How Big Oil Doesn't Pay Taxes

A special report by the Center for Public Integrity

www.thereader.com

by Bob Williams and Jonathan Werve

U.S. oil and gas companies have at least 882 subsidiaries located in oil-free tax havens such as the Cayman Islands, Bermuda, and even the tiny European principality of Liechtenstein, a Center for Public Integrity investigation has found.

Further, the investigation revealed that at least a half dozen U.S. oil and gas companies have actually re-incorporated in tax haven countries.

In the past, Enron Corp. had by far the most tax haven subsidiaries with 780, but that was before the troubled company declared bankruptcy and sold off or shut down nearly all of its operations. It is unclear how many of those subsidiaries are still in existence today.

Among active companies, El Paso Corp. leads the list with 233 subsidiaries located in tax haven countries, followed by ConocoPhillips (133).

Officials from El Paso Corp. and ConocoPhillips did not return repeated phone calls about their subsidiaries located in tax haven countries.

Information on the subsidiaries came from MergentOnline and was gleaned from company financial filings. The latest available information showing where subsidiaries of companies are located was used.

The Cayman Islands were by far the most popular choice for U.S. oil and gas company subsidiaries, with 489 subsidiaries located there. Bermuda comes next with 126, followed by the British Virgin Islands (49), Liberia (41), and Panama (40).

The investigation also showed that U.S. companies are much more active than their overseas counterparts in setting up subsidiaries in tax havens. The entire rest of the world had just 311 such subsidiaries. One expert said companies locate in tax haven countries for a variety of reasons, many of which are absolutely legitimate — and have little or nothing to do with avoiding taxes.

That’s the opinion of Philip Garlett, a policy analyst with the Organisation for Economic Co-operation and Development, a Paris-based international policy consortium made up of 30 governments, including the United States. He said oil companies might have subsidiaries in tax haven countries because they don’t want to set up shop and make themselves subject to local laws in areas such as the Middle East or the Caspian Sea.

“It is sort of like a neutral court in basketball,” Garlett said.

But another expert said the only plausible reason for U.S. oil and gas companies to locate subsidiaries in tax havens is to avoid paying U.S. taxes.

Bob McIntyre, the director of Citizens for Tax Justice, a government watchdog that has studied the issue, said that big companies with tax haven subsidiaries are able to conduct complex transactions that shelter their profits. Since the transactions are kept within the company, he said they are next to impossible to detect.

“The more these companies can bounce things around offshore, the more profit that can be kept offshore and tax free,” McIntyre said. “They shouldn’t get away with it, but it is really hard to police.”

President Bush, who has said he disapproves of U.S. companies establishing subsidiaries in tax havens, was a director of a Texas oil company when it decided to do just that.

In 1989, Harken Energy Corp. set up Harken Bahrain Oil Co. in the Cayman Islands to oversee a drilling contract with the government of Bahrain. When questioned about it by reporters, Bush spokesman Dan Bartlett said the president had no recollection of the matter.

Vice President Dick Cheney was also a big fan of locating subsidiaries in tax havens during his days as CEO of Halliburton Corp.

An analysis of Halliburton’s filings with the Securities and Exchange Commission by watchdog group Citizen Works showed that while Cheney was CEO of Halliburton between 1995 and 2000, the number of subsidiaries the company operated in tax havens rose from nine to 44.

Slashing Tax Bills

Among the U.S. companies incorporated in tax havens are GlobalSantaFe Corp. (Cayman Islands), McDermott International (Panama), Nabors Industries (Bermuda), Noble Corp. (Cayman Islands), Seven Seas Petroleum Corp. (Cayman Islands), and TransOcean Inc. (Cayman Islands).

As these companies have learned, setting up shop in a tax-haven country can certainly lower tax bills. In simple terms, a large U.S. company can effectively reduce its corporate tax rate from 35 percent to zero by reincorporating in a tax haven such as the Cayman Islands.

Take the case of Nabors Industries, one of the largest land-based, oil and gas drilling companies in the world with more than 600 rigs.

Nabors reincorporated in Bermuda in June 2002 and moved its “headquarters” from Texas to Barbados. That new headquarters consisted of a small office located on the tiny Caribbean island. The company’s board of directors also held a meeting on Barbados.

Nabors said its effective overall tax rate fell from 36 percent in 2001 — the last full year before it moved to Bermuda/Barbados — to 10 percent in 2003, the first full year after the move.

In actual dollars, Nabors’ overall tax bill for 2001 was $83.7 million, according to the company’s annual report. In 2003 the company’s overall tax bill fell to just $8.5 million.

The company’s revenue remained relatively steady during that period. In 2001, its revenue was $2.3 billion; in 2003, it was $1.9 billion.

Nabors Director of Corporate Development Denny Smith said the company made the move simply to remain competitive.

“We lost a ton of jobs and found ourselves in a position where we could not be competitive anymore,” Smith said. “Most of our competitors don’t face the same tax burden as we do.”

Smith said Nabors still does most of its work in Houston and estimates the company pumped as much as $100 million into the local economy since re-incorporating offshore.

“We would love to see the tax code get fixed,” Smith said.

Despite the huge tax windfalls it has realized from its move offshore, Nabors still wants to be considered a U.S. company when it works to its advantage to do so.

For example, Nabors wants to be considered a U.S. company to fully qualify for business under the Jones Act, a 1916 law that requires ships engaged in purely domestic trade to be built, owned and operated by American companies.

Nabors owns nearly three dozen ships that service oil rigs in the Gulf of Mexico. The company argues that its American subsidiary fully qualifies under the Jones Act because the Bermuda-based parent company is simply lending it money for the ships.

Nabors’ competitors say full qualification of the company under the Jones Act while it pays no taxes would give the company a huge competitive advantage and could force them to eventually move offshore to remain in business.

Then there is Noble Corp., which operates one of the world’s largest fleets of offshore drilling rigs. Noble reincorporated in the Caymans in May 2002, leaving its physical headquarters where it was in Sugarland, Texas.

The move has already paid off handsomely for Noble.

The company’s overall tax bill fell from $29.5 million in 2001 to just $16.2 million in 2003. The company’s revenue was steady those years at about $1 billion in 2001, compared to about $987 million in 2003.

The drop in U.S. taxes paid by the company was even more dramatic. Noble had paid $15.3 million in U.S. taxes in 2001, but got a refund of $2.6 million in 2003 — the company’s first full year in the Caymans.

Noble claimed it was forced to move to a tax haven in order to compete in the offshore drilling rig business. Noble’s two other main competitors — Transocean Inc. and GlobalSantaFe Corp. — are also incorporated in the Caymans.

Noble CEO James Day admitted to stock analysts soon after the company’s move that he was “philosophically opposed” to reincorporating offshore, but that his hand was forced.

“I don’t want a competitor to get up and say we are bringing 10 percent more to the bottom line because we have a tax structure that Noble is too stupid to take advantage of,” Day told the analysts on a conference call. “We were caught between a rock and a hard place on it.”

Day said he would bring the company back to the U.S. if the tax laws were changed to remove the competitive advantages of incorporating in the Caymans.

“If legislation comes down that says we are going to level the playing field, you bet I would reverse everything we have done,” said Day. “This is not appropriate in my mind.”

Go to publicintegrity.org/oil/default.aspx?act=have s for interactive profiles of each tax haven used by U.S. oil and gas companies, and names the companies using them. Requires Macromedia Flash Player (version six or better), which can be downloaded free.

Center for Public Integrity database editor Aron Pilhofer contributed to this report.

Big Oil Protects its Interests

Industry spends hundreds of millions on lobbying, elections

by Aron Pilhofer and Bob Williams

The United States is the oil and gas industry's biggest customer, slurping up fully a quarter of global production in 2003.

Not surprisingly, the industry has lavished more than $440 million over the past six years on politicians, political parties and lobbyists in order to protect its interests in Washington, according to a new report by the Center for Public Integrity.

This is the first of a series of Center reports that aim to identify the size and scope of the international oil and gas industry and measure its influence in the halls of government worldwide.

Among the key findings:

n The Center found that the industry has spent more than $381 million on lobbying activities since 1998, pushing hard on everything from a new national energy policy to obscure changes in the tax code.

n The industry has given more than $67 million in campaign contributions in federal elections since the 1998 election cycle, about a fifth of the amount it has spent on lobbying.

n Oil and gas companies overwhelmingly favored Republicans over Democrats in their campaign giving, the study found. Just over 73 percent of the industry's campaign contributions have gone to Republican candidates and organizations.

n The industry exerts its influence in other, less obvious ways, including membership on the National Petroleum Council, a commission formed to advise the energy secretary. Koch Industries, the largest privately-held oil company in the United States, has financed a network of conservative nonprofit organizations designed to influence policy debate in this country.

n U.S.-based oil and gas companies have nearly 900 subsidiaries located in tax haven countries, such as the Cayman Islands and Bermuda.

The world's largest oil company and third largest company of any kind, ExxonMobil, was the industry's leader in lobbying expenditures, spending $55 million to plead its case with official Washington over the past six years.

Other big spenders included ChevronTexaco ($32 million), Marathon Oil ($29 million), British oil giant BP ($28 million), and British/Dutch behemoth Royal Dutch/Shell Group ($27 million).

Other noteworthy entries on the list include the top industry group, the American Petroleum Institute ($20 million), and Occidental Petroleum ($12 million).

Some more notorious names on the list include scandal-plagued Enron Corp. ($16 million) and Vice President Dick Cheney's former employer Halliburton Corp. ($3 million), which is currently the subject of government investigations over its contract work in Iraq and alleged bribes paid in connection with a natural gas project in Nigeria.

When it came to tapping the oil industry for campaign dollars, no one has come close to former Texas oilman George W. Bush. The president has received $1.7 million in campaign cash from the oil and gas industry.

That was more than three times the amount given to the next biggest recipient of the industry's largesse, House Energy and Commerce Committee Chairman and fellow Texan Joe Barton, who collected $574,000. Next came another Texas Republican, House Majority Leader Tom DeLay, who took in just under $500,000.

Only three Democrats were able to crack into the top 20 recipients of oil and gas campaign contributions since 1998. All three came from oil-rich Louisiana.

They were Sen. Mary Landrieu, Sen. John Breaux and Rep. Christopher John.

The two national parties each took in more than any individual candidate, national Republican committees getting $24 million and Democrats a bit under $8 million.

While most of the big oil and gas companies operate their own lobbying shops in Washington, the industry also farmed out a substantial amount of its work to some of Washington's largest and most influential lobbying firms.

On the top of that list was Bracewell and Patterson, which has gotten $4,880,000 in lobbying work from the oil and gas industry since 1998.

Among the partners at Bracewell and Patterson is Marc Racicot, the former Montana governor who is the chairman of the Bush-Cheney 2004 election campaign. Edward Krenik, former head of congressional and intergovernmental relations at the U.S. Environmental Protection Agency, is a lobbyist with the firm.

Other top Washington lobbying firms that got work from the oil and gas industry include Hill & Knowlton; Akin, Gump, Strauss, Hauer & Feld and National Environmental Strategies Company.