S. HRG. 112–521 

OIL AND GAS TAX INCENTIVES AND 

RISING ENERGY PRICES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 12, 2011 

( 

Printed for the use of the Committee on Finance 

OIL AND GAS TAX INCENTIVES AND RISING ENERGY PRICES 

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75–747—PDF 2011

S. HRG. 112–521 

OIL AND GAS TAX INCENTIVES AND 

RISING ENERGY PRICES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 12, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Watson, John, chairman of the board and chief executive officer, Chevron 

Corporation, San Ramon, CA .............................................................................. 8 

Odum, Marvin, U.S. president, Shell Oil Company, Houston, TX ...................... 10 

McKay, H. Lamar, chairman and president, BP America, Inc., Houston, TX .... 11 

Mulva, James, chairman and chief executive officer, ConocoPhillips, Houston, 

TX .......................................................................................................................... 13

Tillerson, Rex, chairman and chief executive officer, Exxon Mobil Corporation, 

Irving, TX .............................................................................................................. 14 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 59 

‘‘Description of Present Law and Select Proposals Relating to the Oil 

and Gas Industry,’’ Joint Committee on Taxation staff report, May 

11, 2011 (JCX–27–11) ................................................................................... 62 

Coburn, Hon. Tom: 

Prepared statement .......................................................................................... 86 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement with attachments ........................................................... 92 

McKay, H. Lamar: 

Testimony .......................................................................................................... 11 

Prepared statement .......................................................................................... 101 

Responses to questions from committee members ......................................... 104 

Mulva, James: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 125 

Responses to questions from committee members ......................................... 134 

Odum, Marvin: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 180 

Responses to questions from committee members ......................................... 186 

Rockefeller, Hon. John D., IV: 

Prepared statement .......................................................................................... 201 

Snowe, Hon. Olympia J.: 

Prepared statement .......................................................................................... 203 

Tillerson, Rex: 

Testimony .......................................................................................................... 14 

Prepared statement .......................................................................................... 205 

Responses to questions from committee members ......................................... 208 

Watson, John: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 328 

Responses to questions from committee members ......................................... 330 

Page

IV 

Wyden, Hon. Ron: 

Prepared statement .......................................................................................... 364 

COMMUNICATIONS

Blunt, Hon. Roy et al. .............................................................................................. 365 

Logan, Coleen M. ..................................................................................................... 370 

National Association of Manufacturers .................................................................. 372 

Texas Society of Certified Public Accountants ...................................................... 376 

(1) 

OIL AND GAS TAX INCENTIVES AND 

RISING ENERGY PRICES 

THURSDAY, MAY 12, 2011 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 9:04 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Rockefeller, Wyden, Schumer, Stabenow, Cantwell, Nelson, Menendez, Carper, Cardin, Hatch, Grassley, Snowe, 

Crapo, Roberts, Cornyn, and Coburn. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Lily 

Batchelder, Chief Tax Counsel; and Ryan Abraham, Professional 

Staff. Republican Staff: Mark Prater, Deputy Chief of Staff and 

Chief Tax Counsel; Curt Beaulieu, Tax Counsel; and Maureen 

McLaughlin, Detailee. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

In 2005, President George W. Bush said, ‘‘With $55 oil, we don’t 

need incentives to oil and gas companies to explore. There are plenty of incentives.’’ That was President Bush, 2005. Today, oil costs more than $100 a barrel, so today we will again 

evaluate those oil and gas incentives. We will consider how they 

have affected profits in the industry and prices at the pump. We 

will ask the same question our 43rd President answered more than 

5 years ago: is it wise to continue these tax breaks given to the 

largest oil and gas companies every year? Gas prices are nearly $4 a gallon today, and experts anticipate they will remain close to $4 for the remainder of the season. That 

means gas prices are up more than $1 a gallon compared with last 

summer. In fact, families will pay an average of about $825 more 

for gas this year than they did last year. In rural areas like Montana where people drive farther, the increase is more like $1,200 

per household. 

At the same time, the five largest oil companies who are here today collectively earned more than $35 billion in profits the first 

quarter of 2011 alone. At this pace, 2011 will be their most profitable year. 

Now business should, of course, make a profit. That is the American way. It is what drives our economy. But do these very profitable companies actually need these taxpayer subsidies? Energy inVerDate Nov 24 2008 15:02 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 R:\DOCS\75747.000 TIMD
2 

centives should help us build the energy future we want to see, not 

pad oil company profits. Americans want us to work toward an energy future made in America. They want us to develop energy resources that will not be depleted, like wind and sun. We cannot reduce using fossil fuels overnight; they are here for a long time. We 

must work with them to make them as clean as possible as we convert over to renewables. But investments in clean energy will move 

us away from the oil and gas bills that are squeezing consumers 

today. 

To reach a clean American-made energy future, we have to scru- tinize every dollar of energy subsidies we spend. The $2.1 billion 

we spend every year on subsidies for the largest oil and gas companies are not moving us closer to our energy goals. Everyone today 

finds their budgets are tight: families, governments, households. 

Congress is also debating the best way to address our deficits 

and debt. Some are proposing cutting Medicare for seniors, others 

slashing Pell grants for students. I think all Americans agree, as 

we tighten our belts we all must sacrifice together, equally shared. 

So we have to take a hard look at every subsidy and every spending program to be sure we are using our dollars wisely. 

In 2004, Congress created a Domestic Manufacturing Deduction 

often referred to as section 199. This deduction is designed to stimulate manufacturing here in America. In fact, I remember back 

when it was enacted to replace the Foreign Sales Corporation and 

Extraterritorial Income exclusion, or FISC/ETI. FISC/ETI was basically not used by the majors, so the 199 was essentially a gift given 

to the majors because they were not, according to my recollection— 

I could be corrected here—using the so-called FISC/ETI. So, 199 

was essentially a gift. 

Each company here today has claimed this deduction. What have 

taxpayers received in return? Have these tax breaks proven to be 

more valuable than Medicare or Pell grants? These tax breaks have 

not lowered prices. When these tax breaks were created, retail gasoline prices averaged about $1.80 per gallon. In fact, prices have 

increased. By 2008, prices had risen to an average of $3.26 per gallon. Last week, they approached $4. 

These tax breaks have not moved us toward energy independence. According to a Treasury Department study in 2009, if all the 

subsidies for the oil and gas industry were eliminated, domestic 

production would fall by less than one-half of 1 percent. That is for 

the entire industry. Today we are only talking about the five largest, that produce only about one-third of domestic oil. The Big 5 

have the most resources and are the least dependent on government subsidies, so the effect on domestic production from repealing 

these subsidies for these companies would be even less. 

Despite these facts, some still argue that eliminating tax breaks 

for the largest oil and gas companies will raise prices at the pump 

or force layoffs. The oil and gas industry has launched ad campaigns arguing that repealing these tax breaks will hurt consumers. 

But a 2007 Joint Economic Committee analysis found that repealing the oil and gas tax breaks would not raise energy prices for 

consumers. Would not. Why? Very simple. Oil prices are set on a 

world market. The U.S. share of production is only about 10 perVerDate Nov 24 2008 15:02 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 R:\DOCS\75747.000 TIMD
3 

cent. That makes it difficult, if not impossible, to pass on the cost 

of losing these subsidies to consumers. 

Given profits of $35 billion in just the first quarter alone, it is 

hard to find evidence that repealing these subsidies would cut domestic production or cause layoffs. After all, based on first quarter 

profits, these tax breaks represent less than 2 percent of what 

these companies are on pace to make this year. 

Even without these tax breaks, these companies clearly will be 

highly profitable. The chart here behind me to my right looks at 

financial documents that companies here today have filed with the 

Securities and Exchange Commission. These are in the footnotes 

and in the 10Ks and are basically documents filed with the SEC. 

According to those documents, the average cost to produce a barrel of oil was about $11 in 2010. The average price these companies 

received for a barrel of oil was about $72. I will not say these are 

exact, but it is roughly what the SEC documents show. 

Today, oil prices are higher, a lot higher, 40 percent higher, 

which would increase these large profit margins much further than 

shown on this chart. So it is hard to imagine that companies faced 

with these opportunities would cut production. 

Now, some might argue that these subsidies or these record profits create much-needed jobs, but those same documents—public 

documents—filed at the Securities and Exchange Commission show 

that nearly 60 percent of these companies’ 2010 profits went to 

stock buy-backs and to dividends, not to job creation. We can put 

this money to better use, I believe, and we should. We should use 

this money to reduce our deficit instead of putting the burden on 

seniors and our children’s future. 

These are choices, everybody. It is shared choice, it is America 

working together, looking at the facts and seeing the degree to 

which eliminating these subsidies would in fact be a fairer way for 

us to start to reduce our deficit, because reducing these subsidies, 

evidence shows, will have virtually no effect on jobs, or loss of jobs, 

in this country, for the reasons I have indicated. 

So I just urge us to do what is right, what is wise for our country. This is one place we should examine, look at, see what the 

facts are. There will be lots of other areas that we are going to be 

looking at, not just the big 5 oil companies. Today we can only address one subject at a time, and the subject today is the one at 

hand. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. 

Everybody is angry about high gas prices, and I can tell you that 

I am angry about it. The press keeps telling us that we need America to come together and put aside partisanship. Well, nothing 

makes for a Kumbaya moment like high gas prices. Republicans do 

not like paying high gas prices any more than Democrats do. With 

one voice, Americans are telling us to do something about them. 

4 

Unfortunately for some people, the political philosophy of Rahm 

Emanuel is too hard to resist, and that is: never let a crisis go to 

waste. So, faced with an issue of legitimate concern for the American people, politicians and their media allies decide to exploit high 

gas prices for political gain. 

Now, this is a double game for those politicians. On the one 

hand, they are able to score some cheap political points against the 

politically unpopular oil companies. On the other hand, all of their 

sound and fury signifies nothing and is designed to distract their 

constituents from the simple fact that the Democrats have no energy policy whatsoever. 

Let me take that back. Actually, they do have an energy policy. 

Are you ready for this? Their energy policy is to increase the cost 

of energy. You heard that right. This is the President’s Energy Secretary, Steven Chu: ‘‘Somehow we have to figure out how to boost 

the price of gasoline to the levels in Europe.’’ 

So, while the American people ask Congress to do something 

about high gas prices, the response of Democrats is to rail against 

oil executives to mask the fact that their policy is actually to make 

the price at the pump more painful. For what it is worth, for all 

of their talk about the shrinking middle class and the income inequality, high gas prices do not hit Warren Buffett and Warren 

Beatty the hardest. They hit moms and dads who have to live far 

from where they work and drive minivans and SUVs because they 

have children. 

When Al Gore has to pay a little more to gas up the private jet 

to fly to Cannes in France, he does not feel any pain. When my 

constituents in Utah see gas go above $4 a gallon, they have to 

make real choices about whether they have to work longer hours 

to make ends meet and whether they can send their children to 

camp this summer. 

David Letterman captured this current situation brilliantly. Here 

is how Mr. Letterman put it: ‘‘Gas prices. Aren’t they crazy? It’s so 

expensive, the rats are carpooling in from New Jersey.’’ Now, I 

would expect my friend from New Jersey to change the joke and 

stipulate that the rats arrived from the opposite direction. Of 

course, my friend from New York might take exception to that. 

Now, we do not have as many rats in my home State of Utah, 

but, like folks in New Jersey and New York, Utahans are plenty 

angry about high gas prices. They are bearing the brunt of gas 

prices near $4 a gallon. This is very discouraging because we are 

still recovering from one of the worst recessions our country has 

ever faced, and all that these increased gas prices do is put the 

brakes on an already fragile economy. 

Now, I hear from small businesses that they are trying to make 

a profit and possibly hire more workers, but now have to make 

room for added energy expenses. I hear from families who are trying to work out how these gas prices will fit in their budgets, and 

I hear from those who are still looking for employment. 

What the people of Utah and this country need is a forwardthinking energy policy that will address rising gas prices that are 

a lead weight around the neck of the economy. I am not here to 

defend any particular industry. After all, I am one of the leading 

proponents of promoting alternative fuels. But let us not make any 

5 

mistake about what we are talking about here. I might add, I have 

passed legislation that does do exactly that. 

Let us not gloss over the plan that is being offered here. The 

plan that is being offered here is to raise taxes. Americans are 

rightly upset about the cost of gasoline. And the solution being offered here? Let us raise some taxes. Lawyers would call this a non 

sequitur. Everyday Americans would call it beside the point. 

Raising taxes to address high energy prices is about as relevant 

as a person walking into a doctor’s office complaining of chest pain 

and having the doctor respond by offering to reupholster the patient’s couch. Families and businesses are being hit by high gas 

prices. This demands an energy policy, but all this hearing is about 

is providing a justification for tax increases. 

Now, I wish I could say I was surprised. No matter what the 

question is, it seems that for the President and some of my colleagues the answer is always, raise taxes. Government spends too 

much? Raise some taxes. Health care too expensive? Raise some 

taxes. Gas prices too expensive? I have it, let us raise some taxes! 

I would be doing a grave disservice to my constituents if I was 

to ignore the consequences of these tax increases. Some of us are 

trying to create American jobs, increase energy supply, and reduce 

dependence on foreign oil at a time when we are still recovering 

from a historic economic collapse. 

The proposals that will be discussed today are completely divorced from those pressing needs. The reasoning put forth for repealing these tax provisions—rising gas prices and reporting high 

first quarter profits—would set a bad precedent for future tax increases. Are we to increase taxes anytime a company sees an increase in quarterly profits due to high demand of a commodity? 

What if Wal-Mart’s profits increased due to a spike in global demand for cotton? What if an increase in demand for coffee results 

in Starbucks reporting record profits? What if the Hollywood Studios hit a few home runs with some new films, and record profits 

result? Well, I am not going to hold my breath waiting for Democrats to haul George Clooney up here to justify his income. 

I do not believe we really want to go down the dangerous road 

of deterring American businesses from becoming too profitable. 

This hearing should not be used to score cheap political points, but 

I am afraid, with all due respect, Mr. Chairman, that that is what 

we are going to see here today. I have a chart depicting what I expect this hearing to turn into, a dog and pony show. There you go. 

That is a really nice picture. I think that is pretty good, myself. 

The CHAIRMAN. Who is the horse and who is the dog? [Laughter.] 

Senator HATCH. I think we both know. 

I know who the horse’s ass is, I will put it that way. [Laughter.] 

I should not have said that. My wife is going to give me heck 

when I get home, I will tell you. You will notice I used the appropriate term there. 

Now, it is perfectly appropriate to examine the purpose, design, 

intent, and effectiveness of certain tax incentives that promote the 

domestic production of oil and gas. Let us have that debate. I am 

ready for it. Let us have it. In 2004, Congress passed the American 

Jobs Creation Act. The centerpiece of that legislation was the Domestic Manufacturing Deduction. 

6 

Now, this particular provision was designed to strengthen the domestic manufacturing sector. It is a deduction for manufacturing 

everything from coffee to appliances, to the domestic production of 

oil and gas. The amount of the deduction is specifically tied to 

wages paid to American workers. The intent was not to incentivize 

manufacturing and production, but to manufacture and produce 

within the United States rather than overseas. Congress passed 

this provision with the expectation that it would promote economic 

growth and job creation here in the United States. 

Now, it is important to note that this provision is not just tied 

to oil and gas and to the oil and gas industry, but applies to income 

derived from all manufacturing within the United States. Maybe 

we should have a meaningful conversation about whether this provision is good tax policy. Given that it impacts industries far outside the scope of the oil and gas industry, it is a conversation more 

properly suited to a debate over tax reform. 

But I am not going to hold my breath waiting for this adult discussion of tax policy. I know the distinguished chairman has been 

trying to do a series of hearings on tax policy, and I am personally 

very appreciative of that, and I applaud his leadership. Instead, 

though, I expect some good political theater here today. The liberal 

mouthpieces over at MSNBC certainly had the talking points yesterday afternoon, and they are ready to make some political hay at 

the expense of our witnesses today. 

Many will point to a comment made by a former CEO that oil 

and gas companies do not need these tax provisions. That CEO 

might be right. Oil and gas companies would probably drill with or 

without these tax incentives. But let us be clear: they would be less 

likely to do so in the United States. 

We have to ask whether we want to help increase the market 

share for U.S. corporations in the global oil and gas marketplace 

or do we want to decrease that market share and put ourselves at 

the mercy of foreign importers? 

Now, I am not going to wait for the MSNBC lineup to put on 

their hard hats and stand on an oil rig and do a promotional ad 

asking this tough question about the potential loss of blue collar 

American jobs. We have a great number of resources that could be 

used to promote energy security within the United States. 

I applauded President Obama’s recent pledge to reduce foreign 

oil imports by a third by 2020. However, I was taken aback when 

he told Brazil that we want to be their best customers if they increase their oil production. So it is all right for other countries to 

boost the energy that would drive our economy, but it is wrong to 

produce it here at home? 

To be honest, I do not know what the President and his administration’s agenda is for energy security, and I do not expect to get 

any clarity on that point today. I think that is the point. The American people are upset at high gas prices and are demanding energy 

solutions. The President has no solution. 

In fact, his policies would do precisely the opposite of what our 

constituents are asking for. They would increase the cost of domestic production and harm our economy. So, faced with the uncomfortable fact that the buck stops at the Oval Office and the President’s only solution to high energy prices is to double down on 

7 

them, liberals are out to distract the American people from their 

failure to develop a coherent energy strategy. 

Now, I do know that we currently depend on oil for our energy 

needs because it is abundant and it is dependable. Demand is, and 

will, remain high for the next decade, and certainly beyond that. 

There is a reason why Florida’s demand for petroleum-based transportation fuels is among the highest in the United States. There is 

a reason why States like New Jersey and Maryland consume more 

gas per capita than most States. We certainly have the resources 

to meet that demand. Just recently, geologists have—— 

Senator ROCKEFELLER. Senator Hatch, are you almost through? 

I mean, you have been talking for a long time, and we do not have 

our testimony yet. 

Senator HATCH. No, I am not through yet, but I am almost 

through, and I am not going to be through until I get through. 

We certainly have the resources in this country to meet that demand. 

Just recently geologists have discovered, in the western part of 

North Dakota and parts of Montana, a 25,000 square mile sea of 

oil that could hold the largest accumulation of oil identified in 

North America since 1968. They have dubbed it the Kuwait on the 

prairie. About 100 new oil wells are developed each month. We also 

have a great deal of oil in the Rockies on public lands and off our 

coasts, where the President has done everything in his power to 

shut down Federal leases in these areas. Maybe it is just the people working for him, I do not know. 

Look, we all know politics is thick in the air here today. Our dog 

and pony will feel very much at home, I have to tell you that. Many 

Democratic Senators have admitted that it is good politics to take 

on oil companies when gas prices are high. We all know everyone 

is angry about high pump prices. We do not need to hold a hearing 

on that. 

But, if we want to do something about it, three questions come 

to mind, and I will pursue these questions with the witnesses. The 

first question: will the policies proposed by the President and the 

Democratic leadership cause pump prices to drop? The second question: if pump prices do not drop, then what will the policies proposed by the President and the Democratic leadership do? One possibility might be that these policies will cause the U.S. to become 

more dependent on imported oil. The third question: with respect 

to tax incentives available for all U.S. manufacturers, is it wise— 

and this is an important question—to single out one industry and 

treat it differently from others? I will put a finer point on the question. Is it wise to conduct business tax reform on a selective and 

punitive basis? It is a legitimate question, and we ought to answer 

it. 

Let us send the pony back to the stable. That is what we ought 

to do. Let us send the dog back to the kennel. Let us get back to 

reforming the tax code to support economic growth. So far this Congress, we have been making progress in making the tax code more 

efficient, simpler, and fairer, and I know that the chairman is dedicated to that, as am I, and I hope the chairman will continue in 

these efforts. 

Thanks so much, Mr. Chairman. 

8 

The CHAIRMAN. Thank you very much, Senator. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. I would now like to introduce the panel before 

us. Our first witness is Mr. John Watson, chairman and CEO of 

Chevron; second, Mr. Marvin Odum, the U.S. president of Shell Oil 

Company; third, Mr. Lamar McKay, chairman and president of BP 

America; fourth, Mr. James Mulva, who is the chairman and CEO 

of ConocoPhillips; and finally, Rex Tillerson, chairman and CEO of 

Exxon Mobil. 

So, Mr. Watson, why don’t you begin? You probably know our 

customary procedure here is to have your statements included in 

the record. They will automatically be included. If you could then 

summarize for about 5 minutes. Thank you very much. 

Mr. Watson? 

STATEMENT OF JOHN WATSON, CHAIRMAN OF THE BOARD 

AND CHIEF EXECUTIVE OFFICER, CHEVRON CORPORATION, 

SAN RAMON, CA 

Mr. WATSON. Mr. Chairman, Ranking Member Hatch, and members of the committee, I am John Watson, chairman and chief executive officer of Chevron Corporation. 

Affordable, reliable energy is the backbone of America’s economy 

and competitiveness. Fortunately, our Nation is endowed with 

abundant supplies of energy, including oil and natural gas. Each 

time we come to Capitol Hill, we advocate for measures that would 

better help America develop our energy supplies. 

More domestic supply, along with aggressive measures to use energy more wisely, is one of the most effective ways to counter rising 

energy prices, enhance our energy security, and stimulate economic 

growth. Tax increases on the oil and gas industry, which will result 

if you change longstanding provisions in the U.S. tax code, will 

hinder development of energy supplies needed to moderate rising 

energy prices. It will also mean fewer dollars to State and Federal 

treasuries and fewer jobs, all at a time when our economic recovery 

remains fragile and America needs all three. 

Because my time is limited, I will make three points today. First, 

the oil and gas business pays its fair share of taxes. Despite the 

current debate on energy taxes, few businesses pay more in taxes 

than oil and gas companies. The worldwide effective tax rate for 

our industry in 2010 was 40 percent. That is higher than the U.S. 

statutory rate of 35 percent and the rate for manufacturers of 26.5 

percent. 

Between 2005 and 2009, our industry paid or accrued to the U.S. 

Government almost $158 billion in taxes, royalties, and fees, including $98 billion in Federal income taxes. That totals nearly $86 

million a day. Changing important tax provisions outside the context of broader corporate tax reform would achieve one unmistakable outcome: it would restrain domestic development and reduce 

tax revenues at a time when they are needed most. Likewise, calls 

to raise royalty fees will increase the cost of doing business in 

places like the deepwater Gulf of Mexico and impede development 

of these resources just when we are getting back to work. 

9 

Second, longstanding oil and gas provisions in the tax code parallel tax treatment of other industries or are designed to prevent 

double taxation of income. For all U.S. businesses, a basic tax principle is that they are taxed on income after costs. 

All companies in all sectors may deduct these costs in various 

ways. The oil and gas industry can deduct intangible drilling costs 

such as site preparation, labor, engineering, and design. These expenses are similar to the research expenses deducted by pharmaceutical and technology firms. These deductions allow companies to 

recover the costs of risky investments necessary for the viability of 

their business. 

The tax provisions some seek to change are longstanding provisions in the tax code. Many apply to other segments of the U.S. 

economy, including the manufacturer’s deduction and LIFO accounting. We are deeply concerned about proposals to curtail foreign tax credits for dual-capacity taxpayers. Credits for foreign income taxes are critical because, without these credits which are 

available to all taxpayers, we would pay tax twice on income generated overseas. This would make us less competitive internationally and cost U.S. jobs that support our overseas operations. 

My third point is that there should be equitable treatment for all 

forms of energy and for all energy producers, large and small. I am 

an advocate for developing all forms of energy and using energy 

more wisely, but it is wrong to increase taxes on oil and gas companies to subsidize other forms of energy. This is also likely to have 

serious unintended consequences for production, jobs, and revenues. 

Singling out five companies because of their size is even more 

troubling. Such measures are anti-competitive and discriminatory. 

After all, our five companies are providing the technical, operating, 

and managerial expertise that is allowing the global energy industry to operate at the forefront of energy development. 

Let me close by suggesting that the most sensible path is simple: 

do not punish our industry for doing its job well. Create energy and 

tax policies that make our country a more attractive place to do 

business. Allow us to develop our Nation’s vast energy resources. 

And strengthen, do not weaken, our ability to compete against 

large national oil companies who are major players in the U.S. and 

global energy markets. Responsible development of our resources, 

which will be enabled by sound tax and energy policy, will add 

more high-paying jobs, provide billions in new tax revenues, and 

reduce our dependence on foreign energy supplies. 

If our Nation’s concern is keeping investments here at home and 

ensuring reliable, affordable energy for all Americans, what we ask 

for here is what we look for anywhere we invest: conditions that 

are not punitive and discriminatory, but stable, transparent, and 

equitable. 

Mr. Chairman, I am proud to lead a 132-year-old American company, I am proud of the vital role we play in our economy, and I 

am proud of the profits allowing us to make significant investments 

in our communities and the long-term health of our country. 

Thank you. 

The CHAIRMAN. Thank you very much, Mr. Watson. 

10 

[The prepared statement of Mr. Watson appears in the appendix.] 

The CHAIRMAN. Mr. Odum, you are next. 

STATEMENT OF MARVIN ODUM, U.S. PRESIDENT, 

SHELL OIL COMPANY, HOUSTON, TX 

Mr. ODUM. Thank you, Chairman Baucus, Ranking Member 

Hatch, and members of the committee. I am Marvin Odum, president of Shell Oil Company. Shell is a global energy company with 

more than 90,000 employees in 90 countries—approximately 19,000 

of those are here in the U.S.—working to discover, produce, market, and deliver to consumers today’s energy and tomorrow’s energy 

technology. Thank you for the opportunity to speak to you today. 

I would like to address right up front the issue that is on many 

Americans’ minds, the rising cost of energy, particularly the cost of 

gasoline. Because fuels are refined from crude oil, the biggest impact on the price of fuel is the price of crude oil. Everything from 

weather to politics in the global economy determines the price of 

oil and the fuels made from it. 

Weak economic conditions in 2008 and 2009 lowered demand, 

which helped push prices down. Now, with worldwide economic recovery under way, demand is on the rise, sending prices upwards. 

In addition, because oil is sold in U.S. dollars throughout much of 

the world, when the dollar becomes weaker, it takes more dollars 

to buy the same amount of oil. 

Simply stated, oil is a global commodity, so, while we cannot predict or control the price at the pump, we do know that we can increase the stability of our energy future through a combination of 

efficiency gains and increased supply. 

The surest way to address a challenge of this magnitude is to 

focus on what we can control, using what we know to safeguard 

against what we do not. Without question, our government is facing significant challenges right now, particularly in terms of economic and energy security. But, when you face a deficit, be it energy or financial, choices are usually straightforward: get more or 

use less. Often it is a combination of both that achieves the best 

results. There are choices on how to get more. 

I think it could be tempting to assume that there is something 

to gain by taking more from a few; however, one must also balance 

the implications of increased industry cost on both supply and the 

cost of fuel. The opportunity in front of us is to put policies in place 

that allow the energy industry to become an economic growth engine for America. Developing our own resources, we would see tens 

of thousands of new, well-paying jobs and many, many billions of 

dollars in revenue for local, State, and Federal Governments. 

Some perspective. Last year, Shell reported global earnings of 

$18.6 billion. We also invested some $29 billion, mostly in new 

projects, to bring energy supply to the consumer. In addition, we 

spend more than $40 billion to run our existing businesses worldwide. 

Last year in the Gulf of Mexico, government policies caused Shell 

to defer some $700 million in capital expenditures. We expect to 

lose an estimated 50,000-barrel equivalent per day in 2011 alone 

as a result of that. 

11 

Now, thinking about that impact to date, it represents lost gasoline production just to Shell that could have powered, on average, 

633,000 cars and light trucks every day since January 1. 

Now, here in the U.S., at the invitation of the Federal Government, we have invested more than $3.5 billion since 2005 to develop energy resources in Alaska. Six years later, we have been 

prevented from drilling a single exploration well due to the government’s inability to deliver timely permits to allow this potential 

new resource to be developed. During that time we have drilled 

more than 400 exploration wells worldwide. 

My point is this. Investments in our industry carry huge 

amounts of capital and risk. Policymakers must consider this when 

thinking about the competitiveness of the U.S. relative to other regions. The President recently acknowledged that reducing dependence on certain imports was a national policy imperative. We agree. 

The U.S. is resource-rich in many ways, especially in oil and gas. 

Yet, as a country we import more than 60 percent of our petro- leum at a cost of more than $350 billion a year. The bottom line 

is this: if we do not develop our own energy sources, we will have 

to accept the cost, both financial and geopolitical, of bringing it into 

this country from places that can be less secure and less stable. 

In closing, Shell is grateful for the widespread recognition in 

Congress of the daunting energy challenge facing this Nation. Although some of our opinions differ, we stand ready to work with 

you on developing a more secure, affordable, and efficient energy 

supply for this Nation. Thank you. 

The CHAIRMAN. Thank you, Mr. Odum, very much. 

[The prepared statement of Mr. Odum appears in the appendix.] 

The CHAIRMAN. Mr. McKay? 

STATEMENT OF H. LAMAR McKAY, CHAIRMAN AND 

PRESIDENT, BP AMERICA, INC., HOUSTON, TX 

Mr. MCKAY. Thank you, Mr. Chairman, Ranking Member Hatch, 

members of the committee. Good morning. My name is Lamar 

McKay, and I am chairman and president of BP America. I appreciate the opportunity to address the issue of energy tax incentives 

today. Before doing so, I want to recognize that last month marked 

1 year since the Deep Water Horizon accident, and BP continues 

to work very hard to meet our commitments in the Gulf. 

Now, I would like to provide just a little bit of context on BP’s 

operations and investments in the U.S., both in traditional and renewable energy. BP has a very long history in the United States, 

over 100 years, with 23,000 U.S. employees and operations spread 

across the country. 

We are committed to providing the U.S. with the energy it needs 

to grow in the coming decades, and doing so in a responsible and 

sustainable manner. We are one of the largest oil and natural gas 

producers in the U.S. and one of the Nation’s largest energy investors. 

Now, over the 5 years ending in 2009, we have invested more 

than $37 billion in development of U.S. energy supply. We continue 

to invest in natural gas production from the Rocky Mountain west 

and our existing shale gas regions. We have significant oil production in Alaska and the Gulf of Mexico. 

12 

Further, we have made, and are continuing to make, significant 

investments in our refineries in the U.S., including major capital 

projects that will increase gasoline production capacity at our key 

midwestern refineries. We also invest actively in renewable energy. 

During 2009, we invested nearly $1 billion, or 10 percent of our 

$9.9 billion dollars of U.S. capital budget, in alternative energy. 

These investments include the operation of wind farms in 10 

States, development of the first commercial-scale cellulosic biofuels 

facility in Florida, and work on an advanced biofuels molecule, 

biobutenol, with DuPont. We have our solar business, which has 

been in operation for over 35 years. 

BP supports a comprehensive energy policy that includes all 

forms of energy, including oil, natural gas, coal, nuclear, biofuels, 

wind and solar, and encourages efficiency and conservation. The reality is that, even with major improvements in energy efficiency 

and the rapid growth of biofuels, wind, and solar, 20 years from 

now in 2030, the United States will still depend on oil, natural gas, 

and coal to meet more than three-quarters of its energy needs. 

On the supply side, we support properly scaled transitional incentives for alternative energy, but raising taxes on one form of energy to encourage production of another will reduce industry’s ability to keep up with growing U.S. energy demand. The result could 

be less investment, less production, tighter energy markets, and 

over time, potentially higher prices for consumers. Instead, our Nation should be encouraging production of all forms of energy, including oil and natural gas. 

On the demand side, energy policy should encourage conservation and help drive energy efficiency. The energy challenges facing 

the U.S. are enormous. The impacts of high energy prices on the 

overall economy and the American people are very real. We cannot 

change the international crude oil market which drives those prices 

and on which the country relies for more than 60 percent of the oil 

it consumes, but we can work with the Congress, with the administration, and consumers across the Nation to move towards greater 

energy security and a lower carbon energy future. 

Congress establishes the rules regarding energy and tax policy. 

Companies take those rules into account in making their investment decisions. Given the cost and the long-term nature of the significant capital investments that are required to develop and 

produce energy, a stable and competitive tax framework is critical 

to the United States remaining attractive in the global demand for 

capital investment. 

The currently contemplated changes to the tax rules would limit 

the resources companies like BP have to invest, not only in conventional energy production, but also in new and emerging technologies like wind, biofuels, and solar. BP is very serious about 

bringing new sources of oil and natural gas to the market. We are 

also serious about building a sustainable, profitable alternativeenergy business capable of delivering clean, affordable power. My 

company stands ready to work with you and others to address the 

energy and environmental needs of this Nation. Thank you. 

The CHAIRMAN. Thank you very much, Mr. McKay. 

[The prepared statement of Mr. McKay appears in the appendix.] 

The CHAIRMAN. Mr. Mulva, you are next. 

13 

STATEMENT OF JAMES MULVA, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, CONOCOPHILLIPS, HOUSTON, TX 

Mr. MULVA. Good morning, Chairman Baucus, Ranking Member 

Hatch, and committee members. My hope today is to bring clarity 

to this vital debate on tax policy regarding the major oil companies. 

To begin, there is a great deal of misinformation about our tax 

liabilities, and unfortunately it is being used to justify further increases. So my objective is to convey, first, the realities of our current tax burden, and second, the negative impacts of new proposals, for there would be impacts to our company, our industry, 

American consumers, U.S. job creation, and national energy security. 

So, let us take a look at what we already pay. I have a chart that 

we are pointing to that shows the effective worldwide tax rates of 

the 20 largest U.S. non-financial companies. There are a lot of familiar names on this chart. On average, the group paid 27 percent 

for the years 2006 to 2010. But look at those three on the top. 

The CHAIRMAN. Mr. Mulva, if you could identify a few. I cannot 

read some of those over on the left. If you could just outline two 

or three during your testimony, that would help. 

Mr. MULVA. All right. It comes after the three oil companies: 

Wal-Mart, Berkshire Hathaway, Apple, Intel, Microsoft. 

The CHAIRMAN. Who is down at the bottom? 

Mr. MULVA. The bottom? GE, Pfizer, Merck, Verizon, Coca-Cola, 

Cisco. 

The CHAIRMAN. Okay. Thank you. 

Mr. MULVA. So you can see at the top, ConocoPhillips is 46 percent, followed by the two international American companies. The 

three major U.S. oil companies already pay the highest effective 

tax rates in the top 20. Keep in mind, this is after taking the allowable tax deductions and credits. 

What does this mean in hard dollars? Well, for our company, we earned $11.4 billion last year and we paid $8.3 billion in income 

taxes, as well as $3.1 billion in other taxes. So our total worldwide 

taxes paid actually equaled our income. So any fair-minded person 

would likely agree that we pay our full share. 

Remember, too, that companies like ours carry the flag of U.S. 

competitiveness into the battle for global business, and every day 

we fight for access to energy resources and opportunities around 

the world. Our rivals are typically nationally owned companies 

from other countries, and they literally dwarf us in size. Some are 

dozens of times bigger than we are, and they enjoy explicit support 

from their governments. 

Despite these compelling numbers and despite the need to maintain a competitive U.S. oil industry, some would have us pay even 

more. In fact, one proposal would only impact the three major oil 

companies that already carry the heaviest burdens and would further restrict the foreign tax credits that are available to us, so it 

would seriously undermine our ability to conduct our business 

internationally. That is because, when we decide how much to bid 

for foreign energy opportunities, we have to include taxes among 

the total project cost when we make these investment decisions. 

So, all else being equal, overseas companies with lower tax obligations can outbid us and win the opportunities. Unfortunately, 

14 

this does impact U.S. jobs. For our company, we operate worldwide 

with 29,000 employees, of which 20,000 are right here at home, and 

some of them, 3,000 U.S.-based employees, work to support what 

we do internationally around the world. 

So reducing foreign tax credits will have a cascading effect on our 

business. We would lose projects and opportunities to foreign competitors. Cash flows that would otherwise generate tax revenue 

here would instead go elsewhere. Our U.S. job creation and investments would suffer. Further, as profitability declined, it would reduce our ability to invest in domestic energy, and ultimately we 

could even see more energy and development here conducted by 

foreign competitors, which, by the way, would inevitably send dollars back to their home countries. 

We currently hear a lot about the so-called tax subsidies. This 

calls for another reality check. The major companies do not get special subsidies. In fact, some deductions and credits available to the 

industry are not allowed to the three major companies, and the 

ones we are allowed either match or closely mirror those available 

to all U.S. companies. Even in these cases, the law limits how 

much we can benefit. That hardly sounds like special industry subsidies. 

Congress and the administration often speak of enhancing U.S. 

competitiveness, but enacting the foreign tax credit restrictions and 

other proposals would be very counterproductive. They would penalize U.S. workers and the American public who invest in our 

shares, and they would harm the well-being of companies like ourselves that must carry our country into the energy future. That certainly cannot be your intent, so I urge you to objectively and dispassionately consider the facts and reject these unfair and unwarranted tax proposals. Thank you. 

The CHAIRMAN. Thank you, Mr. Mulva. 

[The prepared statement of Mr. Mulva appears in the appendix.] 

The CHAIRMAN. Mr. Tillerson, you are next. 

STATEMENT OF REX TILLERSON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, EXXON MOBIL CORPORATION, IRVING, 

TX 

Mr. TILLERSON. Chairman Baucus, Ranking Member Hatch, 

members of the committee, I appreciate the opportunity to address 

the topic of today’s hearing: ‘‘Oil and Gas Tax Incentives and Rising Energy Prices.’’ 

All of us here today recognize the strain that high gasoline prices 

impose on many Americans, particularly during difficult economic 

times. We owe it to our customers and to your constituents to address the topic of energy prices and taxes in an open, honest, and 

factual way. Unfortunately, the tax changes under consideration 

that target the five U.S. companies represented here today fail to 

honor those goals. 

It is not simply that they are misinformed and discriminatory: 

they are counterproductive. By undermining U.S. competitiveness, 

they would discourage future investments in energy projects in the 

United States and therefore undercut job creation and economic 

growth. Because they would hinder investment in new energy supplies, they do nothing to help reduce prices. 

15 

There is a more effective way to take steps to reduce prices and 

raise revenues, but unfortunately it is a way Congress and the administration have so far rejected. If the U.S. oil and gas industry 

was permitted to develop our Nation’s enormous untapped energy 

supplies, it would put downward pressure on energy prices and increase revenues for government budgets. 

Working together, industry and government can achieve our 

shared goals. In that spirit, I would like to offer several important 

facts on the specific tax proposals that are currently being advocated by some in Washington. 

First, it is important to make clear that tax provisions such as 

the section 199 Domestic Production Activities Deduction are not 

special incentives, preferences, or subsidies for oil and gas, but 

rather they are standard deductions applied across all businesses 

in the United States. 

Section 199 applies today to all U.S. domestic producers and 

manufacturers, from newspaper publishers to corn farmers, to 

movie producers, and even coffee roasters. All can claim this deduction which is intended to support job creation and retention in the 

United States. 

By any reasonable definition, it is not an oil and gas industry incentive. In fact, our industry is currently limited to only a 6- 

percent deduction, while all other U.S. manufacturers are allowed 

a 9-percent deduction. Frankly, to then deny a select few companies within the oil and gas industry this standard deduction is tantamount to job discrimination. Why should an American refinery 

worker, employed by a major U.S. oil and gas company in Billings, 

MT, be treated as inferior to an American movie producer in Hollywood or an American newspaper worker in New York, or an employee of a foreign-owned refinery in Lamont, IL? 

Another tax measure that is misleadingly labeled a subsidy is 

the foreign tax credit provision which upholds a basic tenet of tax 

fairness by preventing our overseas earnings from being double 

taxed. This provision applies to all U.S. companies with overseas 

income and has been in place since 1918. It is meant to protect 

U.S. competitiveness abroad. 

Again, U.S. oil and gas companies are already treated differently 

from other businesses under this provision, which includes unique 

and proscriptive rules on our industry, requiring us to actually 

prove our foreign tax payments are indeed income taxes and not 

royalties. 

If these rules were changed and the foreign income for select 

U.S. oil and gas companies like Exxon Mobil were to be double 

taxed, our foreign-based competitors and the full range of foreign 

government-owned oil companies would gain a significant competitive advantage. 

Clearly, these tax provisions and others under consideration are 

not special industry incentives or subsidies. They are economywide, generally available deductions and credits under the tax code. 

Removing them for a select few U.S. oil and gas companies is 

therefore nothing less than discriminatory and a punitive tax hike 

which jeopardizes the jobs of American workers. 

Doing so would also do nothing to reduce the prices Americans 

pay at the pump. Gasoline prices are primarily a function of crude 

16 

oil prices, which are set in the marketplace by global supply and 

demand, not by companies such as ours. Furthermore, arbitrarily 

punishing five U.S. oil and gas companies by raising their taxes 

will generate far less government revenue than if we were allowed 

to compete and produce our Nation’s own resources. 

An August of 2010 Wood Mackenzie study estimates that approximately $10–$17 billion in direct upstream investment in this 

country is at risk per year if the section 199 and other tax provisions are repealed for our industry. Another recent Wood Mackenzie study found that opening up Federal lands that Congress 

has kept off-limits for decades could generate 400,000 new jobs by 

the year 2025. Another analysis shows that such actions could generate as much as $1.7 trillion in government revenue over the life 

of those resources. 

The fact is, raising taxes on five U.S. oil and gas companies is 

simply not the way to reduce prices or raise revenues. Increasing 

these companies’ taxes would only discriminate against certain 

U.S. workers and make our companies less competitive against others who are in the same business that we are in, and discourage 

future energy investment in this country. 

A much better solution lies in permitting our industry to increase 

energy supplies, including supplies found here in North America, 

such as oil and natural gas found off our shores and in our shale 

formations. Access, not taxes, will enable us to meet the goals of 

increasing affordable energy supplies for Americans, strengthening 

U.S. energy security, and powering our Nation’s economy forward. 

Exxon Mobil shares these goals, and we look forward to working 

with you to achieve them. 

Thank you. 

The CHAIRMAN. Thank you, Mr. Tillerson. 

[The prepared statement of Mr. Tillerson appears in the appendix.] 

The CHAIRMAN. Gentlemen, I appreciate your taking the time to 

come here. Let me tell you my perspective, which is, as chairman 

of the Finance Committee—and I speak for all members of Congress—we have to find ways to reduce our annual deficits and our 

debt. That is not an easy task. To do so, we have to find an approach that is balanced across the board. There are lots of interests, lots of competing areas where we can cut. We all know that, 

so we have to find a fair solution, one that is shared by Americans 

or perceived by Americans to be pretty fair, pretty balanced, within 

the bounds of reason. 

What you said, Mr. Tillerson, and what you all said, in many respects is true: you do pay high taxes. That is true. But it is also 

true your foreign taxes are higher than your domestic taxes. That 

chart showed the worldwide rate. Your domestic tax rate is quite 

a bit lower than your worldwide rate. 

It is also true that the price of gasoline is determined primarily 

by the world price of crude. That is the primary determinant. The 

world price goes way up, gasoline prices go up. But it is also true 

that, when the world price goes up, the after-tax profits of your 

companies go up very significantly because your costs do not go up 

as much, at least in the last year or so, as the world price of crude 

17 

has gone up. When world crude prices go up at such a high rate, 

then your profit margins go way up. That is true. 

It also seems to me, based on the evidence, that, according to 

your financial reporting statements, if your average cost is roughly 

$10, $11 a barrel, if you add in intangible drilling, maybe it goes 

up to closer to $20 a barrel. But in 2010, your after-tax profits were 

about 72 bucks. Your gross revenue was about $72 a barrel, and 

this year it is much higher. So it just looks, according to the evidence, like this is not a matter of singling anybody out. It is just 

your companies, and how much gross profits you make. 

It is not based on your subsidies; it is based on the world price 

of crude. That is what it is really based on. Maybe a fair way to 

get at reducing our deficit and our debt is to reduce, tail back, if 

not eliminate, the tax breaks which do not have much effect on 

your decisions to produce. It does not have much effect because 

your profits are so high. 

Again, according to the reports, Exxon Mobil, for every dollar increase in the price of crude—Exxon Mobil’s after-tax profits were 

up to, I think, $375 million a year. If you add all five of you together, for every $1 increase in crude, your after-tax profits go up 

$1 billion all together, totaling it all up. The subsidies we are talking about here, they are $21 billion over 10 years, roughly $2 billion a year. Break that down to a quarter. That is $500 million. 

This is rough. I grant you, this is rough. But if the price of oil should go down $2 a barrel, that would be 

more than the elimination of these subsidies. So these subsidies 

really do not have much effect in your decisions of where to 

produce. It is the profits you have and the rate of return you are 

going to get in different locations that really, I am guessing, have 

a much greater effect on your ability to produce. 

So tell me what is wrong with my analysis. It just seems, frankly, that you are making a lot of money. That is fine. It is the American way. But it also seems that maybe the subsidies are not really 

that necessary any more. Many of them were given many years 

ago. 

Mr. Tillerson, 199 is really the aftermath, as we all know, the 

substitute for FISC/ETI. FISC/ETI was intended to give American 

companies a break, an export break. WTO ruled it illegal, so Congress passed 199 for everybody. It is my recollection that the FISC/ 

ETI really wasn’t used very much by you guys, so it was kind of 

a gift, 199. Other companies do use it for export, in effect, whereas 

you do not as much. 

So I just ask the question. I do not know who wants to answer 

it. It just seems to me, as we try to get our deficits and debt under 

control, with oil prices so high and because the subsidies are so low 

compared to the increase in crude oil prices, that you do not need 

it nearly as much as one might initially think. I will let anybody 

go ahead. 

Mr. ODUM. Well, I will make just a couple of points here. 

The CHAIRMAN. My time has expired. I am sorry. So just very, 

very briefly. 

Mr. ODUM. So just a couple of quick points. I think, first of all, 

if you look at ways to impact the deficit, and you think about this 

in terms of a word used a lot these days, which is sustainability, 

18 

the way to impact the deficit and get more money into the Federal 

Government is through more production, where we pay more bonuses for the access, we pay more royalties on the production. 

Those numbers are potentially much, much larger than anything 

we are talking about here. That is the way I think to impact the 

deficit beast. 

I did want to comment on your production cost chart, just because I think it misses a pretty important point, which is the investments that have to be made to produce oil and gas that have 

those kind of ongoing production costs. So it does not include, not 

only the huge investments, the billions of dollars that go in, but 

also the time lag for when those investments start, to when that 

production actually starts to happen. The other piece I think it 

probably misses is that it looks at all of the existing production 

that exists across the country today, I would assume by what you 

said. The cost of future production is not the same as the cost of 

historic production that is currently online. It is more expensive 

now. 

The CHAIRMAN. Thank you. 

Anybody else? Mr. Tillerson? 

Mr. TILLERSON. Well, I think it is helpful if we kind of think 

about, are we going to talk about the past or are we going to talk 

about the future, because a lot of the numbers you are displaying— 

and they are not entirely accurate in terms of total cost as Marvin 

said—are really talking about things in the past and what we have 

already done. 

We are in the depletion business, so we invest in resources that 

deplete, so we constantly must replace those if we want to have a 

sustainable business. We have been around for almost 130 years. 

You heard John Watson say 130 years. So that is what we have 

been doing for more than a century, is taking the revenues from 

the past decisions and finding ways to invest them to replace the 

barrels that are depleting. 

As we have to go out and find and locate those replacement barrels, they are more and more difficult to find. The real question is 

not, can we afford more taxes. If we are never going to invest anymore and we are just going to liquidate the company, there is going 

to be a lot of revenue around. 

But that is not what we are doing. We are sustaining the viability of the enterprise for many years to come, so we have to make 

very large investments. The real question is, what do these tax 

changes mean to that next incremental investment decision we are 

going to make? That is made on an asset-by-asset, investment-byinvestment basis. 

So in the United States, if I want to look at a Shell oil lease in 

North Dakota, I have to run the cost of acquiring those leases and 

drilling and developing and producing and paying all of that, and 

I have to put the tax burden on that. You give me a different tax 

burden than my competitor has, and I do not get to develop that 

lease. 

I am going to take my capital then, since the U.S. is not attractive, and I have to go somewhere else offshore. If you want to raise 

the incremental cost of royalty or development costs or taxes on the 

19 

next investment decision, it is that marginal barrel that you are 

going to take out of our system. 

The CHAIRMAN. All right. I wish I had more time, Mr. Tillerson. 

My time has more than expired. This is not the greatest forum in 

the world to get into deeper depth. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. 

Now, this question is for the entire panel. I would like you to answer yes or no, if you can. You can certainly add to it if you want. 

As you know, President Obama and numerous congressional 

Democrats have proposed raising taxes on United States oil and 

gas production. However, an Associated Press article from Tuesday 

about Senator Menendez’s bill to increase taxes on oil and gas stated, ‘‘Menendez acknowledged that the legislation—slated for a vote 

next week—won’t do anything about gas prices exceeding $4 a gallon in many places.’’ 

Now, with rising taxes on United States oil and gas production, 

will raising taxes on oil and gas production lower the price of gas 

at the pump? Are you aware of any good or service that has become 

less expensive as a result of being taxed more heavily? If we could 

just start with you. 

Mr. WATSON. Senator, directionally, raising taxes on producers 

raises the cost of crude oil. The cost of crude oil is the prime ingredient in the price of gasoline, so raising our taxes will not reduce 

the price of gasoline. 

Senator HATCH. All right. 

Do you all agree with that? 

Mr. ODUM. I certainly do agree with that. I think the bigger 

point behind it is, if the production here in the U.S.—either you 

do not have access to it or it is disadvantaged relative to other opportunities in the world—moves somewhere else, the jobs move 

somewhere else, the trade benefits move somewhere else, all the attendant benefits go away as well. 

Senator HATCH. All right. 

Mr. MCKAY. No, I do not believe, obviously, that raising taxes 

will lower prices. I do think the important thing is to have a competitive fiscal environment to attract investment. More investment 

can raise supply and have an effect on prices. 

Senator HATCH. All right. 

Mr. MULVA. Raising taxes will lead to less investment, less production, and most likely higher cost per gallon and less employment. 

Senator HATCH. All right. 

Mr. Tillerson? 

Mr. TILLERSON. It is going to have little immediate effect, but the 

effect will come in the months and years to come in terms of raising the cost of development here. If a loss of, like, 199 deductions 

puts more pressure on refining margins—refineries already lose 

money most quarters, so, if we lose more refinery capacity in the 

U.S., it means more imported product rather than refining product 

here. 

Senator HATCH. Let me ask this question. My colleague from the 

State of New Jersey, Senator Menendez, recently introduced a bill 

that would increase taxes on the top 5 integrated oil companies, 

20 

meaning your companies. He said in his statement that these socalled subsidies ‘‘only benefit big oil and CEOs.’’ 

Now, I would like to point out to my friend that actually corporate management, as I understand it, only makes up about 1.5 

percent of the shareholders. In fact, 41 percent of the shareholders 

are individual retirement accounts, if I am right on this, or pension 

funds. There is a chart showing the top 10 holdings of the New Jersey Public Employee Pension Fund. Now, I would just point to this. 

As you can see, Exxon Mobil and ConocoPhillips are listed among 

the top 10 holdings. 

Now, my question to you, Mr. Mulva and Mr. Tillerson, is, would 

increasing taxes on your company affect your earnings? 

Mr. MULVA. Increasing taxes obviously would have an impact on 

our earnings, and ultimately on the value of our companies and the 

valuation and the share performance to our shareholders, so it 

would have an impact with respect to these shareholders. 

Senator HATCH. And all these pension funds. 

Mr. MULVA. To the pension funds. 

Senator HATCH. And New Jersey is not the only State that has 

pension funds. 

Mr. MULVA. That is true. If you take all Americans and retirees 

and employees, if they are involved in one way or another directly 

or indirectly with a pension fund, they probably are a shareholder 

in an oil and gas company. 

Senator HATCH. Do you agree with that, Mr. Tillerson? 

Mr. TILLERSON. Yes. Raising the taxes obviously would affect our 

cash flow that is available to pay dividends, which go back to the 

pension companies and institutions that own our shares and can 

affect the overall cash flow and financial management of the company. 

Senator HATCH. One last question in the time that I have. I am 

sure that you are aware that the United States already has the 

highest statutory corporate tax rate among OECD countries. Now, 

according to Compustat, a database that collects information from 

companies’ financial statements, the oil and gas industry has an effective tax rate of 41.1 percent, while other industrial companies 

have an effective tax rate of 26.5 percent. 

Yours is a very high tax rate. All of the tax increases we are 

talking about today would eliminate incentives to produce oil and 

gas within the United States, it seems to me. Now, do these tax 

increases encourage you to produce oil and gas and move jobs and 

investment outside the United States rather than doing it here? 

Any one of you can answer that. 

Mr. WATSON. Certainly tax is a big cost of doing business for us, 

and it is considered in all the decisions that we make. To the extent that taxes are higher in the United States, we will look elsewhere. To the extent that foreign tax credits are limited, it would 

be even more difficult for us to compete overseas as well. So, with 

all the provisions that have been considered, it will make it more 

difficult for us to do business, raise the cost of doing business, ultimately produce less in revenue for the U.S. Government, fewer 

jobs, and move against the President’s agenda of reducing imported 

oil. 

Senator HATCH. All right. My time is up, Mr. Chairman. 

21 

The CHAIRMAN. Thank you, Senator. 

Senator Wyden, you are next. 

Senator WYDEN. Thank you, Mr. Chairman. 

Gentlemen, as you know, this is not the first time the Congress 

has dealt with this issue. Five years ago, those who were serving 

as CEOs then of your companies were asked—I specifically got into 

it—whether they agreed with President Bush’s statement, ‘‘With 

$55 oil, we don’t need incentives for oil and gas companies to explore.’’ Conditions today are pretty much like they were in 2005: 

record profits, price hikes, certainly above inflation. Mr. Mulva, you 

will recall, you were at the hearing. 

What I would like to do, briefly, for the committee, Mr. Chairman, is actually replay the portion of that hearing where the oil 

company CEOs said they did not need incentives from the Federal 

Government when oil was at $55 a barrel. If we could just show 

that video briefly. 

[Whereupon, the video was shown.] 

Senator WYDEN. Gentlemen, the reason I wanted to get into this 

is today’s conditions are much like they were in 2005. That is why 

I mentioned the profits—certainly the prices are far in excess of inflation. Mr. Mulva, you were there. You specifically said, in 2005, 

‘‘Senator, with respect to oil and gas production, we do not need incentives.’’ So oil is now right around $100 a barrel. My question— 

and I want to start with you, Mr. Mulva, because of your history— 

if your company did not need incentives to drill for oil at $55 a barrel, how in the world can you possibly need incentives when oil is 

at $100 a barrel? 

Mr. MULVA. Well, two aspects of that question. First, at $55 

going to $100, we look at the past. The easy-to-find oil has already 

been found. Our costs go up, taxes have gone up. Oil is more difficult to find, more challenging, our costs have changed. I would 

also say that, in response to the question several years in the past, 

we do not view the items that we are talking about—foreign tax 

credits, section 199, and intangible development costs—as subsidies. We essentially view those as similar types of provisions that 

are made available to other companies, all industries, in a similar 

way. So we do not need incentives to drill, just as I said several 

years ago. 

Senator WYDEN. Mr. Mulva, then, as now, I am talking about 

industry-specific incentives: percentage depletion, intangible drilling costs, geologic and geophysical costs. These are industryspecific incentives. You all said you did not need them in 2005. 

Markets, by the way, were global in 2005 just as they are now. I 

just cannot understand how, even if you account for all the possibilities in the world, how you can make the case that you need 

these industry-specific incentives when oil is at $100 a barrel when 

you told me you did not need them at $55. 

Mr. MULVA. Essentially, intangible development expenses, we 

view these essentially similar to research and development technology, similar types of provisions that are made available to other 

industries. 

Senator WYDEN. No. Those are industry-specific incentives, sir. 

They were in 2005, they continue to be today. 

22 

Mr. MULVA. Yes. But they are very similar to what is offered to 

other industries as well. 

Senator WYDEN. And I would note, you also get the R&D credit 

as well. 

But let me just go right down the row. Mr. Watson, your predecessor at Chevron said that he did not need incentives as well at 

$55 a barrel. 

Mr. WATSON. Senator, I would like to offer several comments. 

First, in response to a couple of things you said. You talked about 

percentage depletion. These companies are not eligible for percentage depletion, so perhaps there is some confusion about what we 

are eligible for. 

Senator WYDEN. We are talking about industry-specific provisions. 

Mr. WATSON. Right. 

Senator WYDEN. That is what the President was talking about in 

2005. That is what I am talking about today. He just said incentives, and you all said you did not need them in 2005. It sure 

seems to be a different story today. 

Mr. WATSON. First, we are not eligible for percentage depletion, 

which you cited. Second—— 

Senator WYDEN. You are eligible for a lot of incentives. 

Mr. WATSON. You cited that conditions are exactly the same as 

2005. They are not, respectfully. We have seen costs rise dramatically in our business. Any of a number of published indices would 

tell you that the cost of doing business has more than doubled in 

our industry since that time. We are not asking for special treatment, we are asking for the same treatment and comparable treatment to other industries, Senator. 

Senator WYDEN. If you look at what the Congressional Research 

Service has even said, and they said that recently, you all continue 

to go way beyond inflation in terms of your costs. In fact, if you 

took inflation-adjusted prices today, the price of oil is higher than 

it was in 2005. That is, adjusting for inflation today. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. I welcome all of you 

here today. I felt like I was in a time warp when Senator Wyden 

was mentioning that hearing, because I was there as well back in 

2005. 

I think the greatest travesty to this country, frankly, is that we 

do not even have an energy policy. I do not know how many energy 

crises have to occur in more than a generation to prompt and compel a President and a Congress to develop a comprehensive energy 

policy. It has transcended many administrations and many Congresses, and it has eluded us; hence, what we are dealing with here 

today. 

So we can have multiple hearings, but, if the hearings do not result in action and creating that policy, we have let down the American people. We should be examining all aspects and all facets of 

what we do, and that is the necessity of why we are having this 

hearing today. But we should examine all the subsidies and all the 

tax incentives that we provide in the tax code. 

23 

Frankly, we have put many of them on cruise control for so long. 

The challenge that we are facing today—and I hope, Mr. Chairman, 

you will have more hearings on all these other subsidies and tax 

incentives, because we have not looked at them in terms of their 

effectiveness. I think we need to have an energy policy. I think the 

President and the Congress ought to do it. That is what people are 

asking: why can we not get an energy policy? So I think that that 

is an abject failure, without question. 

The real issue for us here today is to address the effectiveness 

of the tax incentives that are given to your industry, given that you 

obviously provide a very basic commodity to the American people. 

In my State, they pay, on average, $3,500 for oil and electricity, 

and another $1,660 for gasoline. American consumers right now 

are paying the third-highest consumer bills in 1 month, which was 

last month. So obviously we have to look at everything in terms of 

what we can do to mitigate those prices. Now, back in 2005, oil per barrel was $65. Today it is, as you know, $100, $104, $110, it may be estimated. Oil has gone up, an 

87-percent increase. Gasoline in 2005 was $3, now it is more than 

$4. 

The question I had for all of you—there are two things. One is, 

what can you tell us that we can tell the American people, our constituents, how effective these benefits have been to your companies 

in helping to mitigate those prices, first of all? 

Second, there was a report that was done by Wood and Mackenzie for the American Petroleum Institute last August. They 

talked about, in speculating about removing these tax incentives, 

how it would alter the break-even point for oil. That is the cost for 

profitability from an average of $47 per barrel to $52 per barrel. 

If oil is priced at points higher than $80, removal of these incentives will not result in any lost oil production. So I would like to 

have you comment on whether or not you agree with that. Is there 

a point at which we could remove these incentives, at a price point 

beyond $80 or beyond $100? I would like to have your response to 

that as well. 

But first, what about the effectiveness of these? What can we tell 

the American people? How have they benefitted? Because that is 

what we have to examine, and that is what we should examine, by 

the way, on all tax incentives and breaks that are in the current 

tax code. 

Mr. Watson? 

Mr. WATSON. Senator, thank you. I understand some of the concerns. In California, we have very high gasoline prices, a high unemployment rate, and a lot of people are hurting these days, and 

they ask the same questions. I would tell you that the policies that 

we have had over the last decade have provided some benefit in 

terms of U.S. oil production. 

Last year we did increase oil production because, over the last 

decade, we had opened up acreage to development, and we had had 

stable and predictable tax policies in place. What we have seen recently is that we have not conducted lease sales. 

We have had a moratorium on drilling in this country, and we 

are contemplating tax increases that will only move production the 

other way. Some of the Wood Mackenzie studies that I have seen 

24 

indicate that the impact of a $5-billion increase on our industry 

would have a dramatic impact on production going forward. They 

have talked about reductions in production, domestic production, of 

some 400,000 barrels a day, with substantially more at risk. So 

that is the dilemma that I think we have when we think about increasing taxes on the producers in this business. 

Senator SNOWE. Even in the context of record profits, it would 

still have an enormous impact on your industry? 

Mr. WATSON. We make about 6 cents on sales, and we make 

about 6 cents a gallon in our gasoline business. If there is a big 

concern about gasoline prices, Federal and State governments 

make 50 cents a gallon. There is an opportunity to reduce prices 

significantly. 

Senator SNOWE. Mr. Odum? 

Mr. ODUM. Well, first of all, I could not agree with you more 

about needing a long-term energy policy, because I think ultimately 

we have to get to the fundamental issue here, which is something 

that has to be addressed over a period of decades, in my opinion. 

But you need a real strategy to execute to do that. 

To go to the question, has the current tax structure helped investment, I think we are in a position today where the U.S. is competitive and it attracts investment. So to give you an example, we 

are growing our business in the U.S. We have made, on average 

over the last 5 years, about $3 billion a year in income from just 

the U.S. We have invested about $6 billion a year in capital 

projects for new energy projects. So I think that shows you that 

this is competitive. 

The issue then, to address the more fundamental issue and to 

have the larger financial impact on the U.S., is to provide more access, bring more production online, and bring more revenues into 

the Federal Government. I can give you a very clear example, and 

then I will leave it to somebody else. But, if you look at offshore 

Alaska, the University of Alaska has done some studies there. Of 

course, it is an enormous resource potential. The estimated number 

of jobs associated with developing that resource is over 50,000 for 

a multi-decade period of time. The amount of revenue that would 

come from developing those resources is simply on the order of 

$200 billion to governments, to the U.S. State, local, and Federal 

Governments. So there is a real opportunity here, but we have to 

take a longer-term view. 

Senator SNOWE. Thank you. 

The CHAIRMAN. Thank you very much, Senator. 

Senator SNOWE. Thank you. 

The CHAIRMAN. Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. Thank you all for 

coming. First, one of my colleagues suggested that this hearing is 

nothing more than a dog-and-pony show. Well, you would have an 

easier time convincing the American people that a unicorn just flew 

into this hearing room than that these big oil companies need taxpayer subsidies. That is the real fairy tale. I would just say to everybody, the average American family getting gouged at the gas 

pump across America and being asked to sacrifice because of the 

budget deficit certainly does not think this is a dog-and-pony show. 

25 

Now, I would like to just ask my colleagues here about the question of priorities, because we frankly sit in different seats than you 

do, and your job is to maximize what is good for your stockholders 

and good for your employees. I think we all understand that. But 

we have to choose priorities, and right now we have a huge budget 

deficit. 

Many, particularly my colleagues who have put forward budgets 

on the other side of the aisle, have said that the budget deficit, 

even though we do not like it, says we should cut aid to students 

who need to go to college, we should cut cancer research, we should 

cut Homeland Security and veterans’ funds. It boils down to priorities, because we have to get the deficit to a certain level, and we 

have choices. So I want to ask you, sitting in our shoes, just about 

your priorities. So my first question is to Mr. Mulva, and I am asking you for a reason. Do you think that your subsidy is more important than the financial aid we give to students to go to college? 

Could you answer that yes or no? 

Mr. MULVA. Well, it is a very difficult question for me, two totally different questions. 

Senator SCHUMER. But we have to weigh those two things, Mr. 

Mulva. We have to weigh it because we have to get the deficit 

down to a certain level. If you had a choice of one or the other as 

an American citizen, which would you choose? 

Mr. MULVA. Well, Senator, that is a choice that, legislatively, you 

are going to have to be making. 

Senator SCHUMER. We are. 

Mr. MULVA. But for our company, what we are tasked with is to 

provide energy in an affordable way for the American public. 

Senator SCHUMER. So you would choose the oil subsidy over aid 

to students. That is what you are telling me, which I think most 

Americans, even those who worked in the oil industry, would probably agree with. 

I want to ask you one other question. This is why I asked you 

first. Your company put out a press release yesterday. Here is what 

the headline was: ‘‘ConocoPhillips Highlights Solid Results and 

Raises Concerns Over Un-American Tax Proposals at Annual Meeting of Shareholders.’’ Do you think people who advocate cutting 

student aid, are they un-American, too? 

Mr. MULVA. Well, Senator, in that media release—— 

Senator SCHUMER. Yes. What do you mean? 

Mr. MULVA. Nothing was intended personally or anything like 

that. Quite contrary. Our release specifically refers to tax proposals 

and the subject matter that we are talking about here today. 

Senator SCHUMER. Well, I want to ask you a specific question. Do 

you think anyone who advocates cutting these subsidies is unAmerican, yes or no? 

Mr. MULVA. Well—— 

Senator SCHUMER. Yes or no, sir. That one, we deserve a yes or 

no answer on. It was your release that said ‘‘un-American.’’ Yes or 

no. 

Mr. MULVA. Senator, maybe you could hear me out on this because it is a very important question. So if just, if I could, would 

make a comment or two to respond to you. 

Senator SCHUMER. Do you apologize for it? 

26 

Mr. MULVA. Make no mistake: were these proposals enacted that 

we are talking about today—which you say are subsidies, incentives, the proposals that the Senate is considering and the committee is considering—if they were enacted into law, they would 

place the U.S.-based oil companies and natural gas companies like 

our company, probably others—— 

Senator SCHUMER. Sir, I have limited time. I know your view on 

the issue. Do you consider it un-American to have a different view, 

yes or no? 

Mr. MULVA. Senator, I believe that the proposals under consideration are going to have a very adverse impact with respect to energy policy—— 

Senator SCHUMER. I know. But there are many—sir, there are 

many people who disagree with that. You obviously have your point 

of view. That is why you are here. I am glad the chairman let you 

do it. But do any of you others consider it un-American to be 

against the subsidy that you are for? If you do, raise your hand. 

All right. Thank you. I appreciate the other four of you not labeling 

those who are different from you ‘‘un-American.’’ Thank you, Mr. 

Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Roberts? 

Senator ROBERTS. It is very difficult to follow the unicorn from 

New York who has a very sharp horn. [To the witnesses]: Are you 

all right over there? [Laughter.] 

Sometimes a unicorn can sort of morph into a rhinoceros, and 

you do not want to mess with a rhinoceros. At any rate, I am not 

making assertions there, Chuck—yet. 

Mr. Tillerson, I met with a young man yesterday who was the 

manager of a small Exxon refinery—partly owned by CITGO, Hugo 

Chavez—in the mountain west region of the U.S., who was seriously concerned about his job security and the job security of his 

250 other employees working at his refinery because of the legislation seeking to repeal section 199. I note that, because his refinery 

is partially owned by CITGO, that repeal of this tax expenditure 

would not affect Hugo Chavez’s interest, but would his. 

Now, I would call that sort of un-American. Sorry, Chuck. But 

why on earth would we be taxing a U.S. company and this young 

man very worried about his future and then letting big Hugo do 

his thing in Latin America, or Central America? There might be 

some confusion, I think, when some of my friends claim that removing these tax expenditures will not have any impact on the domestic oil industry. 

So why would this young man, Mr. Tillerson, think differently? 

Has the refining sector not seen as much profitability as the oil exploration and production sector? Are the jobs really at risk if these 

taxes are revoked? 

Mr. TILLERSON. Well, if you look at our own refining operations, 

refining has lost money 5 of the last 8 quarters. We made some 

money in the first quarter, we lost money in the fourth quarter. It 

gets back to, what is the price of gasoline? What is in that? It is 

fundamentally the cost of the crude oil that the refiner has to acquire. We are one of the largest refiners in the world. We produce 

27 

about 2.5 million barrels a day of crude oil. We refine 5 million barrels a day of crude oil. 

So we are in the market having to purchase 2.5 to 3 million barrels a day of crude oil, every day, to feed our refineries. So when 

the cost of the oil is high, the refineries’ margin gets squeezed. 

They are unable to pass that through to the finished products fully. 

So the refiners do struggle with very thin margins, so, when you 

increase the tax burden on the refiner, you erode his margin. When 

you lose money 5 out of 8 quarters, obviously it is pretty skinny 

already. 

Senator ROBERTS. I appreciate your answer. 

Mr. Chairman, it was my marching orders now, I understand, to 

present the statement by Senator Cornyn, and I have a minute and 

37 that I am going to yield back. I would like permission to express 

Mr. Cornyn’s statement at this point, if that would be permissible. 

I do not want to tread on anybody’s time over there, or whatever. 

The CHAIRMAN. Go ahead. You have some time; let us use it. 

Senator ROBERTS. All right. Well, I am going to skip the thankyous to you and to Ranking Member Hatch, although I certainly 

want to thank you, and so does Senator Cornyn. Obviously I am 

not Senator Cornyn. I do not even look like him. 

But at any rate, he goes into how important this issue is, how 

a multitude of variables impact on the cost of gasoline, and that 

we should not overlook the main factor that impacts the prices at 

the pump. That is what Senator Hatch said—I am skipping here. 

With roughly 70 percent of the price of gasoline and diesel contingent on the price of crude, it is easy to understand any fluctuations 

in global supply and demand if crude is the most important factor 

in what the consumer pays for at the pump. 

And he goes into the fact that we are overly reliant on foreign 

countries, and understanding again that this commodity is traded 

on a global scale. And increased production cannot serve as an immediate magic bullet for solving rising gas prices, but it is a strong 

start. 

He supports the domestic exploration and drilling. And to fight 

against our almost 9-percent national unemployment rate, why 

then would we pursue any policy as counter to this type of job creation? He indicates that the proposals—we will now call them the 

unicorn proposals—by some of my colleagues in the Congress and 

by our own President would be counterproductive. Then he has a 

video. I am not a chart man, I am not a video man, but I am now 

Senator Cornyn, and so we have a video, and I would like to have 

somebody play it. 

The CHAIRMAN. Senator, you have gone over 20, 30 seconds already. How long is this video? 

Senator ROBERTS. Well, it is 2 minutes. See, I had 5 minutes, 

and now I am Senator Cornyn, so now I have 10 minutes. 

The CHAIRMAN. You are one Senator. There is no one—you are 

the incomparable Senator Roberts. There is no other Senator—— 

Senator ROBERTS. I appreciate that. We were not joined at the 

hip; we were separated. But if we could play this thing, then I am 

going to be in a lot better shape with my colleagues. It is only 30 

seconds. I am sorry. We just cut it down from 2 minutes to 30 seconds. 

28 

The CHAIRMAN. All right. Thirty seconds. 

Senator ROBERTS. Thirty seconds. Here we go. 

[Whereupon, the video was played.] 

Senator ROBERTS. See? That was 30 seconds. A little over a week 

ago, the President called for reducing foreign imports by a third. 

There is a serious disconnect. That is the comment by Senator 

Cornyn, and I truly appreciate your lenience and your treatment 

of this poor minority member. 

Thank you, sir. 

The CHAIRMAN. Thank you, Senator. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. Thank you, gentlemen, for being here today. I know the subject of this hearing is 

about tax subsidies and the effect on the deficit, but I would also 

like to get your opinion about this issue, obviously, on the price of 

oil today, because many Americans are definitely feeling the impact 

at the pump. Mr. Odum’s testimony talked about how oil is a global 

commodity and that oil companies are price takers, not price makers. I am assuming generally people agree with that statement that 

Mr. Odum had in his testimony? 

[Nods in the affirmative.] 

Senator CANTWELL. Thank you. What role do you think excessive 

speculation in the futures market is having on elevated oil prices? 

I know that some of your colleagues—I think, Mr. Tillerson, in the 

past you talked about speculation and the weakening dollar having 

more of an effect than supply and demand, so could you comment 

about speculation, excessive speculation in the market and what effect you think it is having on today’s prices? 

Mr. TILLERSON. Well, it is very difficult to precisely say what impact it has. It is also very difficult to separate in the marketplace 

speculation and risk management because the two are actually 

quite intertwined in terms of how people manage the risk of the 

price of the fuel, whether they are a consumer or a producer. 

I would give you just one benchmark. Immediately after the Libyan outbreak, the fighting in Libya, within the next day the price 

of oil went up $12. Now, nothing had changed in the global supply 

the next day, so what was the market reacting to? It was reacting 

to some level of insecurity about what the future supply was going 

to be. 

So that is people pricing in to the global market what they believe their cost is going to be sometime in the future, building in 

their concerns and their worries about other possible supply disruptions and the ability of the market to respond to that. As time 

goes by and people see how the market responds, they need to adjust back. It goes up and down. 

Senator CANTWELL. What do you think the price would be today 

if it was based on fundamentals of just supply and demand? 

Mr. TILLERSON. Well, again, if you were to use a pure economic 

approach, the economists would say it would be set at the price to 

develop the next marginal barrel. 

Senator CANTWELL. What do you think that would be today? 

Mr. TILLERSON. Well, it is pretty hard to judge. When we look at it, it is going to be somewhere in the $60 to $70 range. If you 

said, if I had access—that is the assumption—to the next marginal 

29 

barrel, what would it cost, everything in, to put the next barrel of 

supply in there, as soon as I develop that one and it depletes, then 

for the next barrel, marginal cost goes up. 

Now, over the years the industry has historically done a very, I 

think, successful job of mitigating that through technology advancements, efficiencies, things we learn how to do better to keep 

the cost of the marginal barrel down. But in a purely economic— 

if all things were according to economics and people did not riskmanage and they did not do everything else they do, it would be 

set at the marginal cost of the next increment of supply. 

Senator CANTWELL. So, $60 to $70 a barrel sounds pretty good 

today, I can tell you that. 

Mr. TILLERSON. Then when we produce that barrel it will be, 

what does the next barrel cost? 

Senator CANTWELL. I mean, oil dropped 5.5 percent yesterday. 

Last week, it was 8.6. I do not think that has to do with the dollar, 

Mr. Odum, or weather. I think that has to do with a lot happening 

and the volatility of the market. I am curious as to what you think 

we should be doing about that volatility. Mr. Odum, do you have 

any comments? 

Mr. ODUM. Yes. Some of the factors that I mentioned are clearly 

factors. Now, neither one may be dominant in the current day or 

the current week that we are talking about, but all of those are 

very real factors on the price. 

I think on the topic of trading, though—I am anything but a 

trading expert, but I do know it has been studied many, many 

times by the Commodities Futures Trading Commission and others 

to try to understand some of the questions you are asking about, 

what is the increase in price that could be associated with that. I 

do know that it serves a very important function. Whether it is an 

airline trying to have predictability around its fuel cost for the future and so forth, it does serve a very important function. 

Senator CANTWELL. Well, I would just say this, that with 70 percent of that futures market now being made up of speculators who 

are not the end users of that oil product is a problem. To go from 

having the market made up of 30 percent today of people who legitimately have to hedge dominated by 70 percent of people who 

are just getting, obviously, in on this oil game, is a problem. Do you 

agree, or do you think that it is all right to have the market drive 

up your price, and then you come here to talk about these subsidies 

as an end result? Mr. Tillerson, I see you smiling. Do you have any 

comment about that? 

Mr. TILLERSON. Well, we are not traders ourselves, so we are not 

in that part of the market. We are observers. That is why I say we 

are price takers. We are physical buyers and sellers of barrels. The 

market decides, again, as I said, based on their view. It is really 

a view of the future because it is a depleting resource: what is 

going to be the availability of the oil sometime in the future? 

The market tries to decide that based on a whole range of things 

it worries about, and then it translates that back to a price today, 

and that is the price we take. It will just be wherever it will be. 

It has been at $9 a barrel, it has been at $8 a barrel during my 

career, and it has been at $147 a barrel, and that is the nature of 

30 

a commodity. It is the nature, in this case, of a very volatile commodity. 

Senator CANTWELL. I disagree. I do not think that is the nature 

of how the commodity markets were established. The commodity 

markets were established to basically prevent or to basically lessen 

the risk that individual users have to take. Now, with 70 percent 

of the market being driven by speculators who are not the end takers of any product, I think you are seeing this price driven up way 

in excess of the $60 to $70 a barrel that you say would be supply 

and demand. 

So, thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Menendez? 

Senator MENENDEZ. Well, thank you, Mr. Chairman. First of all, 

let me say I really appreciate Senator Hatch spending so much 

time on the research he has done on New Jersey, although I take 

offense to, in his opening statement, the aspersions cast on New 

Jersey, even if they are ascribed to some comedian. 

The fact of the matter is, what we have is a lot of hardworking 

New Jerseyians who are being hit really hard at the pump and at 

the same time are subsidizing these Big 5 oil companies, so I am 

sure my colleague from Utah will be happy to tell his taxpayers 

why he supports that. 

I agree about the dog-and-pony show. I would not hold my breath 

waiting for Republicans to say to our friends in the oil industry, 

you have to be part of shared sacrifice in reducing the deficit of this 

country when the average American is making a median income of 

$50,000 and these companies, on average, are making about $25 

billion projected this year. Somehow, only in Washington would 

eliminating those corporate subsidizes be a tax increase, so I am 

glad I did not hold my breath for that. 

I want to, first, ask Mr. Mulva a question. Yesterday in a press 

release, your company called proposals to eliminate wasteful oil 

subsidies ‘‘un-American.’’ I want to hear from you, do you make 

those accusations lightly, or did you really mean to question my patriotism and the patriotism of the 28 other U.S. Senators who are 

co-sponsors? Do you believe that President Obama is un-American 

because he has proposed cutting oil subsidies? Do you believe that 

former President Bush, Speaker Boehner, and Congressman Ryan 

are un-American because they have expressed cutting oil subsidies? 

Mr. MULVA. Senator, it was the media title of our media release. 

Nothing was intended to be personally directed to you, any of the 

Senators, colleagues, or anyone. It was merely utilized because we 

felt the tax proposals that are under consideration are inconsistent 

with the treatment of all taxpayers in a similar situation. It seems 

unfair to highlight, or in a discriminatory way, select five different 

companies for different tax treatment. 

Senator MENENDEZ. But if you believe, at the end of the day, 

that those proposals—which I can understand you might disagree 

with. But you classify them as ‘‘un-American.’’ That means those 

who promote them are un-American. I think that is beyond the 

pale. That is beyond the pale. I was hoping you were going to come 

here and apologize for that because it is simply beyond the pale. 

So are you willing to apologize for what your company—— 

31 

Mr. MULVA. Senator, as I just said, there is nothing intended 

personally. What it was is, we felt that—— 

Senator MENENDEZ. So you are not willing to apologize? 

Mr. MULVA [continuing]. The tax proposals under consideration 

were a question of fairness. The other was that the tax proposals 

under consideration are inconsistent, without having an energy policy that would have an adverse impact on—— 

Senator MENENDEZ. The bottom line is, you are unwilling to 

apologize for your company’s statement. All right. So I will continue to take offense to it. 

Last year, ConocoPhillips spent nearly $4 billion buying back its 

own stock, which of course helps raise stock prices and enriches investors in the company like yourself. It seems to me if subsidies 

were cut, could you not simply buy back less stock and make consumers whole? 

Mr. MULVA. Senator, our share repurchase that we have announced is in the neighborhood of about $10 billion, and it essentially equates to the sale of our 20-percent interest in a Russian oil 

company called Lukoil. We felt the opportunities for investment in 

Russia were not that great, being opportunities of essentially owning shares in a Russian oil company. We are better treated by owning our own shares. It had nothing to do with respect to our capability for investment for energy opportunities or for paying dividends to our shareholders. 

Senator MENENDEZ. But you took those profits. You had a lot of 

decisions as to how you would take those profits, and you put them 

in the whole stock repurchase. 

Let me ask Mr. Tillerson: I have heard a vigorous defense of preserving tax rules that allow oil companies to disguise foreign royalty payments as foreign tax payments and therefore get a U.S. foreign tax credit. Now, why should taxpayers in the United States 

be subsidizing your drilling in Indonesia where royalty payments 

are hidden as a 44-percent tax on oil companies? Why should U.S. 

taxpayers be, in essence, subsidizing the foreign production of oil? 

Mr. TILLERSON. They are not. 

Senator MENENDEZ. How are they not, when in fact those are 

royalty payments? 

Mr. TILLERSON. They are legitimate income taxes paid to the government of Indonesia. As I said in my statement, one of the ways 

our industry is treated differently under a foreign tax code than 

ours is, we must prove that these are income tax payments and not 

royalty payments. So the Internal Revenue Service—we house 35 

auditors 365 days a year in our offices—looks at those very thoroughly, and we must prove to them that in fact they represent income taxes and not royalties. 

Senator MENENDEZ. Well clearly, if you pay, as a structure, taxes 

to a foreign country, the IRS does not have a lot of opportunity to 

dispute that. But if in fact you devise your agreements in such a 

way to have the payment of royalties be a tax, you get a deduction 

here in the United States. That simply means U.S. taxpayers are 

subsidizing. 

I find it hard, gentlemen—I see my time is up. But I find it hard 

to understand how you can come here before this committee and 

the American people and say, when you are projected to make 

32 

$125 billion in profits this year, that you simply cannot—and the 

marketplace is driving you to exploration and production; you really do not need this to pursue production and exploration—that 

somehow the loss of $2 billion a year, which means you would only 

make $123 billion in profits, is somehow so punishing, somehow 

not part of shared sacrifice, somehow you need to go back at them 

at the pump to make up for it, is hard to understand. It is hard 

to understand. 

I really thought you would come here with a different view, like 

when the auto industry came here with a different context. They 

came with a different view. You are really surprising to me. Mr. 

Mulva, I am shocked that you are not willing to acknowledge that 

your company’s statement that this is ‘‘un-American’’ is ultimately 

casting an aspersion upon all of us who have a different point of 

view here. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. 

I thank all five of our witnesses for being here today. I want to 

make an observation first in regards to some of the points Senator 

Hatch made. I think the best thing we could do to strengthen pension plans in this country is a growing, strong economy with stable 

energy prices. I do not think the profits of the five big oil companies have much to do with the stability of the pension systems. I 

just had one other observation, the point that Senator Menendez 

made. 

I listened to your responses, and the math is so overwhelming, with five companies that are making in excess of $100 billion a 

year. I do not want to say that $4 billion, which is I think the number of these tax issues, is insignificant, but it is certainly a very 

small amount of money. Whereas, $4 billion is a huge amount of 

money in regards to the decisions that we have to make here on 

priorities with our children, our seniors, or America’s growth. 

I just think we have to put this in the proper context. We have 

to make some tough decisions. It seems to me this is one area that 

we should be able to reach some common understanding on, and 

I would just urge you to understand the difficulties of our economy 

on balancing our budget and the long-term impact of this deficit. 

We are all going to have to make sacrifices in that regard. It seems 

to me that five companies that make over $100 billion, that there 

is a reason why we are looking at this. 

I want to go to a bipartisan issue, one which Senator Lugar and 

I have championed. That deals with the issue, Mr. Odum, that you 

mentioned on stability of the supply of oil globally. That is the deal 

with good governance and transparency. In so many countries that 

have mineral wealth, the countries are incredibly poor as far as the 

living conditions of the people in that country. The reason is that 

the mineral wealth never gets to the people; it is used in many 

cases to finance a corrupt system, leading to instability, as we have 

seen in recent months. When you have autocratic systems that are 

not transparent, the people ultimately will stand up to them. 

But in the meantime, we have an unstable supply, causing investors to be very nervous about putting money into those countries. 

So Senator Lugar and I have been working for some time to supVerDate Nov 24 2008 15:02 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 R:\DOCS\75747.000 TIMD
33 

port first the extractive industries’ transparency initiative, which 

works in some countries, but many of the oil-rich countries of the 

world do not participate in the extractive industries. Therefore, we 

were successful in getting, as part of the Dodd-Frank legislation, 

disclosure to be made with the SEC as it relates to payments paid 

by oil and gas companies to other countries so that we could have 

more transparency and better good governance in these countries. 

The industry at times has been helpful to us on transparency. 

For reasons I do not understand, there seems to be a reluctance as 

it relates to this most recent change. This applies not to U.S. companies, it applies to all companies that have to move on the SEC. 

The news, quite frankly, is that we have friends in Europe, Canada, and other countries who want to see this made worldwide on 

all the exchanges so that all companies will, as a matter of good 

governance, have to disclose these payments. 

There was a time when bribes paid to other countries for business were a way of life, but we stood up to that and said ‘‘no’’ to 

that type of practice because we knew that this was not in the 

U.S.’s long-term interest. I would just urge you—and I would like 

to get your response—to work with us so that we can get more stable countries around the world, which is in our interest as well as 

the people who live in those countries. We need your help. I just 

am curious as to why we seem to be at odds on this issue. I would 

hope that you would not only comply with the spirit of the bill that 

was passed in Congress, but help us make sure this is implemented 

in a fair way to accomplish its results. 

Mr. Odum, you mentioned stability, so that is the reason why I 

directed the question, at least first, to you. 

Mr. ODUM. Well, no. I appreciate your comment, Senator. I think 

it is pretty clear. I think with our interchange between our company and yourself and others, that we support the intent of transparency. We actually work quite hard for transparency around the 

world through various initiatives. 

I think some of the constructive and pretty comprehensive input 

that we try to give is that we need to do that in a way that does 

not force these companies into an uncompetitive situation, that recognizes some of the challenges that we have with the foreign governments in terms of enforcing something that may actually be illegal in these countries and sorting out that balance. So there are 

complications associated with it. We support the intent and are trying to work with you on how to get to the right answer. 

Senator CARDIN. The standard contracts that deal with it have 

exclusions for SEC-required filings, so it seems to me that the point 

that you raised that you would be in conflict with the host country 

is not what is in the standard contracts that you deal with. 

Mr. WATSON. Senator, if I could just perhaps offer a couple of 

comments on this item. We, too, have been very active in the Extractive Industries Transparency Initiative. We have a comprehensive human rights policy, and frankly agree with the objectives of 

what you are describing. Forcing U.S. registrants to disclose the voluminous information that is required under the law not only is onerous but puts us at a competitive disadvantage to those that do 

not have to comply with the law. It is a very one-sided law at this 

point. 

34 

Senator CARDIN. Work with us so that everyone has to comply 

with it. That is what we want to do. We have friends in Europe, 

friends in Canada, friends around the world who want to work 

with us to make sure this is a uniform policy. 

Mr. WATSON. If you can find a way to have Russian, Chinese, Indian, and other companies comply with the law so that everyone 

is forced to comply, that might be a different story. 

Senator CARDIN. With you on my side, I can get there. 

The CHAIRMAN. Thank you, Senator. 

Senator Rockefeller? 

Senator ROCKEFELLER. Thank you, Mr. Chairman. 

It has been interesting to just observe the hearing, the polemic 

that started it out and then the five of you. Mr. Tillerson, you are 

doing very good things with the Boy Scouts. It affects my State of 

West Virginia. I can thank you for that, but I cannot thank you for 

a lot of other things. 

I get the feeling that it is almost like the five of you are like 

Saudi Arabia, that you are caught up in your profits, you are highly defensive, you yield on nothing. The concept of sharing, in what 

you have said, almost means that you would have to move to another country, which I do not accept because you are already in all 

kinds of other countries, and you are all over the world, all of you. 

I guess most of you. I do not know that all of you are. But being 

out of touch not only with what we are going through in terms of 

Chuck Schumer’s questions, but with the American people. I do not 

think I could blame you for that. 

I think I can just observe that the nature of your life, the nature 

of your international travel, the nature of the size of your profits— 

I do not think you have any idea of what the size of your profits 

does to the American people’s willingness to accept what you have 

to say, which is basically, anything you do to increase our cost is 

going to force us to go overseas, which I do not accept. I mean, I 

think you are saying that. You would get away with it, I cannot 

prove you wrong, but I do not believe you. 

So I just want that on the record. I think you are really out of 

touch. We are making, in these budget decisions—the Ryan budget 

would cut the U.S. Government in half. In half. People dollars. All 

kinds of things would just stop happening. 

Now, I come from West Virginia, and I care a lot about Medicaid, 

I care a lot about education, about Head Start, about the National 

Cancer Institute, about NIH. All kinds of things that are going to 

take enormous hits while you are not. 

My guess is that you will be able to protect yourselves, because 

traditionally oil companies have been able to, through their lobbyists and through friendships and through placements of refineries 

in so many Senators’ States, et cetera, you are able to prevail. You 

are accustomed to prevailing. 

You assume you are going to prevail, which is part of what I 

think creates the distance between us and you, and perhaps between you and the problems that this country faces. I do not know 

how serious you are about those problems. I mean, we are kind of 

terrified up here. I mean, we had a meeting with the President yesterday, and the sizes of the cuts were awful. I mean, it means people lose their health insurance, it means all kinds of things. All 

35 

kinds of things just stop happening, not in what he suggested, but 

in the scenario that possibly could come out of this budget-cutting 

atmosphere. 

So let me just stipulate that. I think you are out of touch, deeply, 

profoundly out of touch and deeply and profoundly committed to 

sharing nothing, because, if you share something, you get on the 

slippery slope. If you give up something, you are on the slippery 

slope. If you give up something, then how do you explain that to 

your stockholders, and all the rest of it? 

Let me ask you just two questions. Senator Wyden made very well the point about the $55 a barrel, and now you are at $102 a 

barrel and talk about having to move overseas, et cetera. How 

much profit on a barrel of oil do you have to make to not be needful 

of these subsidies that we think you do not need, but you say your 

life depends on? At some point you would not need the subsidies. 

I think you are there already, but you do not. So at what point do 

you think that you do not need these subsidies? 

Mr. WATSON. As we have described, we do not receive subsidies, 

Senator. What we do require is a reasonable return on our invested 

capital. I would tell you that I do not think the American people 

want shared sacrifice, I think they want shared prosperity. What 

we have to offer, Senator—— 

Senator ROCKEFELLER. A lovely statement. But do you understand how out of touch that is? We do not get to shared prosperity 

until we get to shared sacrifice. 

Mr. WATSON. More oil field workers are unable to work today because we cannot receive drilling permits or there are leases that 

are not being made available. They feel that. 

Senator ROCKEFELLER. What about the fact that, in the case of 

Exxon Mobil, that your effective Federal tax rate is substantially 

3 percent lower than what the average individual Federal tax rate 

is? Does that mean anything to you? 

Mr. TILLERSON. Well, first, Senator, I want to assure you I am 

not out of touch at all. We do understand the big picture, and we 

understand the enormous challenges confronting the American people with respect to this enormous deficit that has to be dealt with. 

Often it has to be dealt with in a very large way. So I just want 

to acknowledge that we are well-aware of that fact. 

Senator ROCKEFELLER. So what do you want to—— 

Mr. TILLERSON. My effective United States income tax rate on 

my United States income from 2005 to 2010 was 32 percent. Now, 

if you look at any individual year, it could be as low as a single 

digit, it can be as high as 38 to 39 percent, because we do not settle 

our taxes for that year in that year. We have tax filings that are 

open for multiple years. As we resolve issues with the IRS, they 

are recognized in the year we file. So in some years, when our 

taxes appear low, it is because we have recognized the closing of 

issues with the IRS where we overpaid. 

Senator ROCKEFELLER. And I understand. But still, do you understand the average American’s feeling that between 2008 and 

2010, your effective tax rate was about 17 percent and theirs was 

about 20 percent? 

Mr. TILLERSON. From 2005 to 2010, our effective tax rate was 

right at 32 percent. 

36 

Senator ROCKEFELLER. Yes. Well, then that leads me to the next 

round of questions, if we have those. 

The CHAIRMAN. Thank you, Senator. 

Next, Senator Stabenow. 

Senator STABENOW. Thank you very much, Mr. Chairman. 

We appreciate all of you coming here. 

This really is about our priorities as a country. In a time of tremendous challenges and deficits, we have a responsibility to review 

everything. Taxpayers are expecting us to ask tough questions and 

determine priorities and look at what is needed, not needed, works, 

does not work. That is our job. When we look at the fact that it 

was 1916 when one of these tax subsidies that we are talking about 

repealing was put into place—the deduction for intangible drilling 

and development costs—crude oil was roughly $15 to $17 a barrel 

at that time. 

I am sure you would agree things have changed since then. It is 

very appropriate to look at whether or not, when we were developing then and creating the industrial revolution—which we are 

very proud to have led in Michigan—whether or not now when you 

fast forward and it is not $17, it is $100 or more, and you are in 

a very different position in terms of success and corporate profits, 

does it make sense for taxpayers to subsidize what you are doing? 

Not that we do not want you to be successful. 

Does it make sense for taxpayers to subsidize what you are 

doing? Essentially, folks in Michigan feel like they are getting hit 

twice. They are paying the high price at the pump—there is not 

enough competition and consumer choice where they can choose not 

to pay your prices—and at the same time they are turning around 

and paying out of pocket as well. So people are extremely concerned when we have to make choices about whether or not these 

subsidies are working right now. 

So the question that I would have—when we look at the last 3 

months and the corporate profits together that all of you have 

made, the highest corporate profits I think ever, and the fact that 

the taxpayer subsidies are 1 to 2 percent of that profit—that is the 

reality. It is 1 to 2 percent of all of your profits. You are now saying 

that, in light of massive deficits, and you have massive profits, that 

taxpayers should keep providing 1 to 2 percent of your profits or 

you are going to raise gas prices again. 

So my question is the opposite, and I would like each of you to 

answer. What would it take, in lieu of taxpayer subsidies, for you 

to bring our gas prices down? Mr. Tillerson? 

Mr. TILLERSON. Well, first, it is not a subsidy, it is a legitimate 

tax deduction. I think, again, the important question is, what is 

necessary to develop additional supply in this country? 

Senator STABENOW. But what would it take? It is 1 to 2 percent 

right now. 

Mr. TILLERSON. And those—— 

Senator STABENOW. So what does it take? What do we have to 

pay you to bring prices down? 

Mr. TILLERSON. The intangible drilling cost structure is structured to incentivize and help people go out and invest in the next 

incremental barrel of supply. In this country, today that is largely 

coming from the shale resources in the Bakken Formation. 

37 

Senator STABENOW. I appreciate that. But in the interest of time, 

I am going to ask—— 

Mr. TILLERSON. Well, and I am trying to answer your question. 

So, if you do not want the incremental supply, you make the tax 

structure higher, and the incremental barrel does not get developed. It is as simple as that. 

Senator STABENOW. So the 1 to 2 percent that we are talking 

about, which is a big deal for taxpayers, by the way. When we are 

looking at colleagues on the other side of the aisle wanting to eliminate Medicare as we know it, and we have to make choices here— 

which by the way I am certainly not going to support that—the 

question is, what is effective? What works? 

It is really not credible to say that you are going to raise gas 

prices simply because we are asking you to forego 1 to 2 percent 

of your profits, if you are saying that. You are going to raise our 

prices, and right now there is not enough competition. We are held 

hostage. There is not enough competition for us to be able to deal 

with that. 

So, if we take away 1 to 2 percent of your profits, you are saying 

that that will cause you to raise our prices again. My question is, 

what will get you to lower them in terms of the subsidy? If taking 

away 1 to 2 percent will cause you to raise prices, do we give you 

4 percent? Five percent? How much more do we have to give you? 

Mr. TILLERSON. We did not—I did not say we would be raising 

gas prices at the pump. I did not really hear anyone else say that 

either. 

Senator STABENOW. I certainly—— 

Mr. TILLERSON. It really is—— 

Senator STABENOW. There is a real threat here. 

Mr. TILLERSON. It really is about, do we want to solve the problem by getting some more supply developed, which also in this 

country will generate additional revenues for the Federal Government and will relieve the price pressure in the years to come. That 

is the role that the tax structure plays. 

Senator STABENOW. Mr. Tillerson, I understand that. 

Mr. TILLERSON. If you want to eliminate the tax incentives—— 

Senator STABENOW. Before my time runs out—— 

Mr. TILLERSON [continuing]. The incremental barrel does not get 

developed. 

Senator STABENOW. I appreciate that, and I am not being disrespectful. But let me just say, we have to decide, where is the 

most effective place to invest taxpayer dollars that are very hard 

to come by right now? People in my State want us to stretch every 

single dollar and look for what is the most effective and needed 

support and subsidy. So just very quickly, Mr. Mulva, how much 

do we have to give you in additional tax subsidies in order to bring 

prices down? 

Mr. MULVA. Senator, we are not asking for tax subsidies or incentives. What we are asking for is access. Put our people back to 

work with the opportunity to start drilling onshore and offshore. By 

drilling, more drilling, we will create jobs, and we will create more 

supply. That is the best thing we can do to moderate prices. 

38 

Senator STABENOW. I appreciate that, and we are hoping that, in 

more of those 60 million acres that you have in lease, that you will 

be able to do that as well. 

Mr. McKay? I am sorry, Mr. Chairman. I know I am out of time. 

I do not know if I might just ask them to—— 

The CHAIRMAN. If the answer could be very brief. 

Senator STABENOW. Thank you very much. 

Mr. MCKAY. I would just say, we are not asking for subsidies. 

Any increase in taxes will not be consistent with increasing investment for additional supply. 

Senator STABENOW. All right. 

The CHAIRMAN. Thank you, Senator. 

Mr. ODUM. The current U.S. tax structure—— 

The CHAIRMAN. I am sorry. 

Mr. ODUM. Fifteen seconds. 

The CHAIRMAN. Fifteen. That is it. 

Mr. ODUM. The current U.S. tax structure is globally competitive, 

which is why investment gets driven to the U.S. That is a good 

thing. Changing that would drive investment away. That is a fact. 

If I could leave one point with the entire committee today, it is simply to look at the enormous opportunity the U.S. has to develop 

these resources, to create the jobs, and to create the additional revenue into the Federal Government which will help with the longterm deficit issue. That is the real opportunity. 

The CHAIRMAN. Senator Nelson? 

Senator NELSON. Good morning, gentlemen. The American consumer naturally is quite concerned when they go to the pump and 

they pump gas. What they are concerned about is, they see the 

price of the barrel of oil going up and they see the price of the gallon of gas that they are pumping go up, and then when that price 

of the barrel of oil starts coming down, they do not see the commensurate lowering quickly of that price that they are paying per 

gallon at the pump. So they noticed that, back in 2008, the price shot up to $147 a 

barrel, and, while they were pumping gas, it raised it to $4 a gallon. Now they see the price at around $100 a barrel, and they are 

still paying $4 at the pump. So I want to ask that question on behalf of the American people who are pumping gas in their cars. 

Mr. TILLERSON. Well, it is a question of a supply chain. The average time for crude oil produced overseas to reach American refineries is somewhere between 30 days and 45 days. That is the transit time. You have oil that is in inventory at the refinery which has 

already been bought and paid for at some price. You have gasoline 

and products that are in inventory that have already been bought 

and paid for at some price, and often they are delivered to your 

local service station where the consumer pulls up to the pump and 

buys it. So when the price changes on that raw material of crude 

oil, that price has to make its way through that whole supply 

chain. 

Now, when the price is going up, the retailer who owns the station and operates on a very, very thin cash flow—and the vast majority of service stations are not owned by us, they are owned by 

individual business owners or distributors—has to think about, 

what is going to happen to my cash flow as this price moves 

39 

through? So they do begin to price up in advance of the actual 

higher cost barrels getting to them in order to ensure they have 

sufficient cash flow to buy the next tanker wagon that has to deliver. 

So that is why going up, as most business people would do, they 

worry about their cash flow. They are going to chase it a little faster on the way up. Coming down, they have to recover the cost of 

what they have already spent on the barrels in inventory. So, until 

those actual barrels make their way through the system to the 

pump, the consumer is not going to see it. Typically that may take 

somewhere between 2 to 3 weeks, depending on how big the movement is. 

Senator NELSON. All right. I anticipated that that would be the 

answer, and I appreciate that. But the person who is pumping the 

gas is saying, wait a minute. Today I am paying 4 bucks for a gallon of gas, and oil is selling at $100 a barrel. But 3 years ago I was 

paying $4 for a gallon of gas, and oil was selling at $147 a barrel. 

Why? 

Mr. TILLERSON. Well, the $147 price did not last very long. You 

remember what happened shortly after: it plummeted to the 30s. 

That is the nature—and we talked about this earlier—of this commodity which has an extreme amount of volatility in it. Why it 

moves in that wide a range, we could have an entire hearing on 

that subject. 

Senator NELSON. And I would say that a part of it is the speculation that adds to that of people who do not use the oil. But, Mr. 

McKay, let me register a difference of opinion with BP. You all, in 

your financial report in the fourth quarter of last year, announced 

that the Gulf oil spill response costs were going to be approximately $41 billion and that you reported a tax credit of almost $12 

billion. 

Now, for activities that cause such harm, does it not seem wrong 

that you would take a tax credit, lessening your taxes dollar for 

dollar, on the payments that you are paying out to make people’s 

lives right? 

Mr. MCKAY. Let me first just comment that we have pledged all 

along to meet every commitment under the law with the accident 

and the economic impacts of the accident. The $41 billion is a financial charge. We did not take a $12 billion credit. We will be following the law, following the tax code in terms of writing off standard business expenses as they occur, as they are disbursed. 

Senator NELSON. So you consider these as standard business expenses that you think that morally you are entitled to take as a 

tax credit? 

Mr. MCKAY. The ones that are under the tax code as standard 

business expenses, yes. We will not write off things that are not 

under the standard business expenses. 

Senator NELSON. You know, it is interesting that the Boeing 

Company, when they had those kind of payments, they did not take 

them as a tax credit. Also, with Goldman Sachs, the same thing. 

They did not because of the sensitivity of the wrongdoing that occurred. Surely the Gulf oil spill was as a result of wrongdoing, and 

yet you want to claim that as a tax credit. 

40 

Now, I just want you to know that I respectfully disagree with 

your position, and I would urge the chairman and the ranking 

member to consider—as BP may be entitled to this under the law, 

but that does not make it right—I would ask respectfully to the 

chairman that we consider changing the law to follow the example 

set by Boeing and Goldman Sachs. 

The CHAIRMAN. Well, Senator, we certainly will consider it. We 

will consider any request made by any Senator, especially the Senator from Florida. Were you finished with your questions? Yes. 

Next is Senator Carper. 

Senator CARPER. Yes. Thanks very much. Gentlemen, thank you 

for joining us today. 

About a month ago, sitting right in the middle there, was Alan 

Blinder, who used to be the vice chairman of the Federal Reserve. 

He was on a panel, a 3- or 4-person panel, and we were talking 

about deficit reduction, and asking a group of really smart people 

what they thought we ought to be doing. 

I think it was Alan Blinder who said the 800-pound gorilla in the 

room on deficit reduction is health care costs. We live in a country 

where we spend about twice as much as they do in Japan and get 

worse results. They cover everybody, we do not. He said that is the 

800-pound gorilla in the room. 

I followed up his comment by saying, well, with respect to health 

care cost containment and getting a better result for less money, 

what is your advice? He said, ‘‘I do not really know much about 

that.’’ He said, ‘‘But as a lay person, I would just say this: find out 

what works and do more of that.’’ That is what he said: ‘‘Find out 

what works and do more of that.’’ 

Democratic Senators were over at the White House yesterday 

with the President, and our Republican friends were over there 

today. We had a conversation with the President about deficit reduction. I shared with him Alan Blinder’s comments, which I think 

are not only appropriate for health care, but really for the way we 

spend money throughout the government. 

My own view is, and I shared this with Alan Blinder that day, 

we need to look in every nook and cranny of the Federal Government, all of our domestic programs, our defense programs, our entitlement programs, tax expenditures, and just ask this question: is 

there a way we can get better results for less money or better results for maybe the same amount of money? We just need to 

change our culture in government, to focus on moving from a culture of spendthrift to a culture of thrift. 

When it comes to tax expenditures, we need to do the same 

thing. There are assertions and a strong belief in this country, and 

certainly here today, that some of the tax expenditures that relate 

to your industry do not necessarily get us the best result for the 

amount of money that has been lost to the Treasury. We are going 

to vote on the legislation, I think, authored by Senator Menendez 

probably next week. 

My guess is, there are not 60 votes to pass it. But later this year 

we are going to be voting on an effort to try to turn the deficit by 

about $4 trillion over the next 10 years and we are going to do that 

largely on the spending side, maybe $2 of spending for every dollar 

41 

of revenue. Entitlements will be on the table, domestic spending, 

defense spending, and tax expenditures will be on the table. 

I would just say to you that, when the vote occurs next week and 

we do not get 60 votes for Senator Menendez’s proposal, that 

should not be the end of this conversation. We should continue to 

have a conversation so that we can try to figure out, how do we 

get a better result for less money, or really, how do we get a better 

bang for the taxpayers’ dollars. Your industry needs to be involved 

in that as well. 

If I ran your business—and I do not pretend to understand it especially well—I would not consider myself an oil company. I would 

consider myself an energy company. My belief is, that is what you 

do. Most of you do that. I would just like for you to talk to us about 

the efforts that you undertake in your companies to move us away 

from fossil fuels, to move us toward sources of energy that impair 

health less than oil does, or fossil fuels do, that enable us to come 

up with new technologies that we can sell—manufacture products 

and sell them around the world. 

Let us just go down the list. Do you want to go first and just tell 

us what you are doing to help us, through your company’s efforts 

to develop renewables, non-polluting forms of energy, and what can 

we do to help you there? 

Mr. TILLERSON. Well, Senator, first, I agree wholeheartedly with 

your comments on the deficit. Ultimately, we are an advocate for 

comprehensive tax reform. All of these things we are talking about 

today should be on the table in comprehensive tax reform. 

As to what we are doing in developing alternative fuels—and we 

have concentrated principally on transportation fuels because that 

is what we know the best; we are not an electric power generator, 

so we are not into windmills, we are not into solar. It is just not 

our business. But we are in the transportation fuels business. 

As we have evaluated all the various technologies available out 

there for alternative transportation fuels, the one that we believe 

has the most promise—although it is many years away—is to capture biofuels from algaes, from various strains of algaes. We have 

undertaken a joint venture initiative. We have committed $600 million with a company called Synthetics Genomics. They have considerable expertise in mapping genomes. 

Ultimately, we think we are going to have to synthesize the type 

of algaes that are necessary to be able to scale up. First, we have 

to be able to take this to scale, and it has to be delivered at a cost 

that the consumer can afford. So we think there is a lot of promise 

in the algae space, but it is a long, long road ahead of us. 

Senator CARPER. Thank you. 

Please? 

Mr. MULVA. Thank you. We continue to ramp up our spending 

on research and development for alternatives, and we similarly 

have a program that stresses algae. I would say, though, that fossil 

fuels represent, and will continue to represent, more than 80 percent of the energy that is required around the world. 

One of the key things that is very important for our country is 

natural gas. It has been over the last several years. With technology developments—and we are blessed with a great deal of natural gas, some think for decades, and some think even for centuries 

42 

to come. So we are really applying a lot of research and development, how we can develop natural gas even cleaner and more efficiently. We think our country is robust with these resources for 

standard of living and development of our economy. 

Senator CARPER. All right. Thanks. 

Yes, sir? 

Mr. MCKAY. Quickly, we think of oil and gas as the main driver 

in our business. But on top of that and incremental to that, alternative energy, quick numbers, we have invested $7 billion over the 

last several years, most of them in the U.S., around wind, biofuels, 

lignocellulosic biofuels, biobutanol, solar, and then carbon sequestration. It is a growing business. It is difficult, but it is growing. 

Senator CARPER. All right. Thank you. 

Yes, sir? 

Mr. ODUM. Well, we do absolutely consider ourselves an energy 

company. I would tell you that as a company, internally we look 

and say we want to be the most innovative and competitive energy 

company in the world. So that is the perspective we take. We have 

been in all of the businesses that have been mentioned: wind, solar, 

hydrogen, and others. The one that is emerging for us as the real 

opportunity is biofuels. 

We have just recently formed a $12-billion joint venture around 

current technology for producing large-scale amounts of biofuels, as 

well as in adding to that the very intense research and development we have been doing to take that to the next level. It is exciting stuff. We were talking about using enzymes to speed up the 

conversion to an ethanol, and another technology that potentially 

skips the ethanol step and goes straight from a biomass to a gasoline or diesel equivalent. So, it is exciting business. 

Senator CARPER. All right. Thanks. 

The last one. 

Mr. WATSON. Senator, just in addition to some of the comments 

that have been made here, we are the largest producer of renewables thanks to our geothermal business. That is a very active business for us in Indonesia and the Philippines in particular. We too 

are making investments in advanced biofuels. We too believe it will 

be some time before those will come to market. 

One opportunity that I think is out there during this transition 

phase that you were talking about is energy efficiency investments. 

We have an energy efficiency company that goes in and makes investments in educational institutions and elsewhere to reduce energy consumed. I think that is a big opportunity, and it is a nearterm opportunity across this country. 

The CHAIRMAN. Thank you, Senator. 

Senator CARPER. Thank you very much. 

The CHAIRMAN. A couple of us have a couple of follow-up questions here. 

Mr. Tillerson, you mentioned comprehensive tax reform, that you 

are strongly in favor of comprehensive tax reform. I do not think 

there is anyone here who disagrees with that. But that is easy to 

say. The question is, what do we mean by comprehensive tax reform? Before I ask you what you mean, the general feeling is, we 

lower the rate, broaden the base, both in corporate and individual. 

That seems to be a trend, similar on the individual side, to what 

43 

we did in 1986. On the corporate side, we lower the rate. We have 

the highest corporate rate in the world. Lower it, be more competitive. But broaden the base, try to find a way to do this in a 

revenue-neutral way. 

But by definition, if we are doing that, lowering the rate and 

broadening the base, that means we are starting to cut back on 

some incentives. Whether it is biofuels, whether it is solar, geothermal, you name it. Or some of the incentives that you have. 

Your general advice to us—I would like to ask all five of you—as 

we pursue tax reform, does that mean to you that maybe we should 

lower the rate, but also cut back on some of the credits, exclusions, 

deductions, and so-called tax expenditures? Because, by definition, 

we have to, otherwise we are going to lose a lot of revenue. And 

that is hard to do in this big debt/deficit climate. 

Mr. TILLERSON. Well, Senator, I would support all of that. When 

we say comprehensive tax reform, everything for everybody everywhere has to be on the table. So, if you want to talk about section 

199, repeal it for everybody across the board—gone. Again, you say 

you are going to broaden the tax base, if that is coupled with an 

overall lowering of the corporate income tax rate. I just use 199 because there is a whole host, as you well know, of elements to our 

tax code that are very complex. I think simplifying the tax code, 

broadening—— 

The CHAIRMAN. Well, 199 is probably not a bad example, because 

some use it, some do not. 

Mr. TILLERSON. We are really just creating conditions for greater 

investment in the country, because we have to grow our way out 

of this deficit problem. We have to make it more attractive for people to invest, create revenues, broaden that base. That is where a 

lowering of general rates would be productive. 

The CHAIRMAN. But you go along then, though, with the scaling 

back a lot of the tax expenditures. 

Mr. TILLERSON. Across all businesses. Not just ours; across all 

businesses. 

The CHAIRMAN. Yes. I am getting that. All right. 

Mr. TILLERSON. And in the foreign tax code, it needs an overhaul 

as well. The only principles I tend to live by are: make the United 

States a more attractive place for investment, do not harm American competitiveness overseas because competitiveness brings enormous benefits and wealth back to this country, and keep the playing field level within industries so that everyone competes. We love 

to compete. I mean, that is what we thrive on, is the competition. 

The CHAIRMAN. All right. 

Mr. Mulva? 

Mr. MULVA. I completely agree. Make it simpler. Make it in a 

way that is consistent for everyone. Certainty that we do not anticipate changes going forward will promote investment and, I 

think, additional revenues and will certainly help with respect to 

employment. 

The CHAIRMAN. But do you agree with the general principle that 

corporate tax reforms should be revenue-neutral? 

Mr. MULVA. Yes. 

The CHAIRMAN. You do? Thank you. 

Mr. McKay? 

44 

Mr. MCKAY. I agree as well. Anything that can increase competitiveness for the U.S. in terms of investment I think would be good. 

I agree with all the comments that have been made. The simpler, 

the better. The more predictable, the better. Job number one is to 

get investment up. 

The CHAIRMAN. But the way to increase competitiveness, in your 

view, is how? 

Mr. MCKAY. Exactly as we have been saying. If the overall tax 

rate goes down and is broadened, and some of the complexity is 

taken out, that should aid competitiveness. 

The CHAIRMAN. I do not want to make this too complicated, but 

as you well know, in the United States, much business income now 

is no longer corporate income, but is pass-throughs, where it is the 

individual income taxes which have to be looked at, not corporate, 

which greatly complicates this question. 

Mr. MCKAY. Yes. 

The CHAIRMAN. I mean, we have more pass-through business income in this country, I think on a proportionate basis, by far compared with any other country. That is a recent trend. You might 

want to consider being a pass-through, but, as I go down the list 

here, let me just give you a chance, Mr. Odum. 

Mr. ODUM. I am glad the term ‘‘stability and predictability’’ came 

up, because that is very important, so I think comprehensive reform with everything on the table. Yes, I agree with the comments 

that have been made, with the driving policy element being, ensure 

U.S. competitiveness. 

The CHAIRMAN. Mr. Watson? 

Mr. WATSON. I agree with the comments that have been made. 

I would only hope that over time it will raise more revenue because 

it will promote growth. I think that is really what we are trying 

to achieve. 

The CHAIRMAN. Mr. Tillerson, do you want to say something? 

Mr. TILLERSON. Just on your comment, your point about passthroughs and subchapter S partnerships: it is an important one because, as you point out, so many of small and medium-sized businesses are structured as passthroughs under the tax code. Again, 

in comprehensive tax reform, we are dealing with the corporate tax 

code, but also the individual tax code. We will have to deal with 

that. 

Once that is structured, then allow those entities to check the 

box on which they want to file. They do not file under the corporate 

tax code today because it is not advantageous for them to do so, 

but if that is restructured they may find the corporate tax code to 

be more beneficial for their filings than having to file on the individual tax code. 

The CHAIRMAN. One minor point here—not so minor, perhaps, 

from your perspective. That is the dual-capacity question. I think 

you would agree that your company—all companies—should get a 

tax credit for foreign taxes paid to a foreign country, and that is 

the general rule: you get a tax credit. The general rule, too, though, 

is that you do not get a credit for royalties. You do for income tax 

paid in that country, but not royalties. 

I think the question here is characterizing that payment. Is it a 

royalty, or is it a tax payment? I think the goal here on the dualVerDate Nov 24 2008 15:02 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 R:\DOCS\75747.000 TIMD
45 

capacity—there are various ways to structure it—is to make sure 

that the company—your company, any company—properly gets 

that tax credit when it is payment of income taxes to that other 

country, but not as a royalty payment, and it is difficult trying to 

figure out what accurately is royalty and what accurately is income 

taxes. That may have something to do with the law, I do not know. 

But a royalty is a contract for the individual, tax is general applicability to all companies that might make a profit. So we are trying 

to do the right thing by separating what is a royalty from what is 

properly a tax payment. That is the goal here. 

Mr. TILLERSON. Well, and I appreciate the recognition of that 

and do not disagree with any of what you just said, Senator. It is 

challenging dealing with the complexities of the host country’s tax 

system and how is it characterized, payments that we are required 

to make to them, and how that fits under the U.S. tax code. It is 

a difficult task, but, as I said, we must prove to the IRS that they 

are legitimate income taxes, not royalties. So I understand the 

challenge. 

I mean, the alternative is to go to a different system, which I 

know, because we have talked with your staff, and others have 

talked about going to a system of foreign tax code that is more in 

line with what most of the rest of the world has, which would be 

a territorial system. Then again, it is getting that system structured so that it does not violate that principle of mine, which is, 

do not structure it such that American companies are at a disadvantage to their competitors overseas. I think that is achievable. 

As with all things, the devil is in the details, but I think we have 

a way to move to a system like that. That simplifies an awful lot 

of the complexities that exist in our current tax code. 

The CHAIRMAN. Right. Before I pass this on—this is going to be 

incredibly difficult. 

Mr. TILLERSON. It is, without question. 

The CHAIRMAN. It is going to require the good faith of everybody 

involved. It is analogous to our efforts to try to reduce our debts 

and deficits. I mean, it has to be shared. Everybody is going to 

have to give in a little bit here and there, for the greater good. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. Mr. Chairman, 

yesterday on the floor Senators Landrieu and Begich spoke about 

these hearings and related legislation that was quite critical, so I 

ask that their statements be placed in the record. 

The CHAIRMAN. Without objection. 

[The floor statements of Senators Landrieu and Begich appear in 

the appendix on p. 96.] 

Senator HATCH. All right. 

Now, Mr. Chairman, I would like to comment on a few items before I go into the second round of questions. 

My friend from New York implied that the roughly $60 billion in 

tax incentives that we are discussing today are a key factor in reducing our $1 trillion-plus deficit. My friend from Maryland made 

a similar point. Nobody is arguing that the number is insignificant. 

What we are worried about is what the effect of removal of these 

domestic production incentives would be. 

46 

The testimony is clear. Removing these incentives is going to 

drive production offshore; it is just that simple. That is what has 

been said here today. But I will tell you, there were spending cuts 

of similar size proposed by Dr. Coburn—who is a member of our 

committee—that were rejected out of hand by my friends on the 

other side. Those spending cuts, another version of shared sacrifice, 

to use your terms, did not involve student loans. They did not involve low-income folks. They did not involve infrastructure investment. Here is an example. 

Dr. Coburn proposed selling Federal buildings that are defective, 

vacant. That proposal was doggedly opposed, as reasonable as it is, 

by my friends on the other side. That proposal involved $80 billion. 

So let us make no bones about it: there are two sides to what is 

happening here. 

Let me just ask you this, Mr. Tillerson. Combining all of U.S. 

companies into one large company, if you took all five of you—all 

U.S. companies, not just the five of you, but all of them—into one 

large company, if we combined them all, that would give that company control over only 6 percent of the world’s oil production, as 

I understand it. Six percent of the global oil production and control 

over less than 2 percent of global oil reserves. Yet, we require them 

to go out into the world of titanic, nationally owned oil companies 

and still provide us with a continued, large supply of oil. 

Let me show you this chart. U.S. companies are the wee, little 

sliver there. That is 1.4 percent. Look at the OPEC nations, beginning with Saudi Arabian Oil Company, National Iranian Oil Company, Iraq National Oil Company, Kuwait Petroleum, right on 

down the line. Here is where we are. We are this small little sliver 

here. All these others are OPEC nations that own those production 

facilities. 

I guess what I am asking you is, you are the Big 5 American 

companies. Am I wrong on the small slice of petroleum exploration 

and production that is listed on these charts? Mr. Tillerson? 

Mr. TILLERSON. No. I think those numbers show, to my recollection as well, that we do not represent an enormous holding of the 

reserves or the production. I would say this, though. We do represent an enormously important participant in the development of 

global energy supplies, and we do work in a number of the OPEC 

countries. 

Senator HATCH. But you do not own all of these. 

Mr. TILLERSON. No, no. I mean, what you have would represent 

our share of what we would own. 

Senator HATCH. And that is that little slice in that overall pie. 

Mr. TILLERSON. Yes. Yes. 

Senator HATCH. Mr. Odum, did I hear you correctly, you were 

willing to spend $700 million in the Gulf on enough domestic energy production to power more than 600,000 vehicles a day? And 

I believe you also said that you invested $3.5 billion in the last 5 

years to develop large oil reserves in Alaska. Now, is your testimony that Shell has spent over $4 billion to produce domestic oil, 

but that the only thing standing in your way is the government refusing to allow you to go ahead? 

Mr. ODUM. Well, I think the case, as you say, is emphasized by 

what is happening in Alaska, so we are approximately at someVerDate Nov 24 2008 15:02 Sep 12, 2012 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 R:\DOCS\75747.000 TIMD
47 

thing around $3.5 billion, about 5 to 6 years now, into trying to 

drill in Alaska, and we have yet to be able to do so because of the 

permitting situation and overall coordination of the government 

agencies. 

What I tried to emphasize earlier is the impact of something like 

that. So again, the studies through the University of Alaska indicate that developing that part of the industry could be 750,000 barrels a day on a long-term, multi-decade basis. 

Senator HATCH. So you spent $3.5 billion on the project, and you 

cannot get the doggone permits to do what you know is there. 

Mr. ODUM. Exactly. It does not reflect well on the U.S., I am 

afraid, in terms of drawing investment to this country and being 

competitive in this business. 

Senator HATCH. One of the first acts of Secretary Salazar was to 

withdraw 77 onshore Federal oil and gas leases in Utah after years 

of jumping through environmental hoops and we had finally got 

there. It was an agreement between the Governor and the BLM, 

after they had already been studied, auctioned off, and paid for. It 

was one of the strongest anti-oil signals you could have sent to the 

oil industry. Could you elaborate on your experience, or any of the 

rest of you, if you would care to? 

And also answer this question, before we finish. Assuming this 

legislation passes, the Menendez legislation, will it bring down the 

prices of oil at the pump, or is this just a big charade? You do not 

have to use my terms, but answer that for me. Why are we doing 

this? Why are we putting you at a disadvantage when you are that 

little, small slice of the overall pie? You are competing against nations that have oil companies, nationalized oil companies. Go 

ahead. 

Mr. ODUM. Well, I think that the competitiveness point is exactly 

right. The chart is accurate from what my information would tell 

me as well. I think the thing we have to be careful not to lose in 

the chart is what I called earlier this enormous opportunity that 

exists in the U.S. We have a tremendous number of resources. We 

can impact the energy balance and the domestic production of that 

energy balance in the U.S. 

Senator HATCH. Well, why do you not do it then? 

Mr. ODUM. Well, it is a matter of access. 

Senator HATCH. And that of getting the permits. 

Mr. ODUM. Which goes far beyond just the limited part of the 

conversation today, which is around the tax code. I think to look 

at a real energy policy that provides this industry with access to 

those resources, we could have a significant impact on the economy, the deficit, the trade balance, and the energy security of this 

country. 

Senator HATCH. I would like to know if any of you believe that 

this bill will help decrease prices at the pump. 

Mr. TILLERSON. No. 

Mr. MULVA. No. 

Mr. MCKAY. No. 

Mr. ODUM. No. 

Mr. WATSON. No. 

Senator HATCH. And by the way, I know that some people are 

a little upset that I have taken this time. I sat here while every 

48 

Democrat has taken considerable extra time. I am the only one 

here on the Republican side because everybody had to go to the 

White House. So I would hope that I could be granted a little bit 

more time. 

The CHAIRMAN. All right. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. I just have one question, but I also want to note where we are at this point 21⁄2 hours 

into the hearing. Gentlemen, you all have done, as major oil companies, a dramatic about-face this morning. In 2005—you were there, 

Mr. Mulva—all of you said you did not need tax incentives to drill 

for oil. Today you have come to say you have to have them, when 

oil is at $100 a barrel. 

I just think that position defies common sense, and certainly, 

even adjusted for inflation, you are even doing better now than you 

were in 2005. So this debate is going to go forward, and I just want 

to make sure that folks who are paying attention to this pick up 

on that as we wrap up. 

I have one last question I want to ask of you, Mr. McKay, because of some of the comments that you have made. That is the tax 

credit that exists for blending ethanol. Now, as you know, you all 

are required by law to implement the Federal Renewable Fuel 

Standard and blend billions of gallons of ethanol into the gasoline 

that you sell. 

Your testimony says, ‘‘BP is already one of the largest blenders 

of ethanol in the Nation.’’ So my question, Mr. McKay, is why 

should oil companies—it is not just yours, but all of the oil companies—be getting $6 billion a year in tax credits for complying with 

an existing law to blend ethanol? 

Mr. MCKAY. That law was introduced to get ethanol as a biofuel 

into the fuel mix into the U.S., which has been very successful as 

an incentive to do that. We are not opposed to that transitional incentive being phased out. We think it was important for transitional incentives for second-generation biofuels. 

Senator WYDEN. Well, I think that that is constructive, and I am 

glad we are noting that. 

Mr. Chairman, you and I have talked about this. There is no 

question in terms of energy policy that often you need an incentive 

to get something off the ground. Clearly what Mr. McKay is talking 

about is that this incentive made some sense at the beginning, but 

it does not make sense now. It involves $6 billion. Mr. McKay, I 

think it is constructive that you said this morning that you would 

be willing to phase it out. 

Mr. Chairman, I would like to talk with you and Senator Hatch 

and have further discussions, and I thank you. 

The CHAIRMAN. Well, thank you, Senator. 

I think Senator Snowe made a good point, too. This committee 

should, and we will, look at the effectiveness of all the tax expenditures, all the incentives, to see which ones are more effective than 

others, and maybe we can get rid of a few of them. It reminds me 

a little bit—and I am sure some of you do not know this; it is a 

difficult question for all of us—there are about 141 tax provisions 

in the code that expire every year or every 18 months. We call 

them expiring provisions. They are a nightmare. It makes no sense 

49 

for us to go back and reinvent the wheel 141 times every year or 

18 months. They have to be paid for, and it is just maddening. It 

diverts our time from bigger questions. 

So we would be looking at a lot of these provisions and others. 

I would like to eliminate a lot of those or make them permanent 

so there is not a lot of uncertainty surrounding them, both from 

our side and also from the industry side. But anyway, we are going 

to be looking at a lot of different tax expenditures to see which 

ones are effective. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. Let me concur in 

your comments in regard to tax reform and assure you that there 

is great interest in making our tax code more competitive and more 

predictable. I think predictability is extremely important for investors. We have to give you and investors the ability to know what 

the ground rules are, so we agree on that. 

I want to make one comment in response to Senator Hatch. The 

numbers here, $4 billion as I understand it if all were repealed, 

equal about 3 percent of the profits of the five companies. Most of 

these profits are going back to the shareholders. So I just do not 

see the impact that Senator Hatch is referring to on either jobs or 

any of the issues that you bring up. I just think the math is pretty—— 

Senator HATCH. If the Senator would yield. My point is, and I 

think they are making the point, if you are going to do this, you 

should treat them fairly along with all the other companies that receive certain tax expenditures. Now, I agree, we have to do tax reform, and that includes looking at everything. 

Senator CARDIN. And I agree with that. 

Senator HATCH. But I do not want them mistreated just because 

they are an industry that people hate and because they are ‘‘so 

big.’’ 

Senator CARDIN. I understand. Let me bring it back to the point 

that has been used here. I understand the business is taking, the 

five companies here are taking, the tax provisions that are there 

and taking advantage of them. That is your responsibility. If you 

did not do that, you would have problems with your shareholders. 

But understand why we think that these are either unwarranted 

incentives or subsidies, particularly the section 199 deduction. 

Section 199 was a response to the fact that our corporate taxes 

are not border-adjusted versus Europe’s and other countries’ consumption taxes, which are border-adjusted. So we did something to 

help our foreign sales. That was the purpose, the genesis, of section 

199. We wanted to be able to compensate for the fact that our foreign competitors had an advantage over U.S. manufacturers on the 

way that taxes were handled at the border. 

Now, my understanding is that in your industry there is more 

imported product than exported product, so it does not make a lot 

of sense for you to get a tax advantage when this is the philosophy 

of what this section was originally created for. Now, as you know, 

the World Trade Organization ruled the previous provisions for foreign sales were out of compliance, and we had to go to a general 

manufacturing provision. That is how this section came about. 

50 

Well, on two fronts, we have questions as to whether this is a 

reasonable tax advantage to the oil industry. It is not traditional 

manufacturing, and it is not the type of export activity that was 

disadvantaged by the corporate structure in having a product enter 

the international marketplace. 

So I just think we have to get to the rationale—this is the largest 

single source of the revenues we are talking about today—that has 

its genesis in helping United States manufacturers get a product 

into the international marketplace, which is not the circumstances 

of the product that you are basically involved with. You import the 

crude, as I understand it. The final product is mostly domestic. I 

am sure some hits the international marketplace, but it is certainly 

not the target for why this particular tax provision was put in the 

tax code. Does anyone disagree with that? I knew I would get Mr. 

Tillerson involved there. 

Mr. TILLERSON. Well, if you want to repeal it, repeal it for everyone, because I am not sure that the coffee roasters are growing coffee here and exporting coffee. I am not sure that the newspaper 

companies are exporting, predominantly, their newspapers. So I do 

not disagree with your comment or your premise. My only point is, 

if you want to get rid of it, just get rid of it across the board. Do 

it for everybody. 

Senator CARDIN. I do not disagree with the point. 

Mr. TILLERSON. Do not just get rid of it for one industry. 

Senator CARDIN. For some manufacturing companies, this is 

rough justice. It really helps them. I would rather do it directly as 

we did with foreign sales. We cannot do that under the WTO. I 

would like to reform our tax code so that we have a competitive 

base. If we can do that, that is my first choice. If we cannot do it, 

we should tailor this more to its purpose of helping exporters who 

manufacture in the United States. 

Mr. TILLERSON. My only principle that I ask you not to violate 

is, do not treat companies within the same industry differently, and 

do not treat industries on your principle of exports differently. 

Senator CARDIN. Well, it is tough sometimes to draw a line. I understand the point that you are raising. All I am pointing out is 

that that is why some of us look at the section 199 as it relates 

to the oil industry as either an unjustified incentive or as a subsidy, because we do not believe it is the original intent to benefit 

your type of activities. I just really want to put that in the record, 

and I very much appreciate your response. 

The CHAIRMAN. Thank you, Senator. 

Senator Rockefeller? 

Senator ROCKEFELLER. Thank you, Mr. Chairman. 

I want to repeat, but then expand a little bit, what I said earlier. 

I really do believe that you are out of touch. I do believe that. Mr. 

Tillerson does not. That does not mean you are not good people, 

that you do not participate in your communities, that you do not 

do helpful things along with the work that you have to do. 

But I think the main reason that you are out of touch, particularly with respect to Americans and the sacrifices that we are having to look at here in terms of trying to balance, or come even close 

to balancing, a budget is that you never lose. You have never lost. 

You always prevail. 

51 

You always prevail in the halls of Congress, and you do that for 

a whole variety of reasons, because of your lobbyists, because of 

friends, because of all the places where you do business. I do not 

really know any other business that never loses, that never fails to 

do as well as you do. 

Then I think one of the problems—and you cannot help this, in 

a way—is just the size of the amount of money you make is really 

hard for average people in West Virginia to even come close to understanding. They do not think that that can be come by in the regular order of the way the world treats them. They are always in 

the process of losing. Everything is an uphill battle. 

So my view of my work in West Virginia, which is mostly mountainous, 96 percent mountainous, is that I am holding onto a huge 

boulder—a not too huge boulder—with both hands and trying to 

push it uphill. That is every day I feel that. I love that feeling. But 

I know if I take one hand off, I and the boulder would disappear 

into the ether, or I guess the opposite of the ether. The gulch. 

So that then leads me to say—this is my opinion, but I really believe it, I just really believe it—I have just never seen any industry 

so successful, so constantly successful, so I think you all have a 

great sense of assurance as you are sitting there, more so than 

usual—and we have steel people, automobile people, or other kinds 

of people there. You have a great sense of assurance. I do not think 

you feel threatened by anything that is going on here. I do not necessarily know that you have any reason to feel threatened because 

of the way the votes line up in this present Congress. 

But I yearn for one of you to see what average people are going 

through and to figure out some way in your mind, what can I do 

as a very, very large and profitable company, to make sure that 

that bad thing does not happen to that person, losing health insurance or losing unemployment insurance, the endless number of 

things that people have to worry about every single day? You do 

not have to worry about those. None of you took a commercial airplane to come here. I do not blame you for that. You have the 

money to have planes, but our people do not. 

So I just want to sort of stipulate that and then say one more 

thing. The greatest danger to this country right now, other than 

the deficit, in terms of national security, is something called cyber 

security. We are writing a bill in the Commerce Committee, and 

the Homeland Security bill is participating in that, which comes up 

with a solution which I hope we can pass this year. There is an 

enormous amount of work and expense that companies have to go 

to that are being attacked already. 

The Pentagon, I think, has had hundreds of thousands, maybe a 

million times a day, people hacking in, getting secrets, not just 

WikiLeaks, but anybody can do that. So how do they defend themselves? Well, they have to go to all kinds of security measures. I 

met with most of them yesterday, particularly the bigger ones. I 

said, you are going to have to bear that expense. The government 

cannot do that for you. 

We do not have the money to do that for you, because it is going 

to go on for the next 50 or 100 years, we are going to be facing 

these problems. They did not object to that. In fact, they said, we 

think that is the right thing, the way it should be. We should have 

52 

to pay more. We should have to dig into our profits to make ourselves more secure. 

So that is why, when you talk about the R&D, that your expenses are like research and development for pharmaceutical companies or somebody else, that is why I think it is wrong of you to 

say that, because it just is not. So much of that exploration has already been done. I think that is a cost that you could absorb so easily and still do very well. 

But not once during this hearing have I heard any semblance of 

a willingness to share unless every other company also has to, 

which is a way of kind of building up the defense that it cannot 

happen. 

Well, putting it more simply, I have not heard anybody talk 

about what they are doing, what they would be willing to do to 

share in our budget problem, and in the total concept of what 

keeps America together, and that is a sense of fairness, that everybody has to lose at some time, everybody has to give something up 

for us to be a real country. 

Do any of you have any things—if you just do not add on, so long 

as every other company does it too—do any of you think about this, 

things you could give up, things you could just stop doing, breaks 

that you now get that you would not get, as a way of helping? 

Mr. MULVA. Senator, I very much appreciate the comments that 

you are making. I can only represent how we as a company feel. 

I do not know how the others feel. But we feel like we are constrained and restricted from our opportunities. We feel we are in 

a noble industry that provides the energy that has developed this 

country into what it is and its standard of living, and we are constrained from what we feel could be a part of the energy solution 

for this country and for the world. But we are constrained, there 

are shackles on us. We are ready to invest. We are ready to do far 

more; you have heard today. So it is not a question of looking for 

incentives. We are looking for—put us back to work. Give us access 

to the lands. Let us start drilling. Put our people back to work, and 

we will develop assets—— 

Senator ROCKEFELLER. I am way past my time. But can I just 

say that we feel constrained, we cannot do what we want to do? 

Maybe you are right and maybe you are wrong. I think you are 

wrong. I think the great bulk of our people across the country are 

suffering in ways that you probably had no idea of or just do not 

understand. I think that is sad. 

The CHAIRMAN. Thank you, Senator. 

Which opens up another subject, and that is leases. I would just 

like an answer for my own information. I do not know the answer. 

I have not discussed this at any great length with anybody in the 

industry. But I have heard you often say, and have said previously, 

that you would like to have more access around America, whether 

it is the Gulf, the North Slope, wherever it is, more access, permits 

so you can do your work, as you said, Mr. Mulva. 

But on the other hand, I hear some people say—and this is the 

question I have—that there are millions of acres of leases that you 

own which you are not utilizing. I am just curious what your response is to that, if there is one, because it does come up quite frequently, that question. 

53 

Mr. ODUM. If I could just start. I mean, I am going to take you 

back to Alaska again and try to put this in perspective. 

The CHAIRMAN. How many—— 

Mr. ODUM. I will put it in terms of—— 

The CHAIRMAN. I am just curious. 

Mr. ODUM. I will put it in terms of leases. 

The CHAIRMAN. Yes. 

Mr. ODUM. So, in the Gulf of Mexico, we are one of the top three, 

and sometimes the second- or third-largest operator in the Gulf of 

Mexico. We have between 400 and 500 leases, and about 35 percent 

of those are producing. The rest are in some stage of evaluation or 

being drilled, and so forth. 

If you compare it to Alaska, we have over 400 leases in Alaska 

that are sitting idle, waiting for permission to move forward, just 

to put that question into balance. 

The CHAIRMAN. All right. Anybody else? Yes? 

Mr. WATSON. Senator, perhaps I can comment on lead times. A 

lot has been said about leases that are undeveloped. We just made 

a final investment decision last year on a Jack/St. Malo development. This is in 7,000 feet of water. It is a $7.5-billion commitment. We made that commitment during the moratorium on the 

expectation that we would get permits, which I expect we will, to 

drill the development wells. 

Those leases were first issued in the late 1990s, and we did not 

know how to explore or develop in that deep of water. Technology 

has advanced. We have done exploration work, we have done exploratory drilling, we have done delineation drilling. Now we have 

made a decision that will result in production in 2014. So there is 

a long lead time in the offshore area, which is where most of the 

undeveloped leases are today. 

Now, we are having trouble getting permitting on the leases that 

we have, which is keeping those leases inactive. So I think, when 

you hear us talking about the opportunity that is there, one is to 

make sure that we have timely issuance of permits on the acreage 

we already have so that we can continue to explore. The other is 

making sure that the outer continental shelf is fully explored. The 

U.S. Geological Survey and others have made estimates that you 

could create companies twice the size of Chevron with the resources that we have not developed yet. Now, we will not know 

what we have until we explore those areas, but that is the opportunity that we are talking about. 

The CHAIRMAN. My second question is, again, your public reports 

show, I think it was in 2010, that about 60 percent of your aftertax profits were invested in stock repurchase or dividends, and so 

forth, and about 40 percent elsewhere. I suppose that is reinvestment, I do not know. That seems to a lot of people, gee, a lot of 

money is going back to shareholders, and a lot of money that you 

are making is going to stock repurchase. Why is more of that not 

going into reinvestment? So that is the first question. 

The second question is, how does that percentage compare with 

other industries? That may or may not be relevant, but it is just 

a question that came to my mind. 

Mr. Tillerson? 

54 

Mr. TILLERSON. Well, last year we earned about $30 billion. We invested $32 billion, so we invested more than we earned. With 

that cash flow, the first thing we do is we pay all of our expenses, 

we pay our people, their salary, wages, and benefits, we pay all our 

bills. We pay our taxes. We fund our opportunities, $32 billion 

worth. Then what is left over, we pay the dividend. If there is anything left beyond that, then we return that to shareholders through 

share repurchases. It is their money. They invested it with us, they 

entrusted us with their savings to go invest it, grow it, and give 

them some income back. So I know it is a novel thought up here 

in Washington, but we actually give the money that belongs to our 

investors back to them if we do not need it. 

The CHAIRMAN. I appreciate what you said. Maybe this is inaccurate. I have a chart here. It is a Form 10–K for Exxon Mobil. I 

have also ConocoPhillips, Chevron, and Shell here, for 2010. It 

says, according to this chart, stock repurchases and dividends as a 

percent of profit in 2010 was 70 percent, and for ConocoPhillips it 

was 77 percent. That is the data. We are not trying to fudge anything. I just look at the—— 

Mr. TILLERSON. That is roughly consistent with the numbers I 

just gave you. 

The CHAIRMAN. All right. So, you mentioned $32 billion in profit. 

Mr. TILLERSON. Thirty billion in profits. My recollection is, we re- turned $19-plus billion to shareholders last year. I do not have the 

number immediately in front of me. 

The CHAIRMAN. Anyway, I think when the public sees this, they 

will think, well, gee, it would be better if we used that money to 

go back for more jobs, more investment, and so forth. But I understand the shareholders own the company. Your board of directors—— 

Mr. TILLERSON. We would love to. Give us something to work on. 

We would love to. 

Mr. WATSON. Senator? 

The CHAIRMAN. How about a trade here: more leases, give up the 

tax breaks. 

Mr. TILLERSON. I do not think I came to negotiate a trade with 

you today, Senator. I came to answer your questions. 

The CHAIRMAN. That just popped in my mind. [Laughter.] 

Mr. WATSON. Senator, I would just offer that Chevron paid $5.6 

billion in dividends last year to our shareholders. Ultimately, those 

dividends are taxed, and the government receives revenue. We do 

not repurchase very many shares, but when we do our stock has 

gone up $30 or $40 in the last couple of years. There is a nice gain 

on that. 

The CHAIRMAN. Of course. 

Mr. WATSON. That generates tax revenue for the government as 

well, and the money is then reinvested where the investor thinks 

it is appropriate. So the country still benefits from it. 

The CHAIRMAN. All right. 

Do you have more questions? 

Senator HATCH. Yes, I do. 

The CHAIRMAN. All right. Senator Hatch. 

Senator HATCH. Yesterday in the Wall Street Journal, former 

Democratic Congressman Harold Ford, a good friend of mine, 

55 

asked, ‘‘Why, when gas prices are climbing, would any elected official call for new taxes on energy?’’ I thought that was a pretty interesting question coming from a Democrat. 

I think it is a good question. In your testimony, you say that 

changing important tax provisions outside the context of broader 

corporate tax reform would achieve one unmistakable outcome. It 

would restrain domestic development and reduce tax revenues at 

a time when they are most needed. 

Would you folks please elaborate on the negative economic consequences of the proposed selected or selective tax increases that 

the Menendez bill would impose on only your industry, not all the 

others who have similar tax expenditures or tax deductions? 

Mr. WATSON. Certainly. To the extent that taxes are increased, 

it impacts the economic valuations we go through, and we will 

spend less. Natural gas prices are low today. Deep water developments are very expensive. Costs have more than doubled over the 

last few years. To the extent more onerous tax provisions are 

placed on us, we will spend less money on development. That will 

translate to less oil and gas produced in this country. 

Senator HATCH. All right. 

Does anybody else care to comment on that, or do you all agree 

with that? 

[No response.] 

Senator HATCH. All right. Well, this business of dual-capacity 

rules came up today. Generally all U.S.-based companies are entitled to a foreign tax credit against U.S. tax based on foreign taxes 

that they pay. Now, you mentioned that we would be really wise 

to go to a territorial system just like everybody else in the world 

has. But our system is some screwed-up system where we are constantly trying to find ways of resolving some of the difficulties 

when you earn monies overseas and are taxed by the countries 

overseas. 

But let me go through this. So generally, all U.S.-based companies are entitled to a foreign tax credit against U.S. tax based on 

foreign taxes that they pay. In general, foreign-based multinationals do not claim much U.S. foreign tax credit. 

But it is essential to most American companies with global operations. Now, the dual-capacity rules currently in place determine to 

what extent a payment from a U.S. company to a foreign government is equivalent to an income tax, and thus eligible for the foreign tax credit, and to what extent such payment is for specific economic benefit, such as for the purchase of oil from the foreign government or for the right to upgrade a gambling casino, and thus 

only a deductible business expense (and not eligible for a foreign 

tax credit). 

Now, my first question is for anyone on the panel who cares to 

answer. Is it true that repeal of the dual-capacity rules would be 

very harmful to American-based oil companies, but that such repeal would be of negligible effect to foreign-based oil companies? 

The second question is, to the best of my knowledge, the dualcapacity rules are only of significant benefit to two sectors in the 

United States, the oil and gas sector and the gambling and casino 

sector. 

56 

Can any of you confirm that it is the case that the recent proposal, S. 940, would still allow the gambling casinos, such as MGM 

Resorts, Caesar’s Entertainment, Wynn Resorts, Boyd Gaming, and 

Las Vegas Sands, to claim the benefit of dual-capacity rules while 

you would not be able to? Now, just to make sure I have understood correctly, I will summarize. The proposal before us, it seems 

to me, would harm American oil companies but would not harm 

foreign oil companies and would not harm gambling casinos. I am 

not for harming those. Am I wrong on that? 

Mr. WATSON. I do not know that much about the gambling business, but I can tell you, when tax rates exceed the U.S. rate overseas, if we do not have dual-capacity tax treatment, we will be 

ceding business over time to our foreign rivals, whether they are 

Chinese national oil companies, Russian oil companies, even European companies. So it is very important. 

I would further add that the Internal Revenue Service is wellable to distinguish between royalties and taxes. There are very few 

areas of the tax code that have been studied more than this subject, so that may have been a difficulty years ago, but there is 

abundant case law and abundant rules to determine the difference 

between a royalty and a tax. It is important that we be allowed to 

take tax credits where we have already paid taxes overseas. 

Senator HATCH. Would anybody else care to comment? 

Mr. TILLERSON. Well, I would just echo John’s comments, that it 

would have a devastating impact on our ability to compete overseas. This is one topic where you will not find the five companies 

aligned, because two of my foreign-owned competitors are at the 

table. They operate under a territorial system, so we would lose 

competitiveness relative to them. 

Then, in an already very crowded and enormously competitive 

world we find ourselves in, in the resource development space, because of the growing presence of the national oil companies—which 

already come to the game with other advantages that we do not 

have nor do we seek—we have to offset that by finding other ways 

to out-compete them. What we would like to have is at least a level 

playing field from a tax standpoint and not be at a disadvantage. 

Senator HATCH. I pointed out what a small slice you are of the 

world. You are competing with national oil companies, national 

international oil companies, I guess you would have to say. 

Well, let me just finish with this comment, Mr. Chairman. If I 

have you all correctly here, what you are saying is that it would 

be very unfair to pass this type of legislation because it would be 

selective taxation against, peculiarly, your industry that other industries in this country benefit from, and that that just does not 

seem right to you, as far as I can see, I mean, if I am summarizing 

this properly. You can surely correct me if I am not summarizing 

it in the right way. 

That would be an unfair approach and would make you less competitive if that happened. That would cost jobs, and most importantly of all, it would cost real jobs because you employ a lot of people. If you could do your work up there in Alaska, my gosh, you 

would put a lot of people to work. 

Alaska would benefit greatly. It is costly coming to the Congress 

asking for help, where the oil business has really helped Alaska 

57 

over the years. You would put these people to work and, frankly, 

if I understand this hearing and what you are all saying, it would 

be unfair and probably—well, not probably. The bottom line is, and 

I do not think any of you will disagree with this, it will not bring 

down gas at the pump one penny. In fact, it is likely to go up because of the selective taxation approach. Is that right? 

[No response.] 

The CHAIRMAN. Thank you, Senator. 

This concludes the hearing. I will end, though, where I began, 

namely just to remind all of us here, we have a fiscal problem on 

our hands, a Federal fiscal problem. Let us get these deficits down. 

We have to make choices. None of them is easy. I, twice a week, 

go over to the Blair House and meet with the Vice President and 

a couple other members of the Senate, a couple from the House, 

Secretary Geithner, OMB Director Jack Lew, Gene Sperling, the 

President’s economic advisor, going down lists, trying to figure out 

how we do this. It is not easy. 

Agriculture—you tell me how many farmers want their commodity supports cut? Conservation programs, food stamps—I mean, 

you name it, this is not fun stuff. I just urge all of you to keep that 

in mind. When you go back to your daily work and so on and so 

forth, maybe talk to your people and say, gee, maybe there is a way 

we can contribute here, too. 

Because we are in this together, and everybody here clearly 

wants more jobs, more growth, wants America to be number one, 

to have incentives to invest in the United States so foreign corporations, foreign investors invest more in the United States. If we can 

do that more, American investors will invest more in the United 

States, if we find incentives to do that while we also probably reform the corporate and individual income tax system. There are 

other measures clearly which encourage investment. 

So this hearing is concluded, but to be honest with you, I am not 

totally convinced that these provisions add that much to your decisions in where you invest or do not invest, or, if they are taken 

away or substantially reduced, would make that much difference, 

given the huge profit margin which exists because the price of oil 

is just so high. 

I agree with Senator Hatch: this is not going to change the price 

at the gasoline pump. That is not the issue. I do not see that as 

an issue at all. The issue I see is, who shares and how much does 

each segment share as we try to get our debt and deficits under 

control, and at the same time develop an energy policy? 

Senator HATCH. Mr. Chairman? 

The CHAIRMAN. I grant you, we have to develop energy policy in 

this country. It does not have an energy policy. There is a lot we 

have to do, but we also have to figure out how we get our debt and 

deficit down. 

Senator HATCH. Mr. Chairman, just one last comment. I agree 

with you, and I know that you are sincerely devoted to doing that. 

I appreciate it, and it is an honor for me to serve with you. My 

problem is, there is not a real good reason for raising this because 

I guarantee you, if they raise these taxes, Congress will spend 

every dime of it. It will not go to pay down the deficit. We do not 

have the capacity right now, or even a Gramm-Rudman bill—that 

58 

might work better—that would cause this money to go to pay down 

the deficit. I guarantee you, if you raise taxes—— 

The CHAIRMAN. Senator, I respectfully disagree. The reason I disagree is because we have to. We have to get these deficits and 

debts down so we do not bump up against the debt limit, so we do 

not default, so we do not bump against the limit. We have to get 

our debts and deficits down so this country is on sound financial 

footing. We will do it because we have to do it. 

The hearing is concluded. 

[Whereupon, at 12:18 p.m., the hearing was concluded.] 

(59) 

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Æ 


75747326.eps