Big Oil CEOs on Capitol Hill defend profits, tax breaks *updated*

Executives from the nation’s five biggest oil companies are telling a Senate panel this morning that they should not be blamed for spiking crude prices and that proposals to raise taxes on their firms will suppress domestic energy production.

The executives from Chevron Corp., Shell Oil Co., BP America Inc., ConocoPhillips and Exxon Mobil are appearing before the Finance Committee, as the full Senate begins debating a proposal to raise $21 billion over 10 years by axing a suite of industry tax credits and deductions.

Marvin Odum, president of Shell Oil Co., argued that global markets — not oil companies — set the price for crude, now above $100 per barrel. “Stated simply, oil is a global commodity,” Odum said. “And oil companies are price takers, not price makers.”

Congress must “balance the potential implications of increased industry costs on both supply and price,” Odum said. If proposed tax hikes are scratched in favor of increased access to domestic energy resources, “we would see tens of thousands of new, well-paying jobs and billions of dollars in revenue for local, state and federal governments.”

“If we don’t develop our own energy sources, we’ll have to accept the costs — both financial and geopolitical — of bringing it into this country from places that are less secure or less stable,” Odum said.

Chevron CEO John Watson insisted that the oil and gas industry already “pays its fair share in taxes.” He reprised an argument ConocoPhillips made to shareholders Wednesday that the worldwide effective tax rate for the industry was about 40 percent. Chevron alone paid the government $86 million each day between 2005 and 2009 in taxes, royalties and fees, Watson said.

Watson also made the case that that the targeted tax deductions have parallels in other industries and that eliminating them only for the five biggest oil companies would be unfair.

“There should be equitable treatment for all forms of energy and for all energy producers — large and small,” Watson told the Finance Committee. It is “anticompetitive and discriminatory” for the Senate to single out five companies because of their size.

Exxon Mobil CEO Rex Tillerson also argued that the plan is “discriminatory and punitive.”

“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 resources,” Tillerson said.

James Mulva, chairman of Conoco Phillips, illustrated how taxes play a role in the company’s investment decisions. Higher U.S. taxes would give a further advantage to foreign competitors.

Lamar McKay, president of BP America, stressed his company’s investments in renewable energy and alternative fuels.

He emphasized the importance of a “stable and competitive tax framework” for the U.S. to remain attractive in a global competition for capital investment: “Changes to tax rules being contemplated would limit the amount of 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.”

But Senate Democrats argued that the tax deductions amount to wasteful and ineffective corporate subsidies.

“Businesses should of course make a profit. That’s the American way. It drives our economy,” said Sen. Max Baucus, D-Mont., the Finance Committee chairman. “But do these very profitable companies actually need taxpayer subsidies?”

Baucus also dismissed arguments that slashing the tax breaks for the biggest oil companies would suppress their investment in domestic exploration and production.

“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,” Baucus said. “After all, based on first quarter profits, these tax breaks represent less than two percent of what these companies are on pace to make this year. Even without these tax breaks, these companies would clearly be highly profitable.”

Sen. Orrin Hatch, R-Utah, accused Democrats of engaging in political theater “to score political points” and “to distract Americans from their failure to develop a coherent energy policy.”

Hatch said that singling out the oil and gas industry because of high crude prices would set a bad precedent.

“Are we to increase taxes any time a company sees an increase in quarterly profits due to high demand of a commodity?” Hatch asked. “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?”

The hearing was at times combative, with Sen. Robert Menendez, D-N.J., blasting Mulva for his company’s assertion in a press release Wednesday that the tax proposals were “un-American.”

Sen. Charles E. Schumer, D-N.Y., pressed the executives to choose between cutting federal student aid programs or oil industry deductions — and then accused Mulva of standing against students.

Sen. Jay Rockefeller, D-W.V., told the executives, flatly: “I think you’re out of touch — deeply, profoundly out of touch.”

Rockefeller said the business leaders seemed oblivious to the tough federal deficit-cutting decisions facing lawmakers.

“Not once during this hearing have I heard any semblance of a willingness to share unless every company also has to,” Rockefeller said. “I haven’t heard anybody talk about what they are doing — what they would be willing to do — to share in our budget problem. The total concept of what keeps America together . . . is a sense of fairness, that everybody has to lose at some point, everybody has to give something up to be a real country.”

Watson rejected that ideology. “The American people don’t want shared sacrifice,” he said. “I think the American people want shared prosperity.”

Senators repeatedly — and unsuccessfully — pressed the executives to define at what price or profit margin the oil companies would be willing to cede the deductions.

Sen. Olympia Snowe, R-Maine, questioned if there was “a price point at which we remove these incentives.”

Rockefeller asked “how much profit on a barrel of oil do you have to make to not be needful of these subsidies?”

And Sen. Debbie Stabenow, D-Mich., made another attempt: “What would it take, in level of taxpayer subsidies, for you to bring our gas prices down?”

Tillerson insisted that the current tax structure is designed “to incentivize and help people go out and invest in the next incremental barrel of supply.” That can be upended, he said, but the cost would be additional production.

“If you don’t want the incremental supply, you can make the tax structure higher and the next incremental barrel doesn’t get developed,” he told Stabenow.

Watson said that oil companies don’t need a handout, but do require “a reasonable return on our investment.”

The Senate Democrats’ bill would block the top five major integrated oil companies from claiming:

  • A tax credit on payments to foreign governments — including petroleum income taxes — that they pay in exchange for some economic benefit. The five biggest oil companies would still be able to deduct foreign payments.
  • A domestic manufacturing deduction, which has generally been available to a broad range of U.S. firms.
  • A deduction for intangible drilling costs, such as the cost of repairs, site preparation and hauling supplies. Currently, integrated oil companies can expense 70 percent of the cost of these intangible drilling costs, but the legislation would require the big five oil companies to instead capitalize all of these costs.
  • A percentage depletion deduction for oil and natural gas wells, computed using a portion of the revenue from the sale of those hydrocarbons.

The bill also would limit the deduction of certain tertiary injectants, chemicals used to boost the amount of oil and natural gas that can be recovered from individual wells. Currently, companies are allowed to deduct the cost of those injectants, but the bill would force the big five oil companies to instead capitalize those costs and recover them over time.