Opinion ID: 2629624
Heading Depth: 2
Heading Rank: 1

Heading: Severance Tax

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.