Opinion ID: 2629624
Heading Depth: 1
Heading Rank: 5

Heading: Issue I. Point of Valuation

Text: [¶ 12] Pursuant to Wyo. Stat. Ann. § 39-14-203(a)(i), There is levied a severance tax on the value of the gross product extracted for the privilege of severing or extracting crude oil, lease condensate or natural gas in the state. This tax is imposed on the value of the natural gas at the time the production process is completed. Wyo. Stat. Ann. § 39-14-203(b)(ii). It is not always clear, however, just where the production process is completed and other operations, such as transportation, are begun. See, e. g., Union Pac. Resources Co. v. State, 839 P.2d 356, 361 (Wyo. 1992) (The legislature, oil and gas producers, and agencies have struggled over the years to determine when the mining or production process is complete.). [¶ 13] In 1990, the legislature made an effort to clarify the proper point of valuation. See Kennedy Oil v. Department of Revenue, 2008 WY 154, ¶ 22 n.3, 205 P.3d 999, 1006 n.3 (Wyo. 2008). It enacted this statutory guidance: The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first. Wyo. Stat. Ann. § 39-14-203(b)(iv). Significantly, this statute provides only two alternatives: Black Canyon is either an initial dehydrator as set forth in the first sentence, or a processing facility as set forth in the second sentence. There is no third option. The Board concluded that Black Canyon is an initial dehydrator. On appeal, we must determine whether that conclusion is based on correct interpretation and application of this statute.
[¶ 14] As explained by an expert witness for ExxonMobil during the Board's hearing, dehydrators can be divided into three different types. The statute quoted above is relatively simple to apply to Type 1 and Type 2 dehydrators. It is more difficult to apply to Type 3. [¶ 15] The Type 1 dehydrator is a relatively small piece of equipment located at or near the well. It is used to dehydrate sweet natural gas, and typically handles the gas stream from a single well or a small group of wells. The expert witness estimated that Type 1 dehydrators constitute approximately 97% of the dehydrators in use in the United States. After dehydration, much of Wyoming's sweet natural gas already meets commercial quality standards, and can be sent directly from the dehydrators to the pipelines without further processing. A Type 1 dehydrator appears to be precisely the sort of initial dehydrator referred to in the first sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv): The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. Applying this statutory provision, the severance tax is imposed at the outlet of the initial dehydrator. See, e. g., Williams Prod. RMT Co. v. Wyoming Dep't of Revenue, 2005 WY 28, ¶ 34, 107 P.3d 179, 189 (Wyo. 2005) (The statute is quite clear in pronouncing that the natural gas production process is completed, for severance tax purposes, at the outlet of the initial dehydrator.). [¶ 16] According to the expert witness, nearly all of the other dehydrators in use in the United States are Type 2 dehydrators. They are larger in capacity than Type 1 dehydrators, as they typically dehydrate gas gathered from a larger number of wells. Accordingly, they are generally located at a greater distance from the wells. Type 2 dehydrators are used on sour natural gas, and so are usually incorporated within a large and complex gas processing facility. Type 2 dehydrators fall under the second sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv): When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first. An example of a Type 2 dehydrator in Wyoming is the Whitney Canyon processing plant. See Amoco Prod. Co. v. Department of Revenue, 2004 WY 89, ¶ 29, 94 P.3d 430, 442 (Wyo. 2004) (The parties to this case agree that no dehydration occurs in the field, so the point of valuation is either the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever comes first.). Other examples include the Lost Cabin plant, see RME Petroleum Co. v. Wyoming Dept. of Revenue, 2007 WY 16, ¶ 9, 150 P.3d 673, 677 (Wyo. 2007); and the Carter Creek plant, see Chevron U.S.A., Inc., ¶ 1, 158 P.3d at 132. [¶ 17] There are only five Type 3 dehydrators in the world according to the expert witness, and the only one in Wyoming is ExxonMobil's Black Canyon facility. Unlike a typical Type 1 dehydrator, Black Canyon is a very large and complex facility, is used to dehydrate the gas gathered from several wells, and is located approximately five miles from the well fields. Like a Type 2 dehydrator, Black Canyon dehydrates sour natural gas, but unlike a typical Type 2 dehydrator, Black Canyon is a stand-alone unit, not part of the larger processing facility located at Shute Creek. As the Board recited in its findings of fact, In Wyoming, there are no other facilities which dehydrate highly sour raw gas. At the other facilities in Wyoming where raw sour natural gas is processed, the raw gas stream is delivered directly from the wells into a processing facility, without an intervening . . . process. These unique characteristics make it difficult to classify the Black Canyon facility as either an initial dehydrator or a processing facility, as those terms are used in the statute. This difficulty is at the heart of the dispute between ExxonMobil and the Department over the correct point of valuation for severance tax purposes.

[¶ 18] The terms initial dehydrator and processing facility are not defined in the statutes. However, we interpreted these terms in Williams Prod. RMT Co. v. Wyoming Dep't of Revenue, 2005 WY 28, ¶ 34, 107 P.3d 179 (Wyo. 2005). That opinion provides guidance in our current efforts to interpret the statutory terms.
[¶ 19] At issue in Williams was the proper point of valuation for coal bed methane [3] that was gathered from separate wellheads and sent through pipelines and compressors to a triethylene glycol (TEG) dehydrator, a fairly typical example of the Type 1 dehydrator discussed by ExxonMobil's expert witness. In Williams, the Department considered the TEG dehydrator to be the initial dehydrator and, under the first sentence of the statute, set the point of valuation at the dehydrator outlet. Williams disagreed, asserting that dehydration also occurred when the gas was gathered and compressed, long before the gas got to the TEG dehydrator. On that basis, Williams denied that the TEG dehydrator was the initial dehydrator, and contended that the correct point of valuation was at the gathering or compression stages where the gas was also dehydrated. Id., ¶ 12, 107 P.3d at 184. After a hearing, the Board affirmed the Department's position, and Williams appealed to this Court. [¶ 20] Because the statutes did not define the term initial dehydrator, we turned to the statutory definition of dehydrator, which is a device which removes water vapor that is commonly associated with raw natural gas. Wyo. Stat. Ann. § 39-14-201(a)(vii) (LexisNexis 2003). Williams asserted that its gathering equipment and compressors removed water vapor from the raw natural gas, and therefore fell within the definition of a dehydrator. Because the gathering equipment and compressors were upstream of the TEG dehydrator, Williams contended that they constituted initial dehydrators. The Court rejected Williams's position and affirmed the Board's decision on this basis: Citing to numerous pieces of technical evidence in the record, the Board found that, unlike the incidental separation of water and CBM in headers and compressors, and in the pipeline, itself, the TEG dehydrator is a specialized dehydrator  a particular piece of equipment. The Board found this significant because of Wyo. Stat. Ann. § 39-14-203(b)(iv)'s location of the point of valuation at the outlet of the initial dehydrator  a piece of equipment  rather than at the initial place that any dehydration  a function  takes place. Once again, we find that the Board's interpretation of the statute to be consistent with legislative intent. Williams, ¶ 22, 107 P.3d at 186. In other words, the gathering equipment and compressors caused some separation of water from the gas, but that was only incidental to their intended functions of gathering and compressing the gas. The TEG dehydrator was the initial dehydrator specified in the statute, because it was the first particular piece of equipment with the specialized and intended purpose of dehydrating the raw natural gas.
[¶ 21] We also rejected Williams's contention that its TEG dehydrator was a processing facility. The term processing facility is not defined by statute, but the term processing is: any activity occurring beyond the inlet to a natural gas processing facility that changes the well stream's physical or chemical characteristics, enhances the marketability of the stream, or enhances the value of the separate components of the stream. Processing includes, but is not limited to fractionation, absorption, adsorption, flashing, refrigeration, cryogenics, sweetening, dehydration within a processing facility, beneficiation, stabilizing, compression (other than production compression such as reinjection, wellhead pressure regulation or the changing of pressures and temperatures in a reservoir) and separation which occurs within a processing facility. Wyo. Stat. Ann. § 39-14-201(a)(xviii). [¶ 22] Williams argued that the TEG dehydrator was a processing facility because it performed at least some of the functions ( e.g. absorption) listed in this statutory definition. The Board rejected that argument: The Board also relied upon the testimony of witnesses . . . as to characteristics of processing facilities and the lack of those characteristics in the [Williams] facilities. The common understanding of these witnesses was that there was an identifiable universe of processing plants, such as Whitney Canyon, Painter, and Carter Creek. Clearly, within the industry, the term processing facility has a specialized meaning beyond a collection of disparate pieces of equipment. Williams, ¶ 17 n.2, 107 P.3d at 185 n.2. We affirmed the Board's decision. Like an initial dehydrator, a processing facility is a particular facility constructed for an intended and specialized purpose. The purpose of a processing facility, in simplified terms, is to remove components such as condensate, natural gas liquids, or sulfur from the gas stream, id., ¶ 19, 107 P.3d at 186, which changes the well stream's physical or chemical characteristics and enhances its marketability. Wyo. Stat. Ann. § 39-14-201(a)(xviii). The TEG dehydrator in Williams did separate some components from the gas stream, but that separation was only incidental to its intended function of dehydration. The TEG dehydrator was not a processing facility because it was not a particular facility with the intended and specialized purpose of removing these components from the gas stream.

[¶ 23] As interpreted in Williams, the statutory term initial dehydrator is the first device or particular piece of equipment with the intended and specialized purpose of dehydrating natural gas. It is undisputed that the Black Canyon facility dehydrates natural gas, and is intended to do so. It is also undisputed that Black Canyon is the first such equipment in the LaBarge Project gas stream. For these reasons, the Department contends that Black Canyon is an initial dehydrator, falling within the first sentence of the statute. [¶ 24] While ExxonMobil acknowledges that Black Canyon is a dehydrator, it insists that the legislature intended the statutory term initial dehydrator to apply to facilities very different from Black Canyon. Because the legislature did not define the term, ExxonMobil contends that the legislature must have intended to use it in a common and familiar way so it would be readily understood by the petroleum companies that are required to calculate, report, and pay the severance taxes they owe. ExxonMobil further maintains that Type 1 dehydrators are so common and familiar that the legislature must have had Type 1 dehydrators in mind when it used the term initial dehydrator without defining it. ExxonMobil then compares Type 1 dehydrators to the Black Canyon facility, and contends that the contrasts are so significant that the legislature could not have intended the term initial dehydrator to include both types. [¶ 25] As the Board found, Type 1 dehydrators are not significantly larger than a truck. The Black Canyon facility covers more than 2 million square feet, an area described by ExxonMobil's expert witness as equivalent to 30 football fields. Type 1 dehydrators are generally unstaffed, but checked periodically by field personnel. Black Canyon employs 35 full-time workers. Type 1 dehydrators are not individually designed, one-of-a-kind units, but can be ordered prepackaged and shipped to the site. Black Canyon is unique, a facility specifically designed and constructed to meet many unusual conditions encountered in the LaBarge Project. Type 1 dehydrators have historically vented their relatively small emissions directly into the atmosphere. At Black Canyon, both the air emissions and the water outflow are highly toxic, and must be disposed of and managed carefully. Based on these striking differences between Type 1 dehydrators and Black Canyon, ExxonMobil asserts that the legislature could not reasonably have intended the statutory term initial dehydrator to encompass both Type 1 dehydrators and the Black Canyon facility. ExxonMobil therefore contends that Black Canyon is not an initial dehydrator. [¶ 26] We acknowledge that the differences are dramatic, but as a legal matter, it is difficult to say that these differences disqualify Black Canyon as an initial dehydrator. Both Type 1 dehydrators and Black Canyon use a TEG process to remove water vapor from the raw gas stream. Black Canyon is much larger in scale and complexity, which led the Department to characterize Black Canyon as a dehydrator on steroids. In ExxonMobil's favor, we agree that it is a stretch to include both Black Canyon and Type 1 dehydrators within the same statutory classification. Still, we find no support in the statutes or our case law for the proposition that an initial dehydrator becomes something different when it reaches a certain size or complexity. At this point in our analysis, based solely on the interpretation from Williams, we would be inclined to agree with the Board's conclusion that Black Canyon is an initial dehydrator, though we remain troubled by that conclusion because the Black Canyon facility is so significantly different from the Type 1 dehydrators commonly used in the petroleum industry.