BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL
OF
)
EOG RESOURCES INC. FROM A
)
Docket No. 2000-71
PRODUCTION TAX AUDIT
DECISION OF
)
THE DEPARTMENT OF REVENUE
)
(Production Years
1992-1996)
)
CONCLUSIONS OF LAW
DECISION AND ORDER
APPEARANCES
Lawrence J. Wolfe, Holland
& Hart LLP, Cheyenne, Wyoming; Judith M. Matlock, Davis, Graham & Stubbs, LLP,
Denver, Colorado; and Steven P. Williams,
Assistant General Counsel, North America, EOG Resources, Inc., Denver, Colorado, representing EOG
Resources, Inc., Petitioner.
Martin L. Hardsocg, Senior
Assistant Attorney General, for the
Wyoming Department of Revenue (Department), Respondent.
DIGEST
Pursuant to notice duly given
to all parties, this matter came on for hearing on Monday, the 22nd day of October, 2001, at 10:09 a.m., in
hearing room 1299, Herschler Building, 122 West 25th Street, Cheyenne, Wyoming, before the
State Board of Equalization (Board) consisting of Edmund J. Schmidt, Chairman, Roberta A.
Coates, Vice-Chairman, and Sylvia Lee Hackl, Board Member, with Gayle Stewart, Hearing
Officer, presiding. This decision is based
on the testimony presented at the hearing, a review of the transcript and exhibits of the
hearing proceedings, the closing arguments and written proposed findings of fact and
conclusions of law submitted by the parties and the record on appeal. This case arises from an audit conducted by the
Wyoming Department of Audit (DOA) and final administrative decision of the Department
revising the valuation of Petitioner’s 1992
through 1996 natural gas production in Lincoln and Sublette Counties for ad valorem and
severance tax purposes.
ALL STATUTORY CITATIONS USED
IN THIS DECISION AND ORDER REFERENCE TITLE 39,
PRIOR TO RECODIFICATION WHICH WAS EFFECTIVE MARCH 6, 1998.
JURISDICTION
Upon application of any
person adversely affected, the Board is mandated to review final decisions of the
Department, and "[h]old hearings after due notice in the manner and form provided in
the Wyoming Administrative Procedures Act [Wyo. Stat. §§ 16-3-101 through
16-3-115] and its own rules and regulations of practice and procedure." Wyo.
Stat. § 39-1-304(a)(ix).
The Board is required to
"[d]ecide all questions that may arise with reference to the construction of any
statute affecting the assessment, levy and collection of taxes, in accordance with the
rules, regulations, orders and instructions prescribed by the department." Wyo. Stat. § 39-1-304(a)(iv). The rules of practice and procedure for
appeals before the Board involving tax matters contemplate appeals from final
administrative decisions of the Department. Rules,
Chapter 2, § 3, Wyoming State Board of Equalization. The rules require appeals be filed with the
Board within thirty days of any final administrative decision. Rules, Chapter 2, § 5, Wyoming State Board of
Equalization.
DISCUSSION
The DOA engaged an audit of
Petitioner’s oil and gas production in Sublette and Lincoln Counties, Wyoming on
August 27, 1997. The audit covered a period
from October 1, 1992, through December 31, 1996. The
Department issued a deficiency assessment based on the audit, which was appealed by
Petitioner on February 29, 2000.
The document which gave rise
to this tax controversy is a volumetric production payment transaction (“VPP”)
between Petitioner and Cactus Hydrocarbon 1992-A Limited Partnership II
(“Cactus”) dated September 25, 1992. Pursuant
to the agreements between Petitioner and Cactus, and in exchange for $326,775,000 and
extensive undertakings set forth in the transaction documents, Petitioner conveyed to
Cactus a production payment interest in reserves in the ground. A production payment is an interest carved out of
the leasehold estate and is considered to be an interest in real property in the nature of
an overriding royalty, but of a limited duration.
Petitioner operated the
properties subject to the VPP and produced the oil and gas, including the oil and gas
attributable to Cactus’ share of the reserve. At
points located near each well site (and identified in the VPP documents) the minerals
owned by Cactus were delivered by Cactus to Petitioner.
Simultaneously, pursuant to one of the four VPP documents, the Exchange Agreement,
Petitioner was required to deliver gas to Cactus at four points in Colorado and Texas. The amounts of gas delivered at the downstream
locations were equivalent on an MMBTU basis to the volumes of oil, gas and condensate
delivered by Cactus to Petitioner at the Wyoming locations.
Petitioner sold all the
production from the wells subject to Cactus’ VPP, both the production received from
Cactus and Petitioner’s own production, in the same way. Natural gas was gathered at the well and
transported by Williams Field Service to the Opal Gas Processing Plant near Opal, Wyoming. At the Opal plant the natural gas liquids
(“NGLs”) were separated and sold. The
remaining gas was sold in arm’s length and non-arm’s length transactions at the
outlet of the Opal Plant. Oil and condensate
were sold at the outlet of the storage tanks at each well site.
On March 3, 1998, during the
course of the audit, the Department informed Petitioner that it had determined that the
delivery of production from Cactus to Petitioner at the meters in Wyoming was a “bona
fide arm’s length sale” at the point of valuation pursuant to Wyoming Statute
Section §39-2-208(c). The Department
determined that the consideration for the “sale” from Cactus to Petitioner was
“terms equivalent to cash,” which the Department viewed as the index value of
the gas delivered by Petitioner to Cactus at the four downstream points of receipt in
Colorado and Texas.
DOA, using the Department
interpretation, calculated an additional increment of value for each well and each month
during the audit period. The increment of
value was based on the difference between the weighted average index prices at the four
out-of-state delivery points compared to the weighted average price of arm’s length
and non-arm’s length sales prices for residue gas at Opal. The Department summed all of the increments of
value for each well for each month to determine the final tax amount due and assessed
interest for the entire audit period on the additional assessment.
Petitioner argues that the
audit findings are erroneous because (1) there was no arm’s length sale at the
wellhead; (2) the delivery of gas from Cactus to Petitioner is not a sale, but is simply
one part of the large set of obligations undertaken by Petitioner as a result of entering
into the VPP transaction; (3) the VPP is a complex financing transaction in which the
exchange of the Wyoming production for gas in Colorado and Texas was a part of the
repayment obligation that Petitioner undertook; (4) the Department improperly treated the
exchange as a stand-alone agreement, when the four VPP documents are completely integrated
and must be interpreted as a whole; (5) the Department erred by considering the delivery
of gas in Colorado and Texas to be “terms equivalent to cash”; and (6) the
Department erred by imputing to Petitioner the index prices referenced in contracts
between Cactus and Enron Gas Marketing to which Petitioner is not a party. Petitioner contends that it properly valued and
reported the Wyoming production on the basis of sales at the well head and at Opal under
Wyoming Statute Section 39-2-208(d).
The Department argues that
there was an arm’s length sale at the meter locations where Cactus delivered its
volumetric share of production to Petitioner. The
Department’s position is that Wyoming Statute Section 39-2-208(c) thus applied and
that the consideration for the sale was the gas delivered at the four points in Colorado
and Texas. The Department contends that
consideration for such a sale was “terms equivalent to cash” (i.e., the index
prices at the four out-of-state points). The
Department also argues that the VPP is not a financing transaction: rather, the VPP
documents adopt index prices at the four downstream locations. Finally, the Department argues that the Master
Sale Agreement and the Hydrocarbon Purchase and Sale Agreement between Cactus and Enron
Gas Marketing incorporate the VPP documents, and thus validate the use by the Department
of the index prices as a basis for valuation.
Petitioner makes an
alternative argument that if the assessment is affirmed, Petitioner should not be assessed
interest. Petitioner contends that it was
paying its taxes in accordance with the instructions of the Department in 1990 through
1993 to use the comparable value method to value sales not occurring at the well head, or
that were non-arm’s length. Petitioner
argues that the Department changed its own initial valuation method for the 1990 through
1993 audit and did not adopt the valuation method employed in the 1992 though 1996 audit
until after the taxes for the audit period were fully reported and paid. Petitioner contends it did not know nor could it
reasonably have known that it was not paying its taxes in accordance with the
Department’s interpretation of the statutes, and thus it should not be liable for
interest under Wyoming Statute Section 39-2-214(f).
The Department argues that
interest should be assessed from the inception of the production and that Petitioner
should have known the proper way to report. Moreover,
the Department argues Petitioner had an opportunity under the statutes to request a
valuation opinion from the Department and failed to do so.
ISSUES
The following issues have
been raised with respect to the DOA audit of Petitioner and the subsequent Department
determination and final assessment letter regarding the valuation of Petitioner’s
1992 through 1996 natural gas production in Lincoln and Sublette Counties:
1.
Is the Department correct in
determining that an arm’s length sale of the VPP gas occurred at the wellhead between
Cactus Hydrocarbon and Petitioner, and that the value of that gas is the index price in
Colorado and Texas which represents “terms equivalent to cash” under Wyoming
Statute Section 39-2-208(c) and Department of Revenue Rules Chapter 6, Section 4(l)? or;
2. Is
Petitioner correct in interpreting the delivery of Cactus’ volumetric share of
production to Petitioner in Wyoming as simply one step in a large set of duties undertaken
by Petitioner to satisfy its obligations under the VPP transactions, so that the actual
value of the VPP gas is represented by the index price of the gas as sold by Petitioner at
Opal to third parties?
FINDINGS OF FACT
History of EOG Operations in Wyoming
1.
Petitioner, EOG Resources, Inc. (f/k/a Enron Oil & Gas Company), owns and
operates oil and gas properties in southwestern Wyoming in Lincoln and Sublette Counties. [Stipulated
Summary of Uncontested Facts, ¶1]. Petitioner’s
predecessors in interest have owned and operated wells in Lincoln and Sublette Counties
since the 1950s. Petitioner’s wells
produce primarily from the LaBarge Platform and the Moxa Arch formations. [Trans. Vol. I, p. 56; Petitioner Exhibit 107].
2.
Petitioner is an oil and gas producer created in 1989 as Enron Oil & Gas
Company. Its common stock has, since its
inception, been publicly traded on the New York Stock Exchange. When it was initially created, Enron Corporation
(“Enron”) owned 80% of Petitioner’s stock.
Over the next several years, Enron sold its stock ownership down so that it only
owned 53% by 1995. In 1999, Enron sold its
remaining stock interest and Enron Oil & Gas Company became EOG Resources, Inc.,
wholly separate from Enron. [Trans. Vol.
I, p. 55. Petitioner Exhibit 139, p. 00154].
Field Operations
3.
Petitioner’s gas wells produce natural gas and condensate. When gas is produced to the surface it contains
water and liquid hydrocarbon, called condensate, which is a very light oil. The water must be separated because it can corrode
the pipeline and restrict gas flow. After the
free water is separated, additional water is removed in the dehydrator. The separation and dehydration occurs at the well.
[Trans. Vol. I, pp. 78-79; Petitioner Exhibit 139, p. 00158]. Petitioner introduced exhibits, including
photographs, showing a typical well site configuration.
The exhibits show that the separator and the dehydrator are generally located in a
small building a short distance from the wellhead. [Petitioner Exhibit 109, pp. 00043a,
449].
4.
The outlet of the dehydrator is upstream of the orifice meter. The orifice meter is that point at which the gas
is measured. It also may serve as the custody
transfer point as identified in Wyoming Statute Section 39-2-208 (b)(ii). [Trans. Vol. I, p. 81; Petitioner Exhibit 141].
5.
After separation and dehydration, the gas is transported by Williams Field Service
(“WFS”), an independent third party, to the Opal Gas Processing Plant, a
distance of approximately 40 miles. [Trans.
Vol. I, pp. 57, 77-78; Petitioner Exhibit 108].
The Opal Plant is recognized as a major market center. [Trans. Vol. II, p. 322;
Trans. Vol. III, p. 464].
6.
The Opal market is served by three interstate pipelines, Northwest Pipeline, Kern
River Pipeline and CIG Pipeline. [Trans. Vol. I, pp. 57-58; Trans. Vol. II, p. 323].
7.
At the Opal Gas Processing Plant, Natural Gas Liquids such as propane and butane
are removed from the gas stream to be used for home heating and other purposes. These NGLs usually have a higher value than if
sold as Btu’s as part of the gas stream. [Trans. Vol. I, pp. 75-76]. The NGLs
and the remaining residue gas, which consists primarily of methane, are sold at the
tailgate of the Opal Plant. [Trans. Vol. III, pp. 462-463].
8.
The NGLs are valued at the Mont Belvieu, Texas, price less transportation and
fractionation charges. Mont Belvieu is a
large fractionation plant in Texas. [Trans. Vol. III, p. 467].
9.
Residue gas is sold by Petitioner in both arm’s-length and
non-arm’s-length sales at the tailgate of the Opal Plant. [Trans. Vol. III, pp.
464-465].
10.
Oil and condensate are placed into tanks adjacent to the wellhead and then sold. [Trans. Vol. I, pp. 82-83].
Index Prices
11.
An index price is a published average price for natural gas which buyers and
sellers have agreed to pay or receive at a particular time and location. [Trans. Vol.
II, pp. 315-316]. Index prices for natural gas are published in various daily and
weekly publications such as Inside F.E.R.C.’s Gas Market Report, Natural
Gas Week, Gas Daily, and Natural Gas Intelligence. [Trans. Vol. II,
p. 316].
12.
Index prices are determined by publishers who conduct surveys of buyers and sellers
to ascertain the average selling price of natural gas.
For example, Inside F.E.R.C.’s Gas Market Report states that prices
quoted in its table are obtained firsthand in confidential surveys of actual buyers and
sellers. [Trans. Vol. II, p. 316].
13.
Index prices are used as a price discovery mechanism to inform gas sellers and
buyers of the markets at various locations. [Trans. Vol. II, p. 315].
14.
Index prices are only published for major market centers where there are sufficient
buyers and sellers conducting transactions to generate the liquidity needed to establish a
meaningful index price. [Trans. Vol. II, p. 317].
15.
It is a common practice in the natural gas industry for sellers and buyers to
establish sales prices in contracts for locations where there is no published index price
by referencing a published index in the area with a discount (such as the index price
minus so many cents) or a premium (such as the index price plus so many cents) to reflect
the parties’ estimate of value at the place of sale. [Trans. Vol. II, pp.
316-318].
16.
Index prices vary between index pricing markets based upon supply and demand at
those markets which, in turn, are a function of the strength or weakness of the markets
served by gas supplies. [Trans. Vol. II,
p. 323; Petitioner Exhibit 121].
Production Payments
17.
A production payment is a common form of an oil and gas financing transaction that
has been utilized for decades. [Stipulated Summary of Uncontested Facts, ¶4]. The United States Supreme Court recognized a
production payment in the 1940 case of Anderson vs. Helvering, 310 US 404, 60 S.Ct.
95, 284 L.Ed 1277 (1940). [Trans. Vol. I, pp.95, 100].
18.
A production payment is a method of raising capital to finance acquisition,
exploration or development of oil and gas properties. [Trans. Vol. I, p. 95]. It is used most often when conventional financing,
such as a bank loan or mezzanine financing, is not available. [Trans. Vol. I, p. 95;
Trans. Vol. II, p. 340].
19.
Production payment financing is accomplished by the sale from a producer of a
production payment to a buyer who is willing to provide the necessary capital. [Trans.
Vol. I, pp. 95-96]. The buyer of a
production payment purchases an interest in an oil and gas lease which then entitles it to
a share of oil and gas produced for a limited period of time, free and clear of any of the
costs of production. [Trans. Vol. I, p.
96].
20.
A production payment is an interest in real property and is similar to an
overriding royalty interest. [Stipulated Summary of Uncontested Facts, ¶4; Trans. Vol.
I, p. 96]. The only significant
difference is that a production payment is for a limited term. [Trans. Vol. I, p. 96]. Volumetric production payments continue
until a specific quantity of gas is delivered.
Dollar-denominated production payments continue until a specified amount
of proceeds are received. [Trans. Vol. I, p. 97].
21.
The seller of a production payment must produce the reserves that are attributable
to the production payment and deliver the production payment buyer’s share of
production, but the seller has no personal liability if the reserves run out before the
production payment is fully paid. The buyer
of the production payment thus takes the reserve risk.
[Trans. Vol. I, pp. 97-98].
22.
The buyer of a volumetric production payment also assumes the risk of price
fluctuations in the market. [Trans. Vol. I, p. 99].
The buyer takes the risk of downward price fluctuations and receives the benefit of
any upward price fluctuations. [Trans.
Vol. I, p. 100].
23.
For federal income tax purposes, the seller of a production payment is treated as
if the seller had borrowed money and placed a mortgage on the mineral property as security
for the loan. The principal payment is
assumed to be the fair market value of the production at the time of delivery less
interest imputed according to IRS regulations in effect on the date of closing of the
production payment transaction. The speed of
the imputed repayment of the principal depends on prices at the time of production. [Trans. Vol. I, pp. 101-102].
24.
Production payment transactions commonly consist of three primary documents: a
purchase and sale agreement, a conveyance, and a production and delivery agreement. There may also be other documents that are
tailored to the specific transaction. [Trans.
Vol. I, p. 106].
EOG’s Volumetric Production Payment
25.
Petitioner owned and operated over 800 wells in Sublette and Lincoln Counties. Petitioner had a significant lease position and
reserve base, but because of low gas prices Petitioner was unable to finance additional
development of the reserves. In 1992, in
order to finance the development of its oil and gas reserves, Petitioner made the decision
to enter into a volumetric production payment transaction.
Among the reasons for this decision were: gas
prices were at a very low level; there was a large asset base located near a large market
center that needed additional development; and, because gas prices were so low, no other
financing was available to develop the huge reserve base.
Because of the unique reserve base, additional pipelines then coming to Opal, and
the fact that Petitioner’s reserves were located only 50 miles away, Petitioner made
the decision to enter into a volumetric production payment transaction. [Trans. Vol.
II, pp. 361-362].
26.
On September 25, 1992, Petitioner entered into a volumetric production payment
transaction (the “VPP”) with Cactus Hydrocarbon 1992-A Limited Partnership
(“Cactus”). The terms and
conditions of the VPP transaction were set forth in documents, collectively called the
“VPP Documents”:
a.
Purchase and Sale Agreement between Enron Oil & Gas Company, as Seller, and
Cactus Hydrocarbon 1992-A Limited Partnership, as Buyer, dated September 25, 1992. [Joint
Exhibit 300].
b.
Conveyance of Production Payment from Enron Oil & Gas Company, as Grantor, to
Cactus Hydrocarbon 1992-A Limited Partnership, as Grantee, dated September 25, 1992
(Exhibit A to the Purchase and Sale Agreement). [Joint
Exhibit 301].
c.
Hydrocarbon Exchange Agreement by and between Enron Oil & Gas Company and
Cactus Hydrocarbon 1992-A Limited Partnership, dated September 25, 1992 (Exhibit B to the
Purchase and Sale Agreement). [Joint
Exhibit 302].
d.
Production and Delivery Agreement by and between Enron Oil & Gas Company, as
Grantor and Cactus Hydrocarbon 1992-A Limited Partnership, as Grantee, dated September 25,
1992 (Exhibit C to the Purchase and Sale Agreement). [Joint Exhibit 304; Stipulated
Summary of Uncontested Facts, ¶3; Trans. Vol. I, p. 113; Petitioner Exhibit 116].
e.
Hydrocarbon Purchase and Sale Agreement dated September 28, 1992, by and
between Cactus Hydrocarbons 1992 - A Limited Partnership and Enron Gas Marketing, Inc. [DOR
Exhibit 522]
The Board finds that a fifth agreement (describer in
subsection (e) above, which was discovered by the Department on the trip to Houston),
should also be read together with the four VPP documents as an integrated whole.
27.
Consistent with general practices of production payment financing, the VPP
documents gave Cactus a non-operating, non-expense-bearing real property interest. The
interest was free of cost risk and free of the expense of production, operations and
delivery to the delivery point. Cactus’
interest was also free of any and all royalties, other burdens on production and all ad
valorem, property, severance, gross production and other taxes and governmental charges
other than income taxes. [Trans. Vol
I, pp. 118-120, 125, 133; Joint Exhibit 301]. Additionally,
pursuant to the VPP documents, Cactus agreed to look solely to the VPP hydrocarbons for
satisfaction and discharge of the VPP and Petitioner would not be personally liable for
the payment and discharge of the VPP. [Trans.
Vol. I, p. 133]. Finally, as with all
other volumetric production payments, the VPP was for a limited term which was originally
the later of (a) June 30, 1996, or (b) when any Basis Adjustment Amount outstanding as of
June 30, 1996, had been reduced to zero. [Trans.
Vol. I, p. 125]. The Basis Adjustment
Amount was an additional quantity of gas which could have been owed by Petitioner to
Cactus if there had been deficiencies in deliveries of the scheduled quantities prior to
June 30, 1996. [Trans. Vol. I, p. 125]. The term of the VPP was extended to March 31,
1999, by an amendment dated October 1, 1993, and the production payment daily and monthly
volumes were reduced. [Joint Exhibit 301c; Trans. Vol. 1, pp. 128-129].
28.
In the VPP documents, Petitioner made representations and warranties regarding the
accuracy of reserve reports and its financial statements, both matters of concern to
production payment purchasers. [Trans. Vol. I, pp. 116-117, 120-121].
29.
The structure of Cactus and the relationship between Cactus and Petitioner was set
forth in a letter from Petitioner to the DOA. Enron
Big Piney Corp. was the general partner and it held a one percent ownership interest in
Cactus. The remaining ninety-nine percent
interest in Cactus was owned by its limited partner Campanile Charities. [Department
Exhibit 508].
30.
Effective August 1, 1994, and prior to the dissolution of Cactus, the VPP was
transferred to Cactus Hydrocarbon III Limited Partnership (“Cactus III”). Cactus III’s general partner and 1% owner was
Enron Cactus III Corp. The remaining 99%
interest in Cactus III was owned by Cactus Hydrocarbon III Production Payment Trust. In 1995 Cactus Hydrocarbon 1992-A Limited
Partnership was dissolved. [Department
Exhibit 508].
31.
The capital contributions to Cactus Hydrocarbon 1992-A Limited Partnership by the
initial partners were provided by Enron Big Piney Corp., as general partner in the amount
of $163,387.50, and by Campanile Charities, Inc., as the sole limited partner in the
amount of $16,175,362.50, totaling $16,338.750.00. [Department Exhibit 507, p. 000050].
32.
The remaining participants in the original financing transaction were comprised of
a group of banks which loaned funds to Cactus Hydrocarbon 1992-A Limited Partnership. These loan proceeds totaled $310,436,250.00. [Department
Exhibit 505, p. 000022]. Taking the general and limited partners’ capital
contributions, along with the loan proceeds advanced by the group of banks, the total
amount of funds advanced to Cactus was $326,775,000.00.
This is the stated amount of the production payment in the Purchase and Sale
Agreement, and was paid to Petitioner by
Cactus in exchange for the conveyance of the production payment to Cactus and the various
undertakings by Petitioner pursuant to the VPP Documents.
33.
The VPP transaction consisted of Petitioner selling and conveying to Cactus, and
Cactus purchasing and accepting from Petitioner, a volumetric production payment for a
purchase price of $326,775,000.00, and the parties executing and delivering the four VPP
documents. [Joint Exhibit 300, ¶ 2.01].
34.
As a result of the obligations Petitioner undertook in connection with the VPP
transaction, Petitioner commenced a substantial well development program, which resulted
in the drilling of 284 new wells and the investment of $86.8 million.
Year |
Wells |
New Wells drilled and completed |
Investment |
1992 |
700 |
|
|
1993 |
778 |
78 wells + recompletions
|
$29.0 MM |
1994 |
869 |
91 wells + recompletions
|
$30.8 MM |
1995 |
850 |
29 wells + recompletions
|
$10.8 MM |
1996 |
926 |
76 wells + recompletions
|
$16.2 MM |
Total |
|
274 new wells |
$86.8 MM |
[Trans. Vol. II, pp. 387-389; Petitioner Exhibit 140,
p. 00128].
35.
Pursuant to one of the four VPP documents, the Hydrocarbon Exchange Agreement,
Cactus delivered to Petitioner, at delivery points in Wyoming, Cactus’ volumetric
share of production (oil, condensate, NGLs and gas), and Petitioner delivered equivalent
MMBTU quantities of gas to Cactus at four delivery points in Colorado and Texas. [Joint
Exhibit 302, Art. II, ¶ 1]. Petitioner
took Cactus’ share of production and sold it along with Petitioner’s working
interest share of production at the tailgate of the plant in Opal, Wyoming. [Trans. Vol. III, pp. 466, 544].
The Audit:
How EOG Reported and Paid Taxes.
36.
Petitioner reported and paid taxes pursuant to Wyoming Statute Section 39-2-208(d).
[Trans. Vol. III, pp. 495-497, 545; Petitioner Exhibit 110].
37.
Petitioner reported and paid taxes in the same manner for all oil and gas
production, both its own non-VPP working interest share of
production and all the production covered by the VPP. [Trans. Vol. III, pp. 466, 544].
38.
In 1990 and 1993 the Department issued memoranda to all oil and gas producers
directing them to use the comparable value method to value the sales of production that
were not sold by arm’s length sales at the wellhead.
Petitioner complied with these instructions for the valuation of residue gas and
NGL production. [Trans. Vol. III, pp. 498-499; Petitioner Exhibits 101 and 102].
39.
Petitioner valued residue gas sold at the outlet of the Opal Plant on the basis of
its arm’s length and non-arm’s length sales.
Arm’s length sales were valued on the basis of the prices received from
non-affiliated third parties. Non-arm’s
length sales were valued on the basis of the arithmetic average of the three published
pipeline indices for Northwest Pipeline, Kern River and Colorado Interstate Gas Company. [Trans.
Vol. III, p. 464]. For example, in June
of 1993 the arithmetic average of the three pipeline indices was $1.61, which was based upon the sum of the three index
prices as published in Inside F.E.R.C.’s Gas Market Report, June 1,
1993, divided by three. [Trans. Vol. II,
p. 326; Petitioner Exhibit 129].
40. In order to arrive at the wellhead value,
Petitioner subtracted the cost of processing at the Opal Plant and the cost of
transporting the gas from the wellhead to the Opal Plant.
[Trans. Vol. III, pp. 461-462]. The Department did not question the valuation method
used by Petitioner to value the non-VPP gas sold at the Opal tailgate. [Trans. Vol. III, p. 544; Trans. Vol. IV, p.
688].
41.
Oil and condensate were sold from tanks near the wellhead. Oil and condensate were valued on the basis of
arm’s length and non-arm’s sales. Arm’s
length sales were valued on the basis of the price received. Non-arm’s length sales were valued on the
basis of the highest posted price paid in the area by other purchasers, plus any premium
or bonus. [Trans. Vol. III, p. 476]. The
Department did not question the valuation method used for oil and condensate for non-VPP
production. [Trans. Vol. III, p. 544; Trans. Vol. IV, p. 688].
42.
NGLs were valued at the price for sales at Mont Belvieu, Texas, fractionalization
plant, minus a transportation and fractionation fee. [Trans. Vol. III, p. 467]. The
Department did not question the valuation method used for NGLs. [Trans. Vol. IV, p.
728].
The Audit:
How the Department Valued the Volumetric
Production Payment Gas.
43.
Mineral taxpayers report their tax liability to the Department pursuant to a
“self-reporting tax system” which requires that taxpayers report their tax
liability to the Department. [Trans. Vol. IV, p. 705]. Wyo. Stat. §39-6-304(a). The Department is statutorily required to
annually value and assess mineral property at its fair market value. [Trans. Vol. III,
pp. 607-608]. Wyo. Stat.
§39-2-202(a). Based upon information
received or procured from the taxpayer, the Department
is required to determine the fair market value for minerals following the
production process. [Trans. Vol. III, p. 608].
Wyo. Stat. §39-2-202(a).
44.
The Departments of Revenue and Audit learned through EOG’s Annual Report that
Petitioner had engaged in a transaction called a “volumetric production
payment,” which was at first unfamiliar to either department. [Trans. Vol. III, p. 610].
47.
The Department took the initiative to investigate what constituted a volumetric
production payment to determine whether there might be unpaid tax liability. [Trans.
Vol. III, p. 610].
48.
In October of 1997, representatives from the Departments and the Attorney
General’s Office attended a meeting with Petitioner’s representatives in
Houston, Texas, to discuss the volumetric production payment transaction. [Trans. Vol.
III, pp. 611-12].
49.
Petitioner’s representatives at the meeting made a presentation on the
volumetric production payment transaction and provided
the State’s representatives with schematics or flow diagrams to assist in explaining
how the VPP transaction worked. [Trans. Vol. III, p. 612].
50.
The Departments of Revenue and Audit employees and a representative of the Attorney
General’s Office then spent several days in Houston reviewing VPP contracts provided
by Petitioner. [Trans. Vol. III, p. 612-13].
51.
Following Petitioner’s presentation, and their own review of the VPP
transaction documents, employees from the Departments of Revenue and Audit and the
Attorney General’s Office had a good understanding of how the VPP transaction
occurred, including that Cactus was assured an index price from locations in Texas and
Colorado, in exchange for the Wyoming gas. [Trans. Vol. III, p. 613; Trans. Vol. IV, p.
713].
52.
The Department’s ultimate valuation determination was derived primarily from,
and based upon, the information learned at the October 1997 meeting with Petitioner’s
representatives and documents reviewed at the meeting. [Trans.
Vol. III, pp. 614-15, 622-23].
The Audit:
The Hydrocarbon Purchase and Sale Agreement of
September 28, 1992.
53.
Petitioner’s representatives, at the October 1997 meeting in Houston, Texas,
verbally represented that Cactus received index prices for gas received from Petitioner
through the exchange agreement, which was corroborated through review of the Hydrocarbon
Purchase and Sale Agreement between Cactus and Enron Gas Marketing. [Trans. Vol. III, p. 622; Trans. Vol. IV, pp.
647-648; Department Exhibit 522].
54.
Representatives reviewing flow charts provided by Petitioner’s representatives
found that the VPP transaction clearly envisioned the sale of exchanged gas by Cactus to
“EGM” or Enron Gas Marketing pursuant to the Hydrocarbon Purchase and Sale
Agreement. [Trans. Vol. III, p. 621; Department Exhibit 502, p. 000005].
55.
Petitioner’s representatives provided employees of the Departments of Revenue
and Audit and the Attorney General’s Office with a “Hydrocarbon Flow
Summary” which indicated that Cactus,
holding marketable title to gas, sold the gas to Enron Gas Marketing for an index price. The Hydrocarbon Flow Summary states: “Gas and
other hydrocarbons actually flow directly from EOG to EGM.
However, since title to hydrocarbons is owned by the Partnership [Cactus],
hydrocarbons are depicted to move through the Partnership.” [Trans. Vol. III, pp. 626-627; Department
Exhibit 502, p. 000006].
56.
Consistent with the flow charts, the Department understood that Cactus owned
marketable title to the VPP gas and exchanged gas as set forth in the VPP documents. [Trans. Vol. III, pp. 627-628; Joint Exhibits
300-302, 304; Department Exhibits 501-504].
57.
The “Hydrocarbon/Cash Flow Summary” provided by Petitioner’s
representatives demonstrates that gas and oil are transferred to Cactus and sold to Enron
Gas Marketing for index prices. It also
demonstrates that Cactus Hydrocarbon III Production Payment Trust was and is a successor
to Cactus. [Trans. Vol. III, pp. 628-629;
Department Exhibit 502, p. 000007].
58.
Cactus and Petitioner agreed in the Hydrocarbon Exchange Agreement that the Wyoming
VPP gas would be transferred from Cactus to Petitioner and that in exchange Petitioner
would transfer identical MMBTUs back to Cactus at four locations in Texas and Colorado,
with a value to be determined by the index prices at
the four locations in Texas and Colorado. [Trans.
Vol. IV, pp. 660, 709-711, 713-716; Joint Exhibit 302; Department Exhibits 521, 522].
59.
The Department’s review of the Hydrocarbon Purchase and Sale Agreement, dated
September 28, 1992, between Cactus and Enron Gas Marketing (as opposed to
EOG), revealed the price Cactus received for the VPP gas was to be determined at the index
prices situated at the four points in Texas and Colorado. [Trans. Vol. III, pp. 621-622; Department Exhibit
522].
60.
Representatives from the Departments of Revenue and Audit and the Attorney
General’s Office also reviewed and relied upon a Master Natural Gas Purchase and Sale
Agreement, dated June 30, 1993, which was significant because it demonstrated that
Cactus’ obligation to sell gas to Enron Gas Marketing was assumed by Cactus’
successor, Cactus Hydrocarbon III Limited Partnership (Cactus III). [Trans. Vol. IV, pp. 650-651; Department
Exhibit 521].
61.
The Master Natural Gas Purchase and
Sale Agreement, also references the production payment documents and provides many of the
same obligations imposed upon Cactus under the preceding agreement, the Hydrocarbon
Purchase and Sale Agreement, including reference to index prices at the points of delivery
in Texas and Colorado. [Trans. Vol. IV,
pp. 654-655; Department Exhibit 521].
62.
The Hydrocarbon Purchase and Sale Agreement, dated September 28, 1992, between
Cactus and Enron Gas Marketing, specifically refers to the VPP documents and specific
requirements in the VPP documents, including the payment of index prices from the four
locations in Texas and Colorado. [Trans.
Vol. III, pp. 622-623; Trans. Vol. IV, pp. 713, 716-718; Department Exhibit 522].
63.
The Department concluded that the index prices received by Cactus, as reflected in
the Hydrocarbon Purchase and Sale Agreement between Cactus and Enron Gas Marketing,
established the consideration, in terms equivalent to cash, received for transfer of the
VPP gas produced in Wyoming. [Trans. Vol.
III, p. 623; Trans. Vol. IV, pp. 650, 659-661, 713-716, 737-738; Joint Exhibit 307, p.
00211].
64.
Pursuant to the Hydrocarbon Purchase and Sale Agreement, dated September 28, 1992,
between Cactus and Enron Gas Marketing, Cactus is designated as the “seller” and
Enron Gas Marketing, Inc. is designated as the “buyer.” [Trans. Vol. III, pp. 629-30; Department
Exhibit 522, pp. 000329, 000332].
65.
Pursuant to the Hydrocarbon Purchase and Sale Agreement between Cactus and Enron
Gas Marketing, “Production payment documents” was defined as the Conveyance, the
Production and Delivery Agreement and the Exchange Agreement. “Production and Delivery Agreement” is
defined as the “Production and Delivery Agreement between Enron Oil & Gas Company
and seller dated September 25, 1992, as the same may be amended, supplemented or modified
from time to time.” [Trans. Vol. III,
pp. 631-632; Department Exhibit 522, p. 00332].
66.
The Hydrocarbon Purchase and Sale Agreement between Cactus and Enron Gas Marketing,
references or incorporates all of the VPP documents between Cactus and Petitioner. [Trans. Vol. III, p. 632; Exhibit 522].
67.
The Hydrocarbon Purchase and Sale Agreement between Cactus and Enron Gas Marketing,
defined the price for the gas sold by Cactus, and purchased by Enron Gas Marketing, as the
applicable index price, as defined in the Hydrocarbon Exchange Agreement. [Trans. Vol.
III, pp. 635-636; Trans. Vol. IV, pp. 716-718; Department Exhibit 522, pp. 000331,
000337].
68.
The Hydrocarbon Purchase and Sale Agreement states that “Index value has the
meaning as defined in the Exchange Agreement.” [Trans. Vol. IV, p. 718; Exhibit
522, p. 000331].
69.
The term of the Hydrocarbon Purchase and Sale Agreement between Cactus and Enron
Gas Marketing, was consistent with the term of the production payment interest created
between Cactus and Petitioner. [Trans.
Vol. IV, pp. 644-645; Department Exhibit 522, p. 000341].
70.
Pursuant to the Hydrocarbon Purchase and Sale Agreement between Cactus and Enron
Gas Marketing, Enron Gas Marketing was not permitted to hold Cactus liable
for Petitioner’s failure to perform under the VPP documents, but was required to
pursue Petitioner directly for any failure of delivery of gas sold to Enron Gas Marketing.
[Trans. Vol. IV, pp. 645-646; Department
Exhibit 522, p. 000343].
71.
The Department determined that the VPP gas transfer/exchange transaction between
Cactus and Petitioner was a bona fide arm’s length transaction at the point of
valuation in accordance with Wyoming Statute Section 39-2-208(c). [Trans. Vol. IV, p. 719; Joint Exhibits 302,
307, 314].
72.
The Department determined that, pursuant to Wyoming Statute Section 39-2-208(c),
Cactus’ arm’s length transfer of VPP gas to Petitioner in Wyoming was in
exchange for identical volumes of MMBTU’s at the four locations in Texas and
Colorado, after which Cactus immediately sold the volumes in Texas and Colorado to Enron
Gas Marketing. The Department concluded that
the bona fide arm’s length value of the VPP gas was the value assigned by Cactus and
Petitioner, that is, the index values received for the exchanged gas in Texas and
Colorado. [Trans. Vol. IV, pp. 720,
737-738; Exhibits 302, 307, 314, 522].
73.
The Department decided that the VPP gas should be valued pursuant to Wyoming
Statute Section 39-2-208(c), which establishes that gas sold to a third party at or prior
to the point of valuation is valued using the arm’s length value. [Trans. Vol. IV,
pp. 657-658, 679, 709-711; Joint Exhibits 307, 314].
74.
The Department concluded that the parties agreed in the Hydrocarbon Exchange
Agreement that the Wyoming gas would be transferred from Cactus to Petitioner, and that
the gas would be attributed a value established by the index prices at the four locations
in Texas and Colorado. [Trans. Vol. IV, pp. 660-661, 709-713, 713-716; Joint Exhibit
302; Department Exhibits 521, 522].
75.
The Department determined the bona
fide arm’s length value of the VPP gas sold
by Cactus to Petitioner through the Exchange Agreement
by applying the Department’s rules. The
Wyoming State Board of Equalization Rules, Chapter XXI, Section 4(l) (1991), and the
Wyoming Department of Revenue Rules, Chapter 6, Section 4(l) define bona fide arm’s
length sales. Bona fide arm’s length
sales are valued in cash or terms equivalent to cash given for property. [Trans. Vol.
IV, pp. 680, 737-738; Joint Exhibits 307, p. 00211; 319, p. 00316].
76.
The Department, finding an arm’s length sale of the VPP gas between Cactus and
Petitioner, considered the value placed upon the VPP gas by the parties to the Exchange
Agreement and other agreements, which specified that the VPP gas would be valued at the
index prices from four locations in Texas and Colorado.
The agreed-upon index values were deemed terms equivalent to cash and reflected the
consideration received by Cactus in exchange for the Wyoming VPP gas transferred to
Petitioner. [Trans. Vol. IV, pp. 680-681; Exhibit 307].
77.
By letter dated March 3, 1998, from Johnnie Burton, then Director of the Department
of Revenue, to Steve Williams at Petitioner, the Department stated:
After much pondering about the
impact and relevancy of the production payment from Cactus Hydrocarbon to Enron Oil and
Gas on valuation of the gas covered by the “volumetric production payment,” we
have come to the conclusion that Cactus was acquiring a real property interest in the
reserves. The volume of gas covered by the transaction belongs to Cactus. The “production payment,” therefore, has
no relevancy to the valuation of the gas when produced.
Enron and Cactus own their respective shares of the gas separately.
[Stipulated Summary of Uncontested Facts, ¶7; Joint
Exhibit 307].
78.
The March 3, 1998 letter further provided:
Cactus is selling its gas to Enron
in a bona fide arm’s length sale, but does not receive cash for it from Enron
O&G. Instead, it agrees to terms
equivalent to cash, i.e. gas in Colorado, and Texas.
That gas is sold by Enron Gas Marketing and the cash is then remitted to Cactus. This represents the value of the gas sold to Enron
Oil and Gas by Cactus at Big Piney. The audit
will be conducted to gather this information, so that taxes can be assessed based on this
value received by Cactus.
[Stipulated Summary of Uncontested Facts, ¶8; Joint
Exhibit 307].
79.
The DOA did not do a traditional audit, in that it did not examine how Petitioner
had reported and paid taxes on the VPP during the audit period. [Trans. Vol. III, p. 509].
80.
The DOA’s audit finding was based on the legal conclusion set forth in Ms.
Burton’s March 3, 1998, letter that Cactus was making an arm’s length sale to
Petitioner, and that Cactus’ proceeds under such sale, i.e., gas in Colorado,
Louisiana and Texas, were the equivalent to cash. The
DOA, as affirmed by the Department, calculated an additional increment of value on a
well-by-well basis. The Department then used
an average of the index prices at the four out-of-state delivery points and compared that
price to the price reported by Petitioner for residue gas sold at Opal. The Department calculated a theoretical increment
of value between the two prices for each well for each month and then summed all those
increments by year to arrive at a value that the Department claims Petitioner
under-reported for the year. The Department
then applied interest to these year-by-year calculations to determine the amount assessed
to Petitioner. [Trans. Vol. IV, p. 770;
Trans. Vol. III, pp. 621-622].
81.
Department’s final assessment of Petitioner’s VPP gas was as follows:
Additional Severance Tax |
$1,723,952.02 |
Interest Through 3-1-2000 |
$1,187,608.00 |
Total Due |
$2,911,560.02 |
The total increase in ad valorem taxable value was
$28,732,867, which was certified to Sublette and Lincoln Counties. The counties applied their respective mill levies
against that taxable value to arrive at the ad valorem tax.
They then assessed the difference. [Joint
Exhibit 314].
What Was the Total Consideration for the VPP
Transaction?
82.
Cactus paid $326,775,000 for the VPP and delivered its associated volumetric share
of production to Petitioner at delivery points in Wyoming.
In return, Cactus received MMBTU equivalent quantities of gas at four out-of-state
points in Colorado and Texas. Petitioner
received the $326,775,000 from Cactus and also received Cactus’ volumetric share of
production in Wyoming. In return, pursuant to
the VPP documents, Petitioner was obligated at its cost to deliver volumes in Texas and
Colorado, meet production requirements, make capital expenditures, satisfy operating and
drilling requirements; and make certain reports. Petitioner’s
obligations were secured with a mortgage and lien on Petitioner’s own share of
production. [Trans. Vol. I, pp. 156-157;
Petitioner Exhibit 145].
83.
For the 33-month period prior to the time the VPP transaction was entered into, the
value of gas at the wellhead in Wyoming averaged $0.55 per MMBTU less than the index
values of gas at the four out-of-state delivery points in Colorado and Texas. [Trans. Vol. II, p. 333].
84.
Cactus and Petitioner did not enter into the Hydrocarbon Exchange Agreement as a
stand-alone transaction. [Trans. Vol. I,
pp. 158-159]. Petitioner’s expert
witness, John Harpole, stated that such a stand-alone transaction would have been a poor
economic choice for the party receiving gas in Wyoming (in this case, Petitioner), because
of the price differential between Wyoming and Texas. [Trans. Vol. II, pp. 335-336].
85.
Petitioner’s Accounting Manager, Don Manton, who represented Petitioner in
resolving tax disputes, did not request from the Department an interpretation of the tax
statutes or a valuation determination concerning the VPP gas pursuant to Wyoming Statute
Section 39-6-304. [Trans. Vol. III, p. 562].
86.
Despite Mr. Manton’s determination that no sale occurred at the wellhead, he
admitted that he was not familiar with the Hydrocarbon Exchange Agreement between Cactus
and Petitioner. [Trans. Vol. III, p. 574;
Joint Exhibit 302]. He stated he did not
have even a “general understanding” of what occurred under the Hydrocarbon
Exchange Agreement. [Trans. Vol. III, p.
574-75; Joint Exhibit 302]. Nor was he
aware that Cactus, under the Hydrocarbon Exchange Agreement, held full marketable title to
the VPP gas produced in Wyoming. [Trans. Vol. III, p. 575; Joint Exhibit 302]. Mr. Manton also stated he did not know why, under
the Hydrocarbon Exchange Agreement, Cactus transferred the VPP gas back to Petitioner. [Trans. Vol. III, p. 577; Joint Exhibit 302].
87.
Mr. Manton, in determining that no sale occurred between Cactus and Petitioner at
the wellhead, admitted that he knew little about the VPP documents and had not considered
the relationship between Petitioner and Cactus or the
facts and circumstances underlying the State’s valuation determination. [Trans. Vol., pp. 572-581].
88.
Mr. Manton stated he did not have any idea what Cactus received for the gas
Petitioner transferred to Cactus in Texas and Colorado. [Trans. Vol. III, pp. 580-581,
592-93].
89.
There were times when the reported Opal tailgate price was actually higher than the
average index prices at the four locations in Texas and Colorado. [Trans. Vol. III, p.
533].
90.
No witness for Petitioner had any knowledge or would testify concerning what
consideration Cactus received for the gas received in Texas and Colorado or, specifically,
what price Cactus received for gas received and sold in Texas and Colorado pursuant to the
Exchange Agreement. [Trans. Vol. IV, pp. 647-48].
91.
Petitioner affirmatively declared that it had no information concerning what price
Cactus received for gas delivered by Petitioner to Cactus in Texas and Colorado pursuant
to the Exchange Agreement. [Trans. Vol. IV, pp. 648-50; Department Exhibit 520, pp.
000299-300, 000302].
92.
Petitioner’s expert, Mr. Hugh Schaefer, stated that he believed that Cactus,
by transferring the Wyoming gas to Petitioner and receiving in return gas in Texas and
Colorado, knew it would receive a return on its investment of $326,775,000 by receiving
gas at the higher values in Colorado and Texas. [Trans. Vol. II, p. 240].
The Interest Issue
93.
The Department took a new position in the audit on the valuation methodology to be
used to value the VPP production. In a
previous audit, when the volumetric production payment issue was first uncovered, the
Department verbally indicated that it might value the VPP gas by dividing the total MFC
produced by $326,775,000. This position was
never pursued because the parties agreed to set aside the VPP issue for the subsequent
audit. [Joint Exhibit 307; Petitioner
Exhibits 103, 104]. Prior to receiving
the March 3, 1998 letter, Petitioner had no indication that the Department was going to
take a position to value the VPP gas on the basis of the index prices at the four
out-of-state delivery points. [Trans. Vol. III, p. 546].
94.
During the entire time period, October 1992 through December 1996, Petitioner
believed it was paying its taxes consistently with Wyoming law and the Department’s
requirements. [Trans. Vol. III, p. 545].
95.
The Petitioner and its tax officials did not know, nor did they have any reason to
know during the time the taxes were being paid, that the Department would take the
position that it did regarding the effect of the exchange.
The March 3, 1998 Burton letter was written after Petitioner had fully paid
and reported all of its production. [Trans.
Vol. III, p. 547].
CONCLUSIONS OF LAW
96.
Petitioner’s notice of appeal was timely filed and the Board has jurisdiction
to decide this matter.
Burden of Proof
97.
Chapter 2, Section 19, of the State Board of Equalization’s Rules and
Regulations states in relevant part that:
Except as specifically provided by law or in this
section, the Petitioner shall have the burden of going forward and the ultimate burden of
persuasion, which burden shall be met by a preponderance of the evidence.
98.
Petitioner has the burden of going forward and the ultimate burden of persuasion,
to be met by a preponderance of the evidence that the Department of Revenue’s
assessment was arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law. Rules, Wyoming State Board of Equalization, Chapter 2 §19; Wyo.
Stat. §16-3-114(c).
99.
The burden of proof with respect to tax valuation is on the party asserting an
improper valuation. Amoco Production Co.
v. Wyoming State Board of Equalization, 899 P.2d 855 (Wyo. 1995).
100. An
administrative agency’s interpretation of statutory language in statutes which the
agency normally implements is entitled to deference, unless clearly erroneous. Mowry v. State ex rel. Wyoming Retirement Board,
866 P.2d 729, 731 (Wyo. 1993); Laramie County Board of Equalization v. Wyoming State
Board of Equalization, 915 P.2d 1184 (Wyo. 1996).
101. In
reviewing a valuation method, the task is not to determine which of various appraisal
methods is best or most accurately estimates fair market value; rather, it is to determine
whether substantial evidence exists to support use of the chosen method. Amoco Production Co. v. Wyoming State Board of
Equalization, 899 P.2d at 858.
102. The
Department’s valuation established for state-assessed property is presumed valid,
accurate, and correct, a presumption which survives until overturned by credible evidence. In the absence of evidence to the contrary, it is
presumed that the officials charged with establishing value, be it a county assessor or a
Department appraiser, exercise honest judgment in accordance with the applicable statutes,
rules, regulations, and other directives, which presumption survives until overturned by
credible evidence. Chicago Burlington
& Quincy Railroad Co. v. Brunch, 400 P.2d 494, 498-499 (Wyo. 1965).
103. A party challenging an assessment has the initial burden
to present credible evidence to overcome the presumption. A mere difference of opinion as
to value is not sufficient. Teton Valley Ranch v. State Board of Equalization, 735
P.2d 107 (Wyo. 1987); Hillard v. Big Horn Coal Co., 549 P. 293 (Wyo. 1976); Weaver
v. State Board of Equalization, 511 P.2d 97 (Wyo. 1973); CF&I Steel Corp. v.
State Board of Equalization, 492 P.2d 529 (Wyo. 1972); Chicago Burlington &
Quincy Railroad v. Bruch, 400 P.2d 494 (Wyo. 1965); J. Ray McDermott & Co. v.
Hudson, 370 P.2d 363 (Wyo. 1962); Certain-Teed Products Corp. v. Comily, 87
P.2d 21 (Wyo. 1939).
104. The
tax valuation issues in this case are governed by Wyoming Statute Section 39-2-208, which
in part provides as follows:
Valuation of oil and gas.
(a)
Crude oil, lease condensate and natural gas shall be valued for taxation as
provided in this section.
(b)
The mining or production process is completed:
(ii)
For natural gas, 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.
(c)
If the products defined in subsection (b) of this section are sold to a third
party, or processed or transported by a third party at or prior to the point of valuation
provided in subsection (b) of this section, the fair cash market value shall be the value
established by bona fide arms-length transaction.
105. Mineral taxpayers are required to report their tax
liability to the Department pursuant to a “self-reporting tax system” which
requires that taxpayers report their tax liability to the Department. Wyo. Stat §39-6-304(a). [Trans. Vol. IV, p. 705]. Wyoming Statute
Section 39-2-202(a) provides that based on information received from the reporting
taxpayer, the Department shall annually value the gross product for the preceding calendar
year.
106. The
Department is required to “[d]ecide
all questions that may arise with reference to the construction of any statute affecting
the assessment, levy and collection of taxes, in accordance with the rules, regulations
and orders and instructions prescribed by the department.” Wyo. Stat. § 39-1-303(a)(xxv) (recodified as
Wyo. Stat. § 39-11-102(c)(xii)).
There was a Sale or Exchange of the VPP Gas
Between Cactus and EOG.
107. The
Department concluded that upon production Cactus sold the oil and gas to Petitioner in an
arm’s length arrangement and that the consideration for this sale was the delivery of
gas to Cactus at designated delivery points in Colorado and Texas. The Department further decided that the
consideration for the Wyoming gas should be determined by the index price for which gas
traded at the four delivery points in Colorado and Texas.
The Department valued this arm’s length sale pursuant to Wyoming Statute
Section 39-2-208(c). Petitioner argues that
there was no arm’s length sale at the point of valuation, that the delivery of gas,
oil and condensate from Cactus to Petitioner was not a sale, but simply one part of the
larger set of obligations undertaken by Petitioner as a result of entering into the VPP. Petitioner contends the VPP was a complex
financing transaction in which the “exchange” of the Wyoming production for the
gas in Colorado and Texas was the last step in the repayment obligations that Petitioner
undertook in the VPP. Petitioner maintains
that because there was no arm’s length sale at the point of valuation, Cactus’
share of production was properly valued under Wyoming Statute Section 39-2-208(d).
108. The
issue of valuing gas which is subject to a volumetric production payment is a case of
first impression for the Board. There can be
little doubt that the VPP is an exceedingly complex transaction, one which the drafters of
the mineral tax valuation statutes would not have anticipated. Petitioner did an excellent job of educating the
Board on the construction and intricacies of volumetric production payments, and the
Department assisted by dissecting the crucial provisions of the transactions as they
relate to the valuation statutes.
109. There
was no evidence to suggest that the VPP was created to avoid the payment of state
severance and ad valorem taxes or to shelter additional consideration from taxation. Rather we believe that the VPP was created
expressly for the purpose of raising capital to finance the acquisition, exploration and
development of Petitioner’s oil and gas properties.
Because conventional financing was not available, Petitioner utilized production
payment financing; that is, they sold a real property interest in the oil and gas leases
to a consortium of banks for a limited period of time in exchange for $326,775,000. The
VPP transactions were constructed in such a way as to protect the purchasers of the
production payment from any potential creditors in bankruptcy of the seller.
110. Having
stated that we believe the primary purpose for the creation of the VPP was a financing
device, we are nevertheless unable to agree with Petitioner’s argument that the
delivery by Cactus of the VPP gas to Petitioner at the delivery point in Wyoming was
merely an “exchange” in fulfilment of one of the many contractual provisions of
the VPP.
111. “Sale”
is defined as:
A contract
between two parties, called, respectively, the “seller” (or vendor) and the
“buyer” (or purchaser), by which the former, in consideration of the payment or
promise of payment of a certain price in money, transfers to the latter the title and the
possession of property. Transfer of property
as providing of services for consideration. A
transfer of property for a fixed price in money or its equivalent. * * *
The term comprehends transfer of property from one party
to another for valuable recompense. * * *
To constitute a “sale,” there must be parties
standing to each other in the relation of buyer and seller, their minds must assent to the
same proposition, and a consideration must pass.
Black’s Law Dictionary, p. 1337 (6th
Ed. 1990).
112. Wyoming
Statute Section 34.1-2-106(a), defines the term “sale” in the Uniform Commercial
Code, as requiring a “passing of title from the seller to the buyer for a
price.” See also Wyo. Stat. §
34.1-2-401 (describing the characteristics of a sale).
113. “Fair
market value” is defined as “the amount in cash, or terms reasonably equivalent
to cash, a well informed buyer is justified in paying for a property and a well informed
seller is justified in accepting, assuming neither party to the transaction is acting
under undue compulsion, and assuming the property has been offered in the open market for
a reasonable time, . . .” Wyo. Stat.
§ 39-1-101(a)(vi).
114. The
Board’s rules in effect at the time of the VPP transaction defined “bona fide
arm’s-length sale” as “a transaction in cash or terms equivalent to cash
for specified property rights after reasonable exposure in a competitive market between a
willing, well informed and prudent buyer and seller with adverse economic interests and
assuming neither party is acting under undue compulsion or duress.” Rules, Wyoming State Board of Equalization,
Chapter 21 § 4(l) (1991).
115. 77 Am. Jur. 2d Vendor
and Purchaser § 1 (1997) states:
[A]sale is a transfer of real
property for a fixed value, that is, for a price in money or its equivalent, while an
exchange is a transfer of property for other property of value. In this regard, a transaction is a sale, even
though made for something other than money, where the property of one party is transferred
for that of the other at an agreed or market value, so that one thing is received
in payment of the price of the other, or where the property of one party is transferred as
actual part payment in price or value for the price placed on the property of the other. (Emphasis added).
116. “[T]he test for determining whether
a transaction constitutes a sale or an exchange is whether there is a fixed value
at which the exchange is to be made - it is considered a sale if there is a
fixed value and an exchange if there is not.”
Fain Land & Cattle Co. v. Hassell, 790 P.2d 242, 247 (Ariz. 1990), citing
Hawn v. Malone, 188 Iowa 439, 176 N.W. 393, 396 (1920) (Emphasis added).
It is no distortion of
language to employ the term “sale” so as to cover or include an exchange of
property. The courts in certain decisions
have made an effort to define each term with precision and it has been held that the
criterion in determining whether a transaction is a sale or exchange is whether there is a
determination of the value of the things exchanged. If
no price is set for either property, it is said to be an exchange; but if each is valued
and the difference is paid in money, it is a sale.
Gruver v. CIR, 142
F.2d 363, 3365-66 (4th Cir. 1994); See also Gill et al. v. Eagelton, 187
N.W. 871, 872-873 (Neb. 1922) (A transaction is a sale where properties are exchanged and
the consideration or value of the bargain is specified and measured in money terms).
117. The Department was correct in concluding
that a sale, not an exchange, took place between Cactus and Petitioner at the point of
valuation in Wyoming. The consideration or
the value of the bargain at the point of valuation in Wyoming was an equivalent amount of
gas, measured in MMBTUs, delivered to Cactus at specified delivery points in Colorado and
Texas, and the value of that gas was to be the index prices established in Colorado and
Texas. This value was clearly established in
the Hydrocarbon Exchange Agreement and in the Hydrocarbon Purchase and Sale Agreement. Thus the parties specifically agreed upon the
value of the properties to be exchanged, consistent with a sale rather than a simple
exchange. [Trans. Vol. IV, pp. 714-717; Joint Exhibit 302, pp. 00086, 00101].
118. The
fact that the VPP was a “volumetric production payment” rather than a
“dollar denominated production payment” does not create a relevant distinction
between an exchange and a sale. The parties
specifically agreed upon a value for the gas, that being the index prices in Colorado and
Texas. One of the parties to the VPP
documents, Cactus Hydrocarbon, which owned legal title to the VPP gas, was ultimately the
entity which owed severance and ad valorem tax to the State. EOG, under the terms of the VPP documents, assumed
the responsibility for reporting and paying the taxes on behalf of Cactus. Unfortunately, Cactus, one of the parties to the
transactions in question, was conspicuously absent in the contested case before this Board
and thus was unable to testify as to what consideration it bargained for at the time it
entered into the VPP transactions. The Board
is therefore left to surmise the intentions of Cactus when it entered into the VPP
transaction. However, all of the evidence in
the record suggests that Cactus, a consortium of banks, was very sophisticated and
knowledgeable about the natural gas industry and obviously was aware of the significant
differences in gas prices at the various market centers.
As Judy Matlock, Attorney for Petitioner, stated:
Mr. Chairman, the reason that
we are presenting this [EOG Exhibit 124] is to show what the parties knew or probably
should have known about the relative difference between what Cactus was going to give to
EOG in Wyoming and what EOG was going to give to Cactus at the four out-of-state points. This type of information would have been
available to them in making a decision about whether to enter into the purchase and sale
agreement and related transactions.
[Trans. Vol. II, p. 334]
John Harpole,
Petitioner’s expert witness on gas marketing, presented an exhibit which demonstrated
that there was a $0.55 average price differential between Opal and the four indices in
Colorado and Texas. [Petitioner Exhibit 124]. In
response to questions by the Board regarding the differences in gas prices at Opal verses
market centers in Texas, Mr. Harpole
testified:
Every time you trade a
forward price in the Rockies, you also trade a basis differential. You don’t get that NYMEX price because you
decide to go on the NYMEX exchange. You get a
discount to the NYMEX price in Wyoming, in Colorado and Utah. . . .
We know that our gas
isn’t worth as much simply because we’re not located [next] to commercial,
residential and industrial demand.
[Trans. Vol. II, pp.
350-351].
119. The Board agrees with the Department that
Cactus, holding marketable title to the VPP gas in Wyoming, had the right and ability to
do anything it desired with that gas. Cactus
was aware that gas sold in markets in Colorado and Texas had a substantially higher value than gas sold at Opal, so Cactus
bargained for and received a value for the gas to be exchanged which was specifically tied
to the index prices in Colorado and Texas. The negotiation for a specific index price is
consistent with a sale rather than a simple exchange.
120. Petitioner devoted a great deal of time and
effort, through the testimony of its experts, to demonstrate how the four VPP documents
were inextricably linked and related as a “financing transaction” and the
delivery of gas from EOG to Cactus in Wyoming was a “disposition of lease
production.” However, the Department, during its trip to
Petitioner’s offices in Houston, discovered a fifth agreement, the Hydrocarbon
Purchase and Sale Agreement dated September 28, 1992, between Cactus Hydrocarbons and
Enron Gas Marketing. This is not to imply
that Petitioner attempted to hide this document from the Department, because it did
provide the document, but clearly Petitioner has attempted to minimize its importance. Petitioner’s witnesses professed ignorance
about its contents, presumably because Petitioner’s marketing affiliate, Enron Gas
Marketing, was a party to that agreement, not EOG. Yet,
virtually every provision of this September 28th agreement referenced the
original four VPP documents and the Board sees no legitimate reason to draw a distinction
between EOG and Enron Gas Marketing. Enron
Gas Marketing was the marketing affiliate for EOG and without its marketing
affiliate’s ability to deliver an equivalent amount of gas to Cactus at the delivery
points in Colorado and Texas, EOG could not have performed one of the primary
considerations of the VPP documents.
121. The Board concludes that the Department was
correct in declining to read into Wyoming Statute Section 39-2-208(c) an exception for
taxpayers who transfer and sell property pursuant to a purported “financing
transaction.” “If language of
statute is clear and unambiguous, court must abide by its plain meaning.” Amrein v. State, 836 P.2d 862, 864 (Wyo.
1992). Parties are bound by the plainly
stated terms of a contract. Emmett Ranch,
Inc. v. Goldmark Engineering, Inc. 908 P.2d 941, 945 (Wyo. 1995). Courts may not rewrite a clear and unambiguous
contract under the pretext of interpretation. Synder
v. Lovercheck, 992 P.2d 1079, 1089 (Wyo. 1999). Regardless
of how complicated and sophisticated the VPP transaction appears upon first reading, the
intention of the parties was not hidden. Cactus
entered into the contracts for the express purpose of making a substantial profit by
selling the gas delivered to it by EOG at the delivery points in Colorado and Texas. Cactus clearly understood that the value of gas
was significantly higher at the index prices in Colorado and Texas than in Wyoming. That is what Cactus bargained for when it entered
into the agreements to purchase the real property interest in gas in the ground. EOG, in order to entice Cactus into purchasing the
production payment, purposely and deliberately crafted the VPP documents in such a way as
to ensure that the production payment would not be construed as a mortgage.
Although properly drafted
production payments should be excluded from the bankruptcy estate of an operator/debtor,
care must be taken to ensure that the production payment cannot be characterized as a
mortgage, thereby reducing its owner to just another creditor in the operator’s
bankruptcy proceeding.
39 Rocky Mt. Mineral Law
Inst. §16.04[3] (1993). See also [Joint Exhibits 300, 301,
302, 304].
There is no reference to
mortgagor, mortgagee, borrower, borrowee, lender,
loan, mortgage, collateral or debt within the body of the VPP documents. But there are references to buyer and seller,
grantor and grantee, all language that is consistent with a sales transaction.
The First Sale of the
VPP Gas Occurred at the Custody Transfer Meters in Wyoming.
122. The Board also rejects any notion that
Cactus did not have full marketable title and right to possession of the VPP gas in place
when it sold the gas to EOG. In order to
provide Cactus with full protection from liability in any potential bankruptcy of EOG, it
was necessary for Cactus to have total ownership of the VPP gas so that the production
payment could not be construed as a mortgage. It
would be disingenuous to suggest that Cactus had full marketable title for purposes of
claiming protection from potential bankruptcy while disavowing Cactus’ ownership in
order to claim that no sale had occurred between Cactus and EOG for state tax purposes.
123. The Board holds that the first sale of the
produced VPP gas in Wyoming occurred at the point of valuation (custody transfer meters). The Department was correct in determining that the
VPP gas should be valued pursuant to Wyoming Statute Section 39-2-208(b), which provides,
“Crude oil, lease condensate and natural gas shall be valued for taxation as provided
in this section,” and Wyoming Statute Section 39-2-208(c) which provides; “If
the products defined in subsection (b) of this section are sold to a third party, or
processed or transported by a third party at or prior to the point of valuation provided
in subsection (b) of this section, the fair cash market value shall be the value
established by bona fide arm’s-length transaction.”
The Parties to the VPP
Transactions Bargained For Index Prices in Colorado and Texas.
124. The Department, in accordance with its
statutory authority, properly considered all of the contracts between Cactus and EOG, and
between Cactus and Enron Gas Marketing, to determine that Cactus and EOG mutually agreed
and bargained that Cactus would receive an index price for transfer and sale of the
Wyoming VPP gas through the exchange with EOG. Hillard
v. Big Horn Coal Company, 549 P.2d at 298-299 (Department must consider all factors
which relate to value). See also [Trans. Vol.
IV, pp. 660-661, 709-713]. The basic elements of a contract are offer,
acceptance, and consideration. Boone v.
Frontier Refining, Inc. 987 P.2d 681, 687 (Wyo. 1999). “A
generally accepted definition of consideration is that a legal detriment has been
bargained for and exchanged for a promise.” Loghry
v. Unicover Corp., 927 P.2d 706, 712 (Wyo. 1996) citing Moorcroft State Bank v.
Morel, 701 P.2d 1159, 1161-1162 (Wyo. 1985). There
can be no question that Cactus agreed to transfer and sell the VPP gas to EOG in Wyoming
in exchange for an equivalent amount of MMBTUs delivered to Cactus at four points in Texas
and Colorado. If Cactus had not been
contemplating receiving the higher index prices in Texas and Colorado, there would have
been no reason to contractually provide for delivery at those specified points. “In interpreting a contract, court’s
primary concern is the true intent and understanding of the parties at the time and place
the contract was made.” Fremont
Homes, Inc. v. Elmer, 974 P.2d 952, 956 (Wyo. 1999).
The Department Did Not
Violate the Uniformity of Assessment Requirement of the Wyoming Constitution by Valuing
the VPP Gas Differently from the Value of the Non-VPP Gas Sold by EOG at Opal.
125. The Wyoming Supreme Court, discussing the fair and
uniform valuation of property, has explained:
In performing its
constitutional and statutory functions the Board may arrive at different valuations for
different property, but the method or system used by the Board must lead to a fair value,
and the properties must be assessed at a uniform rate.
Scott Realty Co. v. State
Board of Equalization, 395 P2d 289 (Wyo. 1964).
The fact that all of the gas
was produced from the same wells does not require that the gas be valued precisely the
same. The VPP gas was owned by Cactus, not
EOG, and was sold under different circumstances for different mutually agreed-upon
consideration. Neither due process nor equal
protection imposes upon the Department any rigid rule of identical valuation. Severance taxes and ad valorem taxes are based
upon the gross receipts received for the product. Therefore
it is not uncommon for different producers to receive different consideration for their
mineral products based upon their ability to negotiate a good price in the marketplace. All that is required is that a uniform rate of
taxation be applied to the value received.
The Audit Conducted by DOA
Was Not Flawed.
126. Petitioner argued that the audit was somehow
flawed because the auditors did not compare EOG’s actual reporting and payment of
taxes and instead only computed a difference between the value based on index prices in
Colorado and Texas and the Opal index prices. The
DOA announced its intention from the beginning to audit the VPP gas production which had
been identified and set aside as a potential problem in the prior audit. The auditor took painstaking care to isolate the
VPP gas production from EOG’s non-VPP gas production and took into account any
adjustments for taxes and exempt royalties. The
Board believes the auditing technique used by the DOA was a reasonable approach,
particularly when the company was given an opportunity during the course of the audit to
raise objections. Similarly unpersuasive is
Petitioner’s argument that the DOA failed to determine how EOG’s ultimate tax
liability would be affected by considering the amounts that EOG paid for taxes on oil,
condensate and natural gas liquids (NGLs). The
DOA specifically asked EOG to provide information concerning the NGLs in the audit
engagement letter. EOG’s Accounting
Director never objected to the DOA’s treatment of the NGLs when he responded to the
DOA’s preliminary issue letter. His
failure to do so then, and to now, raise the issue on appeal is untimely. A party’s failure to object or assert known
claims may constitute waiver or give rise to an estoppel defense. Dawson, Corbett & Shelp v. Lierance &
Canfield Construction Co., 235 P.2d 457, 463 (Wyo. 1951). In any event, the DOA accepted the values
for oil, condensate and NGL’s reported by Petitioner as they were sold at Opal.
The Department Did Not
Correctly Calculate The Interest.
127. The Board agrees with Petitioner that EOG
did not know nor did it have any reason to know at the time it was reporting and paying
its taxes that the Department would apply the valuation theory set forth in Director
Burton’s March 3, 1998, letter. This is
particularly true because the Department initially indicated that it might value the VPP
gas using a different method than was ultimately chosen.
We do not believe it is reasonable to impose interest on Petitioner for the time
period prior to the March 3, 1998, letter because of the uncertainty of the
Department’s position. Interest should
be imposed only from March 3, 1998, forward.
The Board’s Ruling
Denying Petitioner the Opportunity to Present Evidence on the Presence of Dehydrators and
the Proper Point of Valuation Was Correct.
128. On the second day of the hearing the Board heard
arguments of counsel regarding Petitioner’s position that the Department had used the
wrong point of valuation in its audit. Petitioner
asked the Board to rule that it be permitted to introduce evidence and make a legal
argument concerning the point of valuation. Petitioner’s
argument was that Wyoming Statute Section 39-2-208(b)(ii) sets the point of valuation for
natural gas at the initial dehydrator. The
point at which the gas transfers from Cactus to EOG was at the custody transfer meter. Because the meter is downstream of the point of
valuation, that being the dehydrator, there is a technical statutory argument that the
point of valuation at the outlet of the dehydrator is the proper point of valuation, not
the meter which the Department used. According
to Petitioner, because it believes the first arm’s length sale occurred downstream
from the outlet of the initial dehydrator, i.e., at the Opal plant, the Department
was required to select one of the four valuation methodologies listed in Wyoming Statute
Section 39-2-208(d) which included “comparable sales” and “comparable
value.” The Board heard the arguments of
counsel, reserved ruling at that time, and then issued its oral decision on October 25,
2001, near the end of the hearing, denying Petitioner’s legal argument on the point
of valuation theory. The Board allowed the
parties to file written briefs on this issue and to submit them along with their Proposed
Findings of Fact and Conclusions of Law.
129. Despite the fact that the Board withheld its
ruling on Petitioner’s motion until late in the hearing, there was, in fact, evidence
introduced regarding the point of valuation. Although
none of Petitioner’s witnesses could detail or testify with any certainty as to the
configuration of the nearly 1000 wells that were in the field, there was testimony that
some had “combo” units (orifice meter and dehydrator located within the same
small building), and some did not. The Board
also accepted the testimony of Petitioner’s expert witness, Doug Weaver,
Vice-President and General Manager, who testified that in December of 1996, at the end of
the audit period, approximately 880 of the approximately 970 wells at issue in this case
were equipped with dehydrators. [Trans. Vol. IV, p. 784].
130. As a general rule, most of the VPP
wells were configured similar to the well depicted in Petitioner’s Exhibits 109,
pages 42, 42a, 42b, 43 and 43a. These
Exhibits depict a “combo” unit which is essentially a small metal building
housing the dehydrator and the orifice meter which in turn was connected to a custody
transfer meter attached to the outside of the building.
The distance between the dehydrator and the custody transfer meter was rarely more
than a few feet in distance. The
“combo” unit is designed primarily to protect the dehydrator and meter from the
extreme winter conditions in the Big Piney field. Petitioner’s
Exhibit 141 is a schematic diagram of how the typical natural gas well site was
configured. Petitioner’s Exhibit 109, p. 43a, is a photograph of a well site which
gives one a perspective of the distances between the well bore, production tanks,
separator, combo unit and the sales line. Based
on the testimony in the hearing, the Board concluded that these Exhibits were
representative of the typical gas well in the Big Piney field.
131. In its Motion for Reconsideration,
Petitioner indulged in a hyper-technical argument that if the Department’s position
was correct that a arm’s length sale took place at the custody transfer meter under
the VPP documents, then the Department should have used an alternative valuation method
under the statute because technically the gas was sold a few feet away from the outlet of
the dehydrator which is downstream from the statutory point of valuation. The Board finds this argument to be both
breathtakingly ingenious and nonsensical at the same time.
The reason why the Wyoming Legislature deemed it necessary to establish a point of
valuation was because it was important to separate upstream production costs from
downstream transportation costs, the latter being deductible from the gross value received
by the producer at the wellhead. Many times
this becomes important in gas fields where the wellheads, dehydrators and custody transfer
meters are located miles apart. When the
custody transfer meter and the outlet of the dehydrator are located virtually side-by-side
as they are in this case, the distance is of no significance whatsoever. The Board found Petitioner’s argument to be
irrelevant at the hearing and after further reviewing the record, we find it to be
irrelevant still.
132. The Board also finds that Petitioner’s
motion to be prejudicial to the Department because of unfair surprise, and due to
Petitioner’s failure to raise and plead this issue on any number of occasions during
the course of the audit. During the nearly
two years of the audit, Petitioner never raised an issue with the DOA or Department about
the existence of dehydrators and any possible legal significance that might have as to the
point of valuation. Petitioner became aware
of the Department’s valuation decision on March 3, 1998, when it received the Burton
letter. Petitioner did not raise the issue in
its Notice of Appeal filed on January 16, 2001, nor did it raise the issue during
discovery. The Stipulated Updated Summary of
Uncontested Facts, signed by both parties on October 15, 2001, states in Paragraph 5 that:
“Title to the production attributable to Cactus’ ownership of the VPP passed to
EOG at field custody transfer meters in Wyoming pursuant to the Hydrocarbon
Exchange Agreement.” (emphasis
provided).
134. One week before the hearing began on October
22, 2001, Petitioner served its “Updated Summary of Contentions” upon the
Department. This appears to be the first
clear reference to the presence of dehydrators at the well sites and Petitioner’s
new, alternative theory. Petitioner failed to
provide the Department any reasonable or timely notice that it intended to raise a point
of valuation issue and in fact, appeared to endorse the notion that the custody transfer
meters were the proper point of valuation. To
allow Petitioner’s argument to be admitted at the eleventh hour would be unduly
prejudicial to the Department since the Department would have had virtually no time in
which to investigate which wells may or may not have had dehydrators. Furthermore, making such determination many years
after the time of the production, and of the audit, might will be proved impossible,
Finally, the Board’s rules do not allow motions to be filed within twenty (20) days
of a hearing. Rules, State Board of
Equalization, Chapter 2, §12(a), Chapter 2 §11 (October 20, 1995), Chapter 2 §13
(February 1990).
ORDER
IT IS THEREFORE HEREBY
ORDERED:
A. The decision of the Department of Revenue
assessing EOG Resources, Inc. for a production tax audit conducted by the Department of
Audit for production years 1992 through 1996 is affirmed.
B. The decision of the Department of Revenue
that a bona fide arm’s length sale of natural gas occurred between Cactus
Hydrocarbons and EOG at the custody transfer meters of the wells located in Wyoming is affirmed.
C. The decision of the Department of Revenue to
value the sale of the VPP natural gas using the average of index prices of four specified
delivery points in Colorado and Texas is affirmed.
D. The decision of the Department of Revenue to
assess interest against Petitioner from the dates that the natural gas was produced until
the present is reversed and the case is remanded to the Department for recalculation
of the interest assessment based on the tax deficiency from March 3, 1998 to the
present.
DATED this 25th
day of June, 2002.
STATE BOARD OF EQUALIZATION
ATTEST:
Wendy
J. Soto, Executive Secretary