Energy

BP prevails in Prudhoe Bay oil spill suit

1213-bp-spillBP dodged a possible $700 million bullet last week when a state judge ruled the oil company does not have to pay taxes on oil it didn't produce in the weeks following a major North Slope oil spill in 2006.

Anchorage Superior Court Judge Peter Michalski on Friday rejected arguments by the state that it "lost" tax revenue because the oil was left in the ground. The state has alleged BP was negligent in letting corrosion get so bad in pipelines at Prudhoe Bay that leaks resulted, causing the company to shut down production while repairs were made.

In a three-page ruling that seems simple compared to the lengthy motions and complex arguments that preceded it, Michalski said the state can't tax something until it is produced. Leaving the oil in the ground doesn't mean it was lost, just produced at a later date.

BP spokesman Steve Rinehart said the company is pleased with the ruling but didn't want to comment further.

State Department of Law spokesman Bill McAllister was just as brief. He said state attorneys are "digesting the ruling and considering options."

The tax claim is just one of a number of different ways in which the state has been trying to hold BP accountable for what's considered to be the largest oil spill on the North Slope. In March 2006 an oil field worker smelled oil and discovered a small leak in a pipeline on the western side of the Prudhoe Bay field. Obscured by snow, more than 200,000 gallons had escaped before the spill was discovered. The hole was the size of an almond, according to the state.

A few months later more small leaks were discovered in another line and BP decided major repairs were in order, shutting production for a few weeks while the problems were fixed.

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State attorneys have estimated about 35 million barrels of oil and natural gas liquids weren't produced as anticipated because of the halt in production. That cost taxpayers an estimated $1 billion in taxes and royalties, the state contends.

BP has argued that the oil was not lost, just delayed, and that paying taxes on it before it was produced and again when it was finally produced meant the company would be paying twice.

Michalski's ruling Friday only deals with taxes, not royalties. The tax portion amounted to about 70 percent of the state's estimated loss, according to previous legal filings.

The state's claim for lost royalties and other issues -- roughly $300 million -- is still moving through the system and is scheduled for trial in March 2012. In June, he dismissed one of the counts against BP and on Friday tossed three more.

Efforts to collect back pay for the delayed oil production have been a political bone of contention since the 2006 spill. That was an election year, and former Gov. Frank Murkowski was facing a tough challenge from Sarah Palin, who went on to win the governor's office based in part on promises to clean up perceived oil industry lapses and bad practices. Murkowski had launched an investigation into the spill and accused BP of misleading the state about its maintenance record.

Murkowski also declared the state was losing millions of dollars a day in revenue and implemented a state hiring freeze to offset any financial impact to the state.

It took nearly three years for the state to file its case against BP. By that time, the oil company had paid millions in fines and been put on probation for criminal violations.

In 2007, BP pleaded guilty to a misdemeanor criminal violation of the federal Clean Water Act, paid $20 million in fines and was put on probation for three years. That probation ended last month, but the federal probation officer has filed a petition to keep the oil giant on the legal hook because of another spill at the Lisburne oil field, this one in 2009.

The petition contends BP failed to put in place the reforms it had promised when it was put on probation. But the filing also comes as BP is under continued scrutiny for the April 20 Deepwater Horizon blowout in the Gulf of Mexico this summer, in which 11 people died and an estimated 5 million barrels of oil spilled.

A hearing in the probation case is set for Monday in federal court.

The federal government also filed a civil case against BP at the same time the state filed its lawsuit. The federal case seeks millions of dollars in fines and alleges violations of federal environmental laws. It has been languishing in U.S. District Court after a flurry of discovery motions, and no hearings or trial date has been set. Press reports earlier this summer said settlement discussions were underway.

Contact Patti Epler at patti(at)alaskadispatch.com

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