EOG RESOURCES v. Department of Revenue, 02-231.
Decision Date | 31 March 2004 |
Docket Number | No. 02-231.,02-231. |
Citation | 2004 WY 35,86 P.3d 1280 |
Parties | EOG RESOURCES, INC., formerly Enron Oil and Gas Corporation, a Delaware corporation, Appellant (Petitioner), v. DEPARTMENT OF REVENUE, State of Wyoming, Appellee (Respondent). |
Court | Wyoming Supreme Court |
Representing Appellant: Lawrence J. Wolfe and John P. Glode of Holland & Hart, LLP, Cheyenne, Wyoming; Judith M. Matlock of Davis, Graham & Stubbs, LLP, Denver, Colorado; Steven P. Williams, Assistant General Counsel-North America, EOG Resources, Inc., Denver, Colorado. Argument by Mr. Wolfe.
Representing Appellee: Patrick J. Crank, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General. Argument by Mr. Hardsocg.
Before HILL, C.J., and GOLDEN, LEHMAN, KITE, and VOIGT, JJ.
[¶ 1] Appellant EOG Resources, Inc. (EOG) paid severance and ad valorum tax for severance of minerals as part of a financing arrangement known as a volumetric production payments (VPP) agreement.1 The Department of Revenue (Department) reviewed the several transactions comprising the VPP agreement and determined that an arm's length sale of minerals had occurred. It calculated a valuation based on contract pricing and assessed additional tax and interest. The Board of Equalization (Board) affirmed the Department's actions although it limited the interest assessment. EOG appealed on the basis that the entirety of the VPP agreement constituted a financing agreement warranting treatment as a non-arm's length sale.
[¶ 2] We affirm the Board's order.
[¶ 3] EOG presents this statement of the issues for our review:
The Department presents the following statement of the issues:
[¶ 4] EOG and its predecessors in interest have owned and operated wells in Lincoln and Sublette Counties since the 1950s and produce primarily from the LaBarge Platform and the Moxa Arch formations. In 1992, EOG owned and operated over 800 wells in Sublette and Lincoln Counties. EOG had a significant lease position and a huge reserve base but, because of low gas prices, EOG was unable to finance additional development of the reserves. In 1992, in order to finance the development of its oil and gas reserves, EOG made the decision to enter into a volumetric production payment transaction.
[¶ 5] A volumetric production payment is a common form of an oil and gas financing transaction that has been used for decades. A producer sells its production for a limited duration in exchange for capital funds. The buyer receives a share of oil and gas produced for a limited time, free and clear of any of the costs of production, and its production payment interest is a real property interest of limited duration. Because the buyer owns the production, it has protection from the bankruptcy of the producer if the conveyance does not create a mortgage. Generally, production payment transactions consist of three documents, namely, a purchase and sales agreement, a conveyance, and a production and delivery agreement.
[¶ 6] In this case, the VPP transaction was entered into between EOG and Cactus Hydrocarbon 1992-A Limited Partnership II (Cactus) on September 25, 1992. The VPP transaction contained all three documents referenced above as well as another agreement providing for an exchange (Exchange Agreement). Under the purchase and sales agreement, Cactus gave EOG $326,775,000 in exchange for a production payment interest in reserves in the ground. EOG operated the properties subject to the VPP agreement and produced the oil and gas, including the oil and gas now owned by Cactus. Although Cactus' ownership made it responsible for reporting and paying taxes on its share of product, the VPP agreement provided that EOG would assume all responsibility for reporting and paying all applicable taxes.
[¶ 7] Of particular significance to this case is that the VPP transaction also included an Exchange Agreement where Cactus delivered the minerals back to EOG and, simultaneously, EOG agreed to deliver gas to Cactus at four locations in Colorado and Texas. The VPP documents specified that delivery from Cactus back to EOG was accomplished at meters close to the well site. This variation of the standard VPP agreement raised questions whether this exchange of product altered the VPP agreement's nature from a standard financing arrangement to an exchange on terms equivalent to cash, i.e., a sale. The amounts of gas delivered at the Colorado and Texas downstream locations were equivalent on an MMBTU2 basis to the volumes of oil, gas and condensate delivered by Cactus to EOG at the Wyoming locations. More facts relating to the Exchange Agreement are provided below in the discussion section.
[¶ 8] Cactus executed a fifth document simultaneously with the Exchange Agreement. The fifth document, however, was between Cactus and a third party, Enron Gas Marketing, Inc. (EGM). Under the fifth document (EGM Purchase Agreement), Cactus sold the Colorado and Texas gas to EGM and priced it based on index pricing specific to those locations. The Board found that index pricing in those Colorado and Texas locations was generally higher than for Wyoming.
[¶ 9] The existence of this Exchange Agreement in conjunction with the EGM Purchase Agreement caused the Department to determine that this VPP transaction was something more than a financing arrangement. The Department's review of all five documents led to its conclusion that this Exchange Agreement resulted in an arm's length sale of natural gas3 and based the fair market value on the index pricing referenced in the agreement. The Department also determined that the sale occurred at a point of valuation that required application of § 39-2-208(c).4 EOG had reported a non-arm's length exchange of natural gas at the well head and applied an alternative tax method as provided in § 39-2-208(d).5 The Department assessed additional severance tax liability in the amount of $1,723,952.02 and additional interest in the amount of $1,187,608. The...
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