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Vol. 15, No. 39 Week of September 26, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

State defends tax claims

Alaska lawyers rebut BP’s argument that state can’t collect for Prudhoe spills

Wesley Loy

For Petroleum News

Back in August, lawyers for BP argued the state can’t collect back taxes on North Slope production shortfalls related to neglected, leaky oil pipelines. That would violate the Alaska Constitution, the lawyers said.

Now the state’s lawyers have responded, saying in effect: Oh, please! Collecting the taxes would constitute no such violation.

The tax clash is the latest twist in what is becoming an epic contest between the state and the oil company. The state is suing BP for perhaps $1 billion in damages stemming from pipeline leaks in the huge Prudhoe Bay oil field in 2006. One of the leaks caused the largest oil spill in the history of North Slope production at 212,252 gallons.

Corrosion in key pipelines caused the leaks, and BP came under tremendous regulatory and congressional scrutiny for negligent maintenance on the lines. Ultimately, the company’s Anchorage-based subsidiary, BP Exploration (Alaska) Inc., pleaded guilty to a federal environmental misdemeanor and was sentenced to three years on probation and ordered to pay $20 million in penalties.

Now the company is grappling with the state’s civil suit, and is arguing to have some of the claims tossed out.

No production, no tax?

The state’s lawyers argue that BP’s negligence cost the state dearly. Because BP had to shut-in production and replace corroded pipelines on an emergency basis, an estimated 35 million barrels of production was “lost,” depriving the state of huge tax and royalty collections.

But lawyers for BP argue the state, through its lawsuit, can’t collect taxes on oil that wasn’t actually produced. The state constitution holds that only the Legislature may impose a tax, and the legislature hasn’t imposed any obligation to pay taxes on oil not produced, BP contends.

The state’s legal team has plenty of comeback arguments.

In a 39-page brief filed Sept. 15 in the state Superior Court in Anchorage, state lawyers argue the suit does not raise constitutional concerns.

The state is seeking damages, and some of those damages happen to be taxes the state would have collected had it not been for BP’s misconduct, the brief says.

The state’s claim is no different than, say, a taxi company suing for lost fares because of poor work on its cars, the state’s lawyers write.

“If the operator of a maintenance garage under contract with the taxicab company improperly maintained the company’s taxicabs, the operator would be liable to the taxicab company for the company’s lost income from taxicabs that are out of service because of the improper maintenance,” the state argues.

The state’s lawsuit “does not purport to levy taxes but only to recover damages,” the state lawyers contend.

They continue: “The fact that the State’s damages include a calculation of ‘lost taxes’ does not convert these damages into a tax assessment. ‘Lost taxes’ are no different in character from ‘lost wages’ or ‘lost income’ from any other source, and nothing more should be made of such monikers.”

The state lawyers say certain state statutes (AS 46.03.822 and 46.03.824), case law interpreting those statutes, and a “large body of contract law” all support the state’s claims for lost revenue.

“BPXA’s attempts to convert the State’s economic damages calculation into an imposition of a new tax, retroactive or otherwise, fails in light of the clear permissibility of such a damages calculation,” the state lawyers argue. “Seeking such damages does not violate the Constitution.”

Trial date delayed

BP obviously is busy with lawsuits these days, in light of the Deepwater Horizon disaster in the Gulf of Mexico. Litigation stemming from that event promises to be complex and lengthy.

The same can be said for the suit over the Prudhoe Bay pipeline spills.

The case so far has produced more than 2 million pages of documents as lawyers for both sides make discovery requests of one another, says a joint motion the two legal teams filed with the court on Sept. 13.

In the motion, the lawyers request that trial of the case — originally scheduled to begin on Sept. 12, 2011 — be delayed by about six months to March 19, 2012.

The extra time is needed to prepare for a trial that’s expected to last at least three months, the lawyers say.

“Both parties wish to advance this case as expeditiously as possible,” the joint motion says. “But the scope of the case and the complexity of the legal and factual issues are such that it has become apparent that additional time is required.”

Superior Court Judge Peter Michalski on Sept. 22 granted the motion to delay the trial. He had not yet ruled on BP’s motion to throw out the state’s tax claims.

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