Forecast, taxes drove Kulluk decisions
Tax considerations played a role in Shell’s decision to move its drillship Kulluk from Dutch Harbor to Seattle in late December 2012, but were not the major reason, a company manager told a U.S. Coast Guard inquiry panel on May 25.
The drillship grounded in a storm off Kodiak on Dec. 31.
More important factors in the decision on timing the move was a favorable weather forecast, Shell operations manager Sean Churchfield told the panel. However, the belief that there might also be tax liability to the State of Alaska if the rig was in Alaska waters on Jan. 1 was also a consideration.
“The primary reasons for the timing was weather, the availability of the (tug) Aiviq, the technical requirements to have work done in a shipyard and the cost of keeping the Kulluk in port at Dutch Harbor, which is remote and has limited support facilities,” Chuchfield told the panel.
Tax implications were also considered, particularly in deciding to leave Dutch Harbor before the end of 2012. There was no estimate of what the tax payment would have been, but preliminary estimates were “in the millions,” he said.
One estimate made earlier this year was that the tax could be $5 million to $6 million. The tax involved is the state’s 20-mill ad valorem tax on oil and gas property used in drilling, production or transportation of oil.
Churchfield added, however, that Shell would also have paid taxes in the state of Washington had the rig arrived on schedule at a shipyard in Seattle.
The Kulluk left Dutch Harbor Dec. 21 pulled by the heavy tug Aiviq, but was caught in a major storm south of Kodiak and grounded on a small island off Kodiak.
Ironically, with the Kulluk grounded and back in Alaska waters on Jan. 1, it was liable to the Alaska tax, in theory, and Shell did file a tax return as required by state law.
However, state revenue officials subsequently concluded there was no liability after they classified the Kulluk as a vessel in transit that did not intend to drill in waters within the state’s tax jurisdiction.
The Coast Guard hearing is also probing the thoroughness of Shell and its inspectors in assessing condition of components of the tow array in preparing for the voyage.
Tony Flynn, a marine warranty investigator with Houston-based GL Noble Denton, which had been hired by Shell to certify the equipment used in the tow, was questioned May 25 on the condition of shackles connecting the towline to the drillship.
William Hebert was questioned about those shackles by telephone May 28. Hebert is a rig move coordinator for Delmar Systems, Inc., a Shell contractor. He was at Delmar’s Louisiana offices during his testimony.
It was the failure of the shackle that led to an initial break of the towline Dec. 27 even before rough weather hit. That began a cascade of events including additional towline breaks and engine failures as the storm worsened.
At a critical point early in the incident all four engines on the Aiviq quit and were not all restarted for three to four hours. The Aiviq did have some power during this period, however, when an auxiliary emergency propulsion system, something like a giant outboard motor, was lowered.
That, plus the bow thrusters on the Aiviq, kept the vessel positioned correctly in the heavy seas and kept up some momentum for the Kulluk, which by then was attached again to the tow.
Replacement injectors for the engines were rushed to Kodiak from the Lower 48 in Edison Chouest’s corporate jet, and brought to the Aiviq and air-dropped by a Coast Guard helicopter.
Several other tugs joined the Aiviq Dec. 30 and 31 in efforts to keep the Kulluk from drifting toward shore in storm, but they were unsuccessful.
Shell refloated the Kulluk several days after it grounded. It has since been transported to South Korea for repairs to hull damage and electrical systems.
Flynn, the marine warranty inspector, was questioned as to whether he had seen certificates from the manufacturer verifying the condition of the shackles. Flynn said he had not, although he visually inspected the shackles and other equipment and saw no signs of wear or damage, he told the panel May 25.
Hebert said he had not seen any damage either. The two did not do their inspections together, although he did meet Flynn, he said.
Coast Guard officers on the panel asked both participants a series of detailed questions about the procedures for verifying the condition of the shackle and other equipment, possibly an indication of concern over whether stress on the gear had weakened the shackle or other key parts.
Flynn said there were no non-destructive tests done of the metal parts and those would not have been ordered unless there were signs of wear or some other indication of damage, he said.
A similar tow array and equipment was used on the earlier northbound voyage by the Kulluk and Aiviq and later in the fall from the Beaufort Sea, in the Arctic, to Dutch Harbor, except for using a different chain.
The vessels encountered two severe storms on the earlier trips, one in the Bering Sea and one in the Beaufort Sea, the latter of which approached the intensity of the December storm off Kodiak.
Flynn was questioned as to whether he or Shell knew the history of the shackles. Flynn said he had been told they were new when the Kulluk went north from Seattle in 2012.
Hebert found the shackles in Seattle earlier in the year, before they were installed on the vessel. He thought they looked new at that time because the paint was still on them, they had all pieces intact and the crate appeared new as well. Hebert said he would have reported any signs of wear had he seen them.
He knew the size, Hebert said, because it was forged onto the shackle.
Hebert was also involved in other discussions about switching out certain parts of the towing equipment to ensure a safe voyage. He agreed with a characterization, based on the number of questions asked and suggestions made about the equipment before the Kulluk left Dutch Harbor, that the various participants in the vessel transit paid significant attention to the composition of the tow set up.
Coast Guard Lt. Commander Brian McNamara, a member of the investigating panel, said the hearings in Anchorage will conclude May 30 and conclusions are due July 5 in a report to Rear Admiral Thomas P. Ostebo, Commander of the Coast Guard’s 17th District (Alaska). That deadline could be extended, however, McNamara said.
Shell has a lot riding on the report. The Kulluk grounding was a harrowing experience for the crews of several vessels and saw no lives lost or even injuries, but was essentially a marine accident caused by bad weather and unexpected mechanical failures and not a drilling accident.
However, if the Coast Guard faults Shell’s risk analysis and decision-making for the voyage, particularly its timing, or the resources provided, it will give critics of Shell’s Arctic drilling a lot of fresh ammunition.
With the Kulluk out of commission Shell has already said it will not return to the Arctic to drill in 2014 and has given no date when it will, with a new study now under way by the U.S. Interior Department on the safety of Arctic offshore drilling.