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.
Update: Congress continues to fiddle while Rome burns.