BP rig was offshore in more ways than one

(Update 1: Transocean in Zug.)
(Update 2: Grassley letter)

As BP struggles to contain both the damage and the costs of the tragic accident in the Gulf of Mexico, it emerges that Deepwater Horizon, the semi-submersible rig now shipwrecked as a result of the catastrophic blowout, was registered in the Marshall Islands, a major flag of convenience for ship owners and operators (offshore oil, registered, offshore: a doubly offshore.)

Flag of convenience jurisdictions have been a part of the globalised market place since the 1930s. Operators love them since they provide lax shipping regulation combined with low tax and cheap labour. In an essay titled 'Sovereignty for Sale' American historian Rodney Carlisle noted:

An officer of the first shipping company to transfer a U.S.-flagged ship to Panamanian registry explained the appeal: "The chief advantage of Panamanian registry is that the owner is relived of the continual . . . boiler and hull inspections and the regulations as to crew's quarters and subsistence," pointing out that as long as the ships pay the registry fee and yearly (low) tax, "we are under absolutely no restrictions."

Not surprisingly, offshore oil rig operators share this passion for cutting costs, and since oil rigs are classified as ships for this purpose, they are major users of flags of convenience. Indeed in this article Andrew Leonard claims that oil companies have been prime movers in the creation of flags of convenience in places like Panama, Liberia, and the Marshall Islands, aided and abetted by U.S. diplomats and lawyers.

The rig will also, it has to be said, be covered by U.S. safety regulations (though those were poorly enforced). But drilling rigs are contracted out by the oil service companies (like Transocean) that own them, on short-term jobs, often just for a few months. This rig was leased to BP until 2013 but that gave BP leeway to move it around the world: it is not clear what environmental standards would have been applied had this rig been drilling off Angola, for example, another major BP focus. Imagine if the U.S. government had said "we don't let any rig come into our territorial waters unless it is registered in a reputable jurisdiction." The U.S. could then "export" higher environmental standards around the world.

What would be the loss? Shareholders would lose a bit from not being able to cut costs by cutting corners on environmental standards - and they would undoubtedly scream that they the investment climate has become unattractive - but anyone who understands the oil industry will know this is bluff. The equation is simple: the oil is there, and the investors will come. (As we mentioned recently, oil extraction is a "rentier" business, where you can extract a lot, such as tax or tighter environmental standards, without killing investment."

Sadly for the many victims of shipping and offshore oil disasters, lax regulation carries a price which is not always borne by the ship operators and owners. On this occasion, President Obama is insisting that BP - the licence holder for the oil field in question - carries full responsibility for the entire clean-up cost of the disaster. He is right to do so. But now is also the time to ask searching questions about whether the constant aggressive cost-cutting by shipping companies and oil-rig operators serves any interest other than those of greedy shareholders and executives.