Opinion ID: 2508084
Heading Depth: 1
Heading Rank: 6

Heading: Producer

Text: [¶17] In its second issue, Lance argues that the term producer as set forth in § 39-14-205(f) includes both working interest owners who are operators and take-in-kind interest owners who report their own production and pay taxes on that production. DOR contends the term producer unambiguously refers only to the entity that physically extracts the oil. DOR seems to infer that the term producer is analogous to the term operator. DOR also asserts that the legislature's use of the word producer with respect to the trigger price, but use of the term taxpayer later in the statute, indicates the legislature was making a distinction between these two terms. Therefore, DOR argues that every producer is a taxpayer, but all taxpayers are not producers. [¶18] Upon review of the language used by the legislature in § 39-14-205(f), we conclude the term producer is ambiguous and when construed in context includes a working interest owner who receives a price for its production. SBOE disagreed with Lance's suggestion that producer meant the same thing as taxpayer. SBOE contended that by using two different terms, the legislature meant to refer to two different entities. We do not suggest that producer and taxpayer are interchangeable, but only that producer in this context means an owner that receives a price for its new production. This interpretation does not render the word taxpayer used within the latter portion of the statute meaningless, as suggested by SBOE. That reference is to the entity claiming the deduction and if the oil or gas qualifies for an exemption because of the price for which it is sold, all owners of that production are taxpayers who could claim the deduction. The term producer is simply used to determine when an exemption is available, not who is entitled to the exemption. [¶19] In interpreting statutes, we are governed by the fundamental rule that the role of the courts is to give effect to the plain meaning of unambiguous terms chosen by the legislature. Union Pacific Resources Co. v. Dolenc, 2004 WY 36, ¶13, 86 P.3d 1287, ¶13 (Wyo. 2004). If a statute is unambiguous, we need not apply the traditional rules of statutory construction. Id. Whether a statute is ambiguous is a question of law. Id. We conclude DOR and SBOE were incorrect in concluding the term producer, as used by the legislature in this context, is unambiguous. The best evidence of this mistaken conclusion is DOR's need to resort to various rules of statutory construction in order to arrive at the meaning it ascribes to the term. [¶20] An ambiguous statute is one whose meaning is uncertain because it is susceptible to more than one interpretation. Allied Signal v. State Board of Equalization, 813 P.2d 214, 219 (Wyo. 1991) ; State Board of Equalization v. Tenneco, 694 P.2d 97, 100 (Wyo. 1983). A producer could mean one who owns a working interest in oil and gas, invests in the drilling of wells to produce that resource, and sells that production to a third party, thus receiving a price. Producer could also mean the party who operates the well and is responsible for physically bringing the oil to the surface. The term producer is not defined in the taxation statutes or DOR's regulations. Nor is it a technical term in the oil and gas industry such that it has a well-developed meaning. [¶21] In the development and production of any oil and gas well, various actors play a part: the lessor as the owner of the oil and gas estate who usually retains a royalty interest; the lessees who each have the right to drill and produce the resource and are referred to as the working interest owners; the operators of the well who are usually, but not always, one of the working interest owners; and the purchasers of the production. In many cases, others may have an interest in the revenue produced by the well, although no control over its operation, such as owners of overriding royalty interests and production payments. Most wells involve multiple working interest owners each owning a percentage share of the leasehold estate. Any working interest owner can decide to drill a well and the other working interest owners must either consent and pay their share, or go non-consent and, if the well is productive, their share of the expenses plus a penalty will be deducted from their share of the revenue. Wyo. Stat. Ann. § 30-5-109(g) (LexisNexis 2003). Working interest owners usually contract through operating agreements to have one such owner conduct the day-to-day operations of the well. 27A Rocky Mountain Mineral Law Institute , Cry Wolf: Sherman & Clayton Acts, p. 21-23 (Matthew Bender 1982 ). Most operating agreements provide that individual working interest owners are responsible for disposing of their share of production and for paying the required taxes and royalties due on that production. 6 Walter L. Summers , Oil and Gas, Ch. 41, § 1328, p. 13 (West 1967 ); 27B Rocky Mountain Mineral Law Institute , Oil and Gas Operations, p. 1665. If an owner fails to take in kind or make arrangements to dispose of its proportionate share, the operator may either purchase the oil and gas or sell it to others. Id. In a typical operating agreement, no one is delineated as the producer. [¶22] The statutes governing the taxation of oil and gas define only one of these actors, e.g. purchaser which means first purchaser who acquires the produced crude oil, lease condensate or natural gas from the taxpayer for value. Wyo. Stat. Ann. § 39-14-201(a)(xvi) (LexisNexis 2003). DOR's rules and regulations define operator as any person responsible for the day-to-day operation of a mine or oil and gas property by reason of contract, lease or operating agreement or ownership of an unleased producing mine or well operated by the owner thereof. Dept. of Rev. Rules, Ch. 6, § 4(j). A dictionary of the technical meaning of terms used in the oil and gas industry recognizes that the term producer can include, an operator who owns wells that produce oil or gas, a person who owns or is entitled to a share of production or the proceeds thereof and the `operator' of a well or wells. Howard R. Williams, & Charles J. Meyers, Manual of Oil and Gas Terms, 846 (llth Ed. 2000). Thus, in the oil and gas industry, the term producer can mean two different entities, an owner who operates wells or an owner who simply is entitled to a share of the production. [¶23] While the oil and gas severance tax statutes do not define producer, the statutes governing oil and gas production do. Wyo. Stat. Ann. § 30-5-101(vi) (LexisNexis 2003) defines the term as the owner of a well or wells capable of producing oil and gas or both. The term owner is further defined as the person who has the right to drill into and produce from a pool and to appropriate the oil and gas he produces therefrom either for himself or others. Wyo. Stat. Ann. § 30-5-101(v) (LexisNexis 2003). [3] While this definition does not directly control the meaning of the term as it is used in the tax statutes, it is certainly reasonable for us to assume the legislature was aware of it and understood how the term was used in the regulation of the industry as a whole at the time it adopted the incentive statute. Both Barrett and Lance would obviously qualify as a producer under these definitions. [¶24] Without a statutory definition in the tax statutes themselves, and given the various possible meanings within the industry, and the use of the term in the general oil and gas statutes, the conclusion is unavoidable that the term producer in this context is ambiguous. Applying the rules of statutory construction to this ambiguous term, we must first look at the context in which the term is used. Board of County Comm'rs v. City of Cheyenne, 2004 WY 16, ¶27, 85 P.3d 999, ¶27 (Wyo. 2004). Producer is used to describe the price that serves to trigger the tax exemption. It would appear the legislature intended the trigger price to be that price received by any producer of oil or gas from the well in question. Certainly, the legislature was aware that different owners could receive different prices for their share of the production. Had it intended only one producer's price should govern the exemption for all owners, it could have said so. DOR worries that such an interpretation could allow a non-operating working interest owner to receive an exemption while the operating working interest owner did not. That is certainly true, but it is likewise true, as recognized by the SBOE, that using only the operating working interest owner's price as the trigger, as suggested by DOR, could allow a non-operating, take-in-kind working interest owner who was obtaining a price higher than the trigger price to receive an exemption anyway. We find it more likely that the legislature intended that only owners receiving less than the trigger price should be entitled to an exemption, rather than intending that an owner receiving a price higher than the trigger price should get an exemption simply because the operating owner received a price lower than the trigger price. [¶25] This conclusion is consistent with the apparent purpose of the statute to encourage those considering investing in oil well drilling to do so even in the face of low market prices. All working interest owners (other than those choosing the non-consent option) participate in the decision to drill a particular well, not just the operator. Operators often change depending on the business considerations of all the owners. In fact, in this case, Lance drilled 298 out of the 400 wells in question and was the original operator of most of the wells until July of 1999, when Barrett was chosen as the operator. DOR's inference that a take-in-kind owner is somehow not involved in the investment decision, and that the trigger price would not operate as an incentive to that owner, is simply unsupportable. [¶26] In a somewhat confusing analysis, DOR seems to suggest that because the severance tax is imposed on the privilege of extracting the mineral, somehow that fact requires the conclusion that only the operating owner severs the mineral and therefore, is the producer. However, both the statutes, and the DOR rules implementing them, provide that the owner of the mineral, not the operator, is responsible for paying the severance taxes. Section 39-14-203(c)(ii) provides: In the case of severance taxes, any person extracting crude oil, . . . and any person owning an interest in the crude oil, . . . production to the extent of their interest ownership are liable for the payment of the severance taxes . . .. The phrase to the extent of their interest ownership modifies any person extracting and any person owning and, read properly, the statute clearly provides that each owner is responsible for taxes to the extent of their ownership. That concept is repeated in the DOR rules, in the section entitled Persons Responsible for Remittance of Tax: Take in Kind Election, Term, Termination, and Exchange of Information, which provides, [a]ll severance taxes on the gross product from an oil or gas property attributable to any working or non-working interest owners shall be remitted by the interest owner or may be remitted on behalf of the interest owner in proportion to his ownership interest by the operator. Dept. of Rev. Rules, Ch. 6, §6(a)(ii). With regard to take-in-kind working interest owners, the rules provide the take-in-kind owner must pay the tax or specifically elect the option of having the operator pay on its behalf. Dept. of Rev. Rules, Ch. 6, §6(a)(iii). [¶27] DOR seems to be advocating for the creation of a new classification of owner, one that operates the well and, it argues, pays all the taxes, as the owner that actually severs or produces the oil. This reasoning ignores the reality that all of the owners participate in that severance and, as a result, are liable for the severance tax. The severance tax construct simply does not contain any reference to a producer. DOR's position could result in the exemption being triggered by the price received by a contract operator. This result would not further the legislative intent of encouraging those responsible for drilling decisions, e.g. the owners, to drill when prices are low. [¶28] As another reason for denying the exemption to a take-in-kind owner, DOR seems to suggest that to do otherwise would encourage such owners to seek a lower price for their production or not adequately market their production simply to obtain the exemption. These concerns ignore the realities of the marketplace. All owners are motivated to get the best price and terms possible for their production. In some cases, the terms, e.g. contract length, may dictate a lower price, which may account for the differences in prices obtained by various owners in the same well. Even if DOR's counter-intuitive suggestion were accurate, it would apply as well to the owner who is extracting, which DOR would say is entitled to the exemption. [¶29] DOR suggests any ambiguity must be resolved in favor of denying the exemption because of the rule that tax exemptions are not favored and must be strictly construed. State Board of Equalization v. Wyoming Automobile Dealers Ass'n, 395 P.2d 741 (Wyo. 1964). However, that rule does not prevent the correct interpretation of a statute simply because that interpretation results in an exemption. When it is said that exemptions must be strictly construed in favor of the taxing power, this does not mean that if there is a possibility of a doubt it is to be at once resolved against the exception. It simply means that if, after the application of all rules of interpretation for the purpose of ascertaining the intention of the legislature, a well founded doubt exists, then an ambiguity occurs which may be settled by the rule of strict construction. Cooley, The Law of Taxation § 674, p. 1415 (1924). Further, an interpretation that has the effect of denying Lance an exemption because only one producer can exist on a well is not strict construction because it would allow a take-in-kind owner who gets a higher price than the trigger price to still qualify for an exemption if the operator/producer received a lower price. DOR's interpretation would succeed only in denying the current applicant's exemption without consideration of how future applicants could expand the exemption beyond what the legislature intended. [¶30] While the legislature did not provide us with much to go on in understanding the meaning of the price received by the producer, the most logical interpretation must include any owner who sells its own production and receives a price. In this case, that would include both Barrret and Lance. If the legislature meant something different, it certainly could have said so in plain language.