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Shell Admits Real Reason Coast Guard Had To Rescue Its Arctic Drilling Rig: Failed Tax Avoidance Scheme

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Screen Shot 2012-12-07 at 01.26.25By Ryan Koronowski on May 28, 2013 at 6:17 pm

The main reason an offshore oil rig ran aground off the coast of Alaska late last year was because oil company Royal Dutch Shell was trying to depart state waters to avoid paying millions in taxes.

Sean Churchfield, operations manager for Royal Dutch Shell in Alaska, testified to the Coast Guard over the weekend that the Kulluk, an Arctic offshore drilling rig, left Dutch Harbor in December “driven by the economic factors.” When the Coast Guard’s legal advisor Lt. Cmdr. Brian McNamara asked why leaving by the end of the year was such a concern, Churchfield said:

“The end of the year to my understanding was when the tax liability potentially would have become effective.”

Screen Shot 2013-05-29 at 08.32.40The cost of maintaining the rig in Dutch Harbor was another factor, but the tax liability was larger, according to Churchfield. The Kulluk is a 28,000 ton oil drilling ship that ran aground off the shore of Sitkalidak Island, Alaska due to an extremely strong winter storm in the waning hours of 2012. The Coast Guard took part in a joint operation to evacuate all crewmembers. Currently, the Kulluk and its counterpart the Noble Discoverer are in Asia for repairs.

Soon after the Kulluk left Dutch Harbor, an email from Shell to the Dutch Harbor Fisherman revealed that tax issues did play into the decision to leave when it did. During a press conference the day after the accident, Churchfield said, “The reason we moved it down (to the Seattle-area) was to get off-season repairs done.” Soon after, a Shell spokesman told the Alaska Dispatch that the Kulluk left because of a two-week window in which the weather looked safe through the Gulf of Alaska.

 

As Climate Progress reported in January, Rep. Edward Markey suggested in a letter to Shell CEO Marvin Odum that the odd timing of the Kulluk’s departure was an attempt to avoid $6 million in taxes:

…Shell could have been exposed to potential state tax liability on the Kulluk drill rig if it remained in the state on January 1st. Chapter 43.56 of the Alaska Statutes states that an annual tax of 2 percent can be assessed each tax year on January 1st on “the full and true value of taxable [oil and gas] property taxable under this chapter” Shell had reportedly spent $292 million just on upgrades to the Kulluk since purchasing the drill rig in 2005. That would mean that Shell could have potentially been exposed to state tax liability on the Kulluk in excess of $6 million.

This weekend’s news that tax avoidance played a significant part in Shell’s decision to leave when it did dovetails with Shell’s tax history. In the past, the company has held profits offshore in order to avoid British taxes, and reduced its tax bill by $200 million in the United States through tax breaks. Since the Kulluk ran aground, Shell has pulled in $8 billion in profits during the first quarter of 2013.

Unfortunately for Shell, its efforts to get out of Alaskan state waters were a failure: because the rig ran aground on Alaska, the Kulluk will be liable for the value of the rig in the 2012 tax season — though that value may have decreased because it had to be salvaged.

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