INDUSTRY AFFAIRS

Subject: Letter to editor

 Much has been said about Exxon earning $40 billion. What is less widely discussed is the taxes Exxon pays. Last year, Exxon had $140 billion of pre-taxable income and paid more than $100 billion in taxes, 70 percent of what it earned. Most of that was excise taxes which non-oil companies do not pay. Exxon pays nearly $275 million of taxes every day.

In contrast, last year General Electric made $26 billion and paid $4 billion in taxes. AT&T made $18 billion and paid $6 billion in taxes.

Google made $5.7 billion and paid $1.5 billion in taxes.
Exxon paid more taxes in one week than Google paid in an entire year.
Some politicians have been proposing "windfall profit taxes" specifically targeted at Exxon and a handful of other U.S. oil companies. They stoke public anger toward high gasoline prices in order to build momentum to pass additional taxes that ironically will increase the cost of energy.

Exxon deserves the money it earns. It uses technology to find oil in extreme environments that otherwise would never be brought to market, thus increasing oil supplies and lowering prices. We all benefit from the oil it provides.

OCAPL

INDUSTRY AFFAIRS REPORT

April 11, 2008 

This is the 45th report from the Industry Affairs Committee of OCAPL.  The opinions expressed herein are those of the writers and not necessarily those of OCAPL, AAPL, former clients, or our current employers.  The objective of this exercise is to alert OCAPL members to (a) the activities of organizations and governments that affect the way we do business, (b) public opinion that shapes legislation, and (c) judicial decisions relating to energy issues.  Hopefully, this knowledge will provoke each of us to recognize the critical role we, as LANDMEN, play in sustaining America’s standard of living and thereby feel compelled to respond to the challenges before us.  Your comments regarding this effort are always welcome. 

 The Committee at Work:  current members in the OCAPL Industry Affairs committee, including Monica Smith and Jennifer Krieg, Brett Hudson, and John Raines.  If you would like to participate in this committee effort, we would be pleased to hear from you.

Each of the following Articles is submitted by Committee Member John Raines.

Big Oil Goes to Washington – Execs Answer Questions About High Fuel Prices, by  H. Josef Herbert; The Associated Press; 4/2/2008.

“Executives of the country's five largest oil companies said Tuesday (4-01-08) that they know record fuel prices are burdening people, but argued that it is not their fault and the huge profits these companies are making are in line with other industries. Appearing before a House committee, the executives were pressed to explain why they should continue to get billions of dollars in tax breaks when they made $123 billion last year and motorists are paying record gasoline prices at the pump. "On April Fool's Day, the biggest joke of all is being played on American families by Big Oil," said Rep. Edward Markey, D-Mass., aiming his remarks at the five executives sitting in the congressional hearing room.  

In Oklahoma, Dewey F. Bartlett Jr., president of Tulsa-based Keener Oil and Gas Co., told the Tulsa World that Congress has the potential to adversely affect Oklahoma's oil and gas industry. Bartlett said that lawmakers have good intentions but should address the falling dollar, which is one of the driving forces behind rising oil prices. "Most people in Congress don't understand . . . and don't take the time to realize how world economies are affecting prices," Bartlett said in a phone interview. In Oklahoma, 95 percent of the oil and gas industry consists of smaller, independent producers, who contributed about $1 billion last year to state revenue through gross production taxes, according to Bartlett.

Among those appearing before the House committee was J.S. Simon, senior vice president of Exxon Mobil Corporation. "Our earnings, although high in absolute terms, need to be viewed in the context of the scale and cyclical, long-term nature of our industry as well as the huge investment requirements." Simon said. "We depend on high earnings during the up cycle to sustain . . . investment over the long term, including the down cycles."  The up cycle has been going on too long, suggested Rep. Emanuel Cleaver, D-Mo. "The anger level is rising significantly."  Several lawmakers addressed the rising price of gasoline at the pump, now averaging $3.29 a gallon amid talk of $4 a gallon this summer. "I heard what you are hearing. Americans are very worried about the rising price of energy," said John Hofmeister, president of Shell Oil Co., echoing remarks by the other four executives, including representatives of BP America Inc., Chevron Corp. and ConocoPhillips.

 While Democrats hammered the executives for their profits and demanded they do more to develop alternative energy sources such as wind, solar and biofuels, Republican lawmakers called for opening more areas for drilling to boost domestic production of oil and gas. "We need access to all kinds of energy supply," replied Robert Malone, chairman of BP America, adding that 85 percent of the country's coastal waters are off limits to drilling. But Markey wanted to know why the companies aren't investing more in energy projects other than oil and gas -- or giving up some tax breaks so the money could be directed to promote renewable fuels and conservation and take pressure off oil and gas supplies. "Why is Exxon Mobil resisting the renewable revolution," asked Markey, noting that the other four companies together have invested $3.5 billion in solar, wind and biodiesel projects. Exxon is spending $100 million on research into climate change at Stanford University, replied Simon, but current alternative energy technologies "just do not have an appreciable impact" in addressing "the challenge we're trying to meet."

 It appears that all ties to free-market capitalism may be on the way out.  Congressman Markey implies that it is “Big Oil’s” responsibility to develop alternative energy, and chastises ExxonMobil for not dumping billions into such projects. Well, maybe it has to do with the fact that ExxonMobil is an oil company and not a wind or solar company. Maybe ExxonMobil’s thousands of tax-paying employees are occupied trying to find oil in places that are technologically challenging or competing with national oil companies abroad since so much of our domestic resource is “off-limits”… just thoughts. And what about the $100+ billion dollars these companies and employees paid in taxes to the federal government? An efficient government might find this tax revenue useful in developing incentives for alternative energy…

 Senators say high oil prices may reflect rampant speculation, by Nick Snow, Washington Editor; Oil and Gas Journal Online; April 4, 2008.
“Two US Senate Energy and Natural Resources Committee members said on Apr. 3 that they will push for more aggressive financial market regulation if they do not get a better idea of speculators' impact on oil prices. Democrats Byron L. Dorgan (ND) and Maria Cantwell (Wash.) each said the US Commodity Futures Trading Commission's (CFTC's) oversight does not include transactions that occur outside regulated commodity exchanges. Deals for oil as an investment may be “distorting its actual value and aggravating economic uncertainty”, they warned. "These energy prices are having enormous consequences. We have people buying what they'll never get from people who never had it. Twenty times more oil is sold in these markets than exists," Dorgan said. When Cantwell asked three energy analysts who testified if they predicted last year that oil prices would surpass $100/bbl, they all said they did not and declined to predict where prices would be 6 months from now. "You're basically saying this is all over the map and you don't know what the price will be. If we're going to protect our economy, we need to close loopholes that keep this activity in the dark," she said. Speaking to reporters, the senators each said that they will try to increase regulatory authority and funding at the CFTC, Federal Trade Commission, and Securities and Exchange Commission as part of the three agencies' fiscal 2009 appropriations. "Where were the regulators? Who was minding the store? This is something that has occurred throughout this administration. The chairman of the SEC promised a business-friendly environment when he took office. What kind of a signal did that send?" Dorgan said.

Growing Participation
Other committee members agreed that growing participation by traders seeking oil purely as a financial asset requires more attention but did not call for increased regulation at this time. Chairman Jeff Bingaman (D-NM) noted in his opening statement that the Government Accountability Office reported last fall that the average daily contract volume for crude oil traded on the New York Mercantile Exchange increased by approximately 90% during 2001-06. The office also noted that the average daily number of noncommercial participants in crude oil markets, including hedge funds and large institutional investors, more than doubled during 2003-06, he said. "It seems that just as the demand for physical barrels of oil has grown with the global economy, there is an increasing demand for oil purely as a financial asset," Bingaman suggested. "Untangling whether and how these dual sources of demand may be operating in concert and potentially impacting oil prices is complicated. But, certainly, I think it's accurate to say that there is a growing suspicion on the part of many Americans that, in the very least, Wall Street's geopolitical judgments may be serving to increase current pricing trends," he continued. Sen. John Barrasso (R-Wyo.) noted that factors ranging from growing demand and declining excess supply capacity to the US dollar's falling value and increased reliance on politically unstable and sometimes unfriendly foreign suppliers are pushing oil prices higher. Adding that domestic production must expand, he asked if more regulation would lead to America's losing its leadership in financial markets. Pete V. Domenici (R-NM), the committee's ranking minority member, noted that Rep. John B. Larson (D-Conn.) plans to introduce a bill that would require investors to take delivery of crude oil and petroleum products. Doing this would eliminate speculation by those who are driving prices higher from oil and gas markets, Larson said in Hartford on Mar. 31 as he announced his plan. He plans to introduce the legislation soon, a spokeswoman told OGJ on Apr. 4. "For me, after today's testimony, I wonder whether we haven't made a mistake in not trying to regulate speculators on the oil market more closely," Domenici said during the hearing.

Proposal's Impacts
Jeffrey Harris, CFTC's chief economist, warned that Larson's approach would remove an entire class of investors who take positions that others would not take from the market. "I don't think trying to identify speculation's part of today's oil price constructively moves the discussion forward," added another witness, Sarah A. Emerson, managing director of Energy Security Analysis Inc., Wakefield, Mass. "There's a difference between speculation and the casino example used earlier," she told the committee. Institutions such as the California Public Employees Retirement System (CalPERS), the largest US public pension fund, buy oil derivatives to add value to their portfolios, Emerson said. "These are not gamblers," she maintained. A third witness, Cambridge Energy Research Associates Managing Director James Burkhard, also noted that noncommercial investors are not simply short-term speculators but include pension fund, university endowment, and other institutions' financial managers. Additionally, they help keep markets liquid, he indicated. "The growing role of noncommercial investors can accentuate a given price trend, but the primary reasons for rising oil prices in recent years are rooted in the fundamentals of demand and supply, geopolitical risks, and rising industry costs," Burkhard said. "The decline in the value of the dollar has also played a role, particularly since the credit crisis first erupted last summer when energy and other commodities became caught up in the upheaval of the global economy." As lower interest rates and anticipation of further cuts crushed the value of the dollar, oil became what Burkhard called the "new gold," a financial asset in which investors seek refuge as inflation rises and the dollar's value weakens. "Today's dynamics in the marketplace reveal oil's increasingly cosmopolitan nature," he said. "Its price reflects not only demand and supply, but broader macroeconomic and geopolitical changes such as the growing influence of Asia, the Middle East, Russia, and the Caspian countries," he said in his written testimony.

Won't Last Forever
Kevin Book, senior vice-president of FBR Capital Markets Corp., Arlington, Va., said it may be accurate that noncommercial buyers of oil forward and futures contracts may be driving the price higher because institutional investors are seeking a value-retaining refuge from the falling dollar. "This phenomenon certainly won't be true forever and may not even be true for long," he said. "If funds flowing into commodities are indeed elevating oil futures, then accumulating evidence of a slowdown within the world's biggest oil consuming economies could provoke an equal and opposite reaction as conservative investors close their positions and aggressive investors sell short," Book said. Book and other witnesses noted that sovereign funds, which invest oil-producing countries' revenues, are a growing noncommercial oil futures class. Harris said the CFTC is aware of this group's activities but does not have extensive data on it. He also confirmed that the agency's staffing is at an historic low at a time when futures and derivatives trading are at an historic peak. "We can see what's happening in markets we don't regulate by the behavior of large traders and other reports we receive," Harris said. Emerson pointed out that national oil companies in producing nations are making a lot of money and investing a lot of it in new capacity, which is good. Asked by Bingaman about steps the US could take, she replied, "There's no quick fix. I think the margin requirements need to be raised for oil futures trading. It's one tool Congress can use." Other witnesses agreed. Burkhard said that oil prices in the $110-120/bbl range over 6 months would reduce demand even in China, India, and other economically growing nations. "It can't keep climbing, and there will be some relief. But it's important to remember that an entire generation of employees didn't enter the oil industry in the 1980s and '90s because the price was so low. It could take 10-15 years to recover from this," he said. Dorgan remained skeptical. "You'd have to be drunk to not understand that when you run an $800 billion trade deficit, it won't have an impact on the value of the dollar," he conceded. "But there also are speculators involved."

XTO Energy expanding its Fayetteville shale acreage, By Oil and Gas Journal Editors, April 7, 2008.
XTO Energy Inc. agreed to acquire 55,631 net acres of Fayetteville Shale leasehold acreage, including producing properties, from Southwestern Energy Co. for $520 million. Upon closing, the acquisition will expand XTO's position in the Fayetteville Shale to more than 300,000 net acres. Closing is expected by May 5. XTO Energy Pres. Keith A. Hutton said the acreage being acquired is contiguous to the Fort Worth, Tex., company's core development footprint. "With the pipeline infrastructure already in place, our immediate plans include using four drilling rigs in 2008 and at least six rigs in 2009," Hutton said. "We expect proved reserves attributable to this acquisition to grow to 160 bcfe this year and at least 325 bcfe by yearend 2009."

  Respectfully,

J. Phil Jones, CPL

OCAPL 2007 Industry Affairs Committee