Federal government and Cook Inlet gas explorer Furie fight in federal court

Petroleum NewsNovember 17, 2012 

Federal officials are asking a court to dismiss the lawsuit an Alaska gas explorer filed in an effort to avoid a $15 million fine for an alleged violation of the Jones Act.

Furie Operating Alaska LLC sued federal authorities, including Homeland Security Secretary Janet Napolitano, on Aug. 7 in U.S. District Court in Anchorage.

The suit concerns the ocean transport of a jack-up drilling rig in 2011 from Texas to Alaska's Cook Inlet, where Furie is exploring for natural gas.

Federal authorities determined Furie didn't have clearance under the Jones Act to use a foreign ship to haul the rig. U.S. Customs and Border Protection, an agency within the Department of Homeland Security, assessed a fine of $15 million, which corresponds to the agency's determination of the rig's value.

In its lawsuit, Furie asks for a judgment that the fine is "null and void." The company argues the fine is arbitrary and capricious, and unconstitutionally excessive. Furie also argues that the rig was not "merchandise" as defined in the law, and therefore no Jones Act violation occurred.

On Nov. 9, Department of Justice attorneys representing Homeland Security answered Furie's suit with a motion asking the court to throw out the case, arguing that Furie sued prematurely.

The Jones Act requires that cargo transported between domestic ports be done with U.S.-made ships, owned and crewed by American citizens.

A foreign-flag, heavy-lift vessel, the M/V Kang Sheng Kou, hauled the Spartan 151 rig from a Texas port to Vancouver, B.C. From there, U.S.-flag tugs towed the rig to Cook Inlet, arriving on Aug. 11, 2011.

Escopeta Oil Company LLC originally arranged the rig transport, but Furie acquired Escopeta on June 29, 2011.

Furie's suit says the Kang Sheng Kou was used because the U.S.-flag Jones Act fleet had no ship capable of safely carrying the rig around South America, which was necessary because the rig was too big to pass through the Panama Canal.

Furie argues that, in 2006, Homeland Security granted a Jones Act waiver, although it was for a different jack-up rig and a different foreign transport vessel.

Problems developed with that rig, and it was never transported to Alaska.

In 2010, Furie asked Napolitano to reconfirm the 2006 waiver, saying the basis for the original waiver had not changed -- a looming natural gas shortage in Southcentral Alaska, home to a major military base and Anchorage international airport.

But Homeland Security officials told the company the 2006 waiver was no longer in effect and that it would need to seek a new waiver or face penalties, the government's Nov. 9 motion says.

On March 7, 2011, Napolitano denied Furie's request for a waiver.

"Nonetheless, Furie assumed that a Jones Act waiver would be granted," the motion says, and the Kang Sheng Kou departed Texas with the Spartan 151 rig.

As the long voyage unfolded, Furie continued talks with federal officials, who at one point said initiating the rig transport after Napolitano had denied the waiver would be viewed as an "aggravating factor" in a Jones Act violation.

Customs and Border Protection officials also said the violation was committed for commercial expediency. They noted that Furie could be eligible for millions of dollars in state drilling tax credits as a result of transporting the rig in violation of the Jones Act.

Furie feared Homeland Security officials might seize the rig, but that didn't happen.

Justice Department attorneys argue Furie's suit is premature, as assessment of the $15 million penalty does not constitute a "final agency action."

Furie has not paid any portion of the fine. And although Customs and Border Protection officials have hit Furie with demand letters and threats to forward the matter for "collection action," a violator is "under no compulsion" to pay a penalty that has been merely assessed, the government's motion says.

Only a court has the authority to compel payment, the motion says. So far, federal authorities haven't sued to collect the Jones Act penalty assessed against Furie.

If and when the government files suit, Furie would have an opportunity at that point to defend against the penalty, the motion says.

And so Furie's lawsuit should be dismissed, the Justice Department argues.

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