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Oil Makes Its Own Laws: Self-regulation and Flags of Convenience

The system under which
offshore drilling rigs, and now oil tankers, operate was set up at the end of
the second world war to ensure that the US was supplied with the cheapest
possible oil without having to consider, or pay for, the consequences.

The offshore drilling company Transocean celebrated the
explosion on the Deepwater Horizon in a luxury hotel in Zug, Switzerland, where
the company is based.  On 14 May,
three weeks after the blow-out, the owners of the Deepwater rig, which was
valued at $650m before the accident, were expecting the first instalment of their insurance payout: $401m.  At a closed meeting they agreed to pay
$1bn 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 $27m.  (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 (formerly British Petroleum),
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.1  The White House has now agreed 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 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.

The headquarters of International Registries Inc (IRI) are
in Reston, Virginia, on the outskirts of Washington DC, 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 US, 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 centre.

To register under its flag of convenience, and create a
Marshall Islands “corporation, partnership, limited partnership, limited
liability company or foreign maritime entity”,2 there is no need to set foot on the archipelago.  As I found out, a few faxes or emails suffice.  Pretending to act for a client who
wanted to escape the regulatory constraints of his home country, I made contact
with IRI after the Deepwater Horizon explosion.  In the first email I learned that forming a Marshall Islands
company could be done in a day for an initial filing fee of $650, plus annual
maintenance fee of $450.  We would
immediately benefit from Marshall Islands jurisdiction, including zero
taxation, high levels of client confidentiality (extending to shareholders,
directors, members and limited partners) and voluntary disclosure.

I explained that my client wanted to register a vessel the
size of the BP rig.  By email, IRI
suggested an initial registration fee of $15,000, with a small annual fee of 15
cents per net ton.3  Our correspondent offered a 50%
discount for “registering 10 or more vessels that are 15 years of age or
less”.  By registering in the
Marshall Islands, corporations can evade taxes and royalties, and circumvent
employment laws, environmental legislation and other regulations.  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.

But, I wrote, my fictitious client was worried about what
would happen if there were an accident and the authorities wanted to know his
identity?  Within the hour I had
received this reassurance: “If the authorities come to our Registry or
Jurisdiction and ask us to disclose more information regarding shareholders,
company directors etc, please note that we are not privy to that information
anyway, since all the business organisation and
conduct of the entity is performed by the entity’s lawyers and directors
directly.  Unless the name of the
directors and shareholders are filed in the Marshall Islands and become a
public record (which is not mandatory), we are not in a position to disclose
that information anyway.”

Companies like IRI are the direct heirs of US foreign policy
and a tradition that goes back to the end of the second world war, when US
demand for oil began to outstrip supply, and people realised black gold would become a major strategic resource.  With the support of President Roosevelt’s former secretary of
state, Edward R Stettinius, and the huge energy corporation Standard Oil,4 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 the historian Rodney Carlisle, Liberia’s
maritime code was “read, amended and approved by Standard Oil”.5

Until the 1990s IRI — the successor to Stettinius Inc,
after a series of mergers and acquisitions — made Liberia a haven for oil
companies.  However, during the
country’s civil war, President Charles Taylor became too greedy, so the company
ended a relationship that had provided up to 70% of the government’s legal
revenue.  Then IRI decided to add
the Marshall Islands — a former Japanese colony, under US control from 1947
and independent since 19866 — to its portfolio of registries of convenience.  It transferred all its clients there, and within 15 years the
republic was among the top ranks of tax and regulatory havens.

A significant proportion of oil tankers remain registered in
Liberia, however.  This flag is no
longer administered by the Stettinius firm but by the Liberian International
Ship and Corporate Registry, based outside Washington DC in Vienna, Virginia —
13km from Reston.  According to its
website: “Over 3,100 ships of more than 96m gross tons, which represents
10% of the world’s ocean-going fleet” are registered in Liberia.7  “Many people will be puzzled
by the fact that the shipping registries for Liberia and the Marshall Islands,
both among the largest in the world, are actually based a few miles outside
Washington DC,” said John Christensen, a former senior official on the
island of Jersey, a UK tax haven, who has since founded the Tax Justice
Network.  But he sees no
contradiction: “The truth is that both registries were created by American
interests to get around regulation created to protect Americans, and others,
from exactly the kind of disaster now occurring in the Gulf of Mexico.”

Still within US Law

Registering rigs in the Marshall Islands does not place
their operators out of reach of US legislation, however, as my correspondent at
IRI explained: “Whenever a foreign flag MODU [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.  As
it is that territory they can and do have the authority to ask for whatever
they wish before granting permission for the MODU to engage in drilling for
oil.”

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 department of the interior’s Mineral
Management Service (MMS)8 that there was “no enforcement” of oil rigs, and that the rig’s owner
or operator “self-certifies and establishes what they think is adequate”.9  When Nguyen attempted to summarise 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, responded in the
affirmative: “That would be correct.”

A few years earlier, another enquiry established that MMS
had exempted BP from environmental safety regulations.  On that occasion Earl Devaney, the Department of the Interior’s former inspector
general, described the service as marked by a culture of “ethical failure”,
including acceptance of gifts from energy corporations.10

Were industry safety regulations to be applied, it might not
cause problems for big corporations; regulation and standards relating to
critical safety instruments such as blowout preventers are in the hands of the
corporations and professional organisations such as
the American Petroleum Institute (API), composed of 400 oil and gas corporate
members.

Drill, Baby, Drill

The US system of self-regulation inherited by Obama — who
received the most BP funds to be given to a presidential candidate — was put
in place under the administration of President George W Bush, and under (very
discreet) pressure from Vice President Dick Cheney’s national energy policy
development group, better known as the Energy Task Force.  Formed during the second week of Bush’s
presidency, in January 2001, the Energy Task Force approved, eight weeks after
submission, Executive Order 13211 on energy.  They were able to do it so quickly because, according to the
National Resources Defence Council (NRDC), the text
was “nearly identical in structure and impact” to a document drafted
by the API.  One key section was “nearly
verbatim”.11  The working sessions were held
behind closed doors, with top oil executives, including BP’s John Browne,
present.12

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”.13

During those favourable years, BP —
one of the world’s largest energy corporations, with 294 subsidiaries in
secrecy jurisdictions14 — decided to increase production, while reducing its exposure to risk by
outsourcing its drilling operations.  It leased Deepwater Horizon from Transocean for $1m a day up
to 2013.  Under the leadership of
Tony Hayward, previously the head of exploration, BP aggressively began to tap
offshore fields.  By 20 April this
year the rig was near completion, save for a well that required sealing.  But the cost of the rig led BP’s
managers to ignore Transocean’s 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” (a 2008 US Republican party campaign slogan).

Both Transocean — whose director of communications could
not respond to my questions because of a dental emergency — and BP will no
doubt survive this crisis.  The
same cannot be said of the ecosystem of the Gulf of Mexico, despite Hayward’s
declaration of 18 May: “I think the environmental impact of this disaster
is likely to have been very, very modest.”

Flags of Convenience

The following are the ten principle flags of convenience, in
terms of the size of the ships that sail under them (in thousands of tons):

Country Total tonnage Tonnage of oil
Panama183,50336,945
Liberia82,38932,010
Bahamas46,54316,983
Marshall Islands42,63719,978
Malta31,63310,862
Cyprus20,1094,944
Bermuda9,5921,312
Antigua and Barbuda9,53716
Isle of Man8,9655,137
Saint Vincent and the Grenadines5,203210

Source: UNCTAD, Review of Maritime Transport, 2009

 

1  “Oil Executives
Testify”
, The Wall Street Journal, 16 June
2010.

2  “MI Instructions for
Vessels Registration”, International Registries Inc, 2010.

3  Tonnage is the measure of the size or cargo-carrying
capacity of a ship.

4  Standard Oil became Mobil Oil Corporation, a
predecessor to ExxonMobil.

5  Read Andrew Leonard, “The Gulf Oil Spill
Spreads to the South Pacific”
, Salon.com, 13 May 2010 and 
Rodney Carlisle, “The American Century Implemented: Stettinius
and the Liberian Flag of Convenience”
, The
Business History Review,
vol 54, no 2, Boston, Massachussets, 1980.

6  The Marshall Islands hosts a US military base (US
Army Kwajalein Atoll), receives US aid ($1bn since 1990) and is protected
militarily by the US under the Compact of Free Association.

7  Liberia registry website.

8  Unit within the department
of the interior responsible for overseeing exploitation of mineral resources
and collecting revenues.

9  David Hammer, “Kenner Hearing: Some
Coast Guard Oil Rig Safety Regulations Outdated”
, The Times-Picayune, New Orleans, 12 May 2010.

10  “Sex, Drug Use and
Graft Cited in Interior Department,”
The
New York Times
, 10 September 2008.

11  National Resources Defence Council press release of 27 March
2002.

12  At that time, Lord Browne was the chief executive

of BP.  He
has recently been approached by the UK government to lead a team of advisers
(mostly company bosses) to look at ways government departments can save money.

13  National Resources Defence Council, op cit.

14  “Where
on Earth Are You?”
, Tax Justice Network, 2009.


Khadija Sharife is a journalist and co-author of Aid to Africa:
Redeemer or Coloniser?
(Cape Town: Pambazuka Press, 2009).  This article was first published in the July 2010 issue Le Monde diplomatique;
it is reproduced here with the permission of Agence Global.  For republishing
enquiries, contact: +1 336 686 9002 (phone) or <rights@agenceglobal.com>.




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