Opinion ID: 2629624
Heading Depth: 1
Heading Rank: 7

Heading: Heavy hydrocarbons

Text: [¶ 31] ExxonMobil also points out that the Black Canyon facility removes heavy hydrocarbons from the gas stream. When ExxonMobil began operating the Black Canyon facility, it learned that the raw gas contained unexpected concentrations of heavy hydrocarbons. These heavy hydrocarbons exit the wellhead in a gaseous phase, but later separate out as solids. [4] The solids began to foul and contaminate the equipment at Black Canyon, as well as the pipeline to Shute Creek and the processing equipment there. The accumulating heavy hydrocarbon solids threatened to render the entire project inoperable. [¶ 32] ExxonMobil began cleaning the heavy hydrocarbon deposits from the equipment by hand, but found that to be an unsatisfactory long-term solution to the problem. Later, ExxonMobil developed and installed an activated carbon filtration system that adsorbs the heavy hydrocarbons and removes them from the gas stream. In 2003, ExxonMobil designed and installed a larger, improved carbon filtration system employing two large tanks, each holding 10,000 pounds of activated carbon, to adsorb and capture the heavy hydrocarbons. After the heavy hydrocarbons are removed from the gas stream at Black Canyon, they are disposed of by burning. [¶ 33] ExxonMobil contends that the removal of heavy hydrocarbons at Black Canyon constitutes processing of the gas stream. The carbon filtration system performs the processing function of adsorption, and it changes the physical and chemical characteristics of the gas stream. All of these are elements of the statutory definition of processing. Wyo. Stat. Ann. § 39-14-201(a)(xviii). The removal of heavy hydrocarbons enhances the value and marketability of the gas stream, because failing to remove them from the gas stream could cause the entire LaBarge Project to fail and render the gas stream worthless. Most significantly, it appears that the removal of heavy hydrocarbons is an intended and specialized purpose of the facility. It is done with equipment separate and apart from the TEG dehydrator, employing specially designed equipment constructed for the very purpose of removing the heavy hydrocarbons permanently from the gas stream. All of these factors support ExxonMobil's contention that Black Canyon fits the definition of a processing facility as we interpreted that term in Williams. [¶ 34] The Department contends that the removal of heavy hydrocarbons does not constitute processing because the amount of heavy hydrocarbons removed is so small. But as we previously stated, the amount of carbon dioxide and hydrogen sulfide removed by the Black Canyon facility is not dispositive in determining whether it is a processing facility. Similarly, we conclude that the amount of heavy hydrocarbons removed at Black Canyon is not the determining factor. We note again that failure to remove the heavy hydrocarbons from the gas stream could force the LaBarge Project to shut down, which indicates that the removal of heavy hydrocarbons cannot be considered trivial or incidental. In sum, the removal of heavy hydrocarbons is a specialized and intended purpose of the Black Canyon facility, it changes the physical characteristics, and it enhances the value of the natural gas. Based on the Williams interpretation, Black Canyon appears to be a processing facility as that term is used in the second sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv). [¶ 35] The Department also contended, and the Board agreed, that processing occurs only when saleable products are removed from the gas stream. The heavy hydrocarbons removed at the Black Canyon facility are not sold as a product, but are disposed of by burning. On this basis, the Board found that Black Canyon does not remove any saleable materials from the gas stream, and concluded that Black Canyon is not a processing facility. [¶ 36] The Board inferred this saleable products test from our decision in Williams. In that case, as part of our effort to interpret the term processing facility, we considered the statutory definition of the term natural gas, which for the purposes of taxation . . . includes products separated for sale or distribution during processing of the natural gas stream. Williams, ¶ 18, 107 P.3d at 185. We took this language to suggest that the legislature understood processing would separate certain products from the natural gas stream. Id. The Board read this to mean that processing occurs only when a valuable or saleable product is removed from the gas stream. The heavy hydrocarbons removed at Black Canyon are not sold or distributed, and so applying the saleable products test, the Board determined that Black Canyon is not a processing facility. [¶ 37] We reject this reading of our decision in Williams. The statutory definition of processing refers to enhanc[ing] the marketability of the stream, or enhanc[ing] the value of the separate components of the stream. Wyo. Stat. Ann § 39-14-201(a)(xviii). Removing the heavy hydrocarbons at Black Canyon clearly enhances the marketability and value of the gas stream. Otherwise, ExxonMobil would have no reason to remove the heavy hydrocarbons. While the statutory definition of natural gas does include products separated for sale or distribution, that could as easily refer to the remaining gas stream, which is separated and sold or distributed, as to the heavy hydrocarbons. Neither the statutory definition nor our discussion in Williams provides support for the saleable products test applied by the Board. [¶ 38] Further, the Department has not previously applied the saleable products test as it did here. Prior to the hearing, one of the Department's witnesses was deposed, and asked to define a processing facility. He stated that there has to be a deliberate attempt to remove components from the gas stream, either valuable or nonvaluable components, that are items of natural gas other than water vapor. If the heavy hydrocarbons are considered nonvaluable components of the gas stream, Black Canyon's deliberate removal of them would constitute processing under this definition. At the hearing, however, this same witness testified that at a processing facility, there must be a deliberate attempt to change the physical, chemical characteristics to make . . . the natural gas or the product more marketable and available for sale and distribution. With this change to its definition, the Department asserted that a processing facility must remove a saleable product from the gas stream. While we generally defer to an agency's interpretation of the statutes it administers, an agency's statutory interpretation is entitled to little deference when it is contrary to prior practice and precedent. RME, ¶ 44, 150 P.3d at 689. Moreover, Black Canyon qualifies as a processing facility even under the Department's second definition, because its removal of heavy hydrocarbons makes either the natural gas or the product more marketable. Black Canyon is not disqualified as a processing facility just because the heavy hydrocarbons it removes are not sold. [¶ 39] We are also persuaded by ExxonMobil's argument that a saleable products test could lead to absurd results. At Shute Creek, ExxonMobil removes sulfur and carbon dioxide from the gas stream. Historically, there have been times when sulfur and carbon dioxide have had essentially no commercial value. During such times, ExxonMobil did not sell these components, but reinjected the sulfur back into the ground and vented the carbon dioxide to the atmosphere. See Amoco Prod. Co. v. State, 751 P.2d 379, 380 (Wyo. 1988). Applying the saleable products test as the Board did here, the Department could treat Shute Creek as a processing facility when it is selling sulfur and carbon dioxide, but not when it is reinjecting or venting those components. Shute Creek's classification as a processing facility should not fluctuate with the market, and for this additional reason, we reject the saleable products test used by the Board.
[¶ 40] Our review of the Board's decision in light of the interpretations discussed in Williams yields mixed results. It is a close question because of the significant differences between the Black Canyon facility and the typical Type 1 dehydrator, but we are inclined to agree with the Department that Black Canyon fits the definition of an initial dehydrator. We are not convinced that Black Canyon is a processing facility based on its temporary removal of carbon dioxide and hydrogen sulfide from the gas stream, and yet we are inclined to agree with ExxonMobil that Black Canyon fits the definition of a processing facility because of its deliberate removal of heavy hydrocarbons. These contradictions require us to continue with our analysis.
[¶ 41] In Williams, the Board expressly relied on customary usage in the industry to help interpret the term processing facility, and less explicitly, to help define the term initial dehydrator. Williams, ¶ 17 n.2, 107 P.3d at 185 n.2. In this case, ExxonMobil presented expert witnesses who testified to the Board that, within the petroleum industry, Black Canyon would not be considered an initial dehydrator. They testified that the Black Canyon facility has all of the functional attributes of a natural gas processing facility as understood in the industry, and would be considered a processing facility under customary usage. The Department presented no industry experts to counter or disagree with this testimony. [¶ 42] The Department asserted that ExxonMobil's expert testimony was not relevant. The Board agreed, ruling that the exhibits and testimony presented by Dr. Enick and [Mr.] MacFarland might be appropriate if the question was how to characterize Black Canyon in a technical and engineering context, [but] such evidence does not shed any particular light on, nor significantly assist in the task at hand, which is to determine the Wyoming Legislature's intent in adopting . . . the term `processing facility.' This ruling by the Board contravenes well-established precedent. [W]hen construing technical terms contained within statutes, we look to the meaning ascribed to those terms in the applicable field. Williams, ¶ 19, 107 P.3d at 185. Indeed, for technical terms, particular weight may be given to industry usage: If a word in a statute has a usual meaning and a technical meaning, the technical meaning is preferred as stated in § 8-1-103 W.S.1977, Cum.Supp.1987, which provides: (a) The construction of all statutes of this state shall be by the following rules, unless that construction is plainly contrary to the intent of the legislature: (i) Words and phrases shall be taken in their ordinary and usual sense, but technical words and phrases having a peculiar and appropriate meaning in law shall be understood according to their technical import. Amoco Prod. Co., 751 P.2d at 383 (emphasis supplied in original; some internal punctuation omitted). [¶ 43] The industry's characterization of Black Canyon as a processing facility, even if in the technical or engineering context, is highly relevant in determining what the legislature intended the terms initial dehydrator and processing facility to mean. The Board erred in refusing to consider this evidence. This error is especially troublesome because this evidence was essentially undisputed. The Department presented no industry expert to contest ExxonMobil's testimony that within the petroleum industry, Black Canyon would be considered a processing facility and not an initial dehydrator. [¶ 44] The Department did present evidence that ExxonMobil has historically referred to Black Canyon as a dehydrator and to Shute Creek as a processing facility. This has been done in internal planning documents, and in documents submitted to regulatory agencies. We agree with the Department's contention that these historical references provide evidence that Black Canyon is a dehydrator. That evidence is of little use here, however, because it is undisputed that Black Canyon is a dehydrator. The question before the Board, and now before us, is whether Black Canyon is an initial dehydrator or a processing facility as those terms are used in Wyo. Stat. Ann. § 39-14-203(b)(iv). [¶ 45] Administrative agencies have broad discretion in deciding to admit or exclude evidence. Sinclair Oil Corp. v. Wyoming Public Service Comm'n, 2003 WY 22, ¶ 41, 63 P.3d 887, 901 (Wyo. 2003). In this case, however, the Board admitted the expert testimony into evidence, and used it as the basis for detailed findings of fact. It then ruled that the evidence was irrelevant and could be ignored. This was not a discretionary decision to admit or exclude evidence, but a legal decision about how the evidence could be used. We review this legal question de novo, and have an obligation to correct the Board's legal error. Dale, ¶ 26, 188 P.3d at 561. [¶ 46] Evidence that the industry would consider Black Canyon a processing facility rather than an initial dehydrator is a strong factor in ExxonMobil's favor. Still, we are left with various plausible interpretations of the statutory language. Black Canyon seems to fit the definition of an initial dehydrator as interpreted in Williams, but it is not an initial dehydrator as that term is understood in the petroleum industry. Black Canyon may not be a processing facility because it removes carbon dioxide and hydrogen sulfide from the gas stream, but it may be because it removes heavy hydrocarbons. A statute is ambiguous if it is vague or uncertain and subject to varying interpretations. Allied-Signal v. Wyoming State Bd. of Equalization, 813 P.2d 214, 219-220 (Wyo. 1991). At this point in our analysis, we must conclude that the statutory terms initial dehydrator and processing facility, as used in Wyo. Stat. Ann. § 39-14-203(b)(iv), are ambiguous. This same conclusion has previously been suggested by the Board. Williams, ¶ 34, 107 P.3d at 189.
[¶ 47] Because the statute is ambiguous, we rely upon principles of statutory construction in order to ascertain the legislative intent. Qwest, ¶ 8, 130 P.3d at 511. Two principles of statutory construction are particularly useful in this case. First is a principle of construction applicable to taxation statutes: Tax statutes are to be construed in favor of the taxpayer and are not to be extended absent clear intent of the legislature. Chevron U.S.A., Inc. [ v. State ], 918 P.2d [980,] 985 [(Wyo. 1996)]. In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government and in favor of the citizen. Amoco Production Co. v. Dept. of Revenue, 2004 WY 89, ¶ 18, 94 P.3d 430, 438 (Wyo. 2004). Thus, taxes may not be imposed by any means other than a clear, definite and unambiguous statement of legislative authority. Chevron U.S.A., Inc., 918 P.2d at 984; Amoco Production Co., ¶ 18[, 94 P.3d at 4383-9]. See also Wyo. Const. art. 15, § 13 (stating no tax shall be levied, except in pursuance of law, and every law imposing a tax shall state distinctly the object of the same, to which only it shall be applied.). Qwest, ¶ 9, 130 P.3d at 511-12 (paragraph breaks omitted). Construing the statute in favor of the taxpayer inclines us toward ExxonMobil's position that Black Canyon is not an initial dehydrator, but is a processing facility, as those terms are used in Wyo. Stat. Ann. § 39-14-203(b)(iv). [¶ 48] The second useful principle of statutory construction is this: In ascertaining the legislative intent in enacting a statute . . . the court . . . must look to the mischief the act was intended to cure, the historical setting surrounding its enactment, the public policy of the state, the conditions of the law and all other prior and contemporaneous facts and circumstances that would enable the court intelligently to determine the intention of the lawmaking body. Qwest, ¶ 8, 130 P.3d at 511, quoting Petroleum Inc. v. State Bd. of Equalization, 983 P.2d 1237, 1240 (Wyo. 1999). In the case before us now, the statute's historical setting and the general public policy regarding severance taxes provide helpful insight into what the legislature intended when it enacted the statute at issue. [¶ 49] The severance tax is imposed at the point where the production process is completed. Wyo. Stat. Ann. § 39-14-203(b)(ii). Historically, the term production refers to the severance of minerals from the ground. State v. Pennzoil Co., 752 P.2d 975, 979 (Wyo. 1998). Accordingly, the severance tax was traditionally imposed on the value of the mineral at the point where it is severed from the ground. Petra Energy, Inc. v. Department of Revenue, 6 P.3d 1267, 1271 (Wyo. 2000). For natural gas, severance is generally considered to occur at the wellhead. See Union Pac. Resources Co., 839 P.2d at 360-61. Accordingly, it has been said that the basic concept of the severance tax is valuation at the wellhead. J. Ray McDermott & Co. v. Hudson, 370 P.2d 364, 367 (Wyo. 1962). The legislature may choose to adjust or clarify the precise point of valuation, and over the years it has enacted legislation to do that. But unless the statute includes a clear expression of legislative intent to shift the point of valuation away from the wellhead, the statutory language should be construed to conform as nearly as possible to the basic severance tax concept of valuation at the wellhead. [¶ 50] The Black Canyon facility is separated, physically and functionally, from the wellheads of the LaBarge Project. It does not play a part in removing the gas from the ground, but instead in handling the gas after it has been removed from the ground and gathered at the Black Canyon facility. On this basis, it seems inappropriate to consider Black Canyon, as the Department urges, as part of the production process like a typical, small, Type 1 dehydrator. It seems more appropriate to consider Black Canyon, as ExxonMobil urges, to be part of the post-production operations, more akin to the larger and more complex Type 2 dehydrators. ExxonMobil's position in this litigation places the point of valuation closer to the wellheads, while the Department's position pushes it further downstream. Absent a clear expression of legislative intent to depart from the basic severance tax concept of valuation at the wellhead, we must construe the statute in harmony with that concept. Based on these considerations, our construction of Wyo. Stat. Ann. § 39-14-203(b)(iv) must be that the legislature's intent was not to classify Black Canyon as an initial dehydrator as that term is used in the first sentence, but rather to consider Black Canyon a processing facility as that term is used in the second sentence of the statute. [¶ 51] Based on both of these principles of statutory construction, we are ultimately persuaded that Wyo. Stat. Ann. § 39-14-203(b)(iv) must be construed as urged by ExxonMobil. We therefore determine that ExxonMobil's Black Canyon is not an initial dehydrator, as that term is used in the first sentence of Wyo. Stat. Ann. § 39-142-03(b)(iv), and the correct point of valuation for severance taxes is not the outlet of the Black Canyon facility. Black Canyon is instead a processing facility as that term is used in the second sentence of the statute, and the proper point of valuation is at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first. [¶ 52] ExxonMobil urges us to choose among these three options. It asserts that there is a custody transfer meter located at each wellhead, so the proper point of valuation is at the inlet to these custody transfer meters. The record before us, however, does not establish with sufficient certainty whether those meters are custody transfer meters or volume meters. If they are volume meters, they are not the proper points of valuation. See Amoco Prod. Co., ¶ 31, 94 P.3d at 443. We are unable to resolve this issue based on the record before us, and will remand this case to the Board to determine the correct point of valuation in accordance with this opinion.