Bill Totten's Weblog

Monday, July 26, 2010

Oil is its own master

Energy companies operate in a high-profit, limited-liability world of their own making

by Khadija Sherife (July 11 2010)

Three weeks after the Deepwater Horizon exploded in the Gulf of Mexico, executives of the offshore drilling company Transocean celebrated in a luxury hotel in Zug, Switzerland, where the company is based. The owners of the Deepwater rig, which was valued at $650 million before the accident, were expecting the first installment of their insurance payout: $401 million. At a closed meeting they agreed to pay $1 billion in dividends to shareholders.

Oil rigs are classed as ships under international maritime law, and Transocean's lawyers had been able to argue that the company's financial liability should be limited to the post-accident value of the rig, barely $27 million. (The same law - the 1851 Limitation of Liability Act - allowed the owners of the Titanic to pay only $95,000 to its victims, the value of the safety equipment and lifeboats.)

Transocean is trying to emerge from the disaster unscathed, while the multinational operator of the rig, BP, has become the focus of criticism.

The other big oil companies have started to dissociate themselves from BP, suggesting that the Deepwater leak was avoidable and that they would not have gone ahead with drilling that well. The White House has now agreed to a deal with BP to suspend dividends for a year, with the money put in a special account to cover compensation claims.

The oil companies are not happy about the six-month moratorium on deep-water offshore drilling imposed by President Barack Obama: They want to return to business as usual as quickly as possible, even though that business has led to environmental catastrophe.

Flags of convenience

The headquarters of International Registries Inc is in Reston, Virginia, a long way from the disaster in the Gulf of Mexico. It's a small office: IRI's activities do not require a large staff.

The company offers clients the opportunity to circumvent maritime regulations by registering vessels under the flag of countries with more relaxed laws, such as the Marshall Islands - two chains of coral atolls in the Pacific Ocean with a population of 62,000. IRI boasts of being the most experienced maritime and corporate registry in the world, covering oil drilling as well as transport. Among its clients are Transocean and BP.

Last year the Marshall Islands was ranked the world's fastest-growing maritime registry, with 221 oil tankers sailing under its flag of convenience - four times more than the United States, home to major corporations such as Chevron and ExxonMobil. Like Panama and Liberia, the Marshall Islands is also a "secrecy jurisdiction" - a tax haven and offshore financial center.

To register under the Marshall Islands' flag of convenience, there is no need to set foot on the archipelago. A few faxes or e-mails suffice.

By being registered there, corporations can evade taxes and royalties and circumvent employment laws, environmental legislation and other regulations. Names of directors and shareholders need not be disclosed to IRI and can be kept private in the islands. It is no surprise then that Transocean, the world's largest offshore drilling corporation, has registered 29 of its 83 ships there, with the others sailing under Liberian or Panamanian flags.

Encouraged by US policy

Companies like IRI are the direct heirs of US foreign policy and a tradition that goes back to the end of World War Two, when US demand for oil began to outstrip supply and people realized black gold would become a major strategic resource.

With the support of President Franklin Roosevelt's former secretary of state, Edward R Stettinius, and the huge energy corporation Standard Oil, Liberia set up the world's first open ship registry in 1948. It was run from New York by the firm Stettinius Associates-Liberia Inc. According to historian Rodney Carlisle, Liberia's maritime code was "read, amended and approved by Standard Oil".

Until the 1990s, IRI - the successor to Stettinius Inc - made Liberia a haven for oil companies. But during the country's civil war, President Charles Taylor became too greedy so the company decided to add the Marshall Islands to its portfolio. Within fifteen years, the republic was among the top ranks of tax and regulatory havens.

Registering rigs in the Marshall Islands does not place operators out of reach of US legislation, an official at IRI explained to me: "Whenever a foreign flag [mobile offshore drilling unit] is operating in another country's territorial waters, whatever that country requires in order for that MODU to operate must be adhered to by the MODU's owner".

But that does not seem to cause operators much concern. During a joint investigation hearing into the explosion and sinking of the Deepwater Horizon, US Coast Guard Captain Hung Nguyen was shocked to learn from the Mineral Management Service that there was "no enforcement" of oil rigs, and that a rig owner or operator "self-certifies and establishes what they think is adequate". When Captain Nguyen summarized what appeared to be the MMS method of operation - "designed to industry standard, manufactured by industry, installed by industry, with no government oversight of construction or installation, is that correct?" - Mike Saucier, the MMS regional supervisor, said: "That would be correct".

A few years earlier, another inquiry established that MMS had exempted BP from environmental safety regulations. On that occasion, the Department of the Interior's inspector general described the service as marked by a culture of "ethical failure", including acceptance of gifts from energy corporations.

Years of self-regulation

The US system of self-regulation inherited by Mr Obama - who received the most BP funds given to a presidential candidate - was put in place under the administration of President George W Bush. Vice President Dick Cheney's Energy Task Force, formed only two weeks into Mr Bush's presidency, quickly approved Executive Order 13211, which, according to the National Resources Defence Council, was "nearly identical in structure and impact" to a document drafted by the American Petroleum Institute, the oil industry trade group. The working sessions of the task force were held behind closed doors, with top oil executives, including BP's John Browne, present.

Having obtained a copy of the 13,500 page document by order of a federal judge, the NRDC concluded: "Big energy companies all but held the pencil for the White House task force, as government officials wrote a plan calling for billions of dollars in corporate subsidies and the wholesale elimination of key health and environmental safeguards".

During those favorable years, BP, with 294 subsidiaries in secrecy jurisdictions, decided to increase production while reducing its exposure to risk by outsourcing its drilling operations. It leased Deepwater Horizon from Transocean for $1 million a day up to 2013 and aggressively began to tap offshore fields.

By April 20 this year the rig was near completion, but the cost of the rig led BP managers to ignore Transocean safety procedures. Despite the fact that the blowout preventer was known to be faulty, neither Transocean nor BP put safety above the main objective: "drill baby drill".

Both Transocean and BP no doubt will survive this crisis. The same cannot be said of the ecosystem of the Gulf of Mexico.


Khadija Sherife is a journalist and co-author of "Aid to Africa: Redeemer or Colonizer?"

Copyright (C) 2010 Le Monde Diplomatique - distributed by Agence Global.

Bill Totten


  • "Leges Sine Moribus Vanae."

    Morality is not a luxury, a pretty addition to life. Morality is life. The early greeks understood this, as did the early romans and the early israelites. Morality is reflected in culture. But when right and wrong cease to be relevant, when corruption is prevalent, society is dead. And the US has been dead for a long time now.

    By Blogger Unknown, at 8:34 AM, August 10, 2010  

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