Filed 10/28/14 

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA 

FIFTH APPELLATE DISTRICT 

CHEVRON USA, INC., et al., 

Plaintiffs and Appellants, 

 v. 

COUNTY OF KERN, 

Defendant and Appellant. 

F066273 

(Super. Ct. No. CV-271688) 

OPINION

 APPEAL from a judgment of the Superior Court of Kern County. David R. 

Lampe, Judge. 

 Clement, Fitzpatrick & Kenworthy, Clayton E. Clement; Cahill, Davis & O’Neill 

and C. Stephen Davis for Plaintiffs and Appellants. 

 Arnold & Porter, Steven L. Mayer; Theresa A. Goldner, County Counsel, and 

Jerri S. Bradley, Deputy County Counsel; Kronick Moskovitz Tiedemann & Girard and 

Brett L. Price for Defendants and Appellants. 

-ooOoo- 

 This tax refund case concerns supplemental assessments of new construction 

consisting of the drilling, development and completion of oil and gas wells, and related 

improvements and facilities, on various oil and gas properties operated by Chevron USA, 

Inc. (Chevron). In the trial court, Chevron and its parent corporation, Chevron Corp 
2. 

(Corp), challenged the method by which the Kern County Assessor (assessor) and Kern 

County Assessment Appeals Board (Board) valued the wells as new construction during 

three tax years. (Rev. & Tax. Code, § 5140, et seq.)1 The trial court found that the Board 

used the wrong valuation method and remanded the matter for the Board to determine the 

propriety of issuing supplemental assessments on the wells. The trial court further 

rejected Chevron’s assertion that certain wells were exempt from supplemental 

assessment. 

The County of Kern (Kern) appeals, arguing (1) Chevron does not have standing 

to bring a tax refund action, and (2) the Board did not act arbitrarily, abuse its discretion 

or violate the law when it approved the valuation method the assessor used. Chevron has 

cross-appealed, arguing certain wells are exempt from supplemental assessment. While 

we conclude Chevron has standing to maintain this action, we agree with Kern the Board 

did not abuse its discretion or act contrary to law when it approved the assessor’s 

valuation method, and reject Chevron’s exemption arguments. Accordingly, we reverse 

in part and affirm in part. 

FACTUAL AND PROCEDURAL BACKGROUND

Chevron operates properties in the McKittrick, North Midway, Kern River, 

Midway Sunset, Lost Hills and Cymric oilfields (collectively the oilfields) located in 

Kern County. The oilfields have been in operation since the late 1800s or early 1900s. 

Accordingly, each field has a long history of exploration, development and production, 

such that the operation and continued development of the field is reasonably well-known 

and understood. The oilfields had more than 19,000 active wells as of January 1, 2009. 

During the 2006-07, 2007-08, and 2008-09 tax years, Chevron drilled over 1,800 

wells on the oilfields. Chevron divided these wells into two categories: “infill wells” and 

“replacement wells.” Chevron defines “infill wells” as wells that increase or improve the 

 1 All undesignated statutory references are to the Revenue and Taxation Code. 
3. 

drainage volume and overall well count; they typically “recover new reserves that were 

not being produced by existing wells.” In contrast, Chevron defines “replacement wells” 

as wells that are intended to continue production by replacing an existing producer 

without increasing the drainage volume or overall well count; these wells typically 

“recover reserves that were being produced by a failed well and not new recovery.” 

Before replacing an existing well, Chevron’s engineers perform a workover, in 

which they decide why the existing well is not performing at the rate it should and 

determine whether the problem can be corrected. As a last resort, the well is placed on a 

potential replacement list. Whether a well is replaced depends on the economics; before 

Chevron drills a new well, it does an economic analysis for the proposed well by 

completing an Authorization for Expenditure (AFE) form. In most cases, the estimates in 

the AFEs “hopefully” are pretty close to the actual numbers, with some probable 

overruns and underruns. Unless the economics are positive, so that Chevron expects to 

make more money from the well than it costs to drill it, the well will not be drilled. 

Before 2006, Kern issued supplemental assessments on new wells at 70 percent of 

the cost of drilling, exempting 30 percent of the cost as fixtures, and did not issue any 

supplemental assessments for replacement wells. Beginning in 2006, Kern changed its 

policy and started issuing supplemental assessments based on the full reported cost of all 

of the subject wells, both infill and replacement. 

Chevron paid the supplemental assessments and filed an application with the 

Board for refund of taxes for the three tax years. As relevant to this appeal, the dispute 

before the Board focused on four issues: (1) whether the cost approach to value is the 

correct method of valuing the new wells; (2) whether the new wells can be classified as 

new construction subject to supplemental assessment; (3) whether the new wells add 

value to the properties involved; and (4) whether the assessments constitute double 
4. 

taxation.2 After Chevron and the assessor presented witnesses, including valuation 

experts, and introduced documentary evidence, the Board determined by written order 

that: (1) based on the evidence presented, the cost approach the assessor used is a 

reasonable, appropriate and correct method to value the new wells and the assessor 

appropriately applied that method in determining their taxable values; (2) the 

construction of new oil and gas wells constitutes new construction subject to 

supplemental assessment and the exemptions from supplemental assessment for repair 

and maintenance, or calamity and misfortune, do not apply; (3) all of the new wells add 

value to the properties on which they are located; and (4) there is no evidence of double 

taxation in connection with the new wells. The Board found in favor of the assessor and 

against Chevron on all of the principal and material issues involved in the proceeding, 

that the assessor’s position on the issues is supported by the preponderance of the 

evidence, and that Chevron failed to meet its burden of proof. 

Chevron and Corp filed suit in the superior court for a tax refund of the 

supplemental assessments paid, totaling $3,529,630.79. Before the superior court, Kern 

argued that neither Chevron nor Corp had standing to pursue the tax refund action 

because Chevron did not pay the supplemental assessments and Corp did not participate 

in the Board proceedings. After trial, at which testimony was taken on the issue of 

standing and arguments made, and the exchange of post-trial briefs, the court issued its 

statement of decision. 

 2 Chevron also contended a portion of the new wells was exempt from 

supplemental assessment as fixtures and the assessor was barred from arguing the well’s 

fixtures were part of the appraisal unit by the doctrine of collateral estoppel or res 

judicata. Both the Board and the trial court found the fixtures associated with the new 

wells were not exempt from supplemental assessment and collateral estoppel/res judicata 

did not apply. Chevron does not challenge these rulings in its cross-appeal. 
5. 

The court found that Chevron had standing because it paid the taxes at issue and 

Corp did not have standing because it neither paid the taxes nor participated in the Board 

proceedings. The court found the assessor’s cost method of valuation was incorrect, the 

correct method is the income method, and the assessor unlawfully failed to assess only 

the increase in value of the appraisal unit occasioned by the new construction, instead 

simply enrolling the cost of construction. Reserving jurisdiction, the court remanded the 

matter to the Board with instructions to return the assessments to the assessor for a 

different valuation method and to re-determine the value for supplemental assessment. 

On the remaining issues, the court (1) reserved the issue of whether the supplemental 

assessments constitute unlawful double taxation because the issue may be mooted by the 

application of a proper valuation method; (2) found the replacement wells are new 

construction and do not constitute normal maintenance and repair; and (3) found the 

exceptions for misfortune or calamity do not apply. 

The County filed a timely notice of appeal; Chevron and Corp filed a timely crossappeal from the same judgment. 

DISCUSSION 

I. Kern’s Appeal 

A. Standing 

 We begin with standing. At trial, a finance team leader with Chevron who 

oversees finance staff responsible for the accounting method for property tax payments, 

testified that when Chevron receives a property tax bill, the local property tax group 

creates both an account payable to Kern on behalf of Corp and an intercompany 

payable/receivable between Corp and Chevron, i.e. a payable from Chevron to Corp and 

a receivable on Corp’s book on Chevron’s behalf. Thereafter, an entry is made retiring 

the account payable and Corp issues a check to Kern for the property taxes. The account 

payable is retired before the check is issued. Although Corp writes the check for the 
6. 

property taxes, Chevron pays the taxes. The property tax payment is never reflected on 

Corp’s books; it is only reflected on Chevron’s balance sheet and financial statement. 

Based on this evidence, the trial court found that while Corp paid the taxes for 

Chevron, the funds to pay the taxes came from Chevron. The trial court concluded that 

because Chevron paid the taxes and exhausted its administrative remedies by 

participating in the administrative proceedings, section 5140 did not preclude it from 

maintaining the refund action. Kern contends the trial court erred in so finding because a 

property owner cannot maintain an action for a property tax refund when a third party 

pays the tax on its behalf even if the owner reimburses the third party for the tax 

payments. 

The Legislature has enacted “a specific statutory refund procedure for taxpayers 

whose property has been improperly assessed.” (IBM Personal Pension Plan v. City and 

County of San Francisco (2005) 131 Cal.App.4th 1291, 1299 (IBM).) As explained in 

IBM, “[s]ection 5096 provides for the ‘refund of taxes paid before or after delinquency if 

they were erroneously or illegally collected (subd. (b)), or illegally assessed or levied 

(subd. (c)).’ [Citation.] Section 5097 requires that this refund be based on a claim that is 

‘(1) Verified by the person who paid the tax . . . [¶] If a refund claim filed pursuant to 

section 5097 is denied, section 5140 authorizes an action for refund of the taxes paid.” 

(IBM, supra, 131 Cal.App.4th at pp. 1299-1300.) As pertinent here, section 5140 

provides: “The person who paid the tax . . . may bring an action only in the superior 

court against a county . . . to recover a tax which the board of supervisors of the 

county . . . has refused to refund on a claim filed pursuant to Article I (commencing with 

Section 4096) of this chapter. No other person may bring such an action; but if another 

should do so, judgment shall not be rendered for the plaintiff.” 

The issue here is whether Chevron is “[t]he person who paid the tax” within the 

meaning of section 5140. If so, then Chevron has standing to pursue this action. 
7. 

Whether Chevron has standing “is a question of law that we review de novo.” (IBM, 

supra, 131 Cal.App.4th at p. 1299.) 

“‘“The limitation contained in section 5140 simply means that only a person who 

has actually paid the tax may bring an action as opposed to the situation where someone 

else pays the property taxes of an owner of property.”’ [Citation.] [¶] ‘[S]ection 5140 . . . 

merely defines the procedure for refunding taxes improperly collected. The procedure 

provides for refund to the person who, or entity which, paid the tax if the property was 

exempt. This orderly approach prevents double refund of the taxes to the party who paid 

the tax and the party who owns the tax-exempt property. . . . [¶] . . . [S]ection 5140 is a 

mechanism for enforcing constitutional and statutory rights. Failure to follow the correct 

procedural rules can result in forfeiture of the power to enforce the constitutional right.’ 

(Mayhew Tech Center, Phase II v. County of Sacramento (1992) 4 Cal.App.4th 497, 510 

[(Mayhew)].)” (IBM, supra, 131 Cal.App.4th at p. 1301.) 

Our Supreme Court has held that section 5140 “operates to benefit ‘all persons 

who pay taxes they are not legally bound to pay’ [citation] but does not allow a recovery 

by a property owner whose taxes have been paid by someone else under a contract to do 

so. In that case the property owner has parted with nothing and he has no valid claim for 

a refund.” (Easton v. County of Alameda (1937) 9 Cal.2d 301, 303 (Easton).) In IBM, 

the appellate court held that an IBM pension plan did not have standing to maintain a suit 

to recover property taxes and fraud penalties paid on its behalf by the plan’s trustee, a 

bank. (IBM, supra, 131 Cal.App.4th at p. 1294.) There, IBM authorized the trustee to 

wire money from a particular “‘IBM transfer account’” to the Bank of America for 

payment of property taxes and penalties assessed on the subject property; the record did 

not reveal whether the funds in the transfer account belonged to the plan or IBM. (Id. at 

p. 1303.) The attorney for the plan and IBM admitted in a pre-litigation letter that the 

plan could not pursue appeals through the California courts because it was not the 

taxpayer. (Ibid.) Based on these facts, the appellate court concluded the plain language 
8. 

of section 5140 compelled the conclusion the plan lacked standing to seek the refund of 

taxes paid because it did not pay them. (IBM, supra, 131 Cal.App.4th at p. 1304.) 

In so holding, the court reviewed other Revenue and Taxation Code sections 

regarding tax refund actions that contain similar language, and noted the reason these 

statutes “impose such a restrictive standing requirement is evident. This limitation frees 

the taxing authority from the burden . . . of untangling a web of agreements and/or 

accounts in order to ascertain who is the proper recipient of any refund due. This 

determination is, of course, critical to avoiding a double payment.” (IBM, supra, 

131 Cal.App.4th at p. 1305.) The court determined that even though IBM, the trustee and 

the plan’s investment advisor had executed a release and indemnification agreement that 

gave the plan all rights to recover any overpayment of taxes and penalties, “the standing 

limitation insulates the taxing authority from the risk of inaccurately determining the 

agreement’s validity.” (IBM, supra, 131 Cal.App.4th at pp. 1296, 1305, fn. omitted.) 

Finally, the court noted the record did not establish that the plan paid the taxes challenged 

and did not reflect that the plan authorized the trustee to wire the money in payment of 

the taxes or that the money was wired from the plan’s funds. The court concluded that 

neither the existence of the indemnity agreement nor the fact the plan may be the real 

party in interest “permit[ted] a person or entity other than one expressly authorized in 

section 5140 to bring a tax refund action.” (IBM, supra, 131 Cal.App.4th at p. 1305.) 

In contrast to the record in IBM, here the record shows the supplemental 

assessments were paid with Chevron’s funds, even though Corp’s name appeared on the 

checks. In effect, Corp was the conduit of Chevron’s tax payments. This situation is 

different than the one in IBM, in which the trustee paid the taxes and penalties with 

money that apparently did not belong to the plan. It is also distinguishable from another 

case Kern relies on, Mayhew, supra, 4 Cal.App.4th 497. There, the state and a general 

partnership entered into lease-purchase agreements that required the state to pay any 

taxes and assessments levied on the property it was leasing. (Id. at pp. 501-502.) After 
9. 

the county assessed property taxes based on a transfer of title to a corporation, the state, 

partnership and corporation brought refund actions against the county for property taxes 

paid for three fiscal years. (Id. at pp. 504, 507, 509.) The trial court allowed the state to 

recover property taxes for the one year the state paid the taxes, but denied recovery for 

the other years because the state did not pay the taxes for those years. (Id.at pp. 503-

504.) On appeal, the state argued it was improperly denied a refund for the two years it 

did not “directly” pay taxes to the county. (Id. at 504.) The Court of Appeal rejected the 

state’s refund argument, holding that the state could not obtain a refund for those two 

years because it did not pay the taxes, commenting that if the partnership paid those taxes 

and the state reimbursed the partnership through “increased rental payments or 

otherwise,” then the state should retrieve the funds from the partnership. (Id. at p. 510.) 

Unlike the state in Mayhew, Chevron did pay the taxes itself, using Corp as a 

conduit. It did not, as Kern asserts, reimburse Corp for taxes Corp paid with its own 

funds. Instead, it gave the money to Corp, who wrote the check to Kern. These facts also 

distinguish this case from Grotenhuis v. County of Santa Barbara (2010) 

182 Cal.App.4th 1158 (Grotenhuis), in which the appellate court held that an individual 

“may not sue to recover excess property taxes paid by someone else, such as his landlord, 

who pays the tax by design or mistake.” (Id. at p. 1165.) There, a sole shareholder of a 

closely held corporation sought a refund of taxes paid by the corporation, which held title 

to the taxed property. Citing Easton, IBM and Mayhew, the Court of Appeal held the 

shareholder lacked standing to bring such an action based on the plain language of 

section 5140. (Grotenhuis, supra, 182 Cal.App.4th at p. 1165.) None of the authorities 

Kern cites state a property owner will be denied judicial relief where a third person issues 

a check that pays taxes with the owner’s funds. 

Kern contends the conclusion that Chevron paid the taxes is contrary to the 

statute’s plain terms. But section 5140 says “[t]he person who paid the tax” may bring 

the action. Here, although the check has Corp’s name on it, the “person who paid the 
10. 

tax” is Chevron. Kern also asserts this holding violates the principle of strict compliance 

discussed in IBM, which explains that because the State Constitution “vests the 

Legislature with plenary control over the manner in which tax refunds may be obtained, a 

party ‘must show strict, rather than substantial, compliance with the administrative 

procedures established by the Legislature.’” (IBM, supra, 131 Cal.App.4th at p. 1299.) 

Chevron, however, did strictly comply with section 5140 when it paid the tax using Corp 

as a conduit. Finally, Kern argues this burdens it with having to determine the proper 

recipient of a refund in situations such as this and could result in double refund. This 

case, however, does not involve “untangling a web of agreements and/or accounts in 

order to ascertain who is the proper recipient of any refund due” as expressed in IBM, 

supra, 131 Cal.App.4th at p. 1305). Since the evidence clearly established that Chevron 

paid the tax via a check with Corp’s name on it, there is no danger of a double refund. 

In sum, we conclude that Chevron has standing to pursue this refund action. 

B. The Valuation Method 

Kern contends the superior court erred in invalidating the assessor’s valuation 

method and ordering the use of an approach based on how much income the new wells 

added. 

1. Standard of Review 

“In reviewing a property tax assessment, the court must presume the assessor 

properly performed his or her duty and that the assessment was both regularly and 

correctly made. [Citation.] The burden is on the taxpayer to prove the property was 

improperly assessed.” (California Minerals, L.P. v. County of Kern (2007) 

152 Cal.App.4th 1016, 1022 (California Minerals).) 

When the taxpayer claims a valid valuation method was applied improperly, “the 

court may overturn the assessment appeals board’s decision only if there is no substantial 

evidence in the administrative record to support it.” (California Minerals, supra, 

152 Cal.App.4th at p. 1022.) However, if the taxpayer challenges the validity of the 
11. 

valuation method itself, the court is faced with a question of law subject to our 

independent review. (Ibid.; Maples v. Kern County Assessment Appeals Bd. (2002) 

103 Cal.App.4th 172, 178 (Maples).) “We must determine ‘whether the challenged 

method of valuation is arbitrary, in excess of discretion, or in violation of the standards 

prescribed by law.’” (Maples, supra, 103 Cal.App.4th at p. 178.) 

“‘In this regard we look not to whether another approach might also have been 

valid or yielded a more precise reflection of the property’s value, but whether the method 

chosen was contrary to law. [Citations.] ‘The law requires only that an assessor adopt 

and use a reasonable method – neither a trial court, not this court, can reject a method 

found by the board to be reasonable merely because, in [its] nonexpert opinion, another 

method might have been better.’” (County of Orange v. Orange County Assessment 

Appeals Bd. (1993) 13 Cal.App.4th 524, 530.) 

In the present case, we must determine whether the cost approach used to value 

the new wells, which the Board approved, was arbitrary, an abuse of discretion or in 

violation of law. 

As a threshold matter, we address Kern’s contention that Chevron is barred from 

claiming the assessor used an improper valuation method because Chevron failed to value 

the new wells using its proposed methodology. Pointing to section 1610.8, which 

provides in pertinent part that “[t]he applicant for a reduction in an assessment on the 

local roll shall establish the full value of the property by independent evidence,” and 

Bank of America v. County of Fresno (1981) 127 Cal.App.3d 295 (Bank of America), 

Kern asserts that a taxpayer claiming the assessor used an unlawful valuation method 

must show what the value of its property would be under its proposed valuation 

methodology. Kern argues that because Chevron made no attempt to value the new wells 

using the valuation method it claims is appropriate, i.e. the income approach to valuation, 

it failed to satisfy its burden of proof under section 1610.8. 
12. 

In Bank of America, the taxpayer was claiming a valid valuation method, the 

capitalization of income method, was applied improperly, resulting in an overassessment 

of restricted open space land. (Bank of America, supra, 127 Cal.App.3d at p. 312.) This 

court held that, to establish a prima facie case of overassessment, the taxpayer was 

required to offer independent proof of the capitalized income value of the land as defined 

by statute, which includes evidence of the projected future income and expenses. (Id. at 

pp. 312, 315.) Since the taxpayer in Bank of America failed to present such evidence, it 

did not satisfy its burden of proof. (Id. at pp. 315-316.) 

In contrast here, Chevron is challenging the validity of the valuation method the 

Board adopted. In ITT World Communications, Inc. v. County of Santa Clara (1980) 

101 Cal.App.3d 246, the taxpayer claimed both that the method of valuation the board 

used was illegal and that the board erroneously applied an intrinsically sound method of 

valuation. (Id. at pp. 252-253, 257.) While the Court of Appeal decided the first issue, 

finding the method legal, it refused to consider the second because the taxpayer presented 

no supporting evidence before the board. (Id. at p. 257.) The court therefore determined 

the taxpayer failed to overcome the presumption of correctness of the assessments and 

the board’s decision could not be overturned for lack of support by substantial evidence. 

(Ibid.) As this case is explained in a tax treatise which Kern cites, “[t]he court 

emphasized that to successfully challenge the application of a valid method (as contrasted 

with a challenge to the method itself), the appellant has the burden of presenting evidence 

that the application of the value method would be unfair or inequitable.” (2 Flavin, 

Taxing Cal. Property (4th ed. 2012) (Flavin), Proving the value § 27.11.) 

Since Chevron is challenging the valuation method the Board adopted, i.e. the 

cash method of valuation, on the ground that it is unlawful, rather than the application of 

that method, we can review the lawfulness of that method even if Chevron failed to 

produce evidence before the Board regarding what the value of the new wells would be 
13. 

according to Chevron’s proposed valuation method or evidence from which that value 

could be determined. 

2. Appraisal of Oil and Gas Properties 

 “The right to remove oil and gas from the ground is a property right, taxable as 

real property. (Lynch v. State Bd. Of Equalization (1985) 164 Cal.App.3d 94, 103 

[Lynch].) Oil and gas themselves are not owned by anyone until removed from the 

ground. (Lynch, at p. 102.)” (Maples, supra, 103 Cal.App.4th at p. 186, fn. omitted.) 

 Before the voters adopted California Constitution, article XIII A in 1978 by 

passing Proposition 13, tax assessors were permitted to reappraise oil and gas fields 

annually. As oil and gas reserves were discovered and brought into production, fields 

were reappraised to capture the new value on the tax rolls. (Maples, supra, 

103 Cal.App.4th at p. 187.) Under Proposition 13, however, routine annual reappraisals 

are not permitted; instead, a “base year value” is established for real property, which may 

then be increased by no more than two percent annually unless the property is sold or 

there is new construction. (Cal. Const., art. XIII A, § 2.)3 “Accordingly, in order to fit 

the intrinsically unknown value of oil and gas reserves into the requirement for 

establishment of base year value, without forfeiting the ability to tax such property by 

freezing the base year value of new or unexplored oil and gas fields at zero, the taxing 

authorities needed to reconceptualize the value of oil fields for tax purposes.” (Maples, 

supra, 103 Cal.App.4th at p. 187.) 

 To establish valuation principles for oil and gas properties, the State Board of 

Equalization (SBE) adopted Rule 468 (Cal. Code Regs., tit. 18, § 468).4 (Lynch, supra, 

 3 Further references to article XIII A are to the California Constitution. 

4 All undesignated references to rules are to the rules of the State Board of 

Equalization. 
14. 

164 Cal.App.3d at p. 109.)5 Rule 468, subsection (c) states that oil and gas property 

interests are “unique” and require “the application of specialized appraisal techniques.” 

The uniqueness arises from two aspects of petroleum producing properties: (1) since 

petroleum is a depleting, nonrenewable resource, “in the absence of new discoveries of 

oil at the property, the value of the property decreases over time as existing petroleum is 

extracted”; and (2) since the total amount of petroleum that profitably can be extracted 

from a particular property can be accurately known only when the field is fully depleted, 

geological, economic and technological uncertainties interact to affect the value of a 

petroleum interest over the course of time. (Maples, supra, 103 Cal.App.4th at p. 192.) 

 “Subsection (c) of rule 468 (rule 468(c)) reflects SBE’s recognition of these dual 

factors. It requires assessors to determine the market value of ‘the property.’ Then the 

assessor must determine the value of the ‘mineral interest’ portion of the particular 

appraisal unit in the following manner: After determining “total unit market value” of the 

property and “the volume of reserves using current market data” (rule 468(c)(4)(A)), the 

assessor must subtract from the total market value that portion attributable to ‘land (other 

than mineral rights)’ and improvements. The remainder is the ‘current value of taxable 

reserves’ (rule 468(c)(4)(B).) [¶] The calculated value for the petroleum interest on each 

appraisal unit is used as the basis both for reducing the value of the interest based on 

depletion (rule 468(c)(4)(D)) and for increasing the value based on addition of reserves 

(rule 468(c)(4)(E)) by ‘discovery, construction of improvements, or changes in economic 

conditions’ (rule 468 (c)(3)). In this manner, the rule accommodates both the uniqueness 

of petroleum properties . . . and the requirements of Proposition 13.” (Maples, supra, 

103 Cal.App.4th at p. 192.) 

 5 The SBE is charged by statute with ensuring that taxation is uniform throughout 

the state. (Gov. Code, § 15606.) 
15. 

 Thus, to determine the base year value of an oil and gas property for purposes of 

Proposition 13, the market value of the property is divided into two base year values – 

one comprised of the market value of the land (other than mineral rights) and 

improvements, and the other of the mineral interest. “[T]he base year value of the 

nonpetroleum interest is fixed in accordance with Proposition 13, but the petroleum

interest is subject to revaluation based on changes in proved reserves, as defined in 

rule 468(b) and as calculated pursuant to rule 468(c).” (Maples, supra, 103 Cal.App.4th 

at p. 193.)6 Base year values are “determined using factual market data such as prices 

and expenses ordinarily considered by knowledgeable and informed persons engaged in 

the operation, buying and selling of oil, gas and other mineral-producing properties and 

the production therefrom.” (Rule 468(c)(1).) Rule 468 is mandatory and allows no other 

methods of valuation except those set forth by the rule. (Maples, supra, 103 Cal.App.4th 

at p. 193.) 

 The appraisal unit of an oil and gas property consists of four components: proved 

reserves; wells, casing and parts thereof; land (other than mineral interests); and 

improvements. (Exxon Mobil Corp. v. County of Santa Barbara (2001) 92 Cal.App.4th 

1347, 1355 (Exxon Mobil).) The modified capitalization of income approach is the most 

commonly accepted valuation method of the market value of oil and gas property 

interests. (Texaco Producing, Inc. v. County of Kern (1998) 66 Cal.App.4th 1029, 1035 

(Texaco).) This involves converting a future income stream into a stated value by 

 6 Rule 468(b) provides: “The market value of an oil and gas mineral property 

interest is determined by estimating the value of the volumes of proved reserves. Proved 

reserves are those reserves which geological and engineering information indicate with 

reasonable certainty to be recoverable in the future, taking into account reasonably 

projected physical and economic operating conditions. Present and projected economic 

conditions shall be determined by reference to all economic factors considered by 

knowledgeable and informed persons engaged in the operation and buying or selling of 

such properties, e.g., capitalization rates, product prices and operation expenses.” 
16. 

capitalizing the sum of anticipated future installments of net income, less an allowance 

for interest and the risk of partial or no receipt of income. (Id. at p. 1037.) When valuing 

oil and gas producing property, to arrive at the future net income, the appraiser: 

(1) estimates proved reserves; (2) determines the expected schedule of future production 

from those reserves and estimates the future gross income; and (3) subtracts the estimated 

costs of production. Finally, the assessor discounts the future net income to reduce it to 

present value. The final figure is considered the taxable value of the oil and gas interest. 

(Texaco, supra, 66 Cal.App.4th at p. 1037; Lynch, supra, 164 Cal.App.3d at p. 105.) 

3. New Construction 

 While the base year value of the nonpetroleum interests is fixed, under 

Proposition 13 and Rule 468, the base year value is reestablished if there is new 

construction. (Art. XIII A, § 1, subd. (a) [“The maximum amount of any ad valorem tax 

on real property shall not exceed one percent (1%) of the full cash value of such 

property.”]; Art. XIII A, § 2, subd. (a) [“The ‘full cash value’ means the . . . appraised 

value of real property when . . . newly constructed . . .]; § 110.1 [“(a) . . . ‘full cash value’ 

of real property, including possessory interest in real property, means the fair market 

value as determined pursuant to Section 110 for either of the following: [¶] ... [¶] (2) For 

property which is . . . newly constructed . . . : [¶] ... [¶] (B) The date on which new 

construction is completed, and if uncompleted, on the lien date. [¶] The value determined 

under subdivision (a) shall be known as the base year value for the property. . . . ”].) 

 When there has been new construction, the assessor is required to “determine the 

new base year value for the portion of any taxable real property which has been newly 

constructed. The base year value of the remainder of the property assessed, which did 

not undergo new construction, shall not be changed. . . .” (§ 71.) Rule 463 (Cal. Code 

Regs., tit. 18, § 463) addresses the issue of new construction. It explains that when real 

property is “newly constructed,” “the assessor shall ascertain the full value of such 

‘newly constructed property’ as of the date of completion. This will establish a new base 
17. 

year full value for only that portion of the property which is newly constructed, whether it 

is an addition or alteration. The taxable value on the total property shall be determined 

by adding the full value of new construction to the taxable value of preexisting property 

reduced to account for the taxable value of property removed during construction. The 

full value of new construction is only that value resulting from the new construction and 

does not include value increases not associated with the new construction.” (Rule 463(a), 

italics added.) 

Rule 463 is applicable to oil and gas properties. As Rule 468, subsection (a), 

states, “[w]hether or not physical changes to the system employed in recovering 

[petroleum and natural gas] qualify as new construction shall be determined by reference 

to Section 463(a).” Rule 468(c)(1) further provides that the “base year value (market 

value) of the property shall be estimated as of lien date 1975” or on a subsequent change 

of ownership, and that “[n]ewly constructed improvements and additions in reserves shall 

be valued as of the lien date of the year for which the roll is being prepared[,]” while 

improvements removed from the site are deducted from taxable value. Pursuant to 

Rule 468(c)(5), the valuation of land (other than mineral reserves) and improvements also 

includes consideration of new construction: “(A) A base year value (market value) of 

land (including wells, casing and parts thereof) and improvements shall be estimated as 

of lien date 1975, the date of new construction after 1975, or the date a change of 

ownership occurs subsequent to lien date 1975. [¶] (B) The value of land (wells, casing 

and parts thereof) and improvements shall remain at their factored base year value except 

as provided in (6) below.” Rule 468, subsection (c)(6) provides that “value declines” are 

recognized “when the market value of the appraisal unit, i.e., land, improvements and 

reserves, is less than the current taxable value base of the same unit.” 

The drilling and deepening of wells constitutes new construction. As explained in 

the California State Board of Equalization Assessors’ Handbook (AH), section 566 

entitled Assessment of Petroleum Properties (rev. Jan. 1999) (AH 566): “New 
18. 

construction associated with petroleum properties includes the drilling or deepening of 

wells, recompletions in new zones, the installation of flow lines, and construction of 

surface production facilities.” (AH 566, p. 6-6.) 

4. Supplemental Assessments 

Before 1983, reassessments due to changes in ownership or new construction were 

not made until the following year, thereby resulting in a delay of from four months to 

16 months from the date of the triggering event. The Legislature found this was “an 

unwarranted reduction of taxes for some taxpayers with a proportionate and inequitable 

shift of the tax burden to other taxpayers.” (§ 75; see Montgomery Ward & Co. v. County 

of Santa Clara (1996) 47 Cal.App.4th 1122, 1130 (Montgomery Ward).) Accordingly, in 

July 1983 it enacted a new “supplemental assessment” rule, to fully implement 

Article XIII A and “to promote increased equity among taxpayers by enrolling and 

making adjustments of taxes resulting from changes in assessed value due to changes in 

ownership and completion of new construction at the time they occur.” (§ 75, para. 1.) 

Under this legislation, the assessor is required to appraise property changing 

ownership or new construction “at its full cash value . . . on the date the change in 

ownership occurs or the new construction is completed. The value so determined shall be 

the new base year value of the property or the new construction.” (§ 75.10.) A 

supplemental assessment is then placed on the supplemental roll representing “the 

difference between the new base year value and the taxable value on the current roll.” 

(§ 75.11, subd. (a), (b); Montgomery Ward, supra, 47 Cal.App.4th at p. 1130.) 

“The supplemental assessment provision imposes a new timing mechanism for 

valuation and collection. It does not alter the tax rate or impose new taxes. Nor is 

property taxed which was not taxed in the past. Rather, property owners are simply 

paying taxes based on the value closer to the time of a change in ownership or the 

completion of new construction. (Shafer v. State Bd. of Equalization (1985) 

174 Cal.App.3d 423, 427-428.) 
19. 

From these statutes and rules, it is apparent that new construction is appraised at 

its full cash value or fair market value as of the date the construction is completed. This 

value becomes the base year value of the new construction, while the base year value of 

the remainder of the property remains the same. For purposes of oil and gas properties, 

the value of new construction, such as oil wells, is added to the base year value of the 

nonpetroleum interests, i.e. land (other than mineral rights) and improvements. 

Assuming the wells at issue here are “new construction” within the meaning of 

section 75.10, they must be valued as of the date of completion and that value added to 

the base year value of the nonpetroleum interests. The issue in Kern’s appeal is whether 

the Board acted unlawfully or unreasonably when it found the assessor’s method of 

valuation, the cost approach, was an appropriate method for determining the full cash 

value or fair market value of the new wells. 

5. The Cost Approach to Valuation 

“There are three generally accepted methods of valuation for property tax 

purposes: the comparable sales method, the income capitalization method, and the cost 

method.” (Mission Housing Development Co. v. City and County of San Francisco

(1997) 59 Cal.App.4th 55, 83.) Here, the assessor used, and the Board approved, the cost 

method for valuing the new wells. The cost approach is generally recognized as the 

appropriate method for assessing new construction and other property “that has 

experienced relatively little physical deterioration, is not misplaced, is neither over- nor 

underimproved, and is not affected by other forms of depreciation or obsolescence.” 

(Rule 6(a) (Cal. Code Regs., tit. 18, § 6).) The Assessors’ Handbooks endorse the cost 

method for valuing new construction.7 AH section 502, Advanced Appraisal (Dec. 1998) 

 7 “The State Board of Equalization is authorized to prescribe rules, regulations, 

and instructions to promote uniform assessment practices. (Gov. Code, § 15606, subds. 

(c)-(g).) The State Board of Equalization Assessors’ Handbooks have ‘been relied upon 
20. 

(AH 502) states that, while no single approach to value should be precluded from 

consideration, “[t]he cost approach is the most commonly applied approach in the 

appraisal of new construction.” (AH 502, pp. 127, 128.) AH 502 advises that the 

“[p]roper valuation of new construction means estimating the full value of the qualifying 

new construction as of the date of completion[,]” and only the portion of the property that 

is newly constructed receives a new base year value; the base year value of the remaining 

property remains unchanged. (AH 502, pp. 127, 130.) 

Moreover, AH 566 instructs that cost is used as the basis of the appraisal of wells 

and production equipment on oil and gas properties for the purpose of establishing the 

base year value of those items. (See AH 566, pp. 7-1 [“Although petroleum properties 

are valued as a unit, wells, other improvements and equipment must be listed, appraised, 

and assessed separately from the mineral rights.”], 7-2 [“Common practice for the 

appraisal of the well and production equipment is to tie the value directly to its estimated 

utility to extract petroleum. A remaining reserve factor is determined by taking the 

estimate of proved reserves and dividing by the total ultimate recovery. Then multiply 

this factor by the cost of a new well with the current equipment. As reserves are 

produced, the value of the equipment will decline in direct proportion.”) 

Here, an appraiser with the assessor’s office, David Hammond, reviewed 

information reported by Chevron regarding the new wells, including the depth, cost, date 

of completion and type of well, to determine whether the wells were indeed new wells 

and whether the costs appeared reasonable. Then, using the cost approach, he valued the 

wells and generated the supplemental assessments. In doing so, he valued only the well, 

not the mineral rights. That value was added to the lien-date value of the land, which 

excludes the mineral rights. 

 

by the courts in interpreting valuation questions . . . and have been accorded “great 

weight” in this regard.’” (Exxon Mobil, supra, 92 Cal.App.4th at p. 1353, fn. 2.) 
21. 

Hammond’s normal practice is to make adjustments if it is reported to him that the 

actual cost to drill the well exceeded the anticipated cost. This has happened in the past 

with Chevron, where Chevron provided him with evidence that the lower portion of a 

very expensive well was lost; in that case, Hammond apportioned the cost and assumed 

the lower part of the well was a dry hole, which Kern does not assess. He did not do any 

“specific analysis” of the new wells to try to determine whether drilling them enhanced 

the value of the property evaluated at the lien date; neither did he “specifically” analyze 

whether drilling new wells increased the value of the property. He just took the cost 

Chevron reported and enrolled it as a supplemental assessment. Hammond explained he 

did this because the supplemental assessment is on the well itself, not the property, so he 

was looking at the well’s value, not the property’s value. 

The use of the cost method here was not unreasonable or a violation of law. 

Instead, its use was consistent with the statutes and rules. The assessor valued the new 

wells as of the date of completion; assessed only the value of each well, not the mineral 

rights; and added the new base year value to the base year value of the nonpetroleum 

interests. The assessor’s experts, who are both appraisers of petroleum properties, 

testified that, for property tax purposes, the unit of appraisal for oil and gas properties is 

all of the components necessary to operate the property, including wells, but when 

appraising new construction, only the newly constructed item is appraised. As expert 

Joseph Colosi explained, Rule 463 makes clear that the adjustment, either the addition or 

alteration, is the thing to be valued as of the date of completion; the unit of appraisal for 

the whole property is not the same as valuing the actual physical new construction. 

The assessor’s experts also agreed that the cost approach is the appropriate method 

of valuing the new wells. Colosi explained that when he determines whether to levy a 

supplemental assessment on a new well, if the well is a “normally completed well,” he 

assumes it contributes to the total property and, if the costs associated with it are typical, 

he uses cost as the basis for valuing it. This means the supplemental assessment would 
22. 

be equal to the cost of construction. However, if it costs significantly more to drill a well 

than expected, actual cost is not used because, in that case, cost does not equal the value 

added to the property. 

The assessor’s other expert, Harold Bertholf, prepared a chart showing the value 

of a hypothetical oil field with one well, which compared the value of the field the day 

before a new well is added with the value the day after. The difference between the two 

cash flows is the value of the well, which is equal to its cost even if the well adds to the 

recoverable reserves. Bertholf explained that while the value added was significantly 

higher than the well’s cost, that value was limited to the well because the additional oil 

cannot be assessed. According to Bertholf, in the majority of circumstances involving 

new wells, the value the new well adds is “significantly more” than its cost; he generally 

assumes the well adds at least its cost in value to the field. According to both experts, 

most California counties supplementally assess new wells at 100 percent of the cost. 

Colosi testified about an SBE letter to county assessors (LTA), No. 80-9, which 

contains “Petroleum Assessment Guidelines.” The letter explains that “[s]ubsurface nonretrievable oil well equipment and the hole in the ground have value as long as the 

property is capable of producing oil or gas,” and are part of the total property value. The 

letter further states: “Ordinarily, in a development well, the value of the well (well is 

defined as the subsurface retrievables and non-retrievables) and related production 

equipment have a first year value equal to their cost new.” That value declines over time 

as the reserves decline; the decline, however, is not recognized under Proposition 13. 

As the SBE rules and Assessors’ Handbooks recognize, value and cost are not 

necessarily identical. Rule 463(b)(3) advises that when valuing the physical alteration of 

any improvement which converts the improvement into the substantial equivalent of a 

new structure or changes the way the altered portion of the structure is used, only the 

value, “not necessarily the cost, of the alteration shall be added to the appropriately 

indexed base year value of the pre-existing structure.” Similarly, AH 566 tells assessors 
23. 

that “[w]hile drilling new wells . . . will normally constitute ‘new construction’ as that 

term is used by SBE Rules 463 and 463.5, such activity may not increase the value of the 

property for the purposes of levying a supplemental assessment. In other words, a 

supplemental assessment occasioned by such construction may be zero.” (AH 566, p. 6-

6.) The assessor’s expert explained that a supplemental assessment of a new well would 

be zero where the hole turned out to be dry and had no other utility. As Kern points out, 

that possibility does not exist in this case because the assessor excluded from assessment 

dry holes, and non-productive or inoperable wells, and the Board found there was no 

evidence that any of the new wells fell into these categories. 

Chevron contends the assessor’s valuation method is incompatible with Rule 468, 

which requires the use of the income approach to determine the fair market value of the 

oil and gas property. Chevron reasons that because the income approach is used to assess 

the entire property, it necessarily must be used to assess the value of the new wells. 

AH 502 explains that an appraiser may use the income approach to estimate the value of 

new construction on income-producing properties, which is done by capitalizing the 

difference in the subject property’s economic rent with and without the new construction; 

this requires income data and capitalization rates from highly comparable properties. 

(AH 502, p. 129.) 

Chevron’s expert, Richard Miller, an appraiser of oil and gas properties, testified it 

was inappropriate to use cost to determine the value of the new wells because “the cost of 

the well has nothing to do with the income you expect to generate from the well.” While 

Miller admitted the cost approach is used to allocate the property’s fair market value to 

the wells for purposes of establishing their base year value, he opined that valuation of 

the replacement wells had to be based on the “income approach” by capitalizing “the 

difference in the subject property’s economic rent with and without the new 

construction.” In the case of an oil field, Miller stated that “you should run a cash flow 

on the whole field with and without the new construction” to determine value. When 
24. 

there is a continuous program of drilling replacement wells, there will not be a difference 

in value with or without one replacement well “because you’re continuing to roll forward. 

Every time you drill one and then re-evaluate, you’re moving the queue up of 

replacement wells, and you continue to have to . . . evaluate those over time.” 

The assessor’s experts, however, testified that even if one used the income 

approach to value the wells, the result would be the same – the value of the new wells 

equals the cost to drill them. As Colosi testified, if a cash flow were run on a new well, 

which would include the mineral rights and the value of the well, it would be difficult to 

see the contribution of the well versus the mineral rights except on the basis of cost. 

Colosi further explained that on the lien date, the property’s anticipated production and 

anticipated costs are projected; the anticipated costs include the cost of drilling a new 

well as a negative. This means the property’s value is diminished by the anticipated cost 

of drilling the well, but the well’s value is not included in the property; the only thing 

included is the production benefits on the revenue side. Once the well is actually 

constructed, the liability is removed from the property, thereby increasing the property’s 

value. This principle was demonstrated in Bertholf’s hypothetical one-well property. 

Thus, contrary to Chevron’s contention, the value of the oil field under Rule 468 is 

greater after a new well is created than before. 

While Miller did not disagree that the value of one well could equal the cost of 

drilling in a one-well field, he contended this principle did not apply in fields such as 

Chevron’s, where there is a continuous process of drilling replacement wells. According 

to Miller, in that situation there would not be a difference in value with or without one 

replacement well, as there would be continuous valuation after each well is drilled. Thus, 

if replacement wells are drilled in succession, the cost of drilling the wells extends out to 

the future and reduces the value of the last well to be drilled to zero. 

Miller’s approach, however, is contrary to the statutes and rules governing 

supplemental assessments of new construction. These require that new construction be 
25. 

assessed as of the date of completion and that only the value resulting from the new 

construction, not unassociated value increases, be enrolled as a supplemental assessment, 

thereby establishing a new base year value for only that newly constructed portion of the 

property. (See § 75.10; Rule 463(a).) Because the supplemental assessment occurs on 

the date of completion, the decrease in anticipated costs that occurs when a new well is 

constructed cannot be offset by an increase in the anticipated expenses of constructing 

other wells that have not been completed. As Kern explains, “[t]he legal principle that a 

supplemental assessment enrolls only the value of new construction, and nothing more, 

validates the Assessor’s approach of valuing only one well at a time.” Even Chevron’s 

counsel conceded before the Board that if the “unit of appraisal” for supplemental 

assessment purposes is a single well, then adding a new well to replace a failed well adds 

value “because it wasn’t there before and it’s there now.” 

Chevron also claims the cost method of valuation is incompatible with Rule 468 

because “the sole assessable interest in a California oil and gas property is the right to 

produce oil and gas, and the value of that interest is determined by the present value of 

the net revenue stream obtained by producing and selling the minerals.” Kern’s valuation 

method, however, does not violate this principle, as “the present value of the net revenue 

stream obtained by producing and selling the minerals,” increases when a new well is 

added because previously anticipated expenses are no longer subtracted from new 

revenue. 

Nor is Chevron correct that the assessor “treated the wells as assessable new 

construction without regard to the mineral appraisal unit defined by SBE Rule 468.” This 

contention ignores the fact that the appraisal units for a lien date assessment and a 

supplemental assessment are different: (1) as Rule 468 commands, on the lien date the 

appraisal unit is the oil and gas interest as a whole, which is then allocated into petroleum 

and nonpetroleum interests; but (2) as instructed by Rule 463(a), a supplemental 

assessment is issued based on only the new construction, not the entire oil field, which 
26. 

creates a new base year value for the new construction that is added to the lien-date base 

year value of the nonpetroleum interests. 

Chevron recognizes, by implication, that supplemental assessments are 

incompatible with its view of Rule 468 when it asserts that “[t]raditional construction 

concepts have little meaning in the context of oil and gas assessments.” Rule 468(a), 

however, expressly references Rule 463 without exempting new wells from the ambit of 

supplemental assessments. AH 566 similarly recognizes that drilling wells normally 

constitutes new construction within the meaning of Rule 463. (AH 566, pp. 6-6, 6-8.) 

While Chevron urges us not to apply Proposition 13 in a way inconsistent with the unique 

nature of the interests being assessed, citing Lynch, supra, 164 Cal.App.3d 94, we are not 

free to ignore the plain language of statutes or to dismiss out-of-hand legislative 

enactments and administrative interpretations of those statutes. (See In re Hoddinott

(1996) 12 Cal.4th 992, 1002; Lynch, supra, 164 Cal.App.3d at p. 114.) 

Relying on Exxon Mobil, supra, 92 Cal.App.4th 1347, Chevron asserts the 

appellate court there rejected the assessor’s position in this case, i.e. that the cost 

approach is a valid method of valuing the new construction. In Exxon Mobil, the Court of 

Appeal held that (1) Exxon’s offshore oil and gas leaseholds, and its newly built onshore 

oil processing facility, constituted one appraisal unit governed by the valuation methods 

set forth in Rule 468, and (2) therefore the county invalidly used the cost of reproduction 

method to assess the onshore oil processing facility as a separate appraisal unit. (Exxon 

Mobil, supra, 92 Cal.App.4th at pp. 1349-1350, 1357-1358.) As Kern points out, the 

case does not involve supplemental assessments and therefore has nothing to say about 

the value of new construction as it relates to such assessments. (See McWillams v. City of 

Long Beach (2013) 56 Cal.4th 613, 626 [“‘“It is axiomatic that cases are not authority for 

propositions not considered.”’” ].) 

Chevron further asserts that it would be unconstitutional to segregate its oilfields 

into component parts for individual assessment using the income approach for one 
27. 

component and the cost approach for the other, as assessed value is solely attributable to 

proven reserves, not construction. Chevron reasons that because Rule 468 implements 

Proposition 13 for oil and gas assessment by first valuing additions to and removal from 

the reserve base, adding taxable value for construction activity is an “end run” around the 

Proposition 13 cap on assessed value. 

But that is not how Rule 468 works. Rule 468 provides that when oil and gas 

property is first assessed at the 1975 lien date or on a change of ownership, the base year 

value (market value) of the appraisal unit, i.e. the proved reserves, land (other than 

mineral interest), and improvements, is determined. Newly constructed improvements 

and additions to reserves are valued as of the lien date for which the roll is being 

prepared, and improvements removed from the site are deducted from the taxable value. 

(Rule 468(c)(1).) Thus, contrary to Chevron’s assertion, Rule 468 requires the addition 

of the value of new construction to the property’s base year value. 

The total unit market value is then apportioned between (1) the value of the 

nonpetroleum interests, i.e. the land (other than mineral rights) and improvements, and 

(2) the taxable value of mineral reserves. This is done by determining the market value 

of the nonpetroleum interests, which Chevron concedes is done using the cost approach, 

and subtracting that value from the property’s market value. This creates two base year 

values: (1) a base year value of the nonpetroleum interests that is fixed in accordance 

with Proposition 13; and (2) a base year value of the petroleum interest that is subject to 

revaluation based on changes in proved reserves. (Maples, supra, 103 Cal.App.4th at 

pp. 192-193.) The base year value of the nonpetroleum interests may be increased no 

more than two percent per year, but is adjusted when there is a change of ownership or 

new construction, while the base year value of the mineral reserves is adjusted annually 

by deducting depletions and adding new reserves. (Rule 468(c)(1), (4) & (5).) Value 

declines for the entire property are recognized when the market value of the appraisal unit 

is less than the current taxable value of that unit. (Rule 468(c)(6).) 
28. 

Rule 468 clearly contemplates the addition of the value of new construction to the 

base year value of the nonpetroleum interests; therefore, adding the taxable value of new 

construction is not an “end run” around Proposition 13’s cap on assessed value. A 

supplemental assessment of new construction results in additional value that becomes the 

base year value of the new construction. (§ 75.10, subd. (a).) This is fully consistent 

with Rule 468, which states that the base year value of nonpetroleum interests is equal to 

its market value on the date of new construction. (Rule 468(c)(5).) If the market value of 

nonpetroleum interests is determined using the cost approach, then using the cost 

approach to determine the value of new construction that is added to that is in line with 

Rule 468. 

Citing to a LTA No. 87/40,8 Chevron contends that new construction 

supplemental assessments are limited to the amount by which the new construction 

increases the value of the “unit of appraisal.” LTA No. 87/40, entitled “Assessment of 

Dry Hole Wells,” addresses the correct assessment procedure when a new oil well is 

drilled which turns out to be a dry hole. The question was presented whether an assessor 

erred when he used the cost approach to supplementally assess such a well because he 

believed he could not use the income approach, which would have reflected the dry hole 

and no value, because mineral reserves could only be reassessed on the lien date. The 

SBE found unlawful the practice of assessing a dry well based on the cost of drilling 

without considering the reserves. The letter explained that “the determination of the 

 8 In October 2013, Chevron filed a motion requesting we take judicial notice of 

(1) SBE’s Letter to County Assessors dated April 23, 1987 (LTA No. 87/40), available at 

http://www.boe.ca.gov/proptaxes/pdf/87_40.pdf [as of Oct. 28, 2014]; (2) SBE’s Letter to 

Assessors No. 2003/039, May 29, 2003, “Hierarchy of Property Tax Authorities (LTA 

No. 2003/039), available at http://www.boe.ca.gov/proptaxes/pdf/lta03039.pdf [as of 

Oct. 28, 2014]; and (3) legislative history documents which were the subject of 

Chevron’s request for judicial notice filed with the trial court on May 16, 2011. On 

November 4, 2013, we deferred ruling on the request. Kern has not objected to the 

request, which we now grant. 
29. 

value of new construction of a new well requires the appraisal of the total unit, well and 

mineral reserve, prior to the allocation of value between the newly constructed well and 

the proved mineral reserve. When there are no future benefits anticipated from a newly 

drilled well, i.e., no new reserves, no alternative uses, no operating benefits, etc., there is 

little, if any, value attributable to the new construction.” (LTA No. 87/40, p. 2.)9

Based on this letter, Chevron asserts that, at least with respect to replacement 

wells, while restoring production of an increment of reserves by drilling new wells is an 

operating benefit, “it is not a new or additional operating benefit because such wells 

merely restore production of oil already being assessed.” But the letter’s language 

implies that the value of a new well is not dependent on discovery of new reserves, as 

Chevron contends. Instead, the new well has value if it produces any future benefit: 

“new reserves,” or “alternative uses,” or “operating benefits.” Accordingly, if a new well 

produces “operating benefits,” it is valuable and taxable regardless of whether it leads to 

the discovery of “new”, i.e. previously unknown or untaxed, reserves. Moreover, the 

central point of LTA 87/40 is that dry wells should not be assessed. Kern does not do so. 

Chevron also claims the assessor and the Board arbitrarily added the cost of the 

wells to the lien date value without any analysis of whether value was added to the “unit 

of appraisal[,]” as Hammond admitted he did not follow AH 566 when preparing the 

assessments at issue.10 Hammond, however, said no such thing. Instead, he testified that 

 9 The letter went on to explain that if a new well discovers a mineral reserve value 

less than the cost of constructing the well, it will be a challenge for the appraiser to make 

a reasonable allocation of value between the newly constructed well and the new 

reserves; the value allocated to the well is subject to supplemental assessment while the 

new proved reserves will be assessed the following lien date in an existing field or as a 

supplemental assessment if the new reserves represent a “new discovery.” (LTA 87/40, 

p. 2.) 

10 Chevron’s counsel read Hammond the following excerpt from AH 566, p. 6-6: 

“While drilling new wells, installing flow lines, and constructing surface production 

facilities will normally constitute ‘new construction’ as that term is used by SBE 
30. 

he did not “specifically” review whether “the activity increased the value of the property” 

before he assessed the new wells. Moreover, Hammond’s testimony, when read in 

context, states that the supplemental assessments Hammond prepared valued only the 

new wells as opposed to the property as a whole; he earlier testified that, before issuing 

the assessments, he determined whether the wells were indeed new wells and whether the 

costs appeared reasonable. Finally, whatever Hammond subjectively believed he was 

doing, the assessor’s experts testified the cost of the new wells accurately represents the 

difference in value of the field before and after the construction, and the Board found this 

to be true. 

Chevron next asserts the cost method is unlawful because it resulted in 

unconstitutional double assessment. Chevron claims that because the property’s value 

determined by means of the income approach assumed the existence of, and depended on, 

the presence of the wells that were added to the assessment roll based on their cost, 

double assessment resulted when the assessor and Board added that cost to the existing 

assessed value derived from an income approach. In support, Chevron cites El Toro 

Development Co. v. County of Orange (1955) 45 Cal.2d 586 (El Toro), and GeorgiaPacific Corp. v. County of Butte (1974) 37 Cal.App.3d 461 (Georgia-Pacific). In El 

Toro, our Supreme Court held that appliances in leased rental units could not be 

separately assessed because their value was included in the rent paid by the lessees and 

thus, the income the lessor received. (El Toro, supra, 45 Cal.2d at p. 589.) In GeorgiaPacific, the Court of Appeal held the use of the income method of valuation was 

improper because it included the value of immature timber that was constitutionally 

exempt from taxation. (Georgia-Pacific, supra, 37 Cal.App.3d at p. 470.) 

 

Rules 463 and 463.5, such activity may not increase the value of the property for the 

purposes of levying a supplemental assessment. In other words, a supplemental 

assessment occasioned by such construction may be zero.” 
31. 

These cases are distinguishable because neither involves supplemental 

assessments levied on new construction. By definition, such property cannot have been 

included in the previous year’s lien date assessment because it did not yet exist for 

purposes of property taxation. As the assessor’s experts explained, while the income 

approach of valuing the oil and gas properties may forecast the anticipated construction 

of new wells and the associated expense, it does not include the value of the wells 

because they do not exist on the lien date. Moreover, here the cost of the new wells was 

not added to the assessed value derived from an income approach; instead, it was added 

to the base year value of the nonpetroleum interests, which was determined based on a 

cost approach. Accordingly, the wells at issue in this case could not have been assessed 

before construction was completed and assessing the wells upon completion could not 

constitute double taxation. 

Chevron argues the cost approach is wrong because the actual cost of some of the 

new wells exceeded the projected cost that was included in the cash flow analysis. As 

Kern points out, while Chevron gives one example of cost overruns, it never presented 

evidence or otherwise attempted to prove that such overruns are routine or were not 

cancelled out by overestimates. Since the assessor’s valuation is presumed correct 

(Evidence Code, § 664) and Chevron had the burden of proving otherwise (Rule 321(a), 

(b) (Cal. Code Regs., tit. 18, § 321)), Chevron had to make this showing before the 

Board. Without such a showing, we cannot assume the actual costs routinely exceeded 

projected costs. 

Finally, as Kern points out, the application of Chevron’s proposed method of 

valuation would be virtually impossible. Under that method, the assessor would have to 

compare the value of the relevant oil field at the lien date with its value after each well 

was completed to determine whether each well added value in some way and, if so, how 
32. 

much, which Kern asserts would involve individual valuation determination of hundreds, 

if not thousands, of wells each year.11 Chevron’s counsel admitted before the Board that 

Chevron’s expert had not appraised the whole unit, stating: “No one has done what I 

think would be a Herculean task. Given the number of wells we have, in order to 

demonstrate if there were a value added by this process, and in order to demonstrate what 

that value was, you would have had to have hundreds of cash flows done, because you’d 

have to do a cash flow after each one of these wells was drilled. And it would have been 

impossible to do.” Chevron’s counsel further admitted that “it would have been virtually 

impossible for either Mr. Miller or Mr. Bertholf to have run a cash flow for each of the 

wells.” 

Practical considerations may have an impact on the assessor’s choice of valuation 

method. For example, in Bret Harte Inn, Inc. v. City & County of San Francisco (1976) 

16 Cal.3d 14, our Supreme Court considered the valuation of “merchandise, equipment 

and cash located in [a] hotel.” (Id. at p. 18.) The Court noted that “[s]ince it is 

impracticable to attribute specific income to the type of property here in question the 

income method does not easily lend itself to the appraisal here before us. [¶] Out of 

substantial necessity, then, the assessor in this case resorted to the so-called cost method, 

under which the assessor subtracts depreciation from a figure reflecting cost.” (Id. at 

 11 According to the “2008 Annual Report of the State Oil & Gas Supervisor” 

issued by the California Department of Conservation, Division of Oil, Gas & Geothermal 

Resources, statewide in 2006, 2007 and 2008, there were 1,756, 2,507, and 2,909 

completed wells respectively. Under Chevron’s proposed method, assessors would have 

to determine how each of these wells affected previously forecast oil production in the 

relevant oil field. Kern asked us to take judicial notice of this report; on December 27, 

2013, we deferred ruling on the request. Chevron has not objected to the request, which 

we now grant. (Evid. Code, § 452, subd. (c); Taiheiyo Cement U.S.A., Inc. v. Franchise 

Tax Bd. (2012) 204 Cal.App.4th 254, 267 fn. 5 [“Judicial notice may be taken of official 

acts of the executive department of this state[,]” including reports of administrative 

agencies.]) 
33. 

p. 24, fn. omitted.) Similarly, Flavin states that assessors use the cost method to value 

newly constructed property for supplemental assessment purposes, even where the 

property is income-producing, for “practical reasons.” (2 Flavin, Proposition 13 impact 

§ 17:30.) The same “practical reasons” require adoption of the cost method in this case. 

Chevron admits on appeal that a “well-by-well approach would be taxing[,]” but 

claims this is not what the trial court ordered. The trial court ruled that the correct 

valuation method was the income method and ordered the assessor to adopt a 

methodology that reflects the unique characteristics of oil and gas property. While the 

court explained this did not necessarily require reevaluation of the entire appraisal unit, it 

did state the assessor must evaluate whether new wells add supplemental value, such as 

increased production, extraordinary out of cycle investment, the acquisition of previously 

unattainable reserves, or new technology, to determine how the well affects the 

continuing future net income stream from the appraisal unit reduced to present value. In 

remanding the matter to the Board, the court directed the Board to determine whether any 

supplemental assessments are appropriate under these principles. Chevron asserts the 

ruling “left open the possibility that a mass appraisal technique could be used or that the 

value of new wells could be judged year-by-year for each field.” 

But, as Kern points out, Chevron’s “mass appraisal” approach probably would 

violate section 75.11, subdivision (c), which provides for a “net supplemental 

assessment” in addition to the individual assessments occasioned by each item of new 

construction.12 Chevron’s claim that the trial court’s ruling may not require the assessor 

to undertake individual assessments for each new well is therefore unfounded. 

 12 Section 75.11, subdivision (c) provides, in pertinent part: “If there are . . . 

multiple completions of new construction . . . with respect to the same real property 

during the same assessment year, then there shall be a new supplemental assessment 

placed on the supplemental roll, in addition to the assessment pursuant to subdivision (a) 

or (b).” (See also, 1 Flavin, Supplemental roll § 12:9 [“If there are . . . multiple 
34. 

In sum, we conclude that the Board did not act arbitrarily, in excess of its 

discretion, or contrary to the law when it approved the cost method of valuation the 

assessor used to issue supplemental assessments on the new wells. In other words, the 

assessor’s use of the cost method was reasonable and we have no choice but to accept the 

Board’s decision. 

II. Chevron’s Cross-Appeal 

In its cross-appeal, Chevron challenges only the Board’s and trial court’s rulings 

with respect to its so-called “replacement wells.” Chevron asserts the replacement wells 

are not subject to supplemental assessment for three “technical” reasons: (1) “the 

supplemental assessment of replacement wells and their fixtures is not just a change in 

timing as required by law, but is an assessment of an entirely new class of property”; 

(2) the replacement wells constitute “repair and maintenance” because they merely 

maintain production; and (3) “certain wells were lost and replaced as the result of 

misfortune.” 

A. Assessment of a New Class of Property 

Chevron first asserts that issuing supplemental assessments on replacement wells 

taxes an entirely new class of property, namely “well field improvements that are 

separately valued and then added to the sole assessable interest, the right to take 

minerals.” Chevron complains that instead of allocating a portion of the field value to 

wells to determine the residual value of minerals, the assessor adds the cost of the wells 

to the tax roll without any analysis of the purported new value contribution from the 

wells or regard for whether the wells will add new value in the next lien date appraisal. 

Chevron contends this is a new tax, not merely a change in assessment timing, and 

therefore the supplemental assessments of the replacement wells are void. 

 

completion dates for new construction, there must be a new supplemental assessment for 

each of the multiple occurrences.”]) 
35. 

This argument essentially encompasses the same arguments Chevron made in 

Kern’s appeal concerning the appropriate valuation method of the new wells – arguments 

which we have already rejected. The premise of Chevron’s argument, that the assessor 

added the cost of the wells without any analysis of the purported value of the new 

construction, is faulty because, as we explained above, it ignores the fact that the 

appraisal units for lien date assessment and supplemental assessment are different: 

pursuant to Rule 468, on the lien date the appraisal unit is the oil and gas interest as a 

whole, while the appraisal unit for supplemental assessments under Rule 463(a) is only 

the new construction, namely the replacement wells. Moreover, as we have already 

explained, the assessor’s experts testified the new wells add value to the properties with 

which they are associated. As the Board found, “a potential buyer for the property would 

pay more for the property with a completed new well than if that buyer took the property 

without the well and had to incur the expense of drilling it, reflecting value added by 

New Wells.” 

B. Repair and Maintenance 

Chevron next contends the replacement wells fall under the “normal maintenance 

and repair” exemption to supplemental assessments contained in Rule 463(b)(4). 

As pertinent here, Section 70 defines “new construction” as “[a]ny addition to real 

property” and “[a]ny alteration of land or of any improvement, including fixtures” that 

have occurred since the last lien date. (§ 70, subd. (b).) Rule 463 explains these 

categories of “new construction” as follows: (1) “[a]ny substantial addition to land or 

improvements, such as adding land fill, retaining walls, curbs, gutters or sewers to land or 

constructing a new building or swimming pool or changing an existing improvement so 

as to add . . . to its square footage or to incorporate an additional fixture . . .”; (2) “[a]ny 

substantial physical alteration of land which constitutes a major rehabilitation of the land 

or results in a change in the way the property is used[,]” such as site development of rural 

land to establish a residential subdivision; and (3) “[a]ny physical alteration of any 
36. 

improvement which converts the improvement or any portion thereof to the substantial 

equivalent of a new structure or portion thereof or changes the way in which the portion 

of the structure that had been altered is used.” (Rule 463(b)(1)(2) & (3).) 

Rule 463(b)(4) further explains: “Excluded from alterations that qualify as ‘newly 

constructed’ is construction or reconstruction performed for the purpose of normal 

maintenance and repair, e.g. routine annual preparation of agricultural land or interior or 

exterior painting, replacement of roof coverings or the addition of aluminum siding to 

improvements or the replacement of worn machine parts.” The SBE defines 

“maintenance” as “the action of continuing, carrying on, preserving, or retaining 

something; it is the work of keeping something in proper condition. When performed on 

real property, maintenance is normal when it is regular, standard, and typical. Normal 

maintenance will keep a property in condition to perform efficiently the service for which 

it is used. [¶] In contrast to an addition, which constitutes an entirely new portion of real 

property, normal maintenance is the upkeep of existing real property. Normal 

maintenance will ensure that a property will experience a typical economic life.” 

(AH 502, p. 119.)13 While the effects of maintenance and repair may be reflected in the 

property’s market value estimate, the property retains its original base year value without 

any addition for the costs of the maintenance and repair. (AH 566, p. 6-6.) 

 13 The SBE further explains in AH 502 that replacements, i.e. “the substitution of 

an item that is fundamentally of the same type or utility for an item that is exhausted, 

worn out, or inadequate,” that are “made as part of normal maintenance are excluded 

from the meaning of new construction.” (AH 502, p. 119.) Examples of such items 

include re-plumbing corroded galvanized steel pipe with copper pipe, replacing a heating 

unit, repainting worn areas, and replacing bathroom fixtures, roofs, kitchen appliances, 

wood frame windows or wall or floor coverings. However, when replacements are so 

extensive as to make a building or fixture substantially equivalent to new, such as 

stripping an old house to its studs and rebuilding it from the foundation up, the work is 

considered new construction. (AH 502, p. 119.) 
37. 

Chevron contends the wells it has drilled “to maintain or continue existing 

production” constitute “normal repair and maintenance.” The Board, however, rejected 

this claim, finding that, as Colosi testified, “the drilling of an entirely new well . . . is not 

the equivalent of normal repairs and maintenance.” The Board explained the evidence 

showed Chevron “made no effort to replace or repair any portion of a pre-existing well, 

which might constitute normal repairs and maintenance. The replacement of casing or 

repairing of rods, tubing, pumps, or motors, or other portions of the well might be 

considered repairs and maintenance, if not all done at once. The construction of an 

entirely new well does not constitute repairs and maintenance.”14 Chevron does not 

challenge these factual findings or contend they are unsupported by substantial evidence. 

The Board further found the evidence reflected the new wells are “brand new 

wells, and do not constitute the reconstruction or repair [of] any existing wells.” Noting 

that pursuant to AH 566, Section 70 and Rule 463(b)(1)(3) & (5), extensive replacements 

which convert an improvement or fixture to the substantial equivalent of a new structure 

are assessable new construction, the Board explained that the construction and 

completion of a new well is not only the substantial equivalent of a new structure, 

improvement or fixtures, “it is a new structure with new improvements and fixtures.” 

The Board found persuasive that portion of AH 566 which states that when an “original 

well fails due to pressure decline, loss of permeability, or any reason other than calamity, 

any replacement well is ‘new construction’ and is subject to supplemental assessment 

upon completion.” (AH 566, p. 6-8.) 

We agree with the Board’s findings for the simple reason the replacement wells 

are not alterations to existing improvements that can be considered repairs or 

maintenance; instead, they are entirely new wells. Chevron’s employees who testified 

 14 The trial court likewise found that “[t]he construction and completion of an 

entirely new well does not constitute ‘normal maintenance and repair.’” 
38. 

concerning the operation of the fields at issue explained that replacement wells are drilled 

to replace a producing well and are drilled in the proximity of the existing well; the 

replacements are entirely new wells. The exception for repairs and maintenance applies 

when changes are made to an existing improvement, as shown by examples above. Here, 

no changes were made to the existing wells; instead, an entirely new well was drilled. 

Even if the replacement wells are a “regular, standard, typical” well-field practice, as 

Chevron asserts, they do not qualify as repair or maintenance because they are new 

structures. 

Chevron claims the wells are maintenance because wells are to an oil field as 

plumbing is to a building; therefore, Chevron reasons, replacing the wells is akin to 

replacing plumbing, which is clearly maintenance. We agree with the Board’s finding on 

this issue, namely that the contention “stretches the definition of normal repairs and 

maintenance well beyond its reasonable meaning.” In addition, as we have already 

concluded, this argument ignores the regulations defining the appraisal unit subject to 

supplemental assessment as the new construction, not the property as a whole. 

The Board further found that not all of the new wells were replacements because 

in many cases wells were drilled to not only replace a well that was damaged or incapable 

of efficient production, but also to substantially enhance the property’s economics and to 

reach and develop additional zones or producing horizons. Chevron contends this finding 

is overbroad, incomplete and unsupported by substantial evidence. We need not decide 

this issue however, because regardless of whether Chevron’s replacement wells access 

new reserves, the wells do not constitute repairs or maintenance. 

C. Calamity and Misfortune 

Section 70, subdivision (c), also provides an exemption for new construction 

undertaken to restore property damaged as a result of misfortune or calamity: if “real 

property has been damaged or destroyed by misfortune or calamity,” the timely 

reconstruction of the property that is substantially equivalent to the property before the 
39. 

damage or destruction is not included within the meaning of “newly constructed” or “new 

construction.” 

Chevron contends it is undisputed that a number of wells in the Lost Hills and 

Cymric oil fields were (1) damaged by subsurface land movement that sheared or 

distorted the well bores and casings, or were otherwise suddenly damaged, and 

(2) damaged beyond repair as a result of maintenance activity that went awry. Chevron 

asserts these wells were lost due to misfortune or calamity as those terms are used in 

section 70, and therefore they are not assessable new construction. 

The Board found this contention unsupported by the law or the facts in the case. 

Specifically, it found that pursuant to an opinion by the California Attorney General, 

63 Ops. Cal. Atty. Gen. 304 (1980), a disaster declaration from the Governor is required 

before the exemption for calamity and misfortune applies and no evidence was presented 

of such a declaration. The Board alternatively found, citing T.L. Enterprises, Inc. v. 

County of Los Angeles (1989) 215 Cal.App.3d 876 (T.L. Enterprises), that the wells at 

issue were not lost due to misfortune or calamity because Chevron anticipates the loss of 

wells on its properties due to physical and operating circumstances that existed on the 

properties for many years; it actually budgets for those losses annually with a “relatively 

good idea as to the number of wells they might lose each year”; the losses result from 

natural forces over a period of time; and, to some extent, the losses were not beyond 

Chevron’s control as they were caused by Chevron’s operating practices, which created 

subsidence and the loss of wells. The Board determined there was no basis to exclude 

them from assessment because the loss of wells was not sudden or unexpected, could be 

provided for and was not beyond Chevron’s control.15 

 15 Similarly, the trial court found: “Chevron could and did reasonably anticipate 

the loss of wells on each and all of its properties due to the physical and operating 

circumstances extant on such properties for a period of many years. The losses were all 

the result of natural forces over a period of time. For property tax purposes, property 
40. 

Chevron argues the Board erred because (1) section 70, subdivision (c), does not 

state that a disaster declaration from the Governor is required to qualify for the 

calamity/misfortune exemption, (2) there is insufficient evidence to support the Board’s 

finding that Chevron controlled the conditions that caused the losses, and (3) the Board 

failed to address the wells lost during maintenance. 

We need not decide whether a disaster declaration is required from the Governor 

because we conclude that, even if no declaration is required, Chevron has failed to show 

that the wells were lost due to misfortune or calamity within the meaning of section 70, 

subdivision (c). 16 

In T.L. Enterprises, supra, 215 Cal.App.3d 876, 877-879, the owner of an office 

building sought a refund of property taxes under section 170 due to damage to the 

building from differential expansion and settling of the underlying bedrock and fill that 

occurred over an eight-year period. The appellate court affirmed denial of the owner’s 

claim because the damage was not the result of “misfortune or calamity” within the 

meaning of sections 51, subdivision (d) and 170.17 (Id. at p. 881.) The court noted the 

 

damaged or destroyed by calamity or misfortune must be due to an extraordinarily grave 

event marked by great loss and lasting distress and affliction by an event that is out of the 

ordinary, unforeseeable and beyond the control of the taxpayer.” 

16 In light of our decision not to address the constitutional issues raised concerning 

whether a Governor-issued disaster declaration is required to claim exemption from 

supplemental assessment for calamity or misfortune, we deny as irrelevant both 

Chevron’s March 3, 2014 request and Kern’s March 17, 2014 request that we take 

judicial notice of legislative history materials concerning Proposition 13, which we 

deferred ruling on by our March 18, 2014 order. 

17 Section 170, subdivision (a) authorizes a county board of supervisors to enact 

an ordinance providing that a person whose “property was damaged or destroyed without 

his or her fault, may apply for reassessment of that property. . . . .[¶] To be eligible for 

reassessment the damage or destruction to the property shall have been caused by any of 

the following: [¶] (1) A major misfortune or calamity, in an area or region subsequently 

proclaimed by the Governor to be in a state of disaster. . . . [¶] (2) A misfortune or 

calamity. [¶] (3) A misfortune or calamity that . . . includes a drought condition such as 
41. 

objective of these statutes “is to afford financial relief to the owners of property 

physically damaged or destroyed by an unforeseeable occurrence beyond their control.” 

(Id. at p. 880.) After reviewing dictionary definitions and portions of the legislative 

history, the court held that “misfortune or calamity” require an “event out of the 

ordinary” and “an unusual incident, not a gradually deteriorating condition.” (Id. at 

pp. 880-881.) 

In so holding, the court looked to a federal case, Matheson v. Commissioner of 

Internal Revenue (2d Cir. 1931) 54 F.2d 537, 539, in which damage to inadequately 

sheathed pilings was found not to arise from casualty under federal tax law because “‘a 

“casualty” . . . is an event due to some sudden, unexpected, or unusual cause. Anything 

less than this renders it hardly distinguishable from depreciation from ordinary wear and 

tear which cannot be deducted by a taxpayer in the case of property that is not used in 

trade or business.’” (T.L. Enterprises, supra, 215 Cal.App.3d at p. 881.) The Court of 

Appeal noted that casualty is defined as “‘an unfortunate occurrence’ or ‘disaster,’” and 

explained that while “‘disaster, misfortune or calamity’ may include events not deemed a 

‘fire, storm, shipwreck or other casualty’ [citation], in the present circumstances the 

reasoning of Matheson v. Commissioner of Internal Revenue holds true. The loss to 

appellant’s building was due not to ‘disaster, misfortune or calamity,’ as required by 

section 51, subdivision (d), but rather to ‘the ordinary action of the elements upon a 

poorly constructed building.’” (T.L. Enterprises, supra, 215 Cal.App.3d at p. 881.) 

Chevron’s petroleum engineers testified that wells in the Lost Hills field can fail 

when casings snap due to earth movement that occurs when Chevron stops pulling out 

 

existed in this state in 1976 and 1977.” Section 51, former subdivision (d), provided in 

relevant part that “[i]f the property was damaged or destroyed by disaster, misfortune or 

calamity and the board of supervisors in the county in which the property is located has 

adopted an ordinance pursuant to Section 170, its assessed value is computed pursuant to 

Section 170.” 
42. 

fluid. The earth movement can occur either overnight or over a period of time. Lost 

Hills has more subsidence or reservoir movement than other fields, which is the main 

reason for well failures in that field. Chevron budgets for those well losses, although it 

does not know specifically which wells will fail. 

The predominate mechanism of well failure in the Cymric field is mechanical 

failure, due to broken well casings, which is caused by the bending action of the ground 

movement that creates shear force on the casings. These are sudden events that can 

happen overnight. The average life-to-failure of wells in the Cymric field is 

approximately seven years; Chevron attributes the short life to mechanical failure due to 

the shear forces placed on the well. Chevron knows that earth movement affects the 

wellbores and casings and that, at some point, that movement will cumulatively reach a 

point where the casing breaks. Chevron plans for these well failures by budgeting for 

replacement wells each year. Chevron’s engineers also testified that wells sometimes fail 

due to a “fish in the hole,” which occurs when something gets stuck in the well that one 

tries to “fish out of the hole” if possible. 

In its opening brief, Chevron argues only that the evidence shows the well losses 

resulting from geological shifts or maintenance mishaps are sudden, and that the Board’s 

finding it could control the well losses is unsupported by the evidence. But even if the 

well failures were sudden and Chevron had no control over them, the evidence cited 

above shows that the earth movements that caused the wells to fail were not unusual or 

out-of-the-ordinary events. As the court in T.L. Enterprises stated in rejecting the 

building owner’s contention that the damage to its building caused by earth movement 

was not a disaster, calamity or misfortune, “[a]ppellant has not shown that its loss was 

caused by [an out of the ordinary] occurrence. Although appellant undoubtedly considers 

the decrease in value a misfortune, it was the result of ordinary natural forces. Because it 

took place over a period of years appellant was not in the position of a victim of 
43. 

earthquake, flood, or fire: it could take steps to alleviate the consequences.” (T.L. 

Enterprises, supra, 215 Cal.App.3d at p. 880.) The same is true here. 

In its reply brief, Chevron asserts that because AH 566 provides at page 6-8 that 

“[i]n the case of a calamity, a replacement well drilled to recover the same petroleum as 

the original well would have recovered is not ‘new construction’[,]” it implies that casing 

ruptures and fishes in the hole are calamities. We fail to see the implication. As AH 566 

explains at page 6-7, a “replacement well” can refer to (1) “replacement of a well that 

failed due to an unexpected, calamitous event,” or (2) “replacement of a well that has 

suffered a decline in production due to things such as reduction in pressure available or a 

change in the relative permeability of the formation.” There is nothing in the discussion 

on these pages to suggest this is an exclusive list of the causes of well failure that might 

require a replacement well or that calamities necessarily include casing ruptures and 

fishes in the hole that are not due to unusual events. 

Chevron also points out that Bertholf agreed that these losses were calamities. 

While Bertholf did testify that he would consider “parted tubing and fishes in the hole” as 

“calamities,” this essentially was a legal opinion that was not binding on the Board. 

Chevron next challenges what it claims is Kern’s “phantom requirement that 

[Chevron] be completely free of fault in the episodes that caused well failures.” But Kern 

asserts no such thing. Instead, it argues that “regardless of whether the event is [] sudden 

or beyond the taxpayer’s control,” T.L. Enterprises “requires a showing that the 

precipitating event was ‘unforeseeable’ and ‘out of the ordinary.’” 

Finally, Chevron claims well losses are not foreseeable merely because it 

anticipates and plans for them, since no one knows precisely which wells will fail or how. 

It argues that despite the forecasted losses, each well lost is an unexpected calamity. But 

the fact that Chevron does not know which wells will fail does not mean that the failures 

are out-of-the-ordinary or unusual. Instead, that Chevron plans for the well failures 

shows that such failures are not unusual. 
44. 

In sum, we agree with the Board and trial court that wells were not lost due to 

calamity or misfortune within the meaning of section 70, subdivision (c), and therefore 

such wells are subject to supplemental assessment. 

DISPOSITION 

That portion of the judgment ordering the Board to set aside its April 5, 2010 

decision in the administrative proceedings entitled In the Assessment Appeals of Chevron 

USA, Inc. and remanding the matter to the Board for reconsideration of the 

appropriateness of the supplemental assessments is reversed. The superior court is 

directed to enter judgment for the County of Kern. In all other respects, the judgment is 

affirmed. The County of Kern is awarded its costs on appeal. 

 _____________________ 

Gomes, J. 

WE CONCUR: 

 _____________________ 

Hill, P.J. 

 _____________________ 

Cornell, J.