Nabors Industries, Inc. is one of the world's largest drill
Regulating the regulation
Houston-based -- er, . . I mean Bermuda-based, or is that Barbados-based? . . . -- Nabors Industries, Inc. is one of the world's largest drilling contractors. The company has nearly 600 land drilling rigs and more than 900 land workover and well-servicing rigs, and operates across the U.S. and in Africa, Canada, Central and South America, and the Middle East. Nabors' offshore equipment includes platform rigs, jack-ups, barge drilling rigs, and marine support vessels, and the company provides oil field hauling, maintenance, well logging, engineering and construction services. In short, Nabors is the type of oil field service company that exploration and production companies want to have competing for the business of drilling or providing other services for an oil or gas well at the lowest possible price.
One of the reasons that Nabors has been one of the most profitable oil field service companies over the past 20 years or so is that its management team is constantly searching for ways to make the company more profitable and valuable to its shareholders. So, in 2001, Nabors moved its tax headquarters to Bermuda and its legal headquarters to Barbados to lessen its American income taxes. The move has paid dividends for Nabors shareholders as the company paid only $6 million in U.S. income taxes last year on almost $430 million in profits, which would have generated over $80 million more in taxes if Nabors were based in the U.S. Several other big companies have done the same thing as Nabors.
So, given the competitive advantage that Nabors and other tax haven-based companies have over their American-based competitors, you would think that Congress might get the message and simply reduce the tax regulation that prompted such moves. But that would be too easy. Rather than addressing the cause, a fierce debate developed in Congress with demagogues from both parties promising voters to crack down on "Benedict Arnold companies" such as Nabors that move to tax havens to avoid paying U.S. income taxes.
As a result, Congress passed a law before the fall elections in 2002 that bars companies that moved their tax headquarters to tax havens from getting government contracts. However, in a classic example of American political disingenuousness, Congress quietly included a loophole in the law (probably drawn up between members of Congress and certain industry representatives over a power lunch) that allows American subsidiaries of the tax haven-based companies to bid on the government contracts. Thus, everyone was happy -- the demagogues in Congress got to tell voters that they passed a law against those dastardly Benedict Arnold companies while those companies were able to get around the law and get on with their business by simply bidding on the contracts through a subsidiary.
Now, as this NY Times article reports, Congress and Nabors are at it again. This time the problem for Nabors is the largely obsolescent national security portion of the 1920's Jones Act that provides that only American-built, owned and manned ships can move people and cargo between domestic ports. Again, the key word here is "American," which Nabors is technically not.
But wait. Nabors owns over 30 big ships with wide berths that ferry various heavy drilling equipment, supplies and people to various offshore drilling rigs. And, as you might expect, those vessels come in handy in the aftermath of storms such as Hurricanes Katrina and Rita which damaged a large part of the Gulf Coast drilling and production infrastructure last summer. But if Nabors' vessels aren't available to move equipment and cargo around between American ports, then the cost of repair of oil and gas facilities -- which has a direct impact on the cost of oil and gas products to you and me -- will be higher than it would otherwise be if Nabors could compete in the market and push the cost of such repairs down.
So, it would seem that the logical thing to do is for the politicos to strike another face-saving compromise that would allow their constituents to realize the benefit of the market having access to Nabors' assets while preserving the ruse of the Jones Act "protections." However, as with most things in Washington, it's not that easy. Now, Nabors' competitors have joined together to lobby against an exemption from the Jones Act for Nabors on the grounds that they should be allowed to benefit from the protectionist provisions of the Jones Act because Nabors has an unfair competitive advantage by virtue of not having to pay oppressive U.S. taxes. And just for good measure, Nabors' competitors throw in for demogogic appeal the bogeyman argument that all of the drilling companies will flee the U.S. to foreign countries unless the American companies are allowed to make more money than the market for their services would otherwise allow if companies such as Nabors were allowed to compete.
So, there you have it. A profitable company with assets that push prices lower is hampered from doing so through tax and related governmental regulation. In the meantime, those same governmental regulations are allowing other companies to charge higher prices in those markets that are ultimately passed on to you and me. The real problem is counterproductive corporate tax and related regulations, but condemning Benedict Arnold companies and decrying price gouging is certainly more entertaining
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Oil Drilling Company Loses Twice in One Day in Congress
Nabors Industries, the big oil driller that wanted to be considered a Bermuda company for tax purposes but an American company for business purposes, may regret trying to be both.
The Senate Finance Committee voted unanimously yesterday to treat as American all companies that made Bermuda or any other tax haven their tax headquarters after March 20, 2002. Nabors completed its Bermuda move three months after that deadline.
In a second vote, the House Transportation and Infrastructure Committee rejected language that would have allowed Nabors to continue operating 33 ships servicing offshore oil rigs and platforms even though the Jones Act, a 1920 national security law, allows only American companies to transport goods and people on ships between American ports, including offshore oil rigs and platforms.
Nabors won a temporary exemption to the Jones Act two years ago, but that expires in 2007 and the company sought to make it permanent.
Senator Charles E. Schumer, Democrat of New York, said the votes reflected bipartisan revulsion at Nabors for overreaching.
"We're going to make Nabors pay taxes," Senator Schumer said, adding that Congress would have had no interest in Nabors's tax savings had it not sought the Jones Act exemption. "That was the appalling part," he said.
Changing the last date when a company could adopt a Bermuda, Cayman Islands or other tax address of convenience, and imposing full American taxes beginning this year, would raise $1.2 billion over the next 10 years, the Joint Committee on Taxation staff estimated yesterday.
Significantly, the language that would have given Nabors the permanent exemption from the Jones Act was sponsored by Representative Don Young, Republican of Alaska, the transportation committee chairman. But it was Mr. Young who ruled that the voice vote went against Nabors. Representative Gene Taylor, a Democrat from Mississippi who has long complained about official favors for Nabors, argued that the company had won a three-year exemption from the Jones Act two years ago "and is now trying to change the rules that they agreed to."
Mr. Taylor said his fight was far from over, predicting that Nabors and its supporters "will try to get their language put into the conference committee report." Conference reports, which represent a compromise between the House and Senate versions of a bill, are voted on in full and are often used to dole out special interest favors.
Kenneth J. Kies, tax lobbyist for Nabors, dismissed the Senate vote as window dressing. "They've voted so many times" to end tax benefits for companies that use Bermuda as a tax address, he said, "that I've lost count of all the votes."
But Mr. Kies was more concerned about the House vote, saying: "This is a disappointment" and "the company is going to have to decide what they want to do now."
Dennis Smith, the Nabors spokesman, said the company had no comment.
The Senate vote on tax headquarters of convenience would affect more than just Nabors. Other companies that would lose the benefits include the oil services companies Noble Corporation (formerly Noble Drilling) and Weatherford International, as well as Cooper Industries, a Houston manufacturer.
Among the companies that made the move offshore, on paper, before March 2002 and would, therefore, continue to enjoy the tax benefits would be Transocean, an energy services concern; Ingersoll-Rand and Foster Wheeler, two New Jersey manufacturers; the California pharmaceutical company Xoma; and White Mountains Insurance Group.
