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Vol. 15, No. 51 Week of December 19, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

BP scores legal victory

Alaska judge says state isn’t due taxes on production shortfalls after 2006 spills

Wesley Loy

For Petroleum News

An Alaska judge has dealt the state a major setback in its effort to collect huge civil damages from BP Exploration (Alaska) Inc. for the 2006 oil pipeline spills on the North Slope.

In a three-page ruling issued Dec. 10, Superior Court Judge Peter Michalski of Anchorage granted BPXA’s motion to throw out the state’s claims for back taxes on oil production shortfalls resulting from the spills and subsequent pipeline repairs.

In its lawsuit, the state says BPXA was negligent in safeguarding its pipelines against corrosion, forcing emergency replacements and field shut-ins. The suit says at least 35 million barrels of crude oil and natural gas liquids production was lost from 2006 through 2008 from the Prudhoe Bay and Milne Point units.

This resulted in “lost” revenue to the state in the form of production taxes and royalties, lawyers for the state contend.

But the judge disagreed, at least with respect to taxes.

His ruling said in part: “Taxes become due upon the occurrence of a taxable event. In order to sustain a claim for lost tax damages, it is necessary for the State to allege that a taxable event occurred. Here, there has been no taxable event, and therefore BPXA cannot owe taxes.”

The taxable event to which the judge is referring apparently is the actual production of oil.

Lawyers for BPXA raised arguments in court that oil not actually produced can’t be taxed. They asked the court to strike the tax claims, calling them unconstitutional. The company noted in court papers “the legislature has imposed no obligation to pay taxes on oil that was not produced or income that was not earned.”

Guarded reactions

A lead attorney for the state has said in the past that the state aimed to collect $1 billion or more in taxes, royalties, fines and other damages.

But the judge’s ruling, if it stands, would appear to preclude a recovery anywhere near that large, as the back taxes are believed to be the largest segment of the damages the state is seeking.

“We are pleased with the ruling,” BPXA spokesman Steve Rinehart told Petroleum News on Dec. 13. He declined further comment.

Bill McAllister, spokesman for the Alaska Department of Law, said the department had no comment on the ruling.

The state sued BPXA on March 31, 2009. On the very same day, the federal government filed its own civil suit against the company.

The federal suit, which is pending in U.S. District Court in Anchorage, seeks millions of dollars in fines and accuses BPXA of water and air pollution violations, as well as failure to meet deadlines in a corrective action order from U.S. Department of Transportation pipeline regulators. Justice Department and BPXA lawyers have indicated they’re trying to settle the suit.

Both the state and federal civil suits came after criminal prosecution against BPXA wrapped up in November 2007, when BPXA pleaded guilty to an environmental misdemeanor.

Recently, however, BPXA’s criminal troubles were rekindled when the company was accused of violating its probation. BPXA is scheduled to make its initial appearance on the matter on Dec. 20 in federal court in Anchorage.

Judge doesn’t buy tax claims

In court papers, the state argued lost oil taxes are akin to lost wages.

“An employer who breaches its contract with an employee is liable for the employee’s resulting lost wages,” the state agued in a Sept. 15 filing.

For oil producers, the “contract” is the oil and gas leases and unit agreements between the company and the state.

Judge Michalski, however, didn’t buy the state’s rationale, writing “the Court is not persuaded by the State’s argument that ‘lost taxes’ are compensable in an identical manner as any other standard lost future benefit such as lost wages. The State collects taxes in its role as a sovereign, and this civil suit arises out of the State’s role as lessor and landowner and the State’s police powers. As expressed earlier, no taxable event has occurred, and such an event is a necessary predicate.”

The judge continued: “One can imagine a count for uncollectable taxes in the prosecution of many of the State’s civil actions were the rule to be anything else. E.g., where the State sues a contractor who delayed construction of a highway and they include a ‘lost taxes’ claim for uncollected gas taxes. Such a claim is self-evidently unavailing.”

Although the judge has now thrown out the state’s tax claims — a ruling that could trim its potential damages recovery by several hundred million dollars — the state still is pursuing other substantial claims against BPXA, including lost royalties as well as fines.

The case is scheduled for trial in March 2012.

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