Louisiana Administrative Code › Title 61 - REVENUE AND TAXATION › Part V - Ad Valorem Taxation › Chapter 9 - Oil and Gas Properties › Section V-907 - Valuation of Oil, Gas, and Other Wells

Current through Register Vol. 50, No. 6, June 20, 2024
A. The
				valuation procedure below, which provides that the presence of oil or gas or
				the production thereof may be included in the methodology to determine the fair
				market value of an oil or gas well for ad valorem taxes, covers only that
				portion of the well, including the well's associated leasehold equipment or
				"production train" subject to ad valorem taxation. Further, the valuation
				procedure below provides that no further or additional tax or license shall be
				levied or imposed on oil, gas or sulphur leases or rights and no additional
				value shall be added to the assessment of land due to the presence of oil, gas
				or sulphur or their production therefrom.
B. The presence of oil or gas, or the
				production thereof, is to be included in the year-by-year discounted cash flow
				(DCF) model described below and as adopted by the Louisiana Tax Commission to
				determine the fair market value of an oil or gas well and its associated
				leasehold equipment for ad valorem tax purposes in Louisiana.
1. Production Forecast-oil and gas or other
				hydrocarbon production history for the well, lease or facility represented by
				the LUW (Lease, Unit, or Well) code is to be analyzed by the assessor for
				relevant trends and patterns established as of January 1 of the current tax
				year, using Decline Curve Analysis or other accepted empirical method. A
				commensurate forecast of future production, or production potential,
				attributable to only the working interest owner(s), is to be made by the
				assessor as of January 1 of the current tax year. This production forecast will
				consist of a Start Rate as of January 1 (daily average barrels or mcf) and up
				to five exponential percentage decline rates for designated periods of time in
				the DCF. Alternatively, a hyperbolic forecast formula may be used when
				appropriate.
2. Price Forecast-the
				forecasted oil and gas or other hydrocarbon production amounts for the well,
				lease or facility represented by the LUW code, attributable to the working
				interest owner(s), are to be factored by an oil or gas or other hydrocarbon
				price forecast as of January 1 of the current tax year as annually determined
				by the Tax Commission to result in a forecasted gross revenue stream
				attributable to the working interest owner(s). This price forecast is based on
				the following guidelines:
a. the forecasted
				oil and gas or other hydrocarbon price forecast shall begin with the
				immediately previous calendar year's monthly average price (starting price)
				received by the working interest owner(s) for the oil and gas or other
				hydrocarbons produced and sold from the lease or facility represented by the
				LEW code on the open market to an unaffiliated third party or otherwise at a
				market-oriented rate. The source of this starting price shall correspond to
				severance tax data as reported by the operator to the Louisiana Department of
				Revenue;
i. this previous year average price
				may vary by property;
ii. if oil
				and gas or other hydrocarbons were either not produced or not sold for one or
				more months of the previous calendar year, the average price for which similar
				oil and gas from comparable interests was selling during that month is to be
				used;
b. the previous
				year average price is to be increased or decreased, whichever is appropriate,
				for year 1 of the discounted cashflow analysis with a Price Adjustment Factor
				which will be commensurate with the percentage increase or decrease,
				respectively, as indicated by the forecasted price in the Energy Information
				Administration (EIA) January STEO (Short-Term Energy Outlook) report for the
				current tax year, relative to the actual price shown for the immediately
				previous calendar year in the same publication. These two prices can be
				referenced in the report's Table 2. Energy Prices:
i. for oil, reference "West Texas
				Intermediate Spot Average" (dollars per barrel);
ii. for natural gas, reference "Henry Hub
				Spot" (dollars per million Btu);
iii. this price adjustment factor is to be
				used in the appraisal of each property, to the extent the property's forecasted
				cash flow extends to year 1;
c. the year 1 price used in the DCF appraisal
				is to be either increased or decreased, whichever is appropriate, in four more
				or less equal percentage increments to a year 5 price considered to be
				representative to a long-term average price available for the sale of oil and
				gas from the property as calculated with reference to the last 20 years of
				historical oil and gas price data from the Energy Information Administration
				(EIA);
i. the long-term average price is to
				be calculated after removal of outlier prices, if any, within the 20-year
				range, defined as any historical price outside of one standard deviation from
				the simple average.
ii. these
				percentages are to be used in the appraisal of each property, to the extent the
				property's forecasted cash flow extends to either years 2, 3, 4, or
				5.
d. the year 5 price
				used in the DCF appraisal is to be held flat for all years thereafter in the
				DCF, to the extent the property's forecasted cash flow extends past year
				5;
e. the five oil and gas price
				forecast percentages discussed above, along with the zero percent escalation
				for any years in the DCF past year 5, together constitute the "price forecast
				scenario" as established by the Tax Commission and are to be used in the DCF
				appraisal of each property. This oil and gas price forecast scenario will be
				published on the LTC website.
3. Expense Forecast-in the DCF appraisal of
				the property, the forecasted gross revenues attributable to the working
				interest owner(s) are to be reduced for the allowance of reasonable and
				defendable direct costs of operation, as well as, all applicable state and
				local tax burden, to result in a forecasted net income stream attributable to
				the working interest owner(s) of the specific property being appraised. This
				cost allowance should represent the amount and timing of recurring expense,
				including overhead, along with any applicable non-recurring (capital)
				expense(s), typical to the area and similar operations and not necessarily the
				exact expenses incurred in any previous year, deemed reasonable and necessary
				for the property to achieve the forecasted oil and gas production amounts:
a. an assessor should make effort to obtain
				and consider actual historical expenses being incurred by the operator as
				documented on expense statements required to be provided to the assessor
				pursuant to
				§903.C Absent this
				information, an assessor may assume a minimal amount and/or otherwise rely on
				their own judgement using best information available;
b. the increase or decrease of direct
				operating expense allowance in the cash flow appraisal will correspond to the
				increase or decrease in forecasted price, as established by the Tax
				Commission;
c. the percentage
				increase or decrease for each forecasted year of the cash flow appraisal will
				be calculated at 1/3 of the percentage increase or decrease in price for that
				year relative to the previous year price, referencing the price of the
				property's primary hydrocarbon being produced;
d. the provision for increase or decrease of
				the direct operating expense allowance does not pertain to separate allowance,
				if any, of capital expense(s) in the property's cash flow
				appraisal.
4. Discount
				Rate-the forecasted net income amounts in the property's DCF appraisal are to
				be discounted (reduced) to present day worth by application of a discount
				factor for each year of the forecasted cash flow commensurate with an
				appropriate discount rate:
a. the discount
				rate may vary by property;
b. base
				discount rates to account for the time cost of money and general industry risk
				are to be established by the Tax Commission. These discount rates separately
				extend to oil wells vs. gas wells and are shown in Table 907.C-2. This is a
				minimum rate whereas the assessor may use a higher rate to account for
				additional property-specific risks and/or other considerations as appropriate
				for the determination of each property's market value;
c. these discount rates applies only to the
				forecasted net income of the DCF appraisal. A separate discount rate is
				established by the Louisiana Tax Commission to be applicable to valuation of
				the oil and gas wells' associated leasehold equipment (production train) and is
				shown in Table 907.C-2.