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State: Pipeline boom-era law shields Shell Oil from Kulluk property tax

Suzanna Caldwell
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
The Arctic Challenger, a barge Royal Dutch Shell is renovating to use in Arctic drilling operations.
Courtesy Shell Oil
Approximate location where Royal Dutch Shell's drilling ship Kulluk grounded on Sitkalidak Island, Alaska.
Coast Guard photo via Ground Trekking Truth
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
Ocean Bay on Sitkalidak Island in Alaska, located close to Kodiak Island's southeast shore.
Stacy Studebaker, Kodiak Audubon Society 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
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
Shell Oil tests their "capping stack" in Everett, Washington on June 25, 2012.
Courtesy Shell Oil
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
Shell Oil's spill response gear staged in Wainwright. Summer 2011.
Ben Anderson 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
Greenpeace boat crew protest at Shell drill ship Noble Discoverer anchored near Dutch Harbor, Unalaska, Alaska. August 5, 2012
Jiri Rezac / Greenpeace
Royal Dutch Shell's Kulluk drillship in the Beaufort Sea in fall 2012.
Royal Dutch Shell photo
Fennica, a Finnish icebreaker contracted to Shell's Arctic project, in Dutch Harbor, Alaska.
Shell photo
Curtis Smith, spokesperson for Shell Oil. June 1, 2012
Loren Holmes photo
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
Shell Oil's Kulluk platform, in Seattle, May 25, 2012.
Courtesy Senator Begich's office
The drilling unit Kulluk, towed by the anchor-handling vessel Aiviq, heads to its safe harbor location in Kiliuda Bay.
Courtesy Shell
Shell's Aiviq support vessel in Dutch Harbor, Alaska.
Shell photo
The drilling unit Kulluk, towed by the anchor-handling vessel Aiviq, heads to its safe harbor location in Kiliuda Bay.
Courtesy Shell
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
The Kulluk drill rig near Sitkalidak Island off Kodiak
USCG 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 Kulluk drill rig off Kodiak Island on Jan. 2, 2013
USCG photo
The Shell drilling vessel Noble Discoverer came close to shore in Unalaska on Saturday, July 14.
Kristjan B. Laxfoss photo
Shell Oil's drill rig Kulluk, grounded off Kodiak Island by an Arctic storm it was supposed to be built to withstand
Shell Oil's 514-foot drill ship Noble Discoverer sits 68 miles west of Nome on Aug. 29, 2012.
U.S. Coast Guard photo
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
Shell Oil's exploratory drilling platform departs Seattle for Alaska on June 27, 2012.
Courtesy Vigor Industrial
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
The Arctic Challenger was occupied by Caspian terns while docked in Southern California in 2007.
John Potter / California DFG

The Kulluk is exempted from an oil and gas property tax that's levied by the state of Alaska and that had been floated by a Shell Oil spokesman as one of many factors that led the company to tug the mobile Arctic drilling rig as a whale of a storm wound  a storm system wound through the Gulf of Alaska during the holidays.

The tax would have conceivably cost Shell millions of dollars, but Jim Greeley, an oil and tax assessor with the Alaska Department of Revenue, told the Kodiak Daily Mirror that state policy for more than three decades has been to not tax drilling equipment that operates outside state waters.

The Kulluk, an integral part of Shell's Arctic drilling operation last summer, briefly drilled in the Beaufort Sea -- just beyond the state's 3-mile jurisdiction, Greeley said.

"Because this vessel is dedicated for those activities outside of the state in federal (Outer Continental Shelf) waters, it falls outside (the law)," Greeley told the Mirror.

It's bit of step back from earlier reports from the state and from Shell. Shortly after the Kulluk drilling rig ran aground on New Year's Eve, questions surfaced about the tax -- a 2 percent levy on all assets dedicated to oil and gas exploration, transportation and production in Alaska -- would apply to the Kulluk.

Curtis Smith, a spokesman for Shell in Alaska, told the Dutch Harbor Fisherman not long before the Kulluk grounding that taxes had influenced timing of the conical drilling rig's departure from the international port of Dutch Harbor in Alaska's Aleutian Islands. Smith didn't know exactly how much the tax would cost Shell, but suspected it would be in the millions of dollars.

The Dutch Harbor newspaper quoted a state official who pegged the tax somewhere between $5 and $6 million [if the Kulluk didn't make it out of state waters by the end of 2012].

Smith later qualified his statement, saying that while it had been a factor, it was not a “strong driver” in the decision to move the Kulluk. After its abandonment off Kodiak Island led Shell to coordinate the Kulluk Unified Command, Smith and others with Shell insisted that rig maintenance and repairs in preparation for the 2013 Arctic drilling season -- not tax liability -- had led to the Kulluk's departure for Seattle during a two-week weather window in late December.

Meteorologists contracted by Shell had predicted good weather across the Gulf of Alaska during that time frame for the Kulluk's voyage. What came instead: two major cyclones on Dec. 28, hurricane-force winds and 40-foot waves, and the "coup de grace," a massive storm off Kodiak Island on New Year's Eve.

Shell CEO Peter Voser told investors last week that Dutch Harbor Fisherman reporter Jim Paulin had taken Smith's comments out of context. In an editorial this week, Carey Restino, Paulin's editor at the Fisherman, defended the story, publishing the full email exchange between Smith and Paulin.

“I’m sorry, but there’s no way to take that out of context,” Restino wrote. “Who knows who makes the calls about when to move rigs and why in the upper-level management of Shell, and surely not everyone was privy to the decision-making process. But at least one person at Shell thought this is why the ships were pulling up anchor.”

Shortly after the Kulluk's grounding, Greeley told Alaska Dispatch that it was unclear how much money -- if any -- Shell would owe the state. At the time Shell still had time to file its 2012 property tax statement or request an extension.

Greeley noted at the time that Shell was in a unique situation with its Arctic drilling vessels, mobile rigs that are moved into and out of Arctic Alaska each year. Most oil and gas equipment operating in the state and subject to the tax is stationary.

And the Kulluk may have spent weeks in Dutch Harbor -- Alaskan waters -- the rig itself is dedicated to use in the Outer Continental Shelf.

"There’s a 50 percent-use test," Greeley told Alaska Dispatch in January. “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).”

The tax exemption dates back to the 1970s, as hundreds of miles of pipe was being built from Alaska's North Slope oil fields, down to Valdez. In 1977, at the height of the pipeline boom, then-Attorney General Avrum Gross concluded that Alaska could not tax property used mainly for drilling more than three miles from state shores.

It's a standing that still holds up, state oil and gas attorney Martin Schultz told the Associated Press.

"It's a pretty straightforward interpretation as it applies to the Shell Kulluk," Schultz said. "That particular definition has not changed since this attorney general's opinion was issued."

Contact Suzanna Caldwell at suzanna(at)alaskadispatch.com