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US gas company hit with record Jones Act fine for using Chinese ship

Jul 31, 2017 12:02 PM
The Chinese-flagged Kang Sheng Kou was used to transport a jack-up rig from the Gulf of Mexico to Vancouver, British Columbia, in 2011. The rig was later towed to Alaska by U.S. tugboats.

Courtesy Hannes van Rijn/Shipspotting.com

The Chinese-flagged Kang Sheng Kou was used to transport a jack-up rig from the Gulf of Mexico to Vancouver, British Columbia, in 2011. The rig was later towed to Alaska by U.S. tugboats.

After a six-year dispute, natural gas producer Furie Operating Alaska LLC agreed in late March to pay the U.S. government $10 million in the biggest Jones Act fine to date.

In March 2011, Houston-based Escopeta Oil & Gas, Furie’s predecessor company, used the Chinese heavy-lift ship Kang Sheng Kou to move the drill rig Spartan 151 from the Gulf of Mexico to Alaska. The jack-up rig, owned by Spartan Offshore Drilling of Louisiana, rounded South America and headed to Vancouver, British Columbia.

The same month, the Department of Homeland Security (DHS) denied Escopeta’s application for an extension of a previously issued Jones Act waiver to use a foreign ship to move equipment to Alaska’s Cook Inlet. The agency said U.S. barges could make the trip, citing information from the U.S. Maritime Administration. MarAd that month corrected itself, however, and said that U.S. vessels weren’t available. When Escopeta began transporting the rig, the company still hoped for a waiver or an extension of the one granted in 2006.

Escopeta was racing to get its rig north to qualify for Alaskan tax breaks on drilling that would expire in 2011. The company justified its actions by pointing to low fuel supplies in south-central Alaska, home to a military base and Anchorage International Airport.

DHS issued its final denial of a waiver in late May 2011. Furie acquired Escopeta in June 2011. The rig left Vancouver on July 22, 2011, towed by U.S. tugboats, and soon arrived in Cook Inlet. That October, U.S. Customs and Border Protection (CBP), an agency within Homeland Security, sent Furie a notice of violation because it had used a foreign vessel for part of the trip. A penalty of $15 million, which was considered to be the rig’s fair market value, was assessed. Furie asked DHS to reconsider its findings.

DHS ruled that Escopeta violated the Jones Act, which states that “merchandise” moved by water between points in the United States, directly or via a foreign port, must be on vessels built in this nation and owned by U.S. citizens. The penalty for lawbreakers is forfeiture of the merchandise or a fine that’s the greater of the value of the merchandise or the transportation cost.

Richard Pomeroy, assistant U.S. attorney in Alaska, said in May that the amount of the fine against Furie was determined by the value of the equipment transported. “The company moved a jack-up rig, and it was pretty expensive,” he said. During litigation, the rig’s worth was assessed at between $12 million and $15 million, based alternatively on book value and insured value. At that time, however, Spartan Offshore Drilling valued Spartan 151 at $46.7 million.

CBP denied two petitions from Furie for mitigation, prompting the company to sue in August 2012. Furie wanted the fine overturned. The U.S. District Court for Alaska considered the size of the fine and related issues from 2012 until this spring. In a compromise in March, the $15 million penalty was reduced to $10 million.

“Resolution of this case demonstrates that the Jones Act will be actively enforced and that an intentional violation will not be rewarded,” the Justice Department said in April. “The settlement provides closure to Furie and is designed not to undermine its ability to bring natural gas to market in south-central Alaska.” Furie can pay its fine over several years.

After violating the Jones Act in 2011, Furie discovered natural gas in the Kitchen Lights Unit in Cook Inlet. Furie no longer uses Spartan 151, however, and has switched to a larger jack-up, Randolph Yost — owned by Shelf Drilling Co. in Dubai — for drilling and offshore construction.

In May, attorney Adolf Zeman of Landye Bennett Blumstein LLP, representing Furie, declined to discuss the settlement and directed inquiries to Furie. Attorneys at Blank Rome LLP, also representing Furie, wouldn’t comment. Officers at Furie refrained from discussing the fine.

The size of Furie’s penalty eclipses other Jones Act fines. “The previous record settlement for a Jones Act violation was $550,000, reached in 2000,” CBP spokesman Rob Brisley said. Because of privacy concerns, the agency could not release the company’s name.

In an April 6 statement about Furie’s fine, the Cabotage Taskforce of the London-based International Transport Workers’ Federation, representing 700 unions globally, said national cabotage laws must be respected. “It’s critical that when regulations are violated, those breaking the rules are held accountable,” the group said.

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