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):

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.