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

  • Author: Suzanna Caldwell
  • Updated: September 27, 2016
  • Published February 7, 2013

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)

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