West Virginia Code of State Rules
Agency 110 - Tax
Title 110 - LEGISLATIVE RULE STATE TAX DEPARTMENT
Series 110-01J - Valuation of Producing and Reserve Oil, Natural Gas Liquids, and Natural Gas for Ad Valorem Property Tax Purposes
Section 110-1J-3 - Definitions

3.1. "Abandoned well" means any well which is required to be plugged under the provisions of W. Va. Code § 22-6-19.

3.2. "Actual annual operating costs" means all lease operating expenses, lifting costs, gathering, compression, processing, separation, fractionation, and transportation costs. These costs are limited to the actual costs incurred by the producer, prior to the arm-length sale of the well output to a buyer, without reference to items such as general administration, overhead, or any costs indirectly related to producing, processing, or transporting the well output.

3.3. "Appraised value" means the value of oil producing properties or natural gas producing properties, including real and personal property, determined in accordance with this rule.

3.4. "Assessment date" means the July 1 date preceding the start of the property tax year as defined in W. Va. Code § 11-3-1, et seq.

3.5. "Bands of investment discount component" means a discount rate derived by assigning rates to various debt and equity investment financing tiers and summing these rates, weighted by their respective percentages of total financing, as specified in the annual variables filed pursuant to section heading 10 of this rule.

3.6. "Barrel" or "BBL" means a unit of measurement of volume equal to 42 US gallons.

3.7. "Barren property" means those acres, tracts, and parcels owned in fee in West Virginia where data suggests with reasonable certainty that the presence of oil, natural gas liquids, or natural gas is very unlikely.

3.8. "Capitalization rate" means a single state-wide capitalization rate for oil, natural gas, and natural gas liquids producing property, which shall be determined annually by the Tax Department based on a "Build-up-Model" of the Weighted Average Cost of Capital (WACC).

3.9. "Coalbed methane" means methane gas, and other well output which can be produced from a coal seam, the rock or other strata in communication with a coal seam, a mined-out area, or a gob well.

3.10. "Commissioner" or "Tax Commissioner" means the Tax Commissioner of the State of West Virginia, or his or her delegate.

3.11. "Communitized area" means an area involving more than one lease, due to a cooperative agreement or legal mandate, and is developed for the drilling and operation of a single or multiple oil or gas wells, or both, by one or more operator.

3.12. "Compression costs" are the actual costs in the process of raising the pressure of minerals.

3.13. "Condensate" means liquid hydrocarbons (normally exceeding 40 degrees of API gravity) recovered at the surface without processing. For purposes of this rule, condensate, along with certain other components of well output, constitutes a natural gas liquid.

3.14. "Deeded acre" means an acre of land one owner transferred, or deeded, to a new owner.

3.15. "Discount component" means an element in the determination of a rate reflecting a provision for returning to an investor a sum of money equal to the aggregate of the anticipated return-on-investment over the economic life of an investment.

3.16. "Economic interest" in oil, natural gas liquids or natural gas means that the person has acquired by investment any interest in oil, natural gas liquids or natural gas in place and secures, by any form of legal relationship, current, future, or potential income derived from the extraction of the oil, natural gas liquids or natural gas, to which the person must look for a return of the person's capital.

3.17. "Farm-use well" means a gas well that produces gas solely for the use of the farmer who owns the land where the gas is in place. Ownership of the gas by the farmer is not required to qualify as a farm-use well. The gas produced may not be sold, traded, or bartered.

3.18. "Flat Rate royalty" means a royalty rate in which the amount paid per year (e.g., $100 per year) is set within a lease and is not dependent on the production or income derived from the well.

3.19. "Flush production" means the production of oil and/or natural gas from any well on an oil and/or natural gas property with an initial production date that is two (2) calendar years or less prior to the July 1st assessment date. Production beginning after December 31st and prior to the July 1st assessment date must be reported.

3.20. "Gathering costs" means the actual costs of transportation of oil, natural gas, natural gas liquids, condensate, or any combination thereof from multiple wells by separate and individual pipelines to a central point of accumulation, dehydration, compression, separation, heating and treating or storage.

3.21. "Fractionation costs" means the actual costs incurred by the producer in fractionation. Fractionation is the separating of components of a mixture through differences in physical or chemical properties. Fractionation is the process by which raw hydrocarbons are separated into products.

3.22. "Gross receipts" or "gross proceeds" means the total income received for the production on any well, without reduction for any royalties, costs, allowances, expenses, or adjustments of any kind, determined at the point of a metered or measured first sale to an unrelated third party. "Gross receipts" or "gross proceeds" includes total monies and other consideration paid, payable or accruing to a producer for the disposition of the oil, natural gas liquids, natural gas, residue gas, well output, or gas plant products, or any combination thereof, produced. "Gross receipts" or "gross proceeds" also includes, but is not limited to, payments and accruals to the operator for certain services such as metering, dehydration, liquids separation, measurement, and gathering, or any combination thereof. Monies and other consideration, to which an operator is contractually or legally entitled, but which the operator does not seek to collect through reasonable efforts, are also part of "gross receipts" or "gross proceeds." For purposes of this definition, the total amounts paid, payable, or accruing shall be determined under the method of accounting used for federal income tax purposes.

3.23. "Horizontal well" or "directional well" - For purposes of this rule, and notwithstanding the definitions set forth in W. Va. Code § 22-6A-4 and §22-6B-2, the term "horizontal well" or "directional well" means a well, the wellbore of which is initially drilled on a vertical or directional plane and which is curved to become horizontal or nearly horizontal, in order to parallel a particular geological formation and which may include multiple horizontal or stacked laterals.

3.24. "Home-use well" means a gas well that produces gas solely for the use of the homeowner who occupies the land where the gas in place. Ownership of the gas by the homeowner is not required to qualify as a home-use well. The gas produced may not be sold, traded, or bartered.

3.25. "Lease" means the area encompassed in the leasehold granting the right to explore for or produce oil or natural gas, which may include a single tract or multiple tracts of land described in the instrument granting the leasehold;

3.26. "Lease operating expenses" means the actual costs incurred to bring the subsurface minerals (oil, natural gas, and natural gas liquids) up to the surface and convert them to marketable products. Lease operating expenses refers to the costs of operating the wells and equipment. "Lease operating expenses" includes actual costs of labor, fuel, utilities, materials, rent or supplies, which are directly related to the production, processing, or transportation of oil, natural gas, natural gas liquids, or any combination thereof and that can be documented by the producer. For the purposes of this calculation, depreciation, depletion, extraordinary expenses, ad valorem taxes, capital expenditures, intangible drilling costs, expenditures relating to vehicles or other tangible personal property not permanently used in the production of oil, natural gas, natural gas liquids, or any combination thereof shall not be included as lease operating expenses.

3.27. "Lifting costs" means the actual costs incurred to operate a well during production.

3.28. "Marginal well" means a well that, in the calendar year immediately preceding the July 1 assessment date, has an average daily production of two (2) barrels of oil or less, and an average daily production of ten (10) MCF of natural gas or less.

3.29. "Marketing affiliate" means an affiliate of the lessee whose function is to acquire only the lessee's production and to market that production.

3.30. "M.C.F." or "MCF" when used with respect to natural gas, means 1,000 cubic feet of natural gas measured at a pressure of 14.73 pounds per square inch (absolute) and a temperature of 60 degrees Fahrenheit.

3.31. "Natural gas" means natural gas, coalbed methane, synthetic gas useable for fuel, or mixtures of natural gas and synthetic gas. For purposes of the valuation of natural gas producing property under this rule, references to "natural gas" includes natural gas liquids and liquefied natural gas when those products have not been processed from the natural gas.

3.32. "Natural gas liquids" means propane, ethane, butanes, and pentanes (also referred to as condensate), or a combination of them that are subject to recovery from raw gas liquids by processing in field separators, scrubbers, gas processing and reprocessing plants, or cycling plants.

3.33. "Natural gas producing property" means the property from which natural gas or natural gas liquids has been produced or extracted at any time during the calendar year preceding the July 1 assessment date. Natural gas producing property includes the interest or interests underlying an area of up to one hundred twenty-five (125) acres of surface per vertical well for property with active wells on the parcel; and communitized acres of surface per horizontal well for properties with one or more active wells. All acreage of a natural gas producing property in excess of one hundred twenty-five (125) acres per vertical well, or the communitized acres per horizontal well, shall be valued at the non-producing rate per acre referenced in section heading 4 of this rule.

3.34. "Net proceeds" means actual gross receipts on a sales volume basis determined from the actual price received by the taxpayers as reported on the taxpayer's returns, less royalty interest receipts, and less actual annual operating costs as reported on the taxpayer's returns.

3.35. "Non-Producing or Shut-in Well" means a well, which due to the producer's decisions, market reasons, or product performance, or any other reason or combination of reasons, was non-productive during the entire most recent calendar year preceding the July 1 assessment date.

3.36. "Non-producing property" means properties that were not engaged in production of well output, as herein defined, during the calendar year next preceding the July 1 assessment date. This category includes any acreage that has been shut-in for the entire year.

3.37. "Oil" means natural crude oil or petroleum, and other hydrocarbons, regardless of gravity, which are produced at the well in liquid form by ordinary production methods and which are not the result of condensation of gas after it leaves the underground reservoir.

3.38. "Oil producing property" means property from which oil has been produced or extracted at any time during the calendar year preceding the July 1 assessment date. Oil producing property includes the interest or interests underlying an area of up to forty (40) acres of surface per well with one (1) or more active well(s) on the parcel. All acreage of an oil producing property in excess of forty (40) acres per well, shall be valued at the non-producing rate per acre referenced in section heading 4 of this rule.

3.39. "Overriding royalty" means the fractional interest in the gross production payable to a person who is neither the producer nor the owner of the oil or natural gas estate and who is not required to bear a share of the development or operating costs of the well.

3.40. "Personal property" used in oil or natural gas production means machinery and equipment on the lease or communitized area used in oil production or natural gas production from the well to the point of sale. It shall not include vehicles or other tangible personal property not permanently used in production, nor shall it include third party equipment used to enhance or remarket the gas after the oil or natural gas has left the lease or communitized area.

3.41. "Plant gas products" means separate marketable elements, compounds, or mixtures, whether in liquid, gaseous, or solid form, resulting from processing natural gas, excluding residual gas.

3.42. "Plugged and abandoned well property" means plugged and abandoned wells that produced or were intended to produce well output, as herein defined, without regard to whether the well historically produced well output or was a so-called "dry hole" that failed to produce well output.

3.43. "Processing costs" means the actual costs incurred by the producer for activities occurring beyond the inlet to an oil, natural gas, or natural gas liquids processing facility that changes the physical or chemical characteristics, enhances the marketability, or enhances the value of the separate components. Processing costs are limited to the costs for the following activities: fractionation, adsorption, flashing, refrigeration, cryogenics, sweetening, dehydration within a processing facility, beneficiation, stabilizing, compression, and separation which occurs within a processing facility.

3.44. "Processing, separation and fractionation costs" means de-ethnization fees, processing or fractionation fees, pipeline or transportation fees, fuel fees, and electric fees charged by a processing or fractionation plant to the producer.

3.45. "Producer" or "Operator" means any person or persons, corporation, partnership, joint venture or other enterprise or entity that proposes to or does locate, drill, produce, manage, or abandon any well. "Producer" or "Operator" includes, but is not limited to, lessees, as herein defined, and any person or persons, corporations, partnership, joint venture or other enterprise or entity that owns the economic interest in the natural resource produced, as the term economic interest is defined in § 110-13A-1, et seq., Code of State Rules.

3.46. "Property owner" means the person or persons who own the natural gas or oil in place, except where a different meaning is required by the context in which "property owner" is used in this article.

3.47. "Raw gas" or "raw natural gas" means natural gas as it is produced from the underground reservoir.

3.48. "Raw gas liquids" or "raw make" is a combined stream of propane, butane and pentanes, plus any other liquid hydrocarbon, or any mixtures thereof, which are separated from residue gas and processed at a processing or fractionation plant into plant gas products.

3.49 "Related parties" shall have the same meaning as in the Severance And Business Privilege Tax Act, W.Va. Code § 11-13A-1, et. seq.

3.50. "Residue gas" means the hydrocarbon gas, consisting principally of methane, resulting from processing gas.

3.51. "Risk rate" means a rate reflecting a return to an investor necessary to attract capital to an investment containing a possible loss of principal, or interest, or both.

3.52. "Royalty interest" means the fractional interest in oil production or natural gas production, or both, that may or may not be subject to development costs or operating expenses and extends undiminished over the life of the property. Typically, it is retained by the oil or natural gas rights owner or lessor or the oil or natural gas, or both.

3.53. "Storage wells" means drilled and completed wells on any property used for the artificial injection or storage of natural gas into a natural reservoir strata.

3.54. "Total Production" means the total amount of well output. It includes the total amount of oil, measured in barrels, total amount of natural gas liquids, measured in MCF, and the total amount of natural gas, measured in MCF, of all oil, natural gas liquids and, natural gas actually produced and sold from a single well that is developed and producing on the assessment date. For commonly metered wells, "total production" means the total amount of oil, the total amount of natural gas, and the total amount of natural gas liquids, of all oil, natural gas liquids, and natural gas actually produced and sold from the commonly metered wells divided by the number of the commonly metered wells.

3.55. "Transportation costs" means the actual costs of moving oil, natural gas, natural gas liquids, unprocessed gas, residue gas, or gas plant products or any combination thereof to a point of sale.

3.56. "Vertical well" means any well producing either gas or oil, or both gas and oil, that is not a horizontal well as defined in this rule.

3.57. "Well" means any shaft or hole sunk, drilled, bored, or dug into the earth or into underground strata for the extraction of oil or gas.

3.58. "Well output" means oil, natural gas liquids, natural gas, condensate, raw gas, raw natural gas liquids, plant gas products, residue gas, or any other natural resource produced from a well or any combination thereof.

3.59. "Working interest" means the fractional interest in oil production or natural gas production, or both, subject to development and operating expenses and owned by the leaseholder or operator, or both.