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Shell Says Tax Played Role in Move of Rig That Grounded

January 11, 2013

Arctic Drilling Barge "Kulluk"

Royal Dutch Shell Plc's Arctic drilling barge Kulluk, which was headed to Seattle for maintenance, was safely recovered after being set adrift during a storm in the Gulf of Alaska, on Dec. 29, 2012. Source: Photograph by Ted S. Warren/AP Photo

Avoiding a state tax played a role in Royal Dutch Shell Plc (RDSA)’s decision to move a drilling rig from Alaska waters, though the company said the vessel’s grounding days later was the result of an unforeseen worsening of weather.

The Kulluk broke free from its tugboat in stormy seas on Dec. 31 and ran aground on an uninhabited Alaskan island, another embarrassment for a company that has spent $4.5 billion and seven years in pursuit of oil beneath the Chukchi and Beaufort seas in the Arctic Circle.

A Jan. 1 state tax assessment was “a consideration,” in the timing of the rig’s move, Curtis Smith, a Shell spokesman, said in an e-mail. However, that was “not among the main drivers for our decision to begin moving the Kulluk,” he said. It was being towed from Dutch Harbor, Alaska, to a shipyard in Seattle for maintenance after drilling in the Arctic.

The grounding, which followed problems with another drilling rig and unsuccessful tests on a spill containment dome, prompted U.S. Interior Secretary Ken Salazar on Jan. 8 to order a 60-day review of Shell’s activities. He said the “mishaps” may keep the company from continuing its work this year.

  • Related: Shell's Drilling Went Wrong" in 2012, Salazar Says
  • Slideshow: Shell Arctic Drilling Rig Kulluk Recaptured in Stormy Seas

Shell “could have been exposed to potential state tax liability on the Kulluk drill rig if it remained in the state on January 1st,” Representative Edward Markey of Massachusetts, the top Democrat on the House Natural Resources Committee, wrote in a Jan. 9 letter to Shell Oil Co. President Marvin Odum demanding documents related to the incident.

$6 Million

Markey, a frequent critic of Shell’s efforts to drill in the Arctic, said the tax bill could have exceeded $6 million.

The state hadn’t determined whether a 2 percent assessment on oil and gas exploration, production and transportation equipment would have applied to the Kulluk, or if the company will be liable for the taxes as a result of the grounding, James Greeley, a tax assessor for Alaska’s Department of Revenue, said in a telephone interview.

“This is the first time we’ve had this mobile-type of property,” Greeley said.

In a Jan. 4 article, the Dutch Harbor Fisherman newspaper quoted an e-mail from Smith, the Shell spokesman, saying, “it’s fair to say that the current tax structure related to vessels of the type influenced the timing of our departure.”

Word Choices

Yesterday, Smith said in his e-mail that “it was a poor word choice on my part. Taxes were a consideration, but they were not among the main drivers for our decision to begin moving the Kulluk.”

He added that the maintenance the Kulluk needed was “not realistically achievable in Dutch Harbor” requiring its transport. The rig is now in Kiliuda Bay, Alaska.

Markey, who has announced his intention to run for the U.S. Senate to replace Democrat John Kerry, nominated to be secretary of state, asked Odum to provide by Jan. 17 “all internal correspondence related to the decision of the timing of moving the Kulluk.”

He asked whether the company was “philosophically opposed” to paying the state oil-and-gas tax.

"The models that informed our December 21 departure date indicated a forecast that was within operational thresholds."

The Kulluk, which lacks a propulsion system, started its journey on Dec. 21, when Smith said weather forecasts Shell relied on predicted clear skies.

Gale Warning

The National Weather Service had issued a small craft advisory that day for an area east of Dutch Harbor. By Dec. 25, the threat had grown into a gale warning, according to a weather service bulletin.

A gale warning means sustained surface winds, or frequent gusts, in the range of 34 knots (39 mph) to 47 knots (54 mph) either predicted or occurring.

The forecasts raise questions “as to whether Shell properly evaluated the potential for severe weather,” Markey wrote Odum.

In the e-mailed statement, Smith said Shell relied on reports from its own team of meteorologists. The weather had shifted “unexpectedly,” he said.

“Weather is dynamic and can be unpredictable, but you use the best information you have,” Smith said. “The models that informed our December 21st departure date indicated a forecast that was within operational thresholds for the journey east.”

Greeley, the state tax assessor, said it wasn’t clear whether Shell’s effort to move the Kulluk -- or the fact that the accident kept it in state waters on Jan. 1 -- made it less likely the state would apply the tax.

Recovery Reimbursement

Ultimately, Shell may face an even bigger bill. David Mosley, a spokesman for the U.S. Coast Guard, said Shell may have to reimburse the U.S. government for some of its expenses related to the recovery of the Kulluk. He declined to estimate the potential costs. Taxpayers will pay for the rescue of 18 people off the Kulluk during the storm, Mosley said.

The plan for towing the Kulluk was reviewed by the Coast Guard and approved by the American Bureau of Shipping, Kelly op de Weegh, a Shell spokeswoman, said today in an e-mail.

“The operational decision to sail would have adhered to an approved and strictly prescribed tow plan that included clearly defined weather criteria,” she said. “Tax considerations would not have played a part in the specific ‘go/no-go’ decision to sail away” although “financial costs, including tax, is certainly one” of the criteria used in deciding where to send equipment.

The Kulluk has raised additional issues for Shell. The Environmental Protection Agency issued a notice to Shell, saying its operation of the Kulluk while drilling in the Arctic Ocean violated its permit under the Clean Air Act.

Shell submitted 17 “excess emission” or “permit deviation” reports to the EPA, the agency said. “Shell violated numerous conditions in the permit during the 2012 drilling season,” Edward Kowalski, director of the EPA’s compliance office, wrote in a letter to the company yesterday.

A company can face penalties of $37,500 a day for each violation, the agency said.

To contact the reporter on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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