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Concerns over Kulluk tax bill factored into Shell’s winter Gulf of Alaska crossing

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Suzanna Caldwell: May 25, 2013

Millions of dollars in potential taxes were a primary reason Royal Dutch Shell decided to move the Arctic-ready conical drilling unit Kulluk from Dutch Harbor before the end of the year, according to the company’s Alaska operations manager.

The taxes were part of a hierarchy of issues the Shell Alaska venture considered before moving the Kulluk — the centerpiece of Shell’s $4-billion-plus Arctic drilling program — Sean Churchfield, Shell’s Alaska operations manager, told a US Coast Guard marine casualty investigation Saturday.

He noted that keeping the Kulluk in Dutch Harbor would have been more expensive, for both the taxes and infrastructure maintenance and staffing costs at the remote Aleutian outpost. Financial considerations were one of the primary factors in deciding to move the Kulluk across the Gulf of Alaska at a time of year known to feature volatile weather.

“(Shell’s) preference then was we wanted to be gone by the end of the year, driven by economic factors” Churchfield told investigators.

Why specifically leave in December, Lt. Cmdr. Brian McNamara asked.

“Because tax liability probably would have been effective … and the longer we stayed there, the higher incremental cost we would have occurred.”

The decision to leave Dutch Harbor was finalized in early December 2012. By Dec. 21, the rig had departed, managers citing a clear weather window four days out from its departure.

A week later, a tow shackle connecting the conical drilling unit to the Aiviq broke, leaving the 266-foot diameter rig floating in the Gulf of Alaska. Bad weather would move in, causing a series tow line and engine failures between the Kulluk and numerous assistance vessels. After days of fighting, the Kulluk ran aground just hours before the new year.

Questions over whether the tax played a decision in the Kulluk’s departure immediately emerged after the rig’s grounding. The tax — an oil and gas property tax — could have collected 2 percent of the assessed value of the ship.

How much the Kulluk is actually worth is unclear. Shell has touted the $292 million it has invested in the rig since purchasing it in 2005, but has not released how much it paid for the vessel or its assessed value.

When asked specifically how high the taxes would have been, Churchfield wouldn’t specify, only that they would have been in the millions — and that the tax liability would have been greater than the other commercial factors.

Speaking to the tax as a possible reason for a risky December Gulf of Alaska crossing is a marked change for Churchfield, who served as the face of Shell during the immediate aftermath of grounding. In January, when asked specifically if taxes influenced the Kulluk’s departure, Churchfield demurred, insisting that primary reason for leaving was to have maximum time to prepare for the 2013 drilling season.

“The reason we moved it down (to the Seattle area) was to get off-season repairs done,” Churchfield said during a New Year’s Day press conference following the grounding. “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.”

Churchfield again reiterated in his testimony that such preparation — to repair cranes on the Kulluk, work that could only be done in the Seattle area — was one of the primary reasons to move the drill rig.

Later, Shell attorney Greg Linsin asked whether there would be Washington state tax implications for moving the Kulluk to Seattle area. Churchfield said yes, there were.

“Both tax liabilities were weighed as part of the decision making process,” Churchfield said.

He did not elaborate on what those taxes could be or how much they would cost.

On Saturday, the sixth day of the U.S. Coast Guard’s marine casualty hearing for the Kulluk, investigators pressed Churchfield on four main points:

Preplanning of the Kulluk and reasons for the timing of the move

Reasons Churchfield took leave in December and what impact that may have had on communications

Experiences within Unified and Incident commands to initial response

Tow plan for the Kulluk from Kiluda Bay to Dutch Harbor in Feb. 2013 and the differences between that plan and the other tows

Warranty surveyor’s checklist

Also testifying Saturday was Warranty Surveyor Tony Flynn of GL Noble Denton.

Investigators went through the checklist had for the Kulluk’s December tow, item by item, that he went through before he issued a certificate of approval for the tow.

A warranty surveyor acts as an independent inspector of vessels and tow gear, to make sure everything — from the towing connections to engines and generators — is suitable for the voyage.

Much of Flynn’s testimony focused on the tow set-up established between the Aiviq and the Kulluk. Specifically, he faced questions for his visual inspection of the shackle and its cotter pin — a key component of the tow. The breaking of the shackle Flynn inspected set off a series of events that led to eventual grounding of the Kulluk.

Flynn testified that everyone — including himself — was satisfied with the conditions of the parts.

While there was some rust on the cotter pin — the piece that holds the U-shaped shackle in place – none of it was out of the ordinary.

He also testified that everything was fine on the tug, the Aiviq.

“Everything seem suited for this tow,” he said.

Flynn noted that tow gear — including the shackles — had pulled the Kulluk thousands of miles by the time he saw them in Dutch Harbor, since they had pulled the Kulluk all season, starting from Seattle in June 2012, up to the Beaufort Sea that summer and back down to Dutch Harbor.

Flynn was pressed by Coast Guard Investigator Cmdr. Josh McTaggart on whether the violent seas the Kulluk encountered heading to the Beaufort made him worry about the strength of the shackle, Flynn said it did not. If anything, it was the opposite.

“(It showed the shackle) was adequately strong to handle a storm,” he said.

But it was Flynn’s understanding the shackle was rated to 85 tons. That turned out to be untrue, since it was later found the shackle was rated higher, to 120 tons. Despite the difference in strength, the shackles are similar in size and have no markings to distinguish them.

The Coast Guard investigation, led by McTaggart is in the process of conducting a marine casualty hearing on the Kulluk. The group hopes to uncover what went wrong and, ultimately, who is responsible for the grounding of the conical drilling unit, considered a centerpiece of Shell’s Alaska offshore Arctic drilling program.

All Shell drilling off Alaska in 2013 was suspended earlier this year.

Any recommendations will be passed on to Rear Adm. Thomas Ostebo, who will decide whether or not to make changes to regulations or pursue criminal charges.

Contact Suzanna Caldwell at suzanna(at)alaskadispatch.com

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