Did Alaska tax liability influence Shell Oil's latest Arctic fiasco?

Ben Anderson
The anchor-handling vessel, the Alert, tows the drilling unit Kulluk to a safe harbor location in Kiliuda Bay, Alaska on Jan. 7, 2013. Photo by U.S. Coast Guard Petty Officer 3rd Class Jonathan Klingenberg.
US Coast Guard photo
The drilling unit Kulluk, towed by the anchor-handling vessel Aiviq, heads to its safe harbor location in Kiliuda Bay.
Courtesy Shell
The drilling unit Kulluk, towed by the anchor-handling vessel Aiviq, heads to its safe harbor location in Kiliuda Bay.
Courtesy Shell
The Kulluk drill rig near Sitkalidak Island off Kodiak
USCG photo
The Kulluk drill rig off Kodiak Island on Jan. 2, 2013
USCG photo
Shell Oil's drill rig Kulluk, grounded off Kodiak Island by an Arctic storm it was supposed to be built to withstand
Royal Dutch Shell's drilling ship, the Kulluk, grounded at remote Sitkalidak Island in Alaska on Jan. 1, 2013.
Coast Guard Petty Officer 1st Class Sara Francis footage
Waves crash over the mobile offshore drilling unit Kulluk where it sits aground on the southeast side of Sitkalidak Island, Alaska, Jan. 1, 2013.
U.S. Coast Guard photo
Rear Adm. Thomas Ostebo, 17th Coast Guard District commander, Capt. Paul Mehler, federal on-scene coordinator for the Kulluk mishap, and Sean Churchfield, Shell’s incident commander, discuss the situation with Sen. Lisa Murkowski on Jan. 1, 2013.
USGS Petty Officer 1st Class Matthew Schofield photo
Approximate location where Royal Dutch Shell's drilling ship Kulluk grounded on Sitkalidak Island, Alaska.
Coast Guard photo via Ground Trekking Truth
Ocean Bay on Sitkalidak Island in Alaska, located close to Kodiak Island's southeast shore.
Stacy Studebaker, Kodiak Audubon Society photo
The west end of Sitkalidak Island's shore Ocean Beach, where shoals are visible beneath the waves. Sitkalidak Island is located near Kodiak Island, Alaska.
Creative Commons photo via Ground Truth Trekking
A Coast Guard MH-60 Jayhawk helicopter crew evacuates 18 crewmen from Shell Oil's drilling ship Kulluk in 15 to 20-foot seas, 80 miles southwest of Kodiak, Alaska, on Dec. 29, 2012.
Coast Guard photo
A Coast Guard HC-130 Hercules aircraft from Air Station Kodiak overflies the tugs Aiviq and Nanuq tandem towing the mobile drilling unit Kulluk 116 miles southwest of Kodiak City, Alaska, Sunday, Dec. 30, 2012. The tug Alert from Prince William Sound and the Coast Guard Cutter Alex Haley from Kodiak are en route to assist.
US Coast Guard photo
Royal Dutch Shell's Kulluk drillship in the Beaufort Sea in fall 2012.
Royal Dutch Shell photo
Curtis Smith, spokesperson for Shell Oil. June 1, 2012
Loren Holmes photo
Shell Oil's Kulluk platform, in Seattle, May 25, 2012.
Courtesy Senator Begich's office
Shell's Aiviq support vessel in Dutch Harbor, Alaska.
Shell photo
Shell Oil Alaska vice president Pete Slaiby listens to David Hayes, deputy secretary of the U.S. Department of the Interior, speaking at the Arctic Imperative Summit. August 26, 2012
Loren Holmes photo
Royal Dutch Shell has already begun studying land and sea features to determine the best route and depth to place at least 400 miles of pipelines that can carry crude oil to the trans-Alaska pipeline. The company is considering several options across a wide swath of ocean and tundra. This map was created to provide a general idea of the direction those pipelines will take.
Aaron Jansen illustration
The Shell drilling vessel Noble Discoverer came close to shore in Unalaska on Saturday, July 14.
Kristjan B. Laxfoss photo
Shell Oil's 514-foot drill ship Noble Discoverer sits 68 miles west of Nome on Aug. 29, 2012.
U.S. Coast Guard photo
Shell Oil's exploratory drilling platform departs Seattle for Alaska on June 27, 2012.
Courtesy Vigor Industrial
The Arctic Challenger was occupied by Caspian terns while docked in Southern California in 2007.
John Potter / California DFG
The Arctic Challenger, a barge Royal Dutch Shell is renovating to use in Arctic drilling operations.
Courtesy Shell Oil
The Arctic Challenger with the newly redesigned and repaired Containment Dome move away from the Port of Bellingham, Wash. on Dec. 12. The challenger had been moored since returning in September 2012 after a catastrophic failure of the first iteration of their containment process.
TJ Guiton photo
A night shot of the workers and equipment showing a markedly armored containment dome to replace the one which suffered a catastrophic failure in September 2012 during the initial testing process in calm, predictable conditions in the Salish Sea off of Anacortes, WA. Note the lateral ribs surrounding the upper portion of the dome as well as the outer steel plates to protect the dome from damage and enhance the strength of the structure to the pressures of ocean depths.
TJ Guiton
Shell Oil tests their "capping stack" in Everett, Washington on June 25, 2012.
Courtesy Shell Oil
Shell Oil's spill response gear staged in Wainwright. Summer 2011.
Ben Anderson photo
Greenpeace boat crew protest at Shell drill ship Noble Discoverer anchored near Dutch Harbor, Unalaska, Alaska. August 5, 2012
Jiri Rezac / Greenpeace
Fennica, a Finnish icebreaker contracted to Shell's Arctic project, in Dutch Harbor, Alaska.
Shell photo

Hopes of avoiding millions in state taxes may have faded for Royal Dutch Shell when the clock struck midnight on Jan. 1 and 2012 became 2013. Just hours earlier, its Arctic drill rig, the Kulluk, had grounded on an island in the Gulf of Alaska, exposing Shell to a unique Alaska property tax on equipment dedicated to oil and gas development and exploration.

If the rig had been just three miles from state shores, the tax could have been avoided. Instead, because the vessel had found its way back to Alaska just in time to ring in the new year, the company's hopes for good weather and a quick run to port in another state were dashed in the worst possible way.

According to Shell Alaska spokesman Curtis Smith, there was a two-week window in which the weather looked good through the Gulf of Alaska at the time the Aiviq left Dutch Harbor with the Kulluk in tow on Dec. 21. That was the primary reason that the vessels set out when they did, hoping to make a run to port in Washington for repairs and maintenance.

A week later, the Aiviq suffered multiple engine failures just as a subtropical cyclone made its way into the North Pacific, bringing with it high seas and whipping winds. Multiple attempts to re-establish a lasting towline between the Kulluk and a variety of tow vessels failed.

Eventually, the hulking drill unit found itself resting in shallow water, pounded by waves as officials scratched their heads, trying to figure out what to do next.

Though the favorable forecast was a primary reason for Shell leaving Dutch Harbor when it did, there was another factor: money.

Smith said in an email to the Dutch Harbor Fisherman last week that it could cost “multiple millions” if the Kulluk was still in Alaska waters Jan. 1. That’s because of the state of Alaska’s oil and gas property tax, a tax levied on all assets dedicated to oil and gas exploration, transportation and production in Alaska. The tax comes to 2 percent of the assessed value of the property.

An 'unusual' situation

Smith said Thursday that Shell was aware of the tax, but that it wasn't a “strong driver” in determining when the vessels would leave.

“What mattered most to Shell was the two-week window of good weather (leaving on Dec. 21),” Smith said. “Had it not been favorable, we would not have departed from Dutch Harbor, regardless of tax.”

Shell has provided mixed answers on whether taxes were a determining factor in leaving Dutch Harbor. In a Dec. 27 email to the Dutch Harbor Fisherman, Smith said “it's fair to say the current tax structure related to vessels of this type influenced the timing of our departure.” When asked if taxes influenced departure, in a New Year's Day press conference, Sean Churchfield, Incident Commander and Operations Manager for Shell Alaska, said they had not.

“The reason we moved it down (to the Seattle-area) was to get off-season repairs done,” he said. “We moved once we had the rig ready to tow, prepared and inspected, it was only moved down to give us maximum time to prepare for the 2013 season.”

Smith noted that Shell has held the Kulluk before, as recently as last October, when the company anchored the drill rig in the Beaufort Sea and waited out a severe storm.

He added that the Kulluk has traversed the Gulf of Alaska five times since 2009 with no incident. Smith did not know specifically when those trips had been taken or whether or not they had been during the winter months.

State Petroleum Tax Assessor Jim Greeley said that it was not yet known how much Shell might owe in taxes -- if anything -- because that property tax statement doesn’t have to be filed until Jan. 15. Shell could even request an extension at that time, since the assessed value of the Kulluk following salvage could be significantly less than when it was in better condition.

On Thursday, Smith still couldn't say how much that would be, only saying it could be in the millions.

But more importantly, Shell is in a unique situation with its vessels. Most oil and gas production and exploration equipment is stationary -- think pipelines, drilling stations and other facilities -- but Shell has an especially mobile oil drilling operation.

That could make it difficult to determine just how much of Shell's time in Alaska over the summer and fall could fall under the heading of exploration.  The ships spent lengthy periods in port, or in transit from the Aleutians to the Arctic. It’s also unclear if the Aiviq and Nanuq, officially described as oil-spill response vessels, would be subject to such a tax.

“There’s a 50 percent-use test,” Greeley said. “That means if (an oil and gas asset’s) use is 50 percent dedicated to the production, exploration or transportation of unrefined oil and gas, it’s subject to (state statute).”

Shell’s hope of moving out of state before the Jan. 1 tax deadline was also unusual. Greeley said that there are some tugs operating in Valdez which fall under the oil and gas tax, but they don’t attempt to avoid taxation by making their way three miles from shore -- and outside of state waters -- every New Year’s Eve.

“Realistically, does that occur? I suspect not,” Greeley said. “Technically, can it occur? Yeah. They’ve got motors that could propel them outside of state water, but they also have obligations to (the Trans-Alaska Pipeline) that they have to fulfill.”

Shell has no such obligation, since the Arctic drilling window is a limited one, and the vessels are free to head south for the winter. But because the Kulluk found itself inside state waters, and eventually ashore, on New Year’s Eve, it may now be subject to that tax anyway.

Shell’s other Arctic drillship, the Noble Discoverer, may also be taxed after a weeks-long hold up in Seward, where the Coast Guard held it after discovering numerous safety and pollution prevention issues aboard. Those issues were fixed, but the Noble Discoverer needed a tug of its own to haul it to Washington state due to a continuing problem with its propulsion system.

“The only expectation that the state has is that Shell complies with the statute,” Greeley said. “If you have property here you’re expected to file a property tax statement because it was in state waters on Jan. 1.”

Once Shell files that statement, it will be up to the state to determine exactly which percentage of the fleet’s time in Alaska directly related to exploration. Then, Shell may end up paying those taxes it hoped to avoid, in addition to a pricey salvage and recovery effort for its ill-fated drill rig.

Staff writer Suzanna Caldwell contributed reporting to this article. Contact Ben Anderson at ben(at)alaskadispatch.com.