Exxon Mobil Corp. v. Wyoming Dep't of Revenue

• Decision Date: 09 December 2011
• Docket Number: S–11–0048.,Nos. S–11–0047,s. S–11–0047
• Citation: 2011 WY 161,266 P.3d 944
• Parties: EXXON MOBIL CORPORATION, Appellant (Petitioner), v. WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).State of Wyoming, through Wyoming Department of Revenue, Appellant (Cross–Petitioner) v. Exxon Mobil Corporation, Appellee (Cross–Respondent).
• Court: Wyoming Supreme Court

2011 WY 161

266 P.3d 944

EXXON MOBIL CORPORATION, Appellant (Petitioner),

v.WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).State of Wyoming, through Wyoming Department of Revenue, Appellant (Cross–Petitioner)

v.Exxon Mobil Corporation, Appellee (Cross–Respondent).

Nos. S–11–0047

S–11–0048.

Supreme Court of Wyoming.

Dec. 9, 2011.

Representing Exxon Mobil Corporation: Lawrence J. Wolfe, P.C. and Patrick R. Day, P.C., Holland & Hart LLP, Cheyenne, Wyoming; Brent R. Kunz, Hathaway & Kunz, P.C., Cheyenne, Wyoming. Argument by Mr. Day.

Representing Wyoming Department of Revenue: Gregory A. Phillips, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General. Argument by Mr. Hardsocg.

Before GOLDEN, HILL, VOIGT, and BURKE, JJ., and CRANFILL, D.J.

CRANFILL, District Judge.

[¶ 1] This case arrives before the Court once again from a decision rendered by the State Board of Equalization (“Board”) concerning the valuation point for tax purposes of the natural gas production from the LaBarge Field in Sublette County. Previously, in Exxon Mobil Corp. v. State of Wyo., Dep't of Revenue, 2009 WY 139, 219 P.3d 128 (Wyo.2009), this Court interpreted the terms “initial dehydrator” and “processing facility” and analyzed the proportionate profits valuation method. The Court, however, remanded one issue to the Board: specifically, whether the meters located at the LaBarge Field well sites were “custody transfer meters” as defined by Wyo. Stat. Ann. § 39–14–203(b)(iv) ¹ or volume meters for Exxon's share of gas production. The Board held that the meters were not custody transfer meters for Exxon's share of gas production because Exxon did not actually transfer its gas to another entity at the meters. The Board further held that the same meters were custody transfer meters for the gas produced by two other working interest owners, Howell Petroleum Company (“Howell”) and Yates Petroleum Corporation (“Yates”). Howell and Yates were not parties to the action.

[¶ 2] Both Exxon and the State of Wyoming, Department of Revenue (“Department”) appealed the Board's decision to the district court, Exxon appealing in S–11–0047 and the Department appealing in S–11–0048. Pursuant to W.R.A.P. 12.09(b), the district court certified the cases directly to us for review. The Court consolidated the two appeals for decision. We will affirm the Board's determination that the meters were not custody transfer meters for Exxon's gas, but reverse the Board's determination that the meters were custody transfer meters for Howell's and Yates' gas.

ISSUES

[¶ 3] Exxon states the issues as follows:

1. Did the State Board of Equalization err in its application of the statutory term “custody transfer meter” to value ExxonMobil's natural gas production?

2. Did the State Board of Equalization err when it held that working interest owners Howell and Yates deliver their LaBarge natural gas stream to ExxonMobil through “custody transfer meters” at the wells, as that term is used in Wyo. Stat. § 39–14–203(b)(iv)?

The Department identifies similar issues, albeit phrased differently:

1. Did the State Board have authority to rule on the point of valuation for natural gas owned by two entities, not parties to the State Board's proceedings—Howell Petroleum Corporation and Yates Petroleum Corporation (and their successors)?

2. If so, did the State Board correctly determine that the allocation meters were “custody transfer meters” for Howell Petroleum Corporation's and Yates Petroleum Corporation's 2005 gas production?

3. Did the State Board of Equalization correctly determine that because Exxon Mobil Corporation did not transfer custody or control of its LaBarge gas production at well site meters, the meters were not “custody transfer meters” for determining the taxable point of valuation for Exxon's gas production in accordance with Wyo. Stat. Ann.. § 39–14–203(b)(iv)?

4. Because it was admitted that Exxon Mobil Corporation did not transfer its LaBarge gas at the meters in question, did the State Board of Equalization correctly reject Exxon's attempt to adopt, for its own gas, the point of valuation it imputed to another taxpayer's gas interest?

FACTS

[¶ 4] The facts in this case are essentially undisputed. This Court will therefore rely largely on paraphrases of and quotations from the Board's Findings of Fact. The Court commends the Board for providing a comprehensive and detailed factual background.

[¶ 5] Exxon operates three federal natural gas units, Fogarty Creek Unit, Lake Ridge Unit and Graphite Unit. These units constitute the LaBarge Field in the Bridger–Teton National Forest in Sublette County, Wyoming. Exxon is the sole lessee of the federal leases in the Lake Ridge and Graphite Units and therefore owns all of the unitized substances in these units. There are, however, other leaseholders in the Fogarty Creek Unit. Specifically, Howell and Yates, or their successors in interest,² own seven percent (7%) of all unitized substances in the Fogarty Creek Unit. Howell's and Yates' seven percent (7%) interest in the Fogarty Creek Unit accounts for five percent (5%) of total production from all three units combined.

[¶ 6] Exxon produces LaBarge sour gas from eighteen (18) wells. Each well site has a “well building” that contains equipment to assist in production and movement of the gas from the wellhead downstream. Near the wellheads are meters that measure gas volumes.

[¶ 7] Each unit is governed by a unit operating agreement which identifies the “operator” for all production within the unit, and defines how each unit will be developed. Exxon is the operator for all three units. The unit operating agreement designates the rights and responsibilities of the unit operator and working interest owners. The unit operating agreement for the Fogarty Creek Unit requires Howell and Yates to either take their gas in kind or separately dispose of it. The agreement further states that should Howell or Yates not take their gas in kind or separately dispose of it their gas will be “banked.” In other words, Howell's and Yates' respective shares of gas are left in the ground and one-hundred percent (100%) of production is attributed to Exxon until Howell and Yates can take their gas in kind or separately dispose of it through a processing agreement or otherwise.

[¶ 8] Further downstream from the units is the Shute Creek processing facility, which was first constructed in 1984. At the time the Shute Creek plant was constructed, Exxon offered Howell and Yates the opportunity to acquire ownership interest in the plant. Howell and Yates declined to exercise any ownership interest in the facilities constructed downstream of the LaBarge Field. However, because Howell's and Yates' shares of the gas would have to be processed at the Shute Creek facility the parties attempted to negotiate a processing agreement for Howell's and Yates' share of the gas. After negotiations reached an impasse, Howell and Yates filed an antitrust lawsuit against Exxon.

[¶ 9] The antitrust litigation was resolved by the parties negotiating a complex processing agreement, referred to as the “Howell and Yates Agreements.” The basic term of the agreement was that Exxon would process Howell's and Yates' share of gas from the Fogarty Creek Unit in exchange for Howell and Yates paying Exxon a fee equal to sixty-five percent (65%)of the gross revenues received from the sale of their shares of production.

[¶ 10] Exxon exclusively owns all facilities downstream of the wing valve on the wellhead including the gathering lines, manifolds, Black Canyon facility, the pipeline from Black Canyon to Shute Creek, and Shute Creek. All the cost for facilities after the wing valve are incurred by Exxon, which is compensated for the costs of owning and operating these facilities for the benefit of the other working interests owners by the terms of the Howell and Yates Agreements.

[¶ 11] Article 7.1 of the Howell and Yates Agreements provides that possession, custody and control of Howell's and Yates' gas is transferred to Exxon for processing immediately downstream of the wing valve on the wells, as measured by the meters located at each well. Accordingly, Exxon takes custody of, but not title to, the raw gas at the wing valve and meters. Title to the gas remains with the working interest owner, however.

[¶ 12] Each Fogarty Creek Unit well has multiple “working interest” owners. ³ Despite the fact that Fogarty Creek is unitized, each well has a slightly different working interest ownership because of the parties who are “nonconsents,” ⁴ and because the wells were originally drilled in a manner inconsistent with the federal unit drilling blocks. Exxon must therefore perform an exact accounting for each Fogarty Creek well separately to determine what percentage ownership in each well is attributable to Exxon and the other working interest owners. The meters at the wells are used to measure this production and to properly account for the working interest and royalty ownership of the gas. Although Exxon owns the entire working interest in the Lake Ridge and Graphite Units, each well must be individually metered since the gas from all three units is combined for processing through common facilities downstream. The total production for the LaBarge Field is allocated to working interest owners based on each individual well. In order to properly calculate one working interest owner's share of production in a Fogarty Creek well, Exxon must know the amount of production of all the LaBarge Field wells. The Bureau of Land Management Minerals Management Service (“MMS”) also requires individual meters at each well in all of the LaBarge Field units.

[¶ 13] The matters giving rise to the instant litigation commenced in 2006 when Exxon filed its annual gross products return with the Department reporting its 2005 natural gas production from the LaBarge Field. The...