January 10, 2013 / 5:20 PM / in 5 years

UPDATE 4-Shell may have moved rig to avoid taxes - US lawmaker

By Yereth Rosen and Timothy Gardner

ANCHORAGE, Alaska/WASHINGTON, Jan 10 (Reuters) - Shell may have moved an oil rig that ran aground off Alaska last week partly to avoid millions of dollars in taxes, U.S. Representative Ed Markey said, raising even more questions about the oil company’s decision on the timing of the move.

The letter from the top Democrat on the House of Representatives Natural Resources Committee adds to the already-intense political scrutiny of Royal Dutch Shell’s ambitious and troubled Arctic drilling foray last year.

Shell’s 30-year-old Kulluk drillship ran aground on New Year’s Eve in what were described as “near hurricane” conditions while it was being towed south for the winter.

In a letter to Shell’s top U.S. executive, Marvin Odum, Markey said the decision to move the rig “may have been driven, in part, by a desire to avoid ... tax liability on the rig.”

Shell said in response that its decision to move the rig was guided by safety, not taxes.

Markey, an outspoken critic of the oil and gas industry, said his office received information about Shell and taxes from the Alaska revenue department.

Shell could have been exposed to state taxes if the rig had remained in the state until Jan. 1, as Alaska law says an annual tax of 2 percent can be assessed on drilling equipment on that date, Markey said in the letter sent on Wednesday.

The company spent $292 million on upgrades on the rig since purchasing it in 2005, so the liability could have been about $6 million, he wrote. In total, Shell has spent $4.5 billion since 2005 to develop the Arctic’s vast oil reserves.


Its efforts have been closely watched by many in the industry, and especially by ConocoPhillips ahead of its planned Arctic drilling program off Alaska slated for 2014.

According to the U.S. government, the Beaufort and Chukchi seas hold an estimated 23 billion barrels of recoverable oil - equivalent to a tenth of Saudi Arabia’s reserves.

But the Kulluk accident is only Shell’s latest problem in Alaska. Its 2012 Arctic drilling season was plagued by delays due to lingering ice in the water and problems getting a mandatory oil spill containment vessel certified by the Coast Guard.

The U.S. Interior Department said this week it would review Shell’s Arctic oil drilling program to assess the challenges it faced and to guide future Arctic permitting.

Markey’s committee does not have the power to stop drilling. His investigation, which is in its early stages, will focus on why the rig was being towed along the coast down to Washington state in such severe weather in addition to Shell’s safety policies, an aide to Markey said.

Any permitting changes or delays resulting from the Interior Department review could threaten Shell’s 2013 drilling plans, as the company has a limited drilling window during the summer.

A Shell spokeswoman said the plan was always to move the Kulluk in December. “While we are aware of the tax environment wherever we operate, the driver for operational decisions is governed by safety.” She said an approved tow plan for the rig included weather considerations.

Winter transit in northern waters is not unusual for rigs. Just this month, one owned by rig contractor Seadrill was due to arrive in Norway to start work for Statoil, while another was headed to Canada for Exxon Mobil Corp.

The Kulluk, before heading south, had previously been at a private facility in Unalaska/Dutch Harbor operated by Kirkland, Washington-based Offshore Systems Inc, which serves fishing and other vessels in Alaska. Harbormaster Jim Days said it was there for at least a month after completing its Beaufort Sea drilling.

Unalaska/Dutch Harbor is the home port for crab fishermen featured on TV on “The Deadliest Catch.” It is the nation’s top-volume seafood port and a cargo-shipping hub.

The environmental impact of the Kulluk accident is so far fairly limited. The incident response team has located all four survival ships and one rescue ship that were dislodged from the drillship when it ran aground. The survival ships all had 68-gallon-capacity fuel tanks, and two had been breached.

But none of the 155,000 gallons of fuel and other oil products aboard the Kulluk itself had leaked.

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