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-4 - Methods of Valuation

Universal Citation: 110 WV Code of State Rules 110-1J-4

Current through Register Vol. XLI, No. 38, September 20, 2024

4.1. General. -- The value of oil producing property or natural gas producing property, or property producing both, shall be determined through the process of applying a yield capitalization model to the net receipts (gross receipts less royalties paid and less actual annual operating costs) for the working interest and a yield capitalization model applied to the gross royalty payments for the royalty interest. Where ownership is split through a lease or royalty arrangement, different values shall be determined for the working interest and the royalty interest. If the well produced for less than twelve (12) months during the first calendar year of production, or during the first calendar year of production after being shut-in during the previous calendar year, the gross receipts and royalties paid shall be annualized prior to the process of applying a yield capitalization rate. Each term in this valuation is discussed below.

4.2. Method for valuing oil producing property. -- Except as otherwise provided in this section, the appraised value of a producing oil well, including personal property at the well necessary to recover the oil, shall be determined as follows:

4.2.1. For producing oil wells, the appraised value shall be determined as in section heading 5 of this rule.

4.2.2. Safe harbor. - The Tax Commissioner may annually determine a safe harbor amount for operating costs for marginal wells to be published in the State Register. For those operators choosing to use the safe harbor amount rather than calculate their actual annual operating costs, that safe harbor amount will be considered the costs associated with the production of the oil, typical of the producing area and strata.

4.2.3. For the purposes of valuing oil wells, the appraised value is to include the net proceeds from the sale of oil and the net proceeds from the disposition of any condensate recovered after the decline rate and capitalization rate has been applied to each product.

4.3. Method for valuing natural gas producing property. - Except as otherwise provided in this section, the appraised value of a producing gas well on assessment dates beginning on and after the effective date of this rule, including personal property on the lease or communitized area necessary to recover the gas, shall be determined under this section.

4.3.1. For producing natural gas wells, the appraised value shall be determined as in section heading 5 of this rule.

4.3.2. Safe Harbor. -- The Tax Commissioner may annually determine a safe harbor amount for operating costs for marginal wells to be published in the State Register. For those operators choosing to use the safe harbor amount rather than calculate their actual annual operating costs, that safe harbor amount will be considered the costs associated with the production of the natural gas and natural gas liquids, typical of the producing area and strata.

4.3.3. For the purposes of valuing natural gas wells, if the natural gas is sold after processing or fractionation or if the producer receives proceeds from the sale of processed natural gas liquids based upon its sales contract, the appraised value is to include the combined net proceeds from the disposition of the plant gas products and the gross proceeds from disposition of the residue gas after the decline rate and capitalization rate has been applied to each product. If the natural gas is sold prior to processing, then the appraised value is to include the net proceeds from the disposition of the raw gas after the decline rate and capitalization rate has been applied.

4.4. Percentage interest in oil, natural gas liquids, or natural gas, or a combination thereof. -- Where the ownership of oil, natural gas liquids, or natural gas in place is divided through a lease or other arrangement, leases typically contain a royalty clause, designating the compensation to the property owner, typically measured as a percentage or portion of the gross value of production without deduction of costs of production.

4.4.1. For example: Where the ownership of oil or natural gas in place, or both, is divided through a lease or other arrangement, the compensation to the property owner is typically derived by designating a percentage (generally one-eighth) of the production income to be the royalty payment to the owner. The remainder (generally seven-eighths) is the working interest. Royalty clauses may have any number of different measures for calculation of royalties.

4.4.2. The Tax Commissioner shall annually determine working and royalty percentage interests on a per well or lease basis, through a review of oil and natural gas producer annual property tax returns. These percentages shall be determined annually by dividing the total royalty paid by the reported gross income.

4.5. Valuation of home-use only wells. -- The appraised value of home-use wells will be an annual appraised value determined from information published by the U.S. Department of Energy, Energy Information Administration. If the home-use well owner has ownership in the mineral rights, the assessed value will be added to the real property assessment. However, if the home-use well owner only has rights in the surface, the assessed value will be added to the personal property assessment. This value of home use gas wells will be included in the tentative natural resource variables published in the State Register on or before July 1 each year. If the well also produces oil, that portion of the well will be separately valued.

4.6. Valuation of industrial use wells. -- The appraised value of wells used for industrial purposes only will be based on the actual most recent calendar year preceding the July 1 appraisal date MCF usage times the average West Virginia spot price for that calendar year determined by the "Natural Gas Monthly," published by the U.S. Department of Energy, Energy Information Administration.

4.7. Valuation of farm-use gas wells. -- The appraised value of a gas well, when the gas produced by the well is used only for farm purposes, such as heating the barn and farmhouse, will be an annual appraised value determined from information published by the U.S. Department of Energy, Energy Information Administration. If the farm-use well owner has ownership in the mineral rights, the assessed value will be added to the real property assessment. However, if the farm-use well owner only has rights in the surface, the assessed value will be added to the personal property assessment. This value shall be included in the tentative natural resource variables published in the State Register on or before July 1 each year. If the well also produces oil, that portion of the well will be separately valued.

4.8. Valuation of non-producing acreage. -- The value per acre of non-producing acreage, which includes shut-in wells, shall equal the discounted annual lease payment per acre. A valuation schedule for non-producing properties shall be determined annually by the Tax Commissioner for each district within a county, where data is available. The Tax Commissioner shall annually conduct a review of oil or natural gas lease agreements, or lease agreements addressing both, transacted at arms-length in all fifty-five (55) counties to determine the average annual delay rental lease payment per acre, and lease term. The per-acre value for nonproducing property shall be the sum of the projected annual income stream from delay rental during the lease term discounted in each year by a capitalization rate. A valuation of $1.00 per acre shall be used where property is located in those areas of the State where drilling activity or production have not been established and the property is presumed to be barren.

4.9. Valuation of plugged acreage. -- The appraised value of plugged well property acreage shall be valued to the oil or gas owner at the nominal rate of one dollar ($1.00) per acre. This category includes any plugged and abandoned acreage of up to one hundred twenty-five (125) acres per natural gas well, and the communitized acres per horizontal gas well. In the case of a plugged oil well, this section shall apply to up to forty (40) acres per vertical oil well and the communitized acreage per horizontal oil well. Any additional acreage will be valued as reserve acreage.

4.10. Valuation of abandoned well property acreage. -- The appraised value of abandoned well acreage shall revert to the value of reserve oil and gas acreage in the county provided there is no other producing or plugged well on the property.

4.11. Valuation of barren oil and natural gas areas. -- The appraised value of oil or natural gas interests in barren oil and natural gas property shall be one dollar ($1.00) per deeded acre. When two or more persons own the acreage, this appraised value shall be allocated among the owners based upon the percentage of their ownership of the acreage.

4.12. Valuation of wells that produce both oil and natural gas. -- The appraised value of wells that produce both oil and natural gas shall be determined by use of the methods described in this rule. These values shall then be summed to result in the overall value of the oil or natural gas producing acreage or acreage producing both oil and natural gas.

4.13. Valuation of storage well areas. - The valuation of storage well areas shall equal the discounted annual lease payment per acre that is applied to the reserve oil and gas acreage within the county. The minimum value applied to the areas will not be less than $5.00 per deeded acre. The value shall not include inventories stored within. Natural gas storage inventories shall be assessed to the inventory owner.

4.14. Farm properties. -- The oil and gas rights, that are part of a "fee" estate where the use of the surface has qualified for farm use appraisal, shall be valued as described in the Tax Commission's rule, Valuation of Farmland and Structures Situated Thereon For Ad Valorem Property Tax Purposes, 110 C.S.R. 1A. For purposes of this subsection, "farm fee estate" means absolute ownership of the farmland unencumbered by any other interest or estate.

4.15. Valuation of the Producer's Personal Property at Non-Producing or Shut-In wells. -- The appraised value of the producer's personal property that is part of a non-producing or shut-in well's appraisal will be assigned to the producer at the same appraised value applied to machinery and equipment at home use only wells.

4.16. Valuation of Pre-Production or Permit Leaseholds -- Chattel real accounts (personal property) for pre-production/permit leaseholds will be valued by the county assessor.

4.17. Valuation of Producing Flat-Rate Royalty accounts -- The appraised value of a producing flat-rate royalty will be valued using a discounted cash flow series of the flat rate. It will not include production decline rates.

4.18. Valuation of tangible personal property not used in the production of gas or oil, or both gas and oil, in and about the well shall be valued by the county assessor, except that pipelines of public service businesses that are operating property shall be valued by the Board of Public Works as provided in W. Va. Code § 11-6-1 et seq.

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