In Re: Commission Consideration of Amending And/Or Adopting Tax Commission

LOUISIANA TAX COMMISSION

DOCKET NUMBER RR-2014

In re: Commission Consideration of Amending and/or Adopting Tax Commission

Real/Personal Property Rules and Regulations

Rebuttal Memorandum Filed on Behalf of

Cardinal Gas Storage Partners, Perryville Gas Storage, LLC, Acadia Gas Storage, LLC, Cadeville Gas Storage, LLC, AGL Resources, Inc., Jefferson Island Storage and Hub, LLC, Martin Underground Storage, Inc. and Enterprise Products Operating LLC (collectively the “Operators”) respectfully submit this Rebuttal Memorandum to the proposal submitted by the Louisiana Assessor’s Association (“LAA”) to alter the Commission’s Rules and Regulations regarding the taxation of brine wells used for underground cavern storage (“cavern wells”).

INTRODUCTION

The longstanding approach of the Louisiana Tax Commission (the “Commission”), as shown by its Rules and Regulations, and its Decisions, is that cavern wells are to be valued like other wells using the tables in Section 907 of the Commission’s Rules and Regulations. The methodology adopted by the Commission for the valuation of cavern wells promotes uniformity, consistency and predictability regarding the valuation and taxation of these wells. As set forth below, the proposal offered by the LAA does not overcome the heavy burden of establishing the need or justification for the abandonment of the Commission’s longstanding methodology for valuing these wells. Moreover, the Commission has decided, on at least two occasions, that cavern wells are to be valued using the cost tables in Section 907 of the Commission’s Rules and Regulations. For these reasons, and as discussed more fully below, the Operators request that the Commission reject the LAA’s proposal and its attempt to nullify the Commission’s prior decisions and instead, maintain the status quo and the Commission’s longstanding position with respect to the valuation of cavern wells.

A. The Commission’s Methodology for Valuing Oil, Gas and “Other” Wells.

Historically, the Commission has valued oil, gas and other wells (and more specifically the taxable subsurface equipment) in the Rules and Regulations using the methodology in Chapter 9 and the costs for each type of well as set forth in Tables 907.A-1, 2 & 3. The costs utilized in the Tables are derived from survey reports published by the American Petroleum Institute (“API”) in its Joint Association Survey on Drilling Costs (“JAS”). The JAS is intended to identify all costs associated with drilling and equipping oil and gas wells. As the JAS includes “all” costs of drilling and equipping a well, it includes cost items that do not create taxable property (such as the well bore) or do not contribute to the value of taxable property. The Commission has recognized these facts and thus when formulating the Tables in Section 907 has only included a percentage (historically between 15% and 40%) of the costs compiled by the API in the JAS. The LAA has annually challenged (as it has again this year)[1] the Commission’s use of a percentage of the JAS costs to determine the fair market value of wells as set forth in Section 907 and advocates for the use of one hundred percent (100%) of the JAS costs.

B. The LAA’s Proposal for Valuing Cavern Wells.

In their proposal, the LAA, through their consultants, Pritchard and Abbott, Inc., propose that cavern wells not be taxed under Chapter 9 of the Commission’s Rules and Regulations, but instead be valued as “general business assets” using the methodology set forth in Chapter 25 of the Commission’s Rules and Regulations. Even though the drilling and completion of cavern wells is functionally no different than the drilling and completion of traditional oil and gas wells, or injection wells, and even though cavern wells were likely drilled as injection wells for the mining of salt, and thus valued under Section 907,[2] the LAA proposes to value cavern wells based on one-hundred percent (100%) of the cost of drilling, equipping and completing such a well. The LAA’s proposal completely disregards the constitutional limitations on ad valorem taxation as its proposal would clearly include costs in the valuation that do not create taxable property (i.e. the costs items that lead the Commission to utilize only a percentage of the JAS costs in calculating the well cost Tables in Section 907).

In support of its proposal to alter the Commission’s historical practices relating to the valuation of cavern wells, the LAA has offered a “Louisiana Well Casing Size Analysis” (the “P&A Report”) authored by Charles Frazell of Pritchard and Abbott. The conclusion of the P&A Report is that it is not appropriate to use the Tables in Chapter 9 of the Commission’s Rules and Regulations (Tables 907.A-1, 907.A-2, & 907.A-3) to value cavern wells. See P&A Report at 8. The underpinnings of the conclusion of the P&A Report can be boiled down to two factual assertions: 1) the diameter of the casing of caverns wells is larger at the bottom of the well, and thus cavern wells are more costly to drill and equip than traditional oil and gas wells, and 2) information on the drilling costs of cavern wells is not included in the JAS.

The conclusions in the P&A Report are allegedly supported by data received by Mr. Frazell in a data “dump” from the staff of the Louisiana Department of Natural Resources, Office of Conservation. The P&A Report sorts the data based on the diameter of “long string” casing at the bottom of the well in the sample and uses that information as the comparison point for the relative costs of a cavern well versus a traditional oil and gas well. The P&A Report concludes based on this comparison, without any actual data regarding costs, that there is a significant discrepancy between the cost of drilling and completing a cavern well and a traditional oil and gas well. On page 3 of the P&A Report, there is a list of “reasons,” without any substantiation, that a larger diameter cavern well may be more expensive to drill and complete than a traditional oil and gas well. The majority of these “reasons” relate to intangible drilling costs which the Commission has, historically, not taxed. In addition, the listed “reasons” collectively do not support the factual assertion that large diameter wells are not represented by the JAS cost survey, or vary significantly from it.

C. The P&A Report Is Not Based on An Apples-To-Apples Comparison.

To verify the supporting data, and the ultimate conclusions of the P&A Report, the Operators consulted Dr. David Dismukes with Acadian Consulting Group.[3] Dr. Dismukes conducted his own analysis of the factual bases and conclusions of the P&A Report. Dr. Dismukes’ analysis (the “Dismukes’ Analysis”) is attached hereto as Exhibit “A.” The Dismukes’ Analysis includes the following comments regarding the P&A Report:

The P&A Report identifies 141 storage cavern wells, whereas Dr. Dismukes direct query of the SONRIS database indicates that there are over 1,700 cavern wells in Louisiana.
The Dismukes’ Analysis discards information regarding “shut-in” wells and instead focuses on active oil and gas wells in the analysis as shut-in wells bias the statistics with respect to well sizes as they are likely uneconomical and irrelevant for valuation purposes.
The P&A Report is flawed because it is based solely on a comparison of the diameter of long string casing at the bottom of the well and does not consider the number of intermediate casing strings nor the depth of the well (both of which factor significantly into the actual cost of drilling and completing a well).
The average well depth for a cavern well in Louisiana is approximately 4,300 feet compared with an average depth of an active producing well of 7,542 feet (almost two times deeper).
Dr. Dismukes’ analysis of the SONRIS data indicates that the strings of intermediate casing of producing wells are longer in length and there are more of them when compared to a cavern well.
The P&A Report fails to consider that the average length for all casing for a producing well, including the intermediate casing (which the P&A Report completely excludes) is considerably longer than similar cavern well strings.
The Dismukes’ Analysis notes that when a comparison of the diameter of “surface” casing between cavern wells and producing wells is made there is no dramatic difference in size.

The Dismukes’ Analysis, which is an “apples-to- apples ” comparison, establishes that there are few differences between the diameter of cavern wells and producing wells once the depth of the well and the casing lengths are included in the analysis. To reconcile the inherent defects in the P&A Report, the Dismukes’ Analysis provides a comparison using a “composite casing diameter”. The Dismukes’ Analysis calculates this composite based upon the weighted average casing size where the weights are determined by the length of the casing. The use of a weighted average corrects for differences in depth and size and serves as an appropriate basis to compare cavern wells and producing wells on an “apples-to-apples” basis. See Dismukes’ Analysis at 7, Table 5. The results of this comparison show that there is no significant difference between the composite casing diameters between cavern wells and producing wells once the depth and length of casing are properly factored in and considered.

Based on his analysis, Dr. Dismukes concludes that the P&A Report does not support the conclusion that there are significant differences in the drilling and completion costs of cavern wells versus producing wells. Dr. Dismukes concludes that the factual underpinnings of the P&A Report are simply not supported by a review of all of the appropriate SONRIS data and an “apples-to-apples” comparison. Based on his analysis, Dr. Dismukes recommends that the Commission reject the LAA’s proposal and continue to use its long-standing methodology for valuing cavern wells for ad valorem tax purposes.

ONGOING LITIGATION REGARDING THE VALUATION

OF CAVERN WELLS.

As mentioned above, the issue of whether the Commission’s Chapter 9 Rules and Regulations for valuing oil and gas and associated wells should be used to value cavern wells has previously been litigated before the Commission. In In Re: Protest/Appeal of Jefferson Island Storage & Hub, LLC, Docket Numbers: 06-22045-003 & 07-22045-001, one of the issues before the Commission was the proper method of valuing a cavern well used at an underground storage facility. Although the taxpayer used Section 907 of the Commission’s Rules and Regulations to report and value the well, the Assessor created his own methodology with the assistance of Pritchard & Abbott. After hearing the matter and considering the testimony of the witnesses, the argument of counsel and the relevant law, on page eleven of its decision, the Commission concluded, in part, as follows:

As to the WELLS, the taxpayer properly computed their value in accordance with the guidelines contained in Chapter 9 of the Rules and Regulations.

A copy of the Commission’s Decision dated June 2, 2009 is attached hereto as Exhibit “B.” The Assessor has appealed the Commission’s decision and that matter is currently pending in the 16th Judicial District Court for the Parish of Iberia and is docketed as Huval v. Jefferson Island Storage & Hub, LLC, Docket Number 114,559.

In another matter, In Re: Appeal of PBGS, LLC, Docket Number 11-22097-001, one of the issues before the Commission was whether wells at a natural gas storage facility should be valued under Section 907 of the Commission’s Rules and Regulations. In its Order dated April 23, 2013, the Commission, on page three of its decision, concluded as follows:

Further applying its expertise, technical competence, and specialized knowledge and based upon the law and the evidence presented, the Commission does hereby find that the service well[s] present at the gas storage facility are “other wells” under Tax Commission Rule 907, “Oil, Gas and Other Wells” and properly should be assessed under said rule.

(Emphasis in original). A copy of this Decision is attached as Exhibit “C.”

Based on the foregoing Decisions, the Commission has already considered and rejected in administrative hearings, the contention that cavern wells should be valued in a manner other than as provided for in Section 907 of the Commission’s Rules and Regulations. As those matters are still in litigation, the Operators suggest that the Commission reject the LAA’s attempt to “end-run” the Commission’s decisions and instead, maintain the status quo.

CONCLUSION

Based on the foregoing, it is clear that the LAA has not carried its heavy burden of establishing that there is a sound basis for the Commission to change its longstanding approach to the valuation of cavern wells for ad valorem tax purposes and thereby substantially increase the ad valorem tax liabilities of companies that own and/or operate such facilities. As clearly set forth in the Dismukes’ Analysis, the fundamental underpinnings of the LAA proposal, as set forth in the P&A Report (i.e. that there are significant differences between the drilling and completion costs of an oil and gas well and a cavern well), are not supported by the data and a true “apples-to-apples” comparison taking into consideration key elements of cost, such as the depth of the wells under consideration and the associated casing lengths. In addition, as Dr. Dismukes points out, even if the Commission were to accept the P&A Report’s postulation of a difference in well diameter, the LAA has not carried the burden of establishing that any purported difference actually translates into a cost differential that is significant enough to undermine the Commission’s longstanding and uniform approach to valuing cavern wells for ad valorem tax purposes.

In addition, as discussed above, the Commission has already decided, on at least two occasions, that cavern wells are to be valued for ad valorem tax purposes using Chapter 907 of the Commission’s Rules and Regulations. At least one of those matters is still in litigation and serves to support that the Commission maintain the status quo and its longstanding position regarding the proper methodology to value cavern storage wells.

For the forgoing reasons, and those contained in the Dismukes’ Analysis, the Operators respectfully request that the Commission reject the LAA’s proposed revisions to Chapter 9, and the corresponding revision to Chapter 25, that would dramatically change the Commission’s longstanding approach to the valuation of cavern wells in its 2014 Rules and Regulations.

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[1]See Memorandum on Behalf of Louisiana Assessors’ Association Oil and Gas Committee, submitted on June 6, 2013 by W. Eric Lundin, III.

[2] Interestingly, the LAA proposal does not seek to alter the valuation methodology for wells that are used for injection and storage in a depleted oil or gas field.

[3] Dr. Dismukes is also the Associate Executive Director and Director of Policy Analysis at the LSU Center for Energy Studies, and is a full time professor at LSU. Dr. Dismukes has testified before, and been accepted as an expert witness by, the Commission on numerous occasions. His full list of qualifications is attached to the Dismukes’ Analysis.