Note J – Income Taxes

The Company’s effective income tax rate generally exceeds the statutory U.S. tax rate of 35%. The effective tax rate is calculated as the amount of income tax expense divided by income before income tax expense. For the three-month and nine-month periods in 2011 and 2010, the Company’s effective income tax rates were as follows:


	2011			2010
Three months ended September 30		37.2	%		44.0	%
Nine months ended September 30		41.1	%		42.8	%

The effective tax rates for the periods presented exceeded the U.S. statutory tax rate of 35% due to several factors, including: the effects of income generated in foreign tax jurisdictions; U.S. state tax expense; a tax rate increase in 2011 on oil and gas profits in the U.K.; and certain expenses, including exploration and other expenses in certain foreign jurisdictions, for which no income tax benefits are available or are not presently being recorded due to a lack of reasonable certainty of adequate future revenue against which to utilize these expenses as deductions. A one-time tax benefit in Malaysia reduced income tax expense in 2011.

In July 2011, the United Kingdom enacted a supplemental tax rate increase for oil and gas companies effective retroactive to March 2011. The total U.K. tax rate increased from 50% to 62% for oil and gas companies. The Company recorded the effect of this tax increase in its consolidated financial statements in the third quarter 2011. The supplemental tax increased income tax expense by $14.5 million for the three-month and nine-month periods ended September 30, 2011. The majority of this impact relates to a third quarter adjustment to increase the carrying value of net deferred tax liabilities associated with U.K. upstream operations. The tax rates for the three-month and nine-month periods in 2010 benefited 0.5% and 0.2%, respectively, for an income tax adjustment in the U.K.

In the third quarter 2011, it was determined that Block P expenditures are deductible against Block K income. The Company recorded a $25.6 million income tax benefit in the three-month and nine-month periods ended September 30, 2011 associated with prior-year expenditures in Block P. The Company had previously recognized no tax benefits associated with Block P expenditures.

The Company’s tax returns in multiple jurisdictions are subject to audit by taxing authorities. These audits often take years to complete and settle. Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future years from resolution of outstanding unsettled matters. During the third quarter of 2011, $6.5 million of uncertain tax positions were settled in the U.S. and recorded as a benefit due to a lapse of time related to the statute of limitation. As of September 30, 2011, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows: United States – 2008; Canada – 2006; United Kingdom – 2009; and Malaysia – 2006.