LAC 61:V.907 — Valuation of Oil, Gas, and Other Wells

A. The valuation procedure below, which provides that the presence of oil or gas or the production thereof may be included in the methodology to determine the fair market value of an oil or gas well for ad valorem taxes, covers only that portion of the well, including the well’s associated leasehold equipment or “production train” subject to ad valorem taxation. Further, the valuation procedure below provides that no further or additional tax or license shall be levied or imposed on oil, gas or sulphur leases or rights and no additional value shall be added to the assessment of land due to the presence of oil, gas or sulphur or their production therefrom.
B. The presence of oil or gas, or the production thereof, is to be included in the year-by-year discounted cash flow (DCF) model described below and as adopted by the Louisiana Tax Commission to determine the fair market value of an oil or gas well and its associated leasehold equipment for ad valorem tax purposes in Louisiana.
1. Production Forecast—oil and gas or other hydrocarbon production history for the well, lease or facility represented by the LUW (Lease, Unit, or Well) code is to be analyzed by the assessor for relevant trends and patterns established as of January 1 of the current tax year, using Decline Curve Analysis or other accepted empirical method. A commensurate forecast of future production, or production potential, attributable to only the working interest owner(s), is to be made by the assessor as of January 1 of the current tax year. This production forecast will consist of a Start Rate as of January 1 (daily average barrels or mcf) and up to five exponential percentage decline rates for designated periods of time in the DCF. Alternatively, a hyperbolic forecast formula may be used when appropriate.
2. Price Forecast—the forecasted oil and gas or other hydrocarbon production amounts for the well, lease or facility represented by the LUW code, attributable to the working interest owner(s), are to be factored by an oil or gas or other hydrocarbon price forecast as of January 1 of the current tax year as annually determined by the Tax Commission to result in a forecasted gross revenue stream attributable to the working interest owner(s). This price forecast is based on the following guidelines:
a. the forecasted oil and gas or other hydrocarbon price forecast shall begin with the immediately previous calendar year’s monthly average price (starting price) received by the working interest owner(s) for the oil and gas or other hydrocarbons produced and sold from the lease or facility represented by the LEW code on the open market to an unaffiliated third party or otherwise at a market-oriented rate. The source of this starting price shall correspond to severance tax data as reported by the operator to the Louisiana Department of Revenue;
i. this previous year average price may vary by property;
ii. if oil and gas or other hydrocarbons were either not produced or not sold for one or more months of the previous calendar year, the average price for which similar oil and gas from comparable interests was selling during that month is to be used;
b. the previous year average price is to be increased or decreased, whichever is appropriate, for year 1 of the discounted cashflow analysis with a Price Adjustment Factor which will be commensurate with the percentage increase or decrease, respectively, as indicated by the forecasted price in the Energy Information Administration (EIA) January STEO (Short-Term Energy Outlook) report for the current tax year, relative to the actual price shown for the immediately previous calendar year in the same publication. These two prices can be referenced in the report’s Table 2. Energy Prices:
i. for oil, reference “West Texas Intermediate Spot Average” (dollars per barrel);
ii. for natural gas, reference “Henry Hub Spot” (dollars per million Btu);
iii. this price adjustment factor is to be used in the appraisal of each property, to the extent the property’s forecasted cash flow extends to year 1;
c. the year 1 price used in the DCF appraisal is to be either increased or decreased, whichever is appropriate, in four more or less equal percentage increments to a year 5 price considered to be representative to a long-term average price available for the sale of oil and gas from the property as calculated with reference to the last 20 years of historical oil and gas price data from the Energy Information Administration (EIA);
i. the long-term average price is to be calculated after removal of outlier prices, if any, within the 20-year range, defined as any historical price outside of one standard deviation from the simple average.
ii. these percentages are to be used in the appraisal of each property, to the extent the property’s forecasted cash flow extends to either years 2, 3, 4, or 5.
d. the year 5 price used in the DCF appraisal is to be held flat for all years thereafter in the DCF, to the extent the property’s forecasted cash flow extends past year 5;
e. the five oil and gas price forecast percentages discussed above, along with the zero percent escalation for any years in the DCF past year 5, together constitute the “price forecast scenario” as established by the Tax Commission and are to be used in the DCF appraisal of each property. This oil and gas price forecast scenario will be published on the LTC website.
3. Expense Forecast—in the DCF appraisal of the property, the forecasted gross revenues attributable to the working interest owner(s) are to be reduced for the allowance of reasonable and defendable direct costs of operation, as well as, all applicable state and local tax burden, to result in a forecasted net income stream attributable to the working interest owner(s) of the specific property being appraised. This cost allowance should represent the amount and timing of recurring expense, including overhead, along with any applicable non-recurring (capital) expense(s), typical to the area and similar operations and not necessarily the exact expenses incurred in any previous year, deemed reasonable and necessary for the property to achieve the forecasted oil and gas production amounts:
a. an assessor should make effort to obtain and consider actual historical expenses being incurred by the operator as documented on expense statements required to be provided to the assessor pursuant to §903.C. Absent this information, an assessor may assume a minimal amount and/or otherwise rely on their own judgement using best information available;
b. the increase or decrease of direct operating expense allowance in the cash flow appraisal will correspond to the increase or decrease in forecasted price, as established by the Tax Commission;
c. the percentage increase or decrease for each forecasted year of the cash flow appraisal will be calculated at 1/3 of the percentage increase or decrease in price for that year relative to the previous year price, referencing the price of the property’s primary hydrocarbon being produced;
d. the provision for increase or decrease of the direct operating expense allowance does not pertain to separate allowance, if any, of capital expense(s) in the property’s cash flow appraisal.
4. Discount Rate—the forecasted net income amounts in the property’s DCF appraisal are to be discounted (reduced) to present day worth by application of a discount factor for each year of the forecasted cash flow commensurate with an appropriate discount rate:
a. the discount rate may vary by property;
b. base discount rates to account for the time cost of money and general industry risk are to be established by the Tax Commission. These discount rates separately extend to oil wells vs. gas wells and are shown in Table 907.C-2. This is a minimum rate whereas the assessor may use a higher rate to account for additional property-specific risks and/or other considerations as appropriate for the determination of each property’s market value;
c. these discount rates applies only to the forecasted net income of the DCF appraisal. A separate discount rate is established by the Louisiana Tax Commission to be applicable to valuation of the oil and gas wells’ associated leasehold equipment (production train) and is shown in Table 907.C-2.
C. In the event the DCF appraisal results in a zero economic life and/or zero or negative discounted net income, a minimum amount of value will be established for the leasehold equipment (production train) associated with the oil and gas well(s) represented by the DCF, applying the appropriate schedule value in Table 907.C-3 to the average production depth of the wells represented by the DCF.
1. In the event the DCF appraisal results in a positive value but less than the minimum equipment value as derived using Table 907.C-3, the assessed value will be based on the minimum equipment value as established by Table 907.C-3.
2. Oil and Gas Well Discount Rates
3. Minimum Leasehold Equipment Value
* Includes production platforms/barges.
4. Serial Number to Percent Good Conversion Chart
*Reflects residual or floor rate.
NOTE: For any serial number categories not listed above, use year well completed to determine appropriate percent good. If spud date is later than year indicated by serial number; or, if serial number is unknown, use spud date to determine appropriate percent good.
D. Surface Equipment
1. Listed below is the cost-new of major items used in the production, storage, transmission and sale of oil and gas. Any equipment not shown shall be assessed on an individual basis.
2. All surface equipment, including other property associated or used in connection with the oil and gas industry in the field of operation, must be rendered in accordance with guidelines established by the Tax Commission and in accordance with requirements set forth on LAT Form 12- Personal Property Tax Report - Oil and Gas Property.
3. Surface equipment will be assessed in 5 major categories, as follows:
a. oil and gas equipment (surface equipment not considered leasehold equipment);
b. tanks (surface equipment not considered leasehold equipment);
c. inventories (material and supplies);
d. field improvements (docks, buildings, etc.);
e. other property (not included above).
4. The cost-new values listed below are to be adjusted to allow depreciation by use of the appropriate percent good listed in Table 907.C-4. When determining the value of equipment associated with a single well, use the age of that well to determine the appropriate percent good. When determining the value of equipment used on multiple wells, the average age of the wells within the lease/field will determine the appropriate year to be used for this purpose.
a. January 1, 2016 the allowance of depreciation by use of the appropriate percent good will be based on the actual age of the equipment, if known or available, and will apply only to surface equipment with an original purchase cost of $2,500 or more.
5. Functional and/or economic obsolescence shall be considered in the analysis of fair market value as substantiated by the taxpayer in writing. Consistent with Louisiana R.S. 47:1957, the assessor may request additional documentation.
6. Sales, properly documented, should be considered by the assessor as fair market value, provided the sale meets all tests relative to it being a valid sale.
7. Surface Equipment—Property Description
8. Service Stations
NOTE: The above represents the cost-new value of modern stations and self-service marketing equipment. Other costs associated with such equipment are included in improvements. Old style stations and equipment should be assessed on an individual basis, at the discretion of the tax assessor, when evidence is furnished to substantiate such action.
*This alternative assessment procedure should be used only when acquisition cost and age are unknown or unavailable. Otherwise, see general business section (Chapter 25) for normal assessment procedure.