February 8, 2013 / 10:11 PM / in 5 years

Anchored Shell drillship not subject to state property tax

ANCHORAGE, Alaska, Feb 8 (Reuters) - The stricken Shell rig that has been anchored for a month in a bay off Kodiak Island is not subject to an Alaska oil and gas property tax, a state official said on Friday, adding a new wrinkle to a controversy over its potential tax liability.

The tax question went national last month when the top Democrat on the House of Representatives Natural Resources Committee wrote to Shell, saying it may have moved the Kulluk drillship at least partly for tax reasons.

But Shell will not be assessed that tax for the Kulluk, which escaped its tow lines and ran aground near Kodiak Island on Dec. 31, said Jim Greeley, petroleum property assessor for the state Department of Revenue.

Even before the representative’s letter, critics speculated that Shell took the risk of towing the drillship across the Gulf of Alaska during the storm-plagued midwinter to avoid paying a tax which, under state policy, would be assessed on Jan. 1.

In late December, a Shell spokesman told a local newspaper it was “fair to say the current tax structure related to vessels of this type influenced the timing of our departure.” But Shell later insisted its decision was ultimately guided by safety, not taxes.  The state oil and gas property tax applies to property engaged in petroleum exploration, production or transportation within state territory. Had the 2 percent rate been applied to the Kulluk, it would have generated a tax bill of roughly $6 million based on Shell’s investment of $292 million in the rig.

Because the Kulluk worked in federal waters, “it falls out of the definition of taxable property,” Greeley said.

The vast majority of oil and gas activities in Alaska take place on state territory, either on land or offshore within 3 miles of the coast, so the tax status of property used in federal territory was previously unclear, he said.

To support the determination that the Kulluk was exempt, officials dug up a 1977 opinion from Avrum Gross, Alaska’s attorney general at the time, written prior to an earlier flurry of oil exploration in federal waters off Alaska, Greeley said.

The Kulluk on Friday remained anchored in Kiliuda Bay on the east side of Kodiak Island, where it was towed a month ago, according to the multiagency team that is managing the response to the accident.

Shell and the Coast Guard have not yet announced plans for the Kulluk, though its fate has serious implications for Shell’s Arctic drilling plans this year.

However, Greeley said the Kulluk may be subject to other property taxes. Various local governments stretching from the Aleutians to the Kenai Peninsula might impose their own property taxes on it or on the Discoverer, Shell’s drillship contracted from Noble Corp that is now docked in the port of Seward, Alaska.

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