Title: Chevron U.S.A., Inc. v. State

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Chevron U.S.A., Inc. v. State1996 WY 82918 P.2d 980Case Number: 95-214Decided: 06/18/1996Supreme Court of Wyoming
CHEVRON U.S.A., INC., a Pennsylvania corporation,

 Appellant 
(Petitioner),

 

 v.

 

 STATE OF WYOMING, WYOMING STATE BOARD OF 
EQUALIZATION and its members NANCY FREUDENTHAL, MARVIN APPLEQUIST and TERRY 
RUBALD, in their official capacities; and the DEPARTMENT OF REVENUE AND 
TAXATION, STATE OF WYOMING, Appellees (Respondents). 

 

For 
appellant: William J. Thomson and Brandin Hay of Dray, Madison & 
Thomson, P.C., Cheyenne, Wyoming; and Gary S. Hook, Chevron Corporation, San 
Francisco, California.   For appellees: William U. Hill, 
Attorney General; Michael L. Hubbard, Deputy Attorney General, Cheyenne, 
Wyoming. Before GOLDEN, C.J., and THOMAS, MACY, TAYLOR, and LEHMAN, 
JJ. GOLDEN, C.J.

 

MACY, 
J., files a dissenting opinion.   
Golden, Chief 
Justice. [¶1] 
Chevron U.S.A., Inc. appeals the Wyoming State Board of 
Equalization's interpretation of former WYO. STAT. § 39-2-202(b) which 
determined that the expenses of operating Chevron's Birch Creek compressor 
station were nondeductible expenses of production for ad valorem and severance 
tax purposes. [¶2] We reverse. 
ISSUES [¶3] 
Chevron U.S.A., Inc. (Chevron) presents a single issue for our 
review:

Did 
the district court err in affirming the State Board of Equalization's 
interpretation of former Wyoming Statute § 39-2- 202(b) and rules promulgated 
thereunder by the Department of Revenue and Taxation determining that the costs 
of operating Chevron's Birch Creek compressor station facility were 
nondeductible "expenses of production" for ad valorem and severance tax 
purposes?

[¶4] Wyoming State Board of Equalization (Board) 
presents two issues: 

I. 
Where is the point of valuation for natural gas under W.S. 39-2-202(b) (1985 
pamphlet)? II. Do the activities at Chevron's compressor station 
constitute processing or transportation?

FACTS 
[¶5] Chevron produces natural gas 
from several wells in the Birch Creek field in Sublette County, Wyoming. The gas 
in the Birch Creek field is low in hydrogen sulfide and meets pipeline 
specifications without removal of hydrogen sulfide. After the gas is extracted 
from the wells in the Birch Creek field, it runs through a three-phase separator 
at the wellhead. The separator separates condensate, water, and gas from the 
natural gas well stream. The gas is then run through a dehydrator. After 
dehydration, the condensate and gas streams are remixed at the wellhead. 
Gathering pipelines then transport the gas from the well-head through at least a 
mile of pipeline to the Birch Creek compressor station. [¶6] The compressor station consists of several 
large compressors housed in specially constructed buildings, associated piping, 
a three-phase separator, tankage, and other associated equipment. At the inlet 
of the compressor station, the gas-condensate mix flows through another 
three-phase separator, which separates the gas, condensate, and any residual 
water, resulting in dry gas. Finally, the dry gas is compressed to facilitate 
its injection into the pipeline. [¶7] 
Chevron sells its Birch Creek gas at the outlet of the compressor 
station. The gas is delivered into Northwest Pipeline Company's 30-inch, high 
pressure pipeline which operates at approximately 800 pounds per square inch. 
Northwest also has a 16-inch, low pressure pipeline which transports gas from 
the Birch Creek field without compression. However, all of Chevron's Birch Creek 
gas is transported on the high pressure pipeline because the low pressure 
pipeline is fully nominated. The compressor station is necessary to boost the 
pressure of the gas for transportation in the high pressure pipeline. All Birch 
Creek gas must be run through a compressor to be injected into the high-pressure 
pipeline.    [¶8] 
Chevron reported its gas production from 1984 through 1989, the years 
relevant to this appeal, pursuant to WYO. STAT. § 39-2-201. In its 1984, 1985, 
1987 and 1988 reports, Chevron treated its Birch Creek operating expenses as 
processing costs pursuant to WYO. STAT. § 39-2-202 and the Department's rules 
and regulations, excluding the expenses from the taxable value of the gas for ad 
valorem and severance tax purposes. In 1992, the Department of Revenue performed 
an audit on Chevron's reported production for 1984 through 1989, disallowed the 
deduction for operating costs of the compressor facility and ordered Chevron to 
pay additional tax, interest and a penalty. [¶9] Chevron appealed the Department's order and the 
issues were submitted to the Board on briefs of the parties. The Board 
subsequently entered a final order, concluding the compression expenses were not 
processing or transportation costs and may not be deducted when valuing the gas. 
The Board vacated the penalty assessment. Chevron filed a petition for review in 
the District Court for the First Judicial District on December 1, 1993. In the 
petition, Chevron asked the court to find the Board's order denying the 
deduction for costs of the Birch Creek compression facility unlawful. Chevron 
also asked the court to enter a judgment ordering the deduction of the Birch 
Creek compression expenses as costs of processing and/or transportation in 
arriving at the value of Chevron's natural gas production. The district court 
issued a decision letter and an order affirming the Board's decision. Chevron's 
motion to reconsider was denied and Chevron filed this appeal. 
STANDARD OF REVIEW [¶10]          
When considering an appeal from a district court's review of agency 
action, we do not accord any special deference to the district court's decisions 
on questions of law. Union Pacific Railroad Co. 
v. Wyoming State Bd. of Equalization, 802 P.2d 856, 859 (Wyo. 1990). 
"Using the same evidentiary materials and the same review standards as the 
district court, we conduct an independent inquiry into the matter, just as if it 
had proceeded directly to us from the agency." Id. (quoting Southwest Wyoming Rehab. Center v. Employment Sec. 
Comm'n, 781 P.2d 918, 920 (Wyo. 1989)). [¶11]          
To resolve the issue in this case, we must interpret WYO. STAT. § 
39-2-202(b) and apply that interpretation to the facts. Statutory interpretation 
is a question of law and is reviewed de novo. 
Trefren v. Lewis, 852 P.2d 323, 325 (Wyo. 1993); B & R Builders v. Beilgard, 915 P.2d 1195, 
1197 (Wyo. 1996). If an agency's action "is supported by substantial evidence, 
its decision should be reversed only for errors of law. If the agency did not 
apply the correct rule of law, or applied it incorrectly, this Court does not 
defer to the agency's conclusion. The agency's errors of law are corrected by 
this Court." Laramie County Board of Equalization 
v. Wyoming State Board of Equalization, 
915 P.2d 1184, 1188 (Wyo. 1996) (quoting Butts v. Wyoming State Board of Architects, 911 P.2d 1062, 1065 (Wyo. 1996)). [¶12]          
WYO. STAT. § 16-3-114(c) and WYO. R. App. P. 12.09 provide the scope for 
our review of agency decisions: 

To 
the extent necessary to make a decision and when presented, the reviewing court 
shall decide all relevant questions of law, interpret constitutional and 
statutory provisions, and determine the meaning or applicability of the terms of 
an agency action. * * * The reviewing court shall: 

* 
* *   (ii) Hold unlawful and set aside agency action, findings and 
conclusions found to be: (A) Arbitrary, capricious, an abuse of 
discretion or otherwise not in accordance with law; (B) Contrary to 
constitutional right, power, privilege or immunity; (C) In excess of 
statutory jurisdiction, authority or limitations or lacking statutory right; 
* * *.

 
WYO. STAT. § 16-2-114(c) (1990). Since the issues presented in this case 
involve statutory interpretation, our review will focus on whether the Board's 
decision was in accordance with law and within its statutory authority, right or 
jurisdiction. WYO. STAT. § 16-2-114(c) (1990). 
DISCUSSION [¶13]          
This case requires us to interpret WYO. STAT. § 39-2-202 to determine the 
valuation point of natural gas for severance and ad valorem tax purposes. The 
Board argues that the point of valuation is at the outlet of the compressor 
facility, where the gas enters the pipeline for transportation to market. 
Chevron argues the point of valuation is at the inlet of the compressor station, 
before the gas is compressed for transportation to market. If the point of 
valuation is at the outlet of the compressor facility, Chevron's Birch Creek 
compressor expenses are not deductible when calculating the value of the natural 
gas. If the point of valuation is at the inlet of the compressor facility, the 
compression expenses are deductible. [¶14]          
During the years relevant to this appeal, WYO. STAT. § 39-2-202 provided 
the legislative authority for determining the point of valuation for natural 
gas. The relevant portion of the statute stated: 

 
(a) Based upon the information received or procured pursuant to W.S. 
39-2-201(b) or (c), the board shall annually value the gross product for the 
preceding calendar year, in appropriate unit measures of all mines and mining 
claims from which valuable deposits are produced, at the fair cash market value 
of the product at the mine or mining claim where produced, after the mining or 
production process is completed.   (b) The . . . production process 
is deemed completed when the mineral product is removed from the . . . well, and 
prior to any further processing is placed in storage prior to transportation to 
market, or in the case of natural gas, in the pipeline for transportation to 
market.

 
1977 WYO. Sess. Laws Ch. 45, § 1; WYO. STAT. § 39-2-202 (1977). Pursuant to 
the statute, the Board annually values the gross product of all mines and mining 
claims at the fair market cash value of the mineral product at the mine or 
mining claim where produced after the production process is completed. Thus, the 
point of valuation is at the mine or mining claim after the production process 
is completed. WYO. STAT. § 39-2-202(a) (1977). Subparagraph (b) of WYO. STAT. § 
39-2-202 designates the point at which the production process is complete. 
According to the statute, the production process is complete when the product is 
removed from the well, and prior to any further processing, is placed in the 
pipeline for transportation to market. WYO. STAT. § 39-2-202(b) (1977). 
[¶15]          
In determining whether Chevron's Birch Creek compressor station expenses 
are costs of production (as the Board contends) or processing and/or 
transportation expenses incurred after production (as Chevron contends), 

we 
endeavor to interpret statutes in accordance with the Legislature's intent. We 
begin by making an inquiry respecting the ordinary and obvious meaning of the 
words employed according to their arrangement and connection. We construe the 
statute as a whole, giving effect to every word, clause, and sentence, and we 
construe together all parts of the statute in pari 
materia.

 
State Dept. of Revenue and Taxation 
v. Pacificorp, 872 P.2d 1163, 1166 (Wyo. 1994) (citations omitted). 
When a statute is clear and unambiguous, we give effect to the plain language of 
the statute. Id. 

 
If the language selected by the legislature is sufficiently definitive, that 
language establishes the rule of law. Any additional construction can be 
resorted to only if the wording is ambiguous or unclear to the point of 
demonstrating obscurity with respect to the legislative purpose or mandate. * * 
* We previously have articulated the proposition that a statute is ambiguous 
only if it is found to be vague or uncertain and subject to varying 
interpretations. The converse of this proposition is that the statute is 
unambiguous if its wording is such that reasonable persons are able to agree as 
to its meaning with consistency and predictability. The question of whether an 
ambiguity exists in a statute is a matter of law to be determined by the 
court.

 
Laramie County Board of 
Equalization, 915 P.2d  at 1189 (quoting General Chemical Corp. v. Wyoming State Bd. of 
Equalization, 819 P.2d 418, 420 (1991)). [¶16]          
The term "production" may be subject to various meanings depending upon 
the context in which it is used. See Appeal of 
Monolith Portland Midwest Co., Inc., 574 P.2d 757, 761-62 (Wyo. 
1978); 8 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW 47 (Cum. 
Supp. 1995). However, we hold that the statutory language of WYO. STAT. § 
39-2-202 is clear and unambiguous in the context of this case. The terms are not 
vague or uncertain and they are not subject to various meanings in the context 
of a severance and ad valorem tax statute such as WYO. STAT. § 39-2-202. 
"Severance tax" is defined as "a tax on mineral or forest products at the time 
they are removed or severed from the soil. . . ." BLACK'S LAW DICTIONARY 1374 
(6th ed. 1990). The processes necessary for production of gas, for severance and 
ad valorem tax purposes, are those necessary to sever or remove the gas from the 
well. Shamrock Oil and Gas Corp. v. Commissioner 
of Internal Revenue, 346 F.2d 377, 379-80 (5th Cir. 1965), cert. 
denied, 382 U.S. 892, 15 L. Ed. 2d 149, 86 S. Ct. 185 (1965); JOHN C. 
JACOBS, PROBLEMS INCIDENT TO THE MARKETING OF GAS, 5 INSTITUTE ON OIL AND GAS 
LAW AND TAXATION 271, 273 (1954). Therefore, we hold that those processes which 
are not necessary to remove the gas from the well are post-production expenses. 
 This includes compression which is not necessary to remove the gas from 
the well. See Shamrock, 346 F.2d at 
379-80; Mountain Fuel Supply Co. v. United States, 449 F.2d 816, 823-24 
(10th Cir. 1971), cert. denied 405 U.S. 989, 31 L. Ed. 2d 455, 92 S. Ct. 1251 (1972). [¶17]          
"It is elementary that taxation is a legislative function and that taxes 
may be impressed, levied, assessed and collected only under the statutory 
authority and in the manner provided by law." Kelsey v. Taft, 72 Wyo. 210, 217, 263 P.2d 135, 
136 (1953). Taxes should not be assessed by any means other than a clear, 
definite and unambiguous statement of legislative authority.  Kelsey, 72 Wyo. at 219, 263 P.2d  at 
138. 

"In the interpretation of statutes levying 
taxes it is the established rule not to extend their provisions, by implication, 
beyond the clear import of the language used, or to enlarge their operations so 
as to embrace matters not specifically pointed out. In case of doubt they are 
construed most strongly against the government and in favor of the 
citizen."

 
Kelsey, 72 Wyo. at 219-20, 263 P.2d  at 138 (quoting Gould v. Gould, 
245 U.S. 151, 38 S. Ct. 53, 62 L. Ed. 211 (1917)).  The Board impermissibly 
exceeded its statutory authority when it included the expense of compressing the 
gas as a production expense, since the compression at the compressor station was 
not necessary to remove the gas from the well. [¶18]          
Further, under the plain wording of the statute, production is completed 
when the gas is removed from the well, and prior to 
any further processing. The Board improperly disregarded the 
intent of the legislature that "the . . . production process is deemed completed 
when the mineral product is removed from the. . . well." WYO. STAT. § 
39-2-202(b) (1977). Instead, the Board and the district court focused on the 
phrase "placed in . . . the pipeline for transportation to market." We must read 
statutes in pari materia, and cannot disregard portions of a statute 
when interpreting the legislature's intent. Pacificorp, 872 P.2d  at 1166. 
[¶19]          
The Board improperly interpreted the terms "any further processing" when 
it determined: 

2. 
The Birch Creek compressor facility is not designed to remove elements or 
compounds from the gas which affect the qualities or marketability of the gas. 
The facility does not substantially transform the sweet gas-condensate stream 
into a more valuable, higher quality product, nor does it substantially improve 
marketability by any process which transforms the gas for a use to which the 
original gas stream could not be readily applied. * * * 11. The 
only "processes" which change Petitioner's gas-condensate stream are activities 
which separate the stream into dry gas and condensate. These activities are 
functionally similar, if not identical, to the field processes employed by 
Petitioner, the costs of which are not claimed as deductions. These "processes" 
are not commonly considered "processing" . . . . 12. Based on our 
finding the facility neither substantially transforms the gas-condensate stream 
into a more valuable, higher quality product, nor substantially improves the 
marketability of the gas, we conclude the activities of the Birch Creek 
compressor facility do not constitute processing under the relevant mineral 
valuation statutes or rules.

 
The statute clearly provided that the production process is completed prior 
to any further processing. "Any" is a modifier which is intended to be 
inclusive, not exclusive. It pertains to "every," "all," "unmeasured or 
unlimited in amount, number, or extent." See MERRIAM-WEBSTER'S 
COLLEGIATE DICTIONARY 53 (10th ed. 1994). The Board improperly excluded 
compression used for purposes other than severance of the gas from the well from 
the meaning of the phrase "any further processing." See 1 ROBERT 
POLEVOL & CECIL L. SMITH, FEDERAL TAXATION OF OIL AND GAS TRANSACTIONS § 
3.02[2], at 3-11 (1988) (compression of gas to meet specifications of the 
pipeline company is a manufacturing process); Rev. Rul. 75-6, 1975-1 C.B. 178 
(compression of natural gas to covert it into a product with a higher delivery 
pressure for injection into pipeline is a manufacturing process). The Board 
interpreted the terms "any further processing" too narrowly. By so doing, the 
Board improperly included compression costs, which were not necessary for the 
production of gas, as taxable production costs. Tax statutes are to be construed 
in favor of the taxpayer and are not to be extended absent clear intent of the 
legislature. Kelsey, 72 Wyo. at 
219-20, 263 P.2d  at 138. [¶20]          
Finally, the Department of Revenue's own rules and regulations, in effect 
from 1986 until an attorney general opinion was written in 1989, belie the 
Board's narrow interpretation of "processing" in this case. Chapter XXI, Section 
4(j) of the Wyoming Department of Revenue and Taxation Ad Valorem and Severance 
Taxes on Mineral Production regulations (adopted February 19, 1986), defined 
processing. 

"Processing" 
shall mean any activity or method, including but not limited to crushing, 
milling, washing, drying, refining, upgrading, treating, heating, separating, 
dehydrating or compressing which is intended to improve the quality or 
marketability of a mineral after mining or production is completed. "Processing" 
is considered to be synonymous with the word 
"beneficiation."

[¶21]          
Although the Board is entitled to change its rules and regulations in 
order to carry out the intent of the legislature, we hold that the definition of 
processing found in the 1986 Department of Revenue and Taxation's rules and 
regulations more closely matches the intent and purpose of the taxation statute 
at issue in this case. In this case, compressing the gas clearly improved the 
marketability of the gas since without the compression, the gas could not be 
injected into the high pressure pipeline for transportation to market. 
CONCLUSION [¶22]          
The district court erred in affirming the Board's decision which denied 
Chevron's deductions for the operating costs of the Birch Creek compressor 
station. The compression costs were not production costs because the compression 
was not necessary to remove the gas from the well. The compression costs were, 
on the other hand, deductible processing costs under WYO. STAT. § 39-2-202(b) 
and the Department of Revenue and Taxation's 1986 rules and regulations. 
Therefore, this Court reverses the decisions of the district court and the 
Wyoming State Board of Equalization.  MACY, Justice, dissenting. 
[¶23]          
I believe that the Wyoming State Board of Equalization's decision should 
be affirmed, and, therefore, I dissent from the majority's opinion in this case. 
[¶24]          
I do not agree with the majority's interpretation of WYO. STAT. § 
39-2-202(a) (1985) (amended 1989, 1990 & 1991) and WYO. STAT. § 39-2-202(b) 
(1985) (amended 1990). Section 39-2-202(a) directed the State Board of 
Equalization to determine the value of the natural gas "at the mine or mining 
claim where produced, after the . . . production process [was] completed." 
See Amax Coal West, Inc. v. Wyoming State Board 
of Equalization, 896 P.2d 1329 (Wyo. 1995) (valuing coal 
production).  Section 39-2-202(b) stated that the "production process [was] 
deemed completed when the [gas was] removed from the well, and prior to any . . 
. further processing [was] placed in . . . the pipeline for transportation to 
market." (Emphasis added.) [¶25]          
The statute clearly and unambiguously stated that, when the gas was not 
subjected to further processing between the wellhead and the inlet to the 
pipeline, the point of valuation was at the inlet to the pipeline. The majority 
reads the statute without giving any effect to the phrase "placed . . . in the 
pipeline for transportation to market." The majority further concludes that 
compression amounted to "further processing" of the gas. The Court did not, 
however, define the term "processing" in reaching its conclusion. 
[¶26]          
A common definition of the word "process" is "mode, method or operation 
whereby a result is produced; and means to prepare for market or to convert into 
marketable form." BLACK'S LAW DICTIONARY 1084 (5th ed. 1979). This definition is 
consistent with the State Board of Equalization's regulatory definition of 
processing which is quoted in the majority opinion. The State Board of 
Equalization specifically found that the compressor facility did not change the 
gas in any way which would affect its marketability. Therefore, under the plain 
language of the statute, the compression did not amount to further processing, 
and the gas should have been valued at the inlet to the pipeline.