Category Archives: Offshore

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by Brad Setser February 6, 2017

One important result of my theory about the sources of dark matter in the U.S. balance of payments is a concern that border adjustment might not generate the expected revenues. American multinationals would have a strong incentive to shift their offshore income on intellectual property rights that are now located in subsidiaries offshore back to the U.S..

A lot depends on the details of any proposed tax reform, but I think a firm with U.S. expenses and export revenues would generate a tax loss on its exports (export revenues are excluded from calculation of revenues for the purpose of the tax, and domestic expenses can be deducted). If that tax loss is refundable, exporters essentially get a check back from the government for a sum equal to their domestic labor costs (see Chad Bown on the subsidy component of a border tax adjustment).* Profits that now show up in subsidiaries in Ireland, Puerto Rico, Singapore, and the like** based on intellectual property that is held in the Caribbean, thanks to the low price headquarters charges for the global rights on their intellectual property, might show up back in the U.S.and I suspect the royalties their offshore subsidiaries pay headquarters for research and design and engineering (e.g. exports) would soar.

I havent started to figure out how European companies that now report very little income on their direct investment in the U.S. might try to game the system. I suspect that they have an incentive to try to lower their reported intra-firm importse.g. reduce the transfer prices they charge their U.S. subsidiaries to lower their border adjustment. Auerbach, Devereux, Keen and Vella have emphasized that introducing a destination based cash flow tax in one country would have quite different effects than introducing a destination based cash flow tax in all countries.

But I also wanted to draw out the implications of the rapid growth in the offshore profits of American companies for the broader debate on globalization.

Consider the following chart: normalized versus GDP, the reinvested (tax-deferred, or less politely, largely untaxed as of now) profits of U.S. multinationals have more than doubled over the past twenty years, while U.S. exports of capital goods, consumer goods, and autos (my measure for core manufacturing exports) have stayed constant as a share of GDP. Imports of that set of goods have increased by roughly 25 percent on this measure.

Obviously, setting the initial level at 100 exaggerates a bit to make a pointnamely, that U.S. export and income growth from globalization shows up offshore, not in onshore export jobs.

As a share of GDP, reinvested earnings (a proxy for tax-deferred offshore earnings) have gone from 0.5 percent of GDP to around 1.6 percent of GDP over the past twenty years (they reached a peak of 2 percent of GDP when the dollar was weak).***

Core manufactured goods (autos, capital goods, and consumer goodsI am leaving out manufactured industrial supplies such as chemicalslargely for simplicity) exports have stayed constant at about 5 percent of GDP.

They were a bit higher for a while, but, well, something happened in the last couple of years. I tend to think that something was mostly the impact of the dollars rise but the global fall in demand for oil and mining equipment also played a role.

With rising productivity, a constant (and low) level of exports to GDP meant the export sector was shedding jobs.

And with imports rising relative to GDPcore imports have gone from about 6.5 percent of GDP in 1995 to about 8.5 percent of GDP in 2015 (they will fall a bit in 2016)of course import-competing sectors were shedding jobs.

I suspect the politics around trade would be a bit different in the U.S. if the goods-exporting sector had grown in parallel with imports.

That is one key difference between the U.S. and Germany. Manufacturing jobs fell during reunificationand Germany went through a difficult adjustment in the early 2000s. But over the last ten years the number of jobs in Germanys export sector grew, keeping the number of people employed in manufacturing roughly constant over the last ten years even with rising productivity. Part of the trade adjustment was a shift from import-competing to exporting sectors, not just a shift out of the goods producing tradables sector. Of course, not everyone can run a German sized surplus in manufacturesbut it seems likely the low U.S. share of manufacturing employment (relative to Germany and Japan) is in part a function of the size and persistence of the U.S. trade deficit in manufactures. (It is also in part a function of the fact that the U.S. no longer needs to trade manufactures for imported energy on any significant scale; the U.S. has more jobs in oil and gas production, for example, than Germany or Japan).

Of course, the sectors that have seen their offshore income grow rapidly are growing, and they do employ more peoplethough successful tech companies employ comparatively few people relative to their profits.

But the shift from an economy that pays for its imports by exporting goods to one that increasingly relies on the income its multinationals generate in offshore tax centers likely has had some significant distributional consequences.

And as I have argued before, I suspect that one of the problems the U.S. faces is that a significant share of the gains from globalization arent actually taxed, and thus arent directly available to fund the kind of programs that my colleague Ted Alden has suggested are needed to allow the workforce to adopt to various shocks more effectively. And I am not convinced a border adjustmentwhich I think solves the transfer price problem by exempting export revenue from any calculation of taxsolves this particular problem. I suspect effectively untaxed (permanently tax-deferred) profits offshore become untaxed export profits onshore.

* If the border adjustment leads to an adjustment in the exchange rate, such a rebate is needed to offset the exchange rate drag. ** Puerto Rico is outside the United States for corporate tax purposes, thanks to its unique status. For details on Microsofts tax structure, see the Senate Investigative Committee report. *** Foreign multinationals do not have big cash hoards in the U.S., so their reinvested U.S. profits have stayed roughly constant as a share of GDP, pushing the U.S. surplus on reinvested earnings up.

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The authors argue that the United States has responded inadequately to the rise of Chinese power and recommend placing less strategic emphasis on the goal of integrating China into the international system and more on balancing China's rise.

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Offshore Profits and US Exports - Council on Foreign Relations (blog)

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February 6, 2017, 4:16 PM EST February 7, 2017, 12:01 AM EST

While oil drillers in U.S. shale basins are starting to see business come back, their offshore brethren will have to wait for prices to surge well above $60 a barrel.

U.S. offshore operators like Diamond Offshore Drilling Inc. and Atwood Oceanics Inc. are down more than 15 percent in the last month, as companies focus on onshore oil that reaps better returns. With oil trading near $53 a barrel, firms are looking toward booming plays like the Permian Basin in West Texas and the Scoop and Stack formations in Oklahoma, according to Marc Edwards, Diamond Offshores chief executive officer.

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Members in the Bloomberg Intelligence Global Offshore Drilling Competitive Peers Index sank 5 percent Monday.As demand continues to fall and the number of idle rigs rises, the offshore drilling industry remains a few years away from a rebound, Atwood Oceanics management said on a call with investors and analysts.

The idea of $60 oil pushing producers to go offshore might be optimistic, David Anderson, an analyst at Barclays Plc, said by phone. Even though the costs and the time to market have come down, offshore is nowhere near as enticing as onshore drilling.

While offshore drillers are using the same number of rigs as a year ago, onshore focused companies are continuing to add rigs and expand production. U.S. drillers are continuing to boost production, adding 267 rigs in the last eight months, according to Baker Hughes Inc. data reported on Friday.

The Permian Basin has seen production double and a jump in merger activity as companies that are operating in the region are taking advantage of breakeven levels that are much lower than their deepwater competitors.

What were seeing, especially today, is a recognition that onshore and offshore drilling are in two separate cycles that are moving at very different paces, said Anderson.

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Offshore Drillers Are Still Seeking Recovery Enjoyed by Shale - Bloomberg

Royal Dutch Shell (NYSE:RDS.A) is looking to sell its share of the offshore oil and gas joint venture Danish Underground Consortium, in which the Anglo-Dutch oil majors stake is estimated to be worth up to US$1 billion, Reuters reported on Monday, citing banking sources.

If the sale were to take place, it would mark Shells exit from Denmark and further align with the supermajors plans to continue divesting assets.

According to Reuters sources, Bank of America Merrill Lynch (BAML) is working on the sale.

Shell holds 36.8 percent in the Danish Underground Consortium (DUC) alongside operator A.P. Moller-Maersk, which owns 31.2 percent, U.S. major Chevron, which has 12 percent, and Denmarks state-run Nordsfonden which holds a 20-percent stake.

In September last year, Shell reached an agreement with Dansk Olieselskab ApS for the sale of A/S Dansk Shell in Denmark, which consists of the 70,000-bpd Fredericia refinery and local trading and supply activities, for around US$80 million, including working capital. The sale which was part of Shells strategy to focus its downstream operations on areas where it can be most competitive - completed the oil majors exit from downstream activities in Denmark.

Shells chief financial officer Simon Henry said last week that the group was making significant progress on selling another US$5 billion worth of assets.

Related: Are We Likely To See A Clash Over Resources In The South China Sea?

Last week Shell also announced it had agreed to sell a package of UK North Sea assets to Chrysaor for a total of up to US$3.8 billion and a stake in a field offshore Thailand for US$900 million.

In Shells earnings release last Thursday, chief executive Ben van Beurden said:

We are gaining momentum on divestments, with some $15 billion completed in 2016, announced, or in progress, and we are on track to complete our overall $30 billion divestment program as planned.

By Tsvetana Paraskova for Oilprice.com

More Top Reads From Oilprice.com:

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Shell Aims To Sell Stake In Danish Offshore Oil, Gas Venture - OilPrice.com

E&P

Offshore Drillers See Gains, But Recovery Afar E&P The tide is slowly changing for offshore drillers, but the sector still awaits smoother sailing based on analysts' and company earnings reports. Houston-based Diamond Offshore Drilling Inc.'s (NYSE: DO) reported Feb. 6 a profit of $73 million for ... Diamond Offshore sees recovery when oil "well over $60"Reuters Diamond Offshore Drilling (DO) Q4 2016 Results - Earnings Call TranscriptSeeking Alpha Diamond Offshore Announces Fourth Quarter 2016 ResultsPR Newswire (press release) Yahoo Finance all 66 news articles »

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Offshore Drillers See Gains, But Recovery Afar - E&P

BBC News

Further decline in North Sea offshore supply work BBC News A new study has confirmed the UK's oil and gas supply chain saw its turnover decline in 2015. The report by business advisers EY indicates the fall in the price of oil led to a fall in business activity for firms serving North Sea producers. They ... Day two of our probe into the offshore crisis that is threatening to destroy Scotland's oil industryThe Scottish Sun all 2 news articles »

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Further decline in North Sea offshore supply work - BBC News

This daily digest focuses on Yuan rates, major Chinese economic data, market sentiment, new developments in Chinas foreign exchange policies, changes in financial market regulations, as well as market news typically available only in Chinese-language sources.

- The offshore Yuan maintained stronger than the PBOCs fix and the onshore Yuan on Monday.

- Hong Kong is the major hub for capital flowing into mainland in terms of foreign direct investment.

- Would you like to know more about trading? DailyFX webinars are a great place to start.

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Yuan Rates

- The PBOC lowered the Yuan by -50 pips or -0.07% against the U.S. Dollar to 6.8606 on Monday, the weakest level since January 20th. The onshore Yuan was slightly stronger than the guided level, with the USD/CNY trading at 6.8599 as of 10:30am EST. The offshore Yuan, on the other hand, was over 500 pips stronger than both the onshore Yuan and the Yuan fix, with the USD/CNH trading at 6.8093.

USD/CNH 1-Day

Prepared by Renee Mu.

An offshore Yuan stronger than the onshore Yuan is less common, though not necessarily causes a major concern. However, the offshore rate has been stronger than the PBOCs guided level since January 4th, except on January 27th and 30th when the daily fix was not updated due to the Lunar New Year. Without the regulators recognition, the offshore Yuans strength may not be sustainable and thus, traders will want to be cautious about near-term reversals.

Data downloaded from Bloomberg; chart prepared by Renee Mu.

- The CFETS Yuan Index, the primary measure of the Yuan against a basket of currencies, fell -0.19% to 94.03 last Friday, marking it the third consecutive drop on a weekly basis. Over the same span of time, the BIS Yuan Index declined as well, by -0.30% to 95.26 while the SDR Yuan Index rose +0.08% to 95.43.

Data downloaded from Bloomberg; chart prepared by Renee Mu.

- The PBOC suspended open market operations on Monday despite that there were 150 billion Yuan reverse repos to be matured on the day. This is seen as a further move that the Chinese regulator plans to bring monetary policy back to neutral from slightly loose. From Tuesday to Friday, there will be additional 475 billion Yuan of reverse repos to be matured. Market participants will want to keep a close eye on whether the PBOC will continue to withdraw liquidity.

Market News

Sina News: Chinas most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active usersmonthly.

- Foreign investors holdings in Chinese government bonds dropped -1.9 billion Yuan to 421.8 billion Yuan as of the end of January. This is the first decline on a monthly basis since October 2015. A weaker Yuan may have impacted foreigners interest in Yuan-denominated bonds.

Chinaforex News: a news agency administrated by SAFE

- Foreign Direct Investment (FDI) to China rose +4.1% in 2016 to 813.2 billion Yuan ($126.0 billion) from a year ago. In specific, FDI from Hong Kong was $87.2 billion, taking up the most of all. This does not mean all the investment was made by Hongkongers; rather, it shows that the majority of capital flowing into mainland was through the financial hub - Hong Kong. Investment to China directly from other countries and regions, especially Western countries, was much lower than from Hong Kong: it was $6.2 billion from the U.S., $3.1 billion from Japan, $2.7 billion from Germany and $2.2 billion from the U.K.

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China's Market News: Offshore Yuan at Cross Roads Amid Widened Spread - DailyFX

Rig contractor Diamond Offshore Drilling Inc's chief executive officer, Marc Edwards, said on Monday oil prices needed to be "well over $60" to spur a recovery in offshore drilling.

The company's shares reversed course and were down 6.4 percent at $15.98, with investors shrugging off a beat on quarterly profit and revenue.

Global benchmark Brent crude prices LCOc1 have stabilized after a more than two-year slump, with prices hovering around $55 per barrel.

"Offshore drilling is cyclical in nature, and despite some stabilization in the price of oil we have yet to see a floor in the declining demand of deepwater assets," Edwards said on a post-earnings call with analysts.

"I think (a recovery in demand) is more than likely to be pushed out into 2019 or 2020."

Barclays analysts said last week they expected the offshore floating rig count to bottom at year-end and start to inflect in 2018. Evercore analysts said they expected the offshore downturn to break later this year.

Offshore projects, which take years to develop and are capital intensive, were the hardest hit by the slump in crude prices as oil and gas producers slashed spending.

However, the benefits of the recent recovery in crude prices have largely eluded offshore operators as oil and gas companies prefer to deploy capital in their onshore projects.

Diamond Offshore said it executed a new contract for the Ocean Monarch rig with BHP Billiton in Australia. The contract is scheduled to start at the end of the second quarter and run through late third-quarter of 2017.

Diamond Offshore, majority owned by Loews Corp, said total revenue fell 29.5 percent to $391.9 million, but beat analysts' average estimate of $358.3 million.

Contract drilling revenue rose 13.3 percent to $384.6 million from the third quarter. Evercore ISI had estimated revenue for the business of $356.1 million.

Diamond Offshore's adjusted profit of 27 cents per share beat analysts' average estimate of 13 cents, according to Thomson Reuters I/B/E/S.

The big beat was powered by the Houston-based company's cost cuts, with total operating expenses plunging nearly 68 percent in the three months ended Dec. 31.

However, the company does not anticipate material changes to its base cost trends in the coming quarters, Chief Financial Officer Kelly Youngblood said on the call.

Diamond Offshore also said it expects first-quarter revenue to be flat, compared with the fourth quarter.

The company's shares had fallen about 9.5 percent in the past 12 months, through Friday's close.

(Reporting by Vishaka George and Arathy S Nair in Bengaluru; Editing by Sriraj Kalluvila)

SAO PAULO The status of sugar in the Mercosur trade bloc is likely to be discussed by the presidents of Brazil and Argentina when they meet on Tuesday, Brazil's Agriculture Minister Blairo Maggi said on Monday.

LONDON Hedge funds have accumulated a record bullish position in crude futures and options, betting on further price rises, but the lopsided nature of the positioning has become a key source of risk in the oil markets.

NEW YORK A rally that took raw sugar prices to a more than four-year high in late 2016 is expected to run out of steam this year as Brazil's main producing region looked set for record output that will reduce a world supply deficit, a Reuters poll showed.

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Diamond Offshore sees recovery when oil 'well over $60' - Reuters

Despite strong local opposition, the Japanese authorities began offshore construction work aimed at relocating a US Marine Corps base on the island of Okinawa.

The US Marine Corps Air Station Futenma is being moved from densely populated Ginowan to a less populated location in eastern Okinawa the Henoko coastal area of Nago. Last week, US Defense Secretary James Mattis and Japanese Prime Minister Shinzo Abe held talks in Tokyo and agreed to go ahead with the plan.

The offshore construction work, which started on Monday, will see over 200 concrete blocks dumped in the sea to create a screen, preventing debris and sediment generated from coastal revetment work from damaging the environment.

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Tokyo will also make sure that an undersea survey in the area is carried out, using the same vessels which earlier delivered the blocks to the site, Kyodo news agency reported.

Based on relevant law, the government will pay as much consideration as possible to the natural environment and the livelihoods of local people as we move forward with work to relocate (the base to) Henoko, Yoshide Suga, Japanese chief cabinet secretary, said.

Around 100 people gathered outside Camp Schwab, another US base near the construction site, to protest the relocation again on Monday.

The demonstrators held banners reading No to new Henoko base and Independence from colonialism, AP reported.

Many residents, including Okinawa Governor Takeshi Onaga, object to the heavy US military presence on the island, saying that the Futenma base should be removed, not just relocated.

They cite jet crashes related to the US bases and sexual assaults linked to US military personnel as major reasons for concern.

Large-scale protests against the US bases, which gather thousands of people, are staged regularly on the island.

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Onaga is now expected to refuse the renewal of a permit for moving coral reefs in the construction area, which expires in March, in order to stall the Futenma base relocation, Kyodo said.

The Okinawa governor visited Washington last week, reiterating his strong stance against the US bases on the island.

US military bases occupy 6 percent of the whole of Japan and 70 percent of those US military bases are in places where the population density is about the same as Tokyo. I don't like it anymore, Onaga said.

The Futenma base relocation began in October 2015, but was suspended due to resistance from the Okinawa authorities and population.

The work was resumed by the government on December 27 after the Supreme Court rejected an injunction order earlier issued by the Okinawa governor.

This is a country ruled by law, and we feel that both the state and Okinawa Prefecture will cooperate and act sincerely in continuing with the reclamation work, in line with the Supreme Court ruling, Cabinet Secretary Suga said.

READ MORE: US F-35 fighter jets arrive at military base in Japan in 1st overseas deployment

Tokyo believes that the relocation of the base is the only solution to move it away from the densely populated area, while not undermining the Japan-US security alliance.

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Japan begins offshore construction work on moving US base in Okinawa - RT

Japan's government started offshore construction work Monday on relocating a U.S. Marine base on Okinawa.

The step marks the beginning of the main construction to move Marine Corps Air Station Futenma to Henoko, a less populated area on the island's east coast.

It comes just days after U.S. Defense Secretary Jim Mattis during a visit to Tokyo reaffirmed with Japanese leaders that the Henoko plan is the only option.

Workers are to dump large concrete blocks into sea to create undersea silt curtains to reduce environmental impact a process needed before creating a coastal embankment and subsequent landfill.

The relocation has stalled for over 20 years due to persistent protests. About 100 people gathered outside Camp Schwab, a U.S. base near the construction site, to protest. The held up placards with messages such as "No to new Henoko base" and "Independence from colonialism."

Many residents complain about the large American troop presence on Okinawa and want the Futenma base removed, not relocated.

Monday's move follows a series of legal battle between Japan's central government and the island, which ended up with a supreme court decision rejecting an injunction order back by Okinawa.

Okinawa Gov. Takeshi Onaga, seeking to block the construction, is expected to refuse to renew a current permit for moving coral reefs in the designated area when it expires at the end of March, according to media reports.

Chief Cabinet Secretary Yoshihide Suga told reporters that the central government is determined to "move forward with the relocation work," while paying attention to environment and the livelihoods of residents.

Follow Mari Yamaguchi on Twitter at https://www.twitter.com/mariyamaguchi

Find her work at http://bigstory.ap.org/content/mari-yamaguchi

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Offshore Work Begins on Relocating US Base on Okinawa - ABC News

Ocean Installer has recently completed the very first permanent subsea installation at the Johan Sverdrup field, marking the kick-off of the Johan Sverdrup offshore work.

The offshore campaign took place late January in line with project plans and schedule and involved the installation of a subsea template for water injection. The template weighed 290 ton and was installed making use of the CSV Normand Vision.

This was a very complex lift, taking place during what is normally one of the most challenging offshore months in the North Sea. But thorough planning and excellent cooperation with Statoil ensured that the campaign went very smoothly, says Steinar Riise, CEO of Ocean Installer.

This is the first offshore campaign Ocean Installer will be executing for Statoil on Johan Sverdrup this year, and before the summer Ocean Installer will have installed two more subsea templates for water injection on the field.

We are very happy that Statoil have chosen us as one of the contributors to this important project on the Norwegian Shelf and we are looking forward to the next offshore Sverdrup campaign, says Riise.

Ocean Installer was awarded the Johan Sverdrup work February last year as part of a larger Statoil contract for subsea installation works that also covered Gina Krog and Oseberg Vestflanken. Together this constitutes a significant portion of Statoils planned subsea construction work on the NCS for the 2017 season.

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