate Finance Committee is to further discriminate against five companies only in the oil and gas business. So that’s number one. The second thing is something called intangible drilling and development costs. This is something that’s been part of the internal revenue code since its inception, since 1914, and it allows us to expense the wages and salaries of the people who work on drilling holes. It’s not about the steel that goes into the hole; that’s why it’s called intangible drilling and development costs. But it’s the wages and salaries and other non-tangible elements of our expense that go into drilling the hole. And we get to expense those in – if you’re not a big company, you get to expense 100 percent of your intangible drilling and development costs. This is cost recovery. This is a basic feature of the tax code, that you spend a dollar in earning income; you get to deduct that dollar. Now, large, integrated producers have to capitalize 30 percent of their intangible drilling and development costs. So once again, you have a rule of general application, and then for a subset of large companies, you have a less-favorable treatment. So we have to capitalize it and recover it over 60 months. And furthermore, this only applies to production inside the U.S. If you are drilling wells outside the U.S., you have to capitalize everything. The third point is, in some ways, the most insidious: There is something called percentage depletion. Percentage depletion says that if you’re in the extraction business and you have gross income of a hundred dollars, you get to take a fixed percentage of that production as a(n) expense on your tax return, or as a deduction on your tax return. That is a preference because it is a(n) expense or deduction you get to take that’s not related to your actual cost; it’s related to your revenue. This is something that’s been in the code since the very beginning. It applies to all extraction activity in the U.S. So coal, steel, iron, copper, silver, gold, anything that you’re pulling out of the ground – peat moss, clamshells, caliche – anything that you’re pulling out of the code, you get to take percentage depletion. Now, within that framework, oil and gas is the only mineral that has a listed deduction for percentage depletion. And oil and gas is limited to a thousand barrels a day. So if you work out the math, and you take a thousand barrels a day, even at $100 a barrel of crude, the maximum value for any taxpayer is between 1 (million dollars) and $2 million a year from percentage depletion. And again, oil and gas is the only one that’s limited. You can get a coal percentage depletion that’s, you know, worth a hundred million dollars a year, but you’re never going to get an oil and gas percentage depletion deduction that’s more than 1.5 million (dollars). Now, I saved the best for last: Since 1975, large, integrated oil and gas companies get no percentage depletion – zero, none. So when we purchased XTO in last summer, XTO was
getting percentage depletion out of that thousand barrels a day of oil production. The minute they joined the XTO – sorry, the minute XTO joined the Exxon Mobil group, they immediately lost their percentage depletion deduction. So go back to the big picture: Oil and gas has less favorable rules than other similar industrial activities, and large, integrated producers like ExxonMobil actually have less favorable treatment than the rest of the oil and gas industry. 10:32 MR. COHEN: This is Ken. Thanks, Jaime. Let me add to that, too, just to get us back onto the bigger picture of – you know, we see a lot of reporting that makes the false claim that the industry and our company, in particular, aren’t paying the fair – our fair share of taxes, and that’s just false. You know, let’s just look, for example – I’ll give you first the – let’s look at the first quarter of this past year, and then let’s take a historical look. We just announced our first-quarter earnings. And we did make – we made $10.7 billion in the first quarter of this year. That 10.7 billion (dollars) was on revenues of 114 billion (dollars). And on that 114 billion (dollars), our total expenses were 77 billion (dollars) excluding taxes and duties. And then, we paid government taxes and duties around the world of 28 billion (dollars), leaving the $10.7 billion of earnings for the quarter – so that – I’ll go back to that tax bill: 28.2 billion (dollars) on a global basis. Now, if you – what we always need to do is focus on the U.S. part of our business because I said at the beginning that 75 percent of our earnings come from outside the U.S. In the first quarter, we made $2.6 billion in the U.S., and our U.S. tax burden for that quarter was $3.1 billion. Now, let’s put that in a broader perspective. If we go back and look at the period 2005 to 2010 and look at the United States, our income before taxes was 67 billion (dollars), and our income taxes for that same period – that includes federal and state income taxes – were $22 billion, for an effective tax rate of over 32 percent. So those are the facts. OK, sorry, Jane, I just wanted to get that out there. 12:35 MS. VAN RYAN: No, I think that’s very helpful. And as you know, we had a blogger who sent in a question that goes to the heart of what you just said. He sent it in yesterday, so I’m grateful for the fact that you did indeed respond to his question. Do we have anyone else on the line who has a question, a follow-up to that? 12:52 BEAR: Yeah, Jane? 12:53 MS. VAN RYAN: Yes. 12:53 BEAR: Hey, this is the Bear at The Absurd Report.
12:55 MS. VAN RYAN: Hey, thanks, Bear. 12:56 BEAR: Good morning, everybody. I just would like to clear something up about that debasing of the dollar, if somebody could possibly do it for us. Can you attribute – as the dollar goes down, the cost at the pump – as it relates to the cost at the pump? 13:18 MR. COHEN: Well, we can’t do it with mathematical certainty, but I can tell you that the weak dollar is making gasoline more expensive, and it’s because crude oil is the basic component that we use to make gasoline; accounts for about 70 percent right now of the cost of a gallon of gasoline. And we are paying more in the United States for a barrel of crude than other people around the world because of the weak U.S. dollar. 13:46 BEAR: Thank you. 13:49 MERV BENSON: This is Merv Benson. With respect to the proposed new tax treatments, is there any way to quantify that in terms of what it will do to the price per gallon at the pump? 14:08 MR. COHEN: No, but first we’ll have to see what the – what actually is passed, but just step back and think, well, if the current Baucus proposal is enacted, what it will do is increase the costs – certainly on our company and the other four companies that would be impacted. And we’re in business to make a profit. And if our costs go up, we’re going to need to recover those costs as much as the market will allow us to. So the impact will be, it’s certainly not going to be a positive impact for consumers because it’s going to increase our costs. It’s going to increase our costs in a discriminatory way. And then, as our costs go – the best way –– you know, our job is to increase the supplies available to consumers – our job is to explore for and develop energy, and then – and do so in a reliable way, and then bring that energy, make it available to consumers. And right now, with the government – with government policies, we had the Gulf of Mexico effectively shut down for over a year. We have large areas of attractive acreage both offshore in this country and onshore that are unavailable for exploration and development. And we’re now having serious discussion about increasing the tax burden on the industry, and particularly the large players, the large five companies in the industry. All of that militates, works against lower prices at the pump. 15:44 MR. BENSON: This is Merv Benson again. Just to follow up, I guess it’s fair to say that it also provides a competitive advantage to the companies that aren’t having to pay the additional taxes. 15:58 MR. COHEN: In fact, you know, it’s interesting – we were – I just looked at that over the last couple of days. This proposal doesn’t hit – if you’re looking at the top five, for example, retailers, I don’t think many of you would realize that Walmart is one of the – now in
the top-five retailers of gasoline in the United States. Marathon is not included in the list; they also are one of the top retailers. If you look on the refining side, Valero and Marathon are not included in these tax proposals. And I don’t say that to have the arm and the – of the federal government reach out to touch these other companies, I mention that to show the whimsy of this particular proposal. If you look in the state of – at Baucus’ home state, we have a refinery that would be impacted, and a competitor’s refinery across the street would not be impacted. And that means that our workers in our refinery in Senator Baucus’ home state will be at risk because that refinery becomes less competitive. And then, we have the interesting situation in Chalmette where the Venezuelans would not be subject to the same provisions that would be applied to our operations in Louisiana. On the natural gas side, of the top-five producers of natural gas, only two would be impacted by this proposal. The other three top producers of natural gas would not, meaning that two of the producers of natural gas, which is going to be the future for electricity generation, going to be producing electricity with a lower CO2 input, be cleaner energy – but you’re putting at a disadvantage two of the top producers, and giving your cost advantage to three of the top large five. So this is why – (chuckles) – when we’re talking about tax policy I urge and I hope the discussion turns to, what is effective tax policy? And in our view, it ought to start with fundamental fairness and consistency. And that unfortunately is not what’s carrying the day right now. 18:15 MR. BENSON: Seems to me that as far as the argument to be persuasive to the consumer, though, it’s going to have to be made in terms that impact that consumer. And therefore, you’re going to need to come up with some kind of range or calculation that gives him an idea of the impact this is going to have on his filling up his tank of gas. 18:46 MR. COHEN: I agree with you. And the only – since the market determines that, you know, the price of a gallon of gasoline, our own company has pretty much exited the business of owning the service stations that sell a Shell, an Exxon or a Mobil product. Those are – those businesses are owned by independent business folks, and they’re charging what the market will bear. And all we can do is point out that anything that increases the cost to them, and the costs of the supplier of the product go up, then the operating costs of the station owners would be going up as well. 19:27 JAZZ SHAW: You’re getting into – you’re getting into the right area. This is Jazz Shaw with Hot Air. I put out a request for some questions before this call; I got one for you, but you just touched on an area that really strikes at the heart of this because personally, I find it very hard to listen to this topic and the material that’s being put out and write about it to a general audience without their eyes rolling back in their heads, unless you’re writing – (chuckles) – for a group of CPAs.
So tagging off the last one, one question that came in, and I’ll just read this straight out for you – it’s pretty short – that we received: “Oil companies can talk all day about how much they pay in taxes, but every quarter we see these reports of tens of billions in profits. Crude oil prices go up, and the price we pay at the pump shoots up overnight no matter where you buy it. Why isn’t there more competition between the companies? Are we really supposed to believe that they aren’t fixing prices between them to keep gas prices as high as possible?” And as a follow-up for that person’s question – you just touched on that – is there a message here, that gas actually costs less, but it’s the independent retailers at the gas stations that are gouging people? 20:36 MR. COHEN: No, there’s no – (chuckles) – let me – thanks for – we share your observation that it’s difficult to communicate to gasoline consumers in this environment when prices are so high because obviously it is impacting everyone’s household budgets. The thing that is the reality here, number one, is of course the challenge of talking about a business with such large numbers. If you’re a refiner, you’re caught between two huge numbers in the current environment. One big number is the price of crude oil. And for a large refiner buying a lot of crude oil, that is a big cost at the front end. And then the other big number is the cost of running a large, complex refinery. These are as sophisticated and as complex a manufacturing operation as one could find anywhere in the world, subject to extensive government regulations and controls. So those two – between those two costs, your cost of the – of acquiring the raw material, and the cost of keeping the doors open, for ExxonMobil, it costs us a billion dollars a day to keep our doors open. We then ultimately recover those costs, if you will, if we’re able to, from the marketplace. And in the downstream part of our business, which is refining and marketing of the products we make, in the U.S., that has not been a profitable business over the last five years. In fact, the last – well, excuse me – over the last five quarters, we’ve only made money in one of those quarters in the last five, if I’m looking at the number right. And in the first quarter of 2010, total downstream – I believe we reported a loss for our downstream, total downstream operations. So this is a very tough business. It is a low-margin business. We made – in 2010, on average, we were keeping about 3 cents a gallon, comparing – that is, that returned to ExxonMobil from the sale of a gallon of gasoline, whereas the federal government by statute was keeping 18.4 cents a gallon on every gallon sold. And then, the state governments – the range varies, of course, depending upon the state. But if you’re in a state like New York or a state like California, the total tax take is in excess of 60 cents a gallon. I’m just – I don’t – I just point those numbers out. In the first quarter of 2011, I believe we were keeping 7 cents a gallon. That was our profit on a gallon of gasoline. 23:29 MS. VAN RYAN: John Felmy, I wonder if you might be able to insert a little information here about the marketing end of the business.
23:38 MR. COHEN: Let me clarify – 23:38 JOHN FELMY: Well, certainly – 23:39 MR. COHEN: By the way, hang on, I got tripped up on my own numbers. For the period and the last five quarters of this – of the five out of the last six quarters ending with the first quarter in 2010, we only made money in the downstream in the U.S. in one of those quarters. There we go. Sorry. 24:02 MS. VAN RYAN: Thank you – 24:02 MR. FELMY: You know, Jane, I could add a couple of quick things to that. If you look at – for the first quarter of this year, if you look at all of the independent refiners and marketers and what their earnings were versus their revenues, on average they made about half a penny out of that dollar of gasoline that you have. So just to reinforce the point that Exxon is consistent, that it is a low-margin or nomargin business in terms of refining and marketing, and it’s because it’s so competitive. 24:34 MS. VAN RYAN: Thank you. 24:35 LEW WATERS: Hi, Jane. Lew Waters here. I’d like to get a clarification going back to earnings, and taxes being higher than earnings. In their blog post on this on Perspectives, it also says that during the quarter, we made about 9 cents for every dollar of sales. Now, is that 9 cents after expenses, before taxes, or just – how does that work out? 25:00 MR. COHEN: That’s at the end of the day, after all expenses. Yeah, you know, our total return as a business, our margin, profit margin, is 9 percent. Little over nine. But the round figure is 9 percent. 25:10 MR. WATERS: That’s after taxes? 25:16 MR. COHEN: That’s our profit. And then you have to put that profit margin in comparison with other large Fortune 100 companies, and that profit margin puts us right in the middle. And I think what attracts attention is that our business is very large. And I guess the question that we need to ask ourselves from a tax policy perspective, if I invest $100 billion in my business, and at the end of the day I make a profit of 10 billion (dollars), and then I look at another business who invests $100 million and keeps $10 million as profit – so both of us made a profit of 10 percent. Is it wise tax policy to treat us differently? Do I tax – do I have one set of rules for the business that – on a 10-percent profit margin is keeping $10 billion, and another player is keeping 10 million (dollars), but the same 10-percent return? Is it effective tax policy to treat those two businesses differently?
26:16 MR. SPELLINGS: This is Jaime. Let me – let me kind of make one other point for perspective on that. We’re big – we’re a big company because the industry’s big. And that’s something that’s a lot of times hard for people to get their head around. ExxonMobil’s the largest private – by market cap – privately-held company in the world. We produce about 3 percent of the world’s oil. So we’re not Google. We’re not Microsoft. You know, we’ve got market share that’s much less than any of the other household names that you talked about in the Fortune 100, Fortune 500. We’re producing 3 percent of the world’s oil. We’re producing much less than that of the world’s energy, because we’re not participating in all parts of the energy spectrum. We’re producing 3 percent – that’s all. So we’re big because the industry’s big. We are not a commanding market share in that large industry, and we’re the biggest. 27:26 MS. VAN RYAN: Excellent point. Additional questions? 27:29 BEAR: Yes, Jane, the Bear – 27:30 MEGHAN GORDON: Real quick, this is Meghan Gordon. Who from Exxon will be at the Senate Finance on Thursday? And besides on what we’ve talked about before, any other previews to what they might testify? 27:44 MR. COHEN: I would say – (chuckles) – the questions are going to be very similar to what we’re talking about right now, but I would not discount the political theater that will play out. It is – frankly, we are an attractive target. I think the term I used was “irresistible,” right now, for politicians to whale away. And I just hope that we can have a – at some point, though, that there is some rational discussion about what the country’s tax policy should be. And other large industries should also take note, or actually, any industry, because today it’s ExxonMobil and the oil companies that are on the block, but what about tomorrow? What about other industries? And shouldn’t all of us be focused on: What is effective tax policy? What’s – how do you make an investment, particularly in a large capital-intensive business, when you’re not sure what the rules are going to be quarter to quarter or year on year? For ExxonMobil, the energy that you are using today is the result of investments we made, in some cases two decades ago. Or certainly the oil that’s coming on stream today was the result of years of planning and then execution and drilling. It takes seven to 10 years for a large oil and gas project to go from the planning stage to delivery. And we take the risk – we take the market risk, but what we ask policymakers to do is be consistent in the application of their rules. 29:2 MS. GORDON: And who is going to be testifying?
29:25 MR. COHEN: ExxonMobil’s been invited, and we have – we’ll have someone – we will respond, but we haven’t responded yet to the invitation. 29:35 BEAR: Jane, the Bear here. 29:37 MS. VAN RYAN: Yes, Bear. 29:40 BEAR: OK. I read on their – ExxonMobil’s site that over the last five years, you paid 59 billion (dollars) in taxes. Does that number include royalties or not? 29:56 MR. COHEN : That is not – that is just tax. That is not royalties. 29:59 BEAR: OK. 30:00 MR. SPELLINGS: And this is – and one of the reasons why people might be getting confused, in the press release from the Senate Finance Committee that came out last week or the week before last, there was something in there about Exxon-Mobil being able to take credit for royalties as taxes. And that – 30:18 BEAR: Exactly where I was going. Go ahead. 30:18 MR. SPELLINGS: OK, and that’s absolutely not true. If you go in to the internal revenue code and the Treasury regulations, which are the result of 50 years of history working on these issues, the Treasury regulations are crystal-clear. You cannot take a tax credit – you cannot take a foreign tax credit for something that is a royalty. And the IRS – we have a permanent team of 35 IRS agents who live here year-round. You know, we accommodate them, we deal with them every single day. They’re all over this. We’ve had to litigate cases, other majors have litigated cases, and the rules are very clear. If it’s a royalty, you get to deduct it just like you get to deduct a business expense, but you only get a tax credit for foreign taxes that you pay. Royalties are not taxes, and the revenue code is very clear on that. So when the – when the – when you see that phrase in the press release, what that’s code for is, we don’t like – even though we do it ourselves through 199 and other provisions, we don’t like other companies taxing oil and gas more heavily. And if they’re going to tax oil and gas more heavily, we’re not going to recognize what they do as taxes. 31:38 BEAR: Little bit of a follow-up on the royalty thing. You got any kind of numbers that you pay out to the U.S. government? 31:47 MR. SPELLINGS: On royalties? 31:48 BEAR: Yeah.
31:49 MR. SPELLINGS: Yeah, we do. I don’t have those at – I don’t have those on hand, but we can provide those after the call. 31:55 BEAR: Yeah, if you would provide them to Jane. What I’m looking at is to try to establish the kind of money that you people are paying into the United States government, and are we biting the hand that is feeding us. 32:10 MR. COHEN: John – this is Ken Cohen. John Felmy? Do we – I assume the API has for the industry those numbers. We certainly would have the numbers that we paid historically, publicly. 32:25 MR. FELMY: Yeah, we can get you this – the details. It’s roughly in the order – I believe the latest number is on the order of $85 million a day. 32:25 BEAR: Oh, my God. 32:37 MR. COMSTOCK: It’s between 80 – it’s a little over 86 – this is Stephen Comstock with API. It’s a little over – and that includes both royalties, lease bonuses as well as income taxes. So that’s the – that’s sort of a total number. It doesn’t include excise taxes or taxes paid on the product. 32:59 BEAR: One more point of information for me. How many people do you employ in the U.S.A.? 33:05 MR. COHEN: In the U.S. it’s around 35,000, of a total workforce of 84,000. 33:14 BEAR: Thank you. 33:17 MR. COHEN: Now, those are – remember, that’s direct employees. If you then add contractors and suppliers, it’s a huge number of workers, and if you look at the industry, we indirectly employ – or are responsible for the employment of 9.2 million American workers and contribute over a trillion dollars a year to the U.S. economy. 1.7 trillion (dollars), sorry. My – got to get my numbers in front of me. 1.7 trillion (dollars), on an annual basis. 34:00 MS. VAN RYAN: More questions? 34:06 MR. PERRY: Jane, this is Mark Perry. I have one more question. 34:07 MS. VAN RYAN: Yes, Mark. Please, go ahead. 34:11 MR. PERRY: On the first quarter earnings, U.S., of 2.6 billion (dollars), as you mentioned, and then the 3.1. billion (dollars) in U.S. taxes for quarter one – does that include income taxes, sales taxes, all taxes together?
34:25 MR. SPELLINGS: Yes, that’s all U.S. tax. So that would mix excise, income, and – you know, severance and property tax. And we can’t break it out with any more specificity at this point because it just takes a while to go through it all, and we have to – we’ll do that at the end of the year. 34:55 MS. VAN RYAN: Let me interject a question here, because we’ve talked about the numbers to a great degree here today, but I guess the basic question is, so what do you say to people who claim that ExxonMobil is number two on a list of companies that absolutely isn’t paying taxes this year, with G.E. being number one? And there’s a website online that alleges that, and I did have a blogger send in a question about that. What do you say, Ken? 35:22 MR. COHEN: Liar, liar, pants on fire. (Laughter.) It’s just not true. You know? I – we’ve – the blog I do points that out. We’ve put the numbers out. It’s just – I don’t know what it is, but it’s just something that is irresistible to whale away on this topic with – you know, the inconvenient truth here is that we are a very large taxpayer. And I’ve given you the numbers on what our – over the last five years, what our U.S. income taxes were versus our U.S. earnings, and I – the effective tax rate during that period in the United States was 32.4 percent during that period. Those are the facts. So I – (chuckles). 36:19 MR. SPELLINGS: I mean, I think the one – all the numbers that we’re talking about come from footnote 18 of our 10K. And you can – you know, we can supply a table – I mean, we’ve tabulated all these numbers from footnote 18. You know, in 2009, in the U.S., the reported tax expense was basically zero. And the reason why was that we saw – we resolved several open years with the IRS for old years going back to pre-2000, and we resolved those favorably. So the IRS adjustments were much lower than we thought they were going to be. So that reduction in our tax expense all showed up in 2009. It was not attributable to 2009 activities. The tax expense attributable to our 2009 activities was about $500 million. But when you took that 500 million (dollars) and you added in all of the favorable audit settlements from those 35 people who camp out in our office every day, that’s what brought it down to zero. And so you can look at that – those numbers in the 10K and come up with total income taxes in the U.S. of 6 billion (dollars) in 2005, 5 billion (dollars) in 2006, 5 billion (dollars) in 2007, 4 billion (dollars) in 2008, and then in 2009, in the depth of this – of the financial crisis, our earnings were down and our taxes were down. But that’s why we like to talk about these numbers on a five-year period or even a longer period. And you’re always going to be able to – you know, in a big table of numbers, you’re always going to be able to find one single number that’s – you know, to try to make a point on. But –
38:07 MR. COHEN: Yeah. And to finish that, Jaime, if we did not have the adjustment for those pre-2000 – year 2000 returns, on the tax exposure of 500 million (dollars), that would have been for that year, in that down period, an effective tax rate of 19 percent. Over 19 percent. So even in that year, that would have been the tax exposure. 38:40 MS. VAN RYAN: Very helpful information. Thank you. Do we have more questions from the bloggers on line? 39:43 MR. PERRY: One more from Mark Perry. Could you please verify again, did you say you have 35 full-time IRS agents working at ExxonMobil year-round? 38:50 MR. SPELLINGS: Yup. 38:50 MR. COHEN: Yup. 38:54 MR. PERRY: Thank you. 38:56 MS. VAN RYAN: And that’s true for the rest of the companies, too, is it not? For many of them, for the large integrated companies? 39:03 MR. SPELLINGS: Absolutely. I think we’re all in the IRS program where we’re audited every single year. We’re audited in two-year cycles, and they finish one cycle and they go home and they come back the next day and start the next cycle. 39:18 MR. COHEN: Yeah. And Jaime’s explanation, by the way, of the 2009 number that was reported in the 10K – 2009 is included in that five-year roll-up that I gave you. So that 32.4 percent income tax rate for that period includes the 2009. 39:40 MR. SPELLINGS: Includes zero, basically, for 2009. 39:41 MR. COHEN: Yeah, for 2009 after the adjustment’s made for the pre-2000 period. So that number would be even higher than 32.4 percent, but for those prior close-outs of the pre-2000 period. 39:57 MR. SPELLINGS: But because we’ve got 35 auditors in there – you know, we know that they’re not going to come down and totally agree with our return. They come in every year, they propose adjustments, we wrestle them down to something that we can live with, and that’s why these numbers are complicated. 40:20 BEAR: Jane? 40:23 MS. VAN RYAN: Yes, go ahead.
40:25 BEAR: Yeah, this is Bear here. How does that tax rate that you talked about, 32 percent or whatever, compare to the other countries that you’re paying taxes in? 40:36 MR. COHEN: Jaime, why don’t you give our global – 40:38 MR. SPELLINGS: Well, our global rates for – on the same basis as that 32 (percent), is the – is the 44 (percent). So on average, around the world, we’re paying rates higher than 32 (percent). 40:48 BEAR: Thank you. 40:58 MS. VAN RYAN: More questions? Don’t be bashful. We have Ken and Jaime with us for a few more minutes yet. All right. Well, based on that, perhaps we’ll close out this blogger conference call. Jaime, Ken, I want to thank you both very much for joining us today. This was very helpful information. 41:28 BRUCE MCQUAIN: Hey, Jane? 41:29 MS. VAN RYAN: Yeah? 41:30 MR. MCQUAIN: I finally got my phone to work. (Laughs.) 41:32 MS. VAN RYAN: Oh, is this Brian? 41:33 MR. MCQUAIN: Yeah, I’ve been pressing – this is Bruce McQuain. I’ve been pressing this button for – anyway. Can I get one quick question in? 41:41 MS. VAN RYAN: Yes, please. 41:43 MR. MCQUAIN: With all that’s going on and all the – all the – I guess, unsettled market as it is now, with taxes and all that good stuff, and the fact that you guys at ExxonMobil had 75 percent, obviously, earned 75 percent outside the U.S., looking at the future, this has got to affect the – ExxonMobil’s corporate planning. Could you kind of address that? 42:12 MR. COHEN: Well, we approach our investments on a global basis, and obviously it’s – the money that we’re investing is our – it’s money – it’s not our money; it’s our shareholders’ money. And we’re looking to make investments that are safe; they are going to make consistent returns over a long period of time, given the nature of our business; and obviously, government policy and the consistency of government policy is an important criteria for us as we look at projects that are competing for our investment dollars around the world. So to the extent that United States policy makes an investment, for example, in a U.S. refinery less attractive than an investment in a similar operation outside the United States, is that something we will consider? The answer’s yes, of course we’ll consider it.
43:10 MS. VAN RYAN: Perhaps we ought to add something there. John Felmy, are you still on the line? The importance to that could be is that if you had greater investments being made outside the United States, then you potentially could have an impact on U.S. energy security, correct? 43:28 MR. FELMY: Well, there’s no question. You know, the more we invest here, the more we produce, the more we have improved energy security and, really importantly, it reduces the trade deficit. And for every reduction in the trade deficit means that’s dollars that aren’t flowing abroad and can be spent here, and adds further to the U.S. economy that we desperately need. 43:48 MR. COHEN: Yeah. Thanks for that point. The thing that tends to get lost is we’re the home team here. And you have two – if the government is looking, U.S. government is looking to raise revenue and they’re looking at our industry, they really have – it’s coming down to two choices, it appears. They’re looking at, right now, singularly focused on increasing tax, our taxes, as a way to increase revenue coming into the government. But study after study show that if you increase access, increase business opportunity for our industry, give us access to more resources to go explore and develop, give equal treatment to downstream investments, that by increasing access, you will increase revenue. And by – and you will increase revenue by magnitudes more than by focusing just on raising taxes. And by giving us – the industry more opportunity to explore, develop, refine, what have you, that increases jobs. And jobs increases overall social welfare. So to us, the choice is pretty clear, and we hope that Washington sees it the same way. 45:05 MS. VAN RYAN: Any additional questions? You’re talking about the home team – nobody wants to ask a question about Brazil? I’m surprised. Oh, Ken, they’re being much too polite today. (Laughs.) So did you all put out a statement regarding the president’s comments in Brazil? 45:30 MR. COHEN: Are you asking me, Jane? 45:32 MS. VAN RYAN: I am, indeed. 45:34 MR. COHEN: No, no, we didn’t put out a statement that’s specific to Brazil. It’s just interesting that the president is lauding the industry’s activities in Brazil and the Brazilian government’s opening up and encouraging access and development, while at the same time we’ve shut down the most prolific production area in North – right now, in North America, which is the deep-water Gulf of Mexico. It’s – the incongruity of that is striking to us.
46:08 BEAR: Jane? 46:08 MS. VAN RYAN: Yes. 46:09 BEAR: The Bear here again. If I’m hearing this right, is – you know, people like Exxon, are we driving them away from the American shores? Because if you can’t do business here in a businesslike manner, in the sense that you don’t know where you’re going and what tomorrow – what shoe is going to drop tomorrow, are we not really driving them to go – make their investments someplace else? 46:43 MR. COHEN: Well – this is Ken. I’ll answer the question. The answer right now is that we are – we are the world’s third-largest oil producer, and we don’t act like it. We just – we are the only oil-producing – oil and gas producing country in the world that doesn’t act like it. We really could – there’s so much more that the industry could be working on and doing if you look at what technology is allowing us to do. Look at the miracle that’s occurring in natural gas over the last seven to 10 years, basically without government – with no government subsidy, with no government support, the industry, through the use of technology and ingenuity, has unlocked unconventional gas productions, and we’ve gone from a discussion in this country of wondering where our natural gas supplies are going to be, if we’re going to be short on natural gas, we are now looking at a hundred years’ supply of natural gas. 47:50 MS. VAN RYAN: Excellent point. Okay, we’re about out of time. Anybody have a last question? All right. Well, once again, Ken, Jaime, thank you so much for joining us. All of the bloggers on line, thank you so much for dialing in. If you have any additional questions, something that you think about later today or whatever, send them to me by email. I should be able to get back online sometime in the next hour or two, and hopefully then I’ll be able to submit your questions to ExxonMobil or to others here at API for responses. And we will put out the transcript and the audio file as quickly as we can get the transcript produced. They will be posted at energytomorrow.org on the blog. And I’ll be sending a link to everyone who’s on the call so you can go through everything that was stated today. Thanks, everybody. I appreciate it. I hope you have a good day. 48:49 ANNOUNCER: Thank you for listening to this installment of “Energy Conversations with API.” For more information or to join the conversation, visit EnergyTomorrow.org. That’s www.EnergyTomorrow.org (END)
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