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

  • Author: Ben Anderson
  • Updated: September 27, 2016
  • Published January 3, 2013

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)

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