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This presentation provides a verbal rebuttal to the proposed revisions by the Louisiana Assessors' Association for the 2011 LTC Rules and Regulations Chapter 9 - Oil and Gas Properties. It addresses various aspects such as production depth, installation cost of surface equipment, obsolescence adjustments, taxable cost of wells, depreciation, and renditions of surface equipment. The presentation includes recommendations based on industry analysis and legal considerations.
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Rebuttal to the Louisiana Assessors’ Association’sProposed Revisions to 2011 LTC Rules and Regulations Chapter 9 – Oil and Gas PropertiesbyLouisiana Oil and Gas Association andLouisiana Mid-Continent Oil and Gas AssociationJuly 20, 2010 Information included in this presentation is the same as submitted in writing July 9, 2010 to the Louisiana Tax Commission. This presentation is prepared only to facilitate the verbal rebuttal on July 20, 2010 as indicated in the LTC Docket Number RR-2011, Notice of Hearing.
§901.C. Production DepthItem 1 • No equipment is added in laterals for horizontal wells. • In most horizontal wells, no casing is added in laterals (it’s an open hole). Laterals with casing have numerous perforations, i.e. the casing is blown apart to enhance flow of oil or gas. • The lateral serves the well merely as a fracture of the producing zone. • Recommendation: No change.
§905.B.2. Installation Cost of Surface EquipmentItem 2 • LOGA/LMOGA is confident installation was included in data provided by industry for the 2008 surface equipment schedule (basis for current schedule). • Why? Cost from books was provided. Materials, installation, taxes, etc. are not separately shown on company books; it’s all together. • Recommendation: Do not add more installation to the surface equipment schedule.
§907.A.6.a. Obsolescence Adjustments for Active WellsItem 3 • We acknowledge the LAA proposed tiered obsolescence is more appropriate than the current rules. • Additional adjustments may be necessary to adjust to market value. • Recommendation: The LAA proposed obsolescence table may be applied to taxable cost, however the maximum value should be one year of gross revenue.
§907.A.6.b. Obsolescence Adjustments for Inactive WellsItem 4 • The LAA’s proposal would exclude wells that have been reported as inactive, but not yet updated in the Department of Conservation’s system. • Recommendation: Retain the current “all inactive (shut-in) wells” without the proposed addition by LAA.
Table 907.A-1 Taxable Cost of WellsItem 5 • Drilling and certain completion costs are precluded from property taxation by the state constitution, statutes, and case law. This statement is supported by legal analyses by Kean Miller and retired LSU Professor Tom Harrell. • The API JAS instructions (Exhibit 1) indicate non-taxable cost in the survey. • An industry analysis of AFEs from 2005-2009 indicated average tangible and completion percentages of 20% and 26%, respectively. The median percentages were 18% and 25%. Various general sources indicate tangible as 15%-35%. • Recommendation: If the Cost Approach is used, require reporting of historical taxable cost. Alternatively, if the LTC decides to use the API JAS, assign no more than 25% as taxable.
Table 907.B-2 DepreciationItem 6 • A 25-year life and adjustment for “sustaining capital” significantly understates depreciation. • ASA, IAAO, and other reputable appraisal sources apply an age-life depreciation method differently than the LAA proposed. E.g., the IAAO calculates the depreciation percent as: economic age/life span. • 30% good floor is inappropriate. Marshall & Swift and the LTC general business section generally indicate a 20% floor (which is before obsolescence). • Recommendation: Economic lives of 5 years for horizontal, 8 years for vertical gas, and 11 years for oil/other with depreciation factors proposed by LOGA/ LMOGA.
Table 907.B-3 ObsolescenceItem 7 See comments on item 3.
Table 907.C-1.2. Rendition of Surface EquipmentItem 8 • We do not object to inserting “including installation cost.” It is included in the current surface equipment schedule and book cost of all LOGA/LMOGA members, to our knowledge. • Recommendation: No change is necessary, but proposed addition is acceptable to industry.
Table 907.C-1.4. Actual Age for Depreciation ofSurface EquipmentItem 9 • Listing actual age of every piece of equipment would add to the current administrative burden of listing each equipment. • Recommendation: Continue applying average age of wells if the LTC continues the current schedule. Alternatively, report book cost by category (e.g., all surface equipment) by year acquired.
Table 907.C-1 Cost of Surface EquipmentItem 10 • The cost indices from the Energy Information Administration is a well-recognized reference, but not the preferred indices for the LTC rules and regulations. • The “IHS CERA Upstream Capital Cost Index” indicated a 9% decline in 2009 to early-2007 levels (see Exhibit 2). • Recommendation: No change for 2011. When indices are applied, use the Marshall Valuation Service “Equipment – National Average, Petroleum” index.
Table 907.C-3 Trending Factors for Surface Equipment Installation CostItem 10 • Same comments as item 2. Generally, installation cost is already in the schedule, so this table is not applicable. • Recommendation: Do not add this table.
