Kulluk left Dutch Harbor to avoid taxes, Shell official testifies

Lisa Demer
US Coast Guard Lt Commander Brian McNamara questions Sean Churchfield, Shell Operation Manager for Alaska, on Saturday.
Bob Hallinen
Sean Churchfield, Shell Operation Manager for Alaska, answers questions during a US Coast Guard hearing, on Saturday.
Bob Hallinen

Shell's Kulluk oil drilling rig left Dutch Harbor in December to avoid the prospect of millions in taxes, a Shell official revealed Saturday morning in testimony to a Coast Guard investigation panel.

Questions over the timing of the Kulluk's departure have been swirling since the Dec. 31 grounding of the rig in a fierce Gulf of Alaska winter storm.

Before Saturday's sworn testimony by Sean Churchfield, operations manager for Royal Dutch Shell in Alaska, Shell had maintained that taxes were "a consideration" but not the driving factor for when the Kulluk was being moved to a Seattle shipyard for major maintenance.

Churchfield said it differently on Saturday.

"Our preference for the timing was to be gone before the end of the year, driven by the economic factors," Churchfield said. He was being questioned by Lt. Cmdr. Brian McNamara of the Coast Guard Investigations National Center of Expertise. As with other witnesses, Churchfield had a lawyer by his side, in his case, Gregory Linsin, a Shell lawyer with Blank Rome law firm.

"Why specifically was the end of the year such a concern?" McNamara asked.

"The end of the year to my understanding was when the tax liability potentially would have become effective," Churchfield answered.

Another consideration he said, was the cost of maintaining the rig in Dutch Harbor. Under later questioning by Linsin, Churchfield said that Shell's other drilling rig, the Noble Discoverer, was being docked in Seward, and it was inefficient and expensive having the rigs in two locations.

But the potential tax hit was the bigger expense, he said.



Churchfield said he didn't know how much the Alaska tax would have been other than "millions." Alaska law provides for an annual 2 percent tax on the value of property used in oil and gas exploration, production and pipeline transportation. The date for assessing the value of covered properties is Jan. 1.

Shell has never revealed the Kulluk's overall value. The company has said it put $292 million into upgrades between 2006 and 2012 as it prepared for drilling. Shell bought the Kulluk in 2005 for the Alaska Arctic. The round rig, now 30 years old, is reinforced for ice but had been mothballed for years before Shell acquired it.

State officials have said they hadn't determined whether Shell would owe the tax on a mobile drilling unit that was in port.

Shell decided Dec. 7 to move the Kulluk from Dutch Harbor to a Seattle shipyard for major off-season maintenance, including the replacement of the rig's cranes, Churchfield said. Shell evaluated doing the work in Alaska to avoid another big journey, he said, but a bigger shipyard was needed. What was supposed to be a weeks-long trip started Dec. 21.

The Coast Guard is investigating the circumstances of the grounding and could make recommendations for safety improvements and also could seek actions against the licenses of mariners involved.



Saturday's hearing, on a bright blue holiday weekend day in Anchorage, drew perhaps a dozen people besides panel members, lawyers and journalists. One of the more assertive panel members was missing, too. Barry Strauch of the National Transportation Safety Board had to return to Washington, D.C., for prior commitments, a Coast Guard spokesman said.

Tom Lakosh, a citizen activist who has been pushing the panel to explore more angles, came again to press his case during breaks. Gary Chouest, one of the owners of Edison Chouest Offshore, which built the Kulluk tow vessel, was there. So was Mark Fesmire, director of the federal Bureau of Safety and Environmental Enforcement's Alaska region. BSEE ovesees offshore drilling.

On Saturday, the panel also heard from Anthony Flynn of GL Noble Denton, an oil and gas technical service consultant. Flynn served as Shell's warranty surveyor for three Kulluk tows, including the disastrous one in December, checking the setup ahead of time for Shell's insurance underwriters. He arrived in Dutch Harbor Dec. 19, just two days before the voyage began. He had been on the Kulluk at sea but not the Aiviq, the Kulluk's tow vessel.

Flynn, testifying by phone from Houston, said he found no big issues with either vessel. Earlier witnesses said he asked Kulluk crew members to fasten down gear and supplies more securely. The Aiviq's chief engineer, Carl Broekhuis, testified Thursday that he remembers Flynn only spending about 30 minutes on the Aiviq and asked him just one question: Whether he had any major engineering issues.

"And I said 'no,'" Broekhuis testified earlier. Flynn on Saturday said he recalls spending one and a half to two hours on the vessel.

Cmdr. Joshua McTaggart, who is leading the investigation, asked Flynn to describe how he inspected the Kulluk's tow gear in Dutch Harbor.

Flynn said some of the tow hardware was suspended from a crane and crews were connecting pieces.

"It was obvious to everybody there. You could see the shackles being connected and the pins and the nuts and the cotter pins being put in place," Flynn testified. The tow master, a Shell representative, an engineer and others all looked the gear over, he said. "We were all satisfied there was no damage."

Was he sure, McTaggart asked, that the cotter pins -- kind of bobby-pin shaped fasteners -- were in place?

Yes, said Flynn. Don't his pictures show that? McTaggart said one photo was from the right perspective, but was dark. The Coast Guard has not released any of the evidence from its investigation.



The shackles were listed in multiple Shell tow plans as being rated for 85 tons of working load strength, and Shell showed Flynn certification for 85-ton shackles that he needed to see to approve the trip. But in fact, Shell and its contractors had upgraded the shackles to 120-ton strength. Shell didn't seek certification for the bigger shackles, however, and didn't have that paperwork in hand, marine manager John Kaighin testified Friday.

The outdated tow plan was an oversight, Churchfield said. Flynn said he never knew the shackles he inspected were 120-ton strength, not 85-ton, but that only improved the setup.

The same tow gear had been used since the Kulluk and Aiviq left the Seattle area in June to head to Alaska for drilling, Flynn said. Kulluk crew members told him in November during an earlier inspection that they were "rocking and rolling" in a storm on the trip north but the tow gear held.

McTaggart asked whether that made him want to take a closer look at the equipment.

"The opposite," Flynn said. "I think it gave me confidence in it."

McTaggart kept on. Couldn't the stress of a tow in harsh conditions damage the equipment? Should it be tested?

If it looked deformed or damaged, a piece of gear as basic as a shackle should simply be replaced, Flynn said.

On the Kulluk, the main tow gear failed Dec. 27 as the seas were picking up. The Coast Guard is zeroing in on a key connecting shackle that somehow came apart and was lost at sea. While hooked by an emergency rope tow to the Kulluk, all four main engines shut down on the Aiviq. Despite repeated efforts to connect the Kulluk to various vessels that came to help, crews couldn't get it under control in the escalating storm.

An earlier witness said Shell had a four-day window of good weather when vessels left Dutch Harbor. A weather study for Shell showed similar weather for December and January, Churchfield said. The drilling rig and its tow vessel were both ready to go. A high level team had signed off on the plan, as had the Shell tow master, the warranty surveyor and others.

Shell never put any financial limits on the tow operation itself and didn't try to do it the cheapest way, Churchfield said under questioning by his lawyer.

"The imperative was always that the tow must be conducted safely," Churchfield testified.

Shell couldn't get a slot in a Seattle shipyard for the crane work until February, Churchfield said. Shell's Kaighin earlier testified that Shell arranged for a temporary berth at the Port of Everett for preliminary work until the shipyard space opened up.

Shell also faced taxes in Washington state, Churchfield noted.



At a press conference in Anchorage the day after the grounding, Churchfield was asked if Shell left when it did because of the Alaska tax potential.

"No, the reason we boated down there was actually to get the off-season repairs done," Churchfield said in January. "Once we had the rig ready for tow, prepared and inspected, was when we moved down to give us the maximum time to ready for the 2013 season."

In later interviews, Shell spokesman Curtis Smith said the tax issue was considered but not the primary factor.

The Kulluk departure timing has been a political issue. U.S. Rep. Ed Markey of Massachusetts, the top Democrat on the Natural Resources Committee, asserted back in January that Shell was rushing to leave the state because of taxes.

The Kulluk needed to be back in Alaska by June for this year's drilling season, Churchfield said. Shell now is regrouping and no longer plans to drill in Alaska this year. It intends to return at some point, officials have said.

The Coast Guard hearing continues Tuesday.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


An earlier version of this story is available here.



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