Key Terms and Definitions

CSS: Carbon Capture and Sequestration refers to the effort to capture large scale CO2 emissions at the point of origin, an example of which is the emissions produced at a coal-fired electrical plant. Once captured the CO2 would be permanently stored in subsurface saline aquifers, reservoirs or other sinks. The approach is to permanently reduce the overall amount of free CO2 in the atmosphere. There is an opportunity to apply this type of technology to the Canadian Oil Sands operation to lower the overall carbon footprint of Canadian Oil Sands.

Cap & Trade: Cap & Trade is an approach to limit the amount of industrial emissions, in the current environment the focus is on limiting CO2 emissions. The government would set a cap on the amount of CO2 that could be emitted, and may continuously lower the cap over multiple years. Companies are issued permits and need allowance credits for the amount of CO2 that they emit. The industries’ total emissions must fall at or below the cap. If a company is able to operate without the need for all of their allowances, they can sell their extra allowances to companies that are exceeding their allowance credits.  The trade portion of the proposal sets up a market for the secondary trade of allowances. Those who are more efficient at reducing emissions are able to sell extra allowances to buyers who are not as efficient. There are two ways to distribute the initial allowances. In the European implementation, the allowances were distributed to carbon producers without a required fee. In contrast to that approach, the current proposed US method is to charge carbon producers a set fee for their initial allowances and to use the majority of those proceeds on other non-energy related programs.

In Marathon’s view, a cap-and-trade approach controls the quantity of emissions rather than price; it lacks transparency and it is essentially a hidden tax on American consumers.  In addition, this approach is highly susceptible to market speculation which can cause extreme market price volatility to the detriment of all energy producers and consumers.

Carbon Tax: A Carbon Tax is also a method to reduce overall CO2 emissions, which differs from the Cap & Trade approach by focusing on the cost of carbon versus the quantity.  A carbon tax is the direct application of a tax based on the amount of carbon emitted.  It establishes a clear and consistent cost of carbon.  The tax can be adjusted over time to drive the intended amount of CO2 reductions.  This approach is easily understandable and provides companies with incentives for the reduction in the total amount of carbon emitted.

Marathon’s perspective is that a carbon tax is more stable, transparent and equitable across all producers and users of energy.  In addition, it reduces the chance of picking winners and losers and it could be adjustable over time with minimal volatility.  Furthermore, Marathon believes a substantial amount of the revenues generated through a carbon tax should be directed toward the development and application of technologies that will minimize the impact of fossil fuel use on the environment, as well as emerging alternative energy technologies.

Conference Committee: Is a temporary, leadership-appointed, ad hoc panel composed of a small number of House and Senate members, usually a collection of committee chairpersons, ranking members, and leadership from both chambers. The conference committee is formed for the purpose of reconciling differences when the House and Senate pass separate versions of the same legislation. After the conference committee passes a modified version of the bill, it is returned to both chambers for a vote and cannot be amended on the floor. Typically, conference reports are debated and passed by both chambers, though the report can be returned to the conference committee with instructions on changes that need to be made.

Lease Diligence: Suggestion that oil and natural gas companies are hording federal mineral leases, especially in the offshore.  Various “Use it or Lose it” provisions have been suggested that define active leases as only those that are producing.  If a lease is not active, it would have to be relinquished to the government at a rate accelerated from current law that does not accurately account for long lead times required by these projects.

Dual Capacity: Current law allows U.S. companies to get a tax credit against U.S. tax liability for any foreign income tax paid. Under the proposal, U.S. companies will be denied the right to prove to the court that an income tax being paid to a foreign government meets the definition of an income tax under U.S. law. This proposal will result in double taxation on the foreign earnings of oil and gas companies, making U.S.-based companies less competitive in the global marketplace against foreign oil companies.

IDC Expensing: Intangible Drilling and Development Cost (IDC) – As documented in an  IPAA overview, “IDC tax treatment is designed to attract capital to the high risk business of natural gas and oil production. Expensing IDC has been part of the tax code since 1913. IDC generally include any cost incurred that has no salvage value and is necessary for the drilling of wells or the preparation of wells for the production of natural gas or oil. Only independent producers can fully expense IDC on American production.  Eliminating IDC expensing would remove over $3 billion that would have been invested in new American production.”

LIFO:  Is an accounting method for valuing inventory, and it stands for Last–In, First-Out.  This method assumes that companies should value the inventory that they utilize in their cost of goods sold at the replacement value, the amount that they last paid for it.  The replacement value is used in the income statement, which in an inflationary period will lead to lower profits and lower taxes.  An alternative, which is First–In, First-Out (FIFO), values the cost of goods sold at the historical price, and assumes that the inventory that was purchased first is what should be used to value the inventory on the income statement.  In an inflationary period, this will lead to higher profits and higher taxes.

Section 199:  American Petroleum Institute (API) documentation explains Section 199 as “While the American Jobs Creation Act of 2004 began as an effort to modify tax rules declared illegal by the World Trade Organization, Congress redirected that effort and developed a tax deduction to encourage investment in U.S. manufacturing jobs. The result was IRC Section 199, which makes deductible a portion of income derived from domestic manufacturing and production activities. For most U.S. manufacturers, the deduction will eventually be equivalent to a three-percentage point reduction (35% to 32%) in the corporate income tax rate for qualified domestic income. While the inclusion of oil and gas extraction and refining income for purposes of Section 199 had bipartisan support when the legislation was adopted, recent legislation has already limited the deduction for domestic oil and gas activities from fully phasing in.”

Superfund:  American Petroleum Institute (API) documentation states “The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), otherwise known as Superfund, is the federal program created to pay for the cleanup of “orphan” waste disposal sites – those that are either abandoned or whose owners are bankrupt. Annual budget authority and appropriations for the Superfund program have remained stable. Future cleanups are not in jeopardy, and responsible parties will continue to pay for cleaning up the sites for which they are responsible, thereby ensuring the continued application of the “polluter pays” principle.