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

Sean Churchfield, Shell Operation Manager for Alaska, answers questions during a US Coast Guard hearing. (Credit: Bob Hallinen, Anchorage Daily News)

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.”

The 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.

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

  1. Merrelyn Emery says:

    How to shoot yourself in the foot without a gun! Hilarious. Reminds me of ‘The Unknown Industrial Prisoner’ which is a comic novel about how a Shell refinery blew up south of Sydney, ME

  2. Raul M. says:

    Amazing that Shell would buy the entire solar industry back in the 70’s out of their petty cash and let it be just a money market thing. China is perusing subsidizing their solar industry. The point being that there are reasons to do so beyond profit margin considerations. Point being that profit margins make more sence when the weather is nice.

  3. Jake says:

    I’m interested in the Shell purchase you mention, Raul. Can you give me more information that will lead me to where I can read about it?

  4. Raul M. says:

    Not sure if the book is still out there . Written in the early seventies croon chilling the employee lay offs in the solar industry as the companies shut down after Shell purchased such. It was a while before Shell panels started up. One of which is installed on my solar set up. It is a nice panel and goes well with the BP panel to make electricity.

  5. Keith S says:

    I never thought I’d defend an oil company, but the way I read this, it’s not the fault of Shell. They were apparently playing by the rules as they stood. The fault lies with US. It’s the people WE elected to Congress that made this behavior legal in the first place. It’s OUR job to fix it.

  6. Joan Savage says:

    The rescue operation cost has been borne by taxpayers, yet the risk of running aground was known to Shell in advance!
    It seems we have no procedure for recovery of the US Coast Guard’s expenses from Shell’s insurance carriers.

  7. Chris Lyon says:

    I agree, Keith. Good god, TP is just more and more alarmist by the day.

  8. Superman1 says:

    You have violated the main rule of this site, which states that we the electorate are not responsible for anything. The only miscreants are the energy companies or the media or the politicians or …., but not us. We can do no wrong! And, I am sure we can find a poll that backs that up.

  9. Superman1 says:

    The fossil equivalent of the Price-Anderson Act!