The Jones Acts Survival Is Triumph Enough

The largest fine ever imposed for a Jones Act violation was upheld by U.S. Customs and Border Protection (CBP) against Escopeta Oil, which is now rebranded as Furie Operating Alaska LLC. Escopeta defied the Jones Act after being denied an extension on a 2006 waiver it had received when it hired a Chinese-flagged vessel to move a jackup rig from Houston, Texas, to Cook Inlet, Alaska.

The $15 million fine, which was the market value of the Spartan 151 rig, was imposed on October 23, 2011. In its petition requesting relief from the unprecedented fine, the company admits to the violation but claims its actions were ‘non-aggravated’ and that a qualified U.S. vessel was not available. But CBP states the facts say otherwise.

On November 8, 2010, CBP made it adamantly clear to Escopeta that its 2006 waiver was no longer valid and that it must secure a new waiver from the Department of Homeland Security (DHS). The oil company submitted another request to DHS on the premise there was an immediate energy shortage in Alaska and a qualified U.S. vessel could not be hired in time. Meanwhile, the company continued its preparations to move the rig with the Chinese charterer, but on March 7, 2011 DHS denied the Jones Act waiver.

Locked on the horns of a dilemma, and with precious oil leases and a $20 million tax credit from the State of Alaska on the line, Escopeta decided to ‘roll the dice’ and commenced transportation of the Spartan 151 rig on March 18, 2011. While the Chinese vessel sailed towards South America’s Cape Horn with the jackup, Escopeta launched a full-blown media assault, claiming southern Alaska was desperately in need of energy and that its actions were fully supported by the Alaskan congressional delegation. Moreover, the company insisted that the 2006 waiver had never been revoked and that it continued to rely on it, even in the face of a denial of the new request by DHS Secretary Napolitano.

The Painful Elaboration of the Obvious

Danny Davis, President of the company at the time the illegal transport took place, had bought about 100,000 acres of onshore and offshore oil and gas leases from the State of Alaska during the 1990s and named the area ‘Kitchen Lights’ in honor of crude oil being cooked over time. He proclaimed the acreage held about 250 million barrels of crude and between 750 billion and 3.5 trillion cubic feet of natural gas reserves.

Davis had tried numerous times to get a drilling rig to Cook Inlet, but whether it was the availability of a rig or money, he simply could not get the project off the ground. In 2006 he negotiated for a rig, and the stars seemed aligned as he petitioned DHS Secretary Michael Chertoff for a Jones Act waiver, which was granted. In fact, a foreign vessel was actually in Houston and languished on standby for over a month, but Davis couldn’t hold the deal together.

So after more than a decade of trying, in 2011 the wildcat oilman finally had a firm grip on a jackup rig and, no matter what the consequences, he was going to transport it to Cook Inlet. But Davis diverted the rig to Canada for prepping and final repairs. And, in a calculated move, he hired a U.S. towing company for the final leg from Canada to Alaska.

During the illegal transport of the rig and as DHS and CBP were bearing down on Escopeta for its violation, a reality loomed that the U.S. government could actually seize the rig. Davis was removed by Escopeta’s Board of Directors, which quickly began its own legal maneuvering. As the rig sat in Canada, Escopeta claims that it would not have committed the ‘considered, intentional and (a) commercial/financial’ Jones Act violation if it had not been for ‘assurances’ received in two letters from the government.

A DHS letter dated May 20, 2011 said that, while denying the Jones Act waiver, the agency would work with Escopeta in an equitable way to allow transportation of the rig to Alaska. Additionally, a letter sent by email on July 6, 2011 from Allen Gina, Assistant Commissioner of the Office of International Trade, said that after mitigating factors advanced by the oil company the rig would not be seized upon its arrival in Alaska. But a Jones Act penalty would be assessed, and Mr. Gina recommended a $7 million fine to the CBP commissioner, who instead ruled that the penalty be assessed under normal procedures.

A third party assessor for the government calculated the market value of the rig to be $15 million, and that amount was used by CPB as the amount of the penalty. The oil company said the rig should be assessed at the median value of the rig ($12-$15 million). But CBP stated that the rig’s owner, Spartan Offshore Drilling, involved in litigation in Texas, cited the value of the rig as $46.7 million, and that its decision to use the third party assessment was fair and justifiable. The fine is to be paid within 30 days, which is now in play.

Did the Rule of Law Prevail?

While Furie Operating Alaska LLC argues it should not be held responsible for Danny Davis and Escopeta Oil’s actions, the precedents on that subject are clear: A corporate takeover and change of name do not permit the existing corporation to shrink from its legal responsibilities for pre-existing liabilities to the government. Davis was fully empowered to make decisions on behalf of Escopeta, which caused a Jones Act violation and the largest fine in its history.

The fact is Escopeta was forewarned three times: twice before the transportation commenced and once while in transit. Davis threw caution to the wind when he loaded the rig onto a foreign vessel because he wholeheartedly believed the citizens, government and congressional delegates of Alaska would come to his aid. But it was the oil company’s Board of Directors, in the end, that hired the towing company and conducted the illegal and final move between Canada and Alaska.

Unfortunately, the blatant disregard of the Jones Act has hardly been expiated in this saga because the Spartan 151 rig is now drilling in the Kitchen Lights; the company has filed production and drilling tax credits and, if Danny Davis was right and the Kitchen Lights is a hydrocarbon-rich sanctuary, the company will reap billions. Finally, if you look hard enough, somewhere in the background Mr. Davis is lurking, and he will profit somehow. For the Jones Act and its operators, the government’s fine is for the government, and what could have been revenue and work for them simply never happened.    

Related Articles:

CBP Denies Escopeta's Petition for Relief of $15 Million Jones Act Fine (2/6/12)

Escopeta Slammed with $15 Million Fine for Jones Act Violation (10/25/11)

Mailbag: Readers Respond to "Jones Act Dead at 91" in MarEx's LinkedIn Group (8/24/11)

Jones Act Dead at 91 (8/22/11)

Escopeta Oil Offloads Spartan 151 in Canada Due to Jones Act Violation (6/9/11)

The Jones Act In Extremis (6/6/11)

Ship Strong for America Denounces Jones Act Violation (5/26/11)

Mailbag: 'Violating the Jones Act?' (4/19/11)

Violating the Jones Act? (4/15/11)