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-7 - Actual Annual Operating Costs

Universal Citation: 110 WV Code of State Rules 110-1J-7

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

7.1. For the working interest, the Tax Commissioner shall allow a deduction against the gross proceeds determined under this rule for the actual annual operating costs. Actual annual operating costs are those costs or fees incurred by the producer from the well to the point of sale. The annual actual operating costs shall be the actual costs incurred by the producer, under that contract, except as provided in subsection 7.2.2. of this section, subject to monitoring, review, and audit by the Tax Commissioner.

7.2. Transportation costs must be allocated among all products produced and transported.

7.2.1. The deduction for transportation costs shall be determined on the basis of the lessee's cost of transporting each product through each individual transportation system. Where more than one product in a gaseous phase is transported, the allocation of costs to each of the products transported shall be made in a consistent and equitable manner in the same proportion as the ratio of the volume of each product (excluding waste products which have no value) to the volume of all products in the gaseous phase (excluding waste products which have no value).

7.2.2. Processing costs must be allocated among the gas plant products. A separate processing allowance must be determined for each gas plant product and processing plant relationship. Natural gas liquids shall be considered as one product for the purposes of allocation.

7.2.3. The costs of processing the NGLs after the residue gas has been removed cannot be applied against the value of the residue gas.

7.2.4. The lessee shall propose a cost allocation procedure to the Tax Commissioner. The lessee shall submit all relevant data to support its proposal. The Tax Commissioner shall then determine the transportation allowance based upon the lessee's proposal and any additional information the Tax Commissioner deems necessary.

7.3. Allowable costs in determining actual annual operating costs. -- Actual annual operating costs are limited to the following:

7.3.1. Lifting costs. Lifting costs are the actual costs incurred to operate a well during production.

7.3.2. Lease operating expenses. Lease operating expenses are the actual costs incurred to bring the subsurface minerals (oil, natural gas liquids, and natural gas) up to the surface and convert them to marketable products while on the lease or communitized area. Lease operating expenses refers to the costs of operating the wells and equipment on a producing lease. Items specifically listed as non-allowable costs in this Rule shall not be included in lease operating expenses.
7.3.2.a. Allowable lease operating expenses include the actual costs of labor, fuel, utilities, materials, rent, or supplies, which are directly related to the production, processing, or transportation of natural gas or oil, and that can be documented by the producer.

7.3.2.b. 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 natural gas or oil shall not be included as lease operating expenses.

7.3.3. Transportation costs. Transportation costs are the actual costs of moving unprocessed gas, residue gas, or gas plant products to a point of sale. These costs are limited to the following:
7.3.3.a. Firm demand charges paid to pipelines. -- Lessees may deduct, as a component of the transportation allowance, firm demand charges or capacity reservation fees paid to a pipeline, including charges or fees for unused firm capacity that the lessee has not sold. If a lessee receives a payment from any party for release or sale of firm capacity or capacity reservation after reporting a transportation allowance that included the cost of that unused firm capacity, or reservation, or if a lessee receives a payment or credit from the pipeline for penalty refunds, rate case refunds, or other reasons, the lessee must reduce the allowance reported by the amount of the payment, credit or reduction of charges or fees claimed.

7.3.3.b. Gas supply realignment (GSR) costs. -- The GSR costs result from a pipeline reforming or terminating supply contracts with producers to implement the restructuring requirements of FERC Orders in 18 CFR part 284 ;

7.3.3.c. Commodity charges. -- The commodity charge allows the pipeline to recover the costs of providing service;

7.3.3.d. Wheeling costs. -- Hub operators charge a wheeling cost for transporting gas from one pipeline to either the same or another pipeline through a market center or hub. A hub is a connected manifold of pipelines through which a series of incoming pipelines are interconnected to a series of outgoing pipelines;

7.3.3.e. Gas Research Institute (GRI) fees. -- The GRI conducts research, development, and commercialization programs on natural gas related topics for the benefit of the U.S. gas industry and gas customers. GRI fees are allowable, provided such fees are mandatory in FERC approved tariffs;

7.3.3.f. Temporary storage services. -- This includes short duration storage services offered by market centers or hubs (commonly referred to as "parking" or "banking"), or other temporary storage services provided by pipeline transporters, whether actual or provided as a matter of accounting. Temporary storage is limited to 30 (thirty) days or less; and

7.3.3.g. Costs for compression, dehydration, and treatment of gas. -- The Tax Commissioner allows these costs only if such services are required for transportation or are necessary to place production into marketable condition.
7.3.3.g.1. "Gathering costs" are the actual costs of transportation of oil, condensate, or natural gas from multiple wells by separate and individual pipelines to a central point of accumulation, dehydration, compression, separation, heating and treating or storage.

7.3.3.g.2. "Compression costs" are the actual costs directly incurred in the process of raising the pressure of gas.

7.3.4. Processing, Separation and Fractionation costs -- The actual costs of processing, separation or fractionation may be included in the actual annual operating costs. These costs may include 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.
7.3.4.a. "Fractionation costs" means the actual costs incurred by the producer in the fractionation. Fractionation is the separating of components of a mixture through differences in physical or chemical properties. For the purposes of this rule, fractionation is the process by which raw make is separated into gas plant products.

7.3.4.b. "Processing costs" means the actual costs incurred by the producer for activities occurring beyond the inlet to a natural gas processing facility that changes the raw gas's physical or chemical characteristics, enhances the marketability of the raw gas, or enhances the value of the separate components of the raw gas. 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.

7.3.5. Producers may not use any cost as a deduction that duplicates all or part of any other cost that the lessee uses under this section heading 7.

7.4. Nonallowable costs. -- The costs that a producer may not include in their actual annual operating costs include, but are not limited to, the following:

7.4.1. Overhead and administrative costs. - These costs are not allowed, whether or not those costs are directly or indirectly attributable and allocable to the operation and maintenance of the transportation system.

7.4.2. Taxes and Fees. -- State and Federal taxes, income taxes, severance taxes, and other fees, including royalties.

7.4.3. Costs of surety. -- Costs of surety are the costs of securing a letter of credit, or other surety, that the pipeline requires the producer to maintain.

7.4.4. Fees or costs incurred for storage. -- This includes storing production in a storage facility, whether on or off the lease, for more than 30 (thirty) days;

7.4.5. Aggregator or marketer fees. -- This includes fees paid to another person (including payment to affiliates) to market oil or gas, including purchasing and reselling the oil or gas, or finding or maintaining a market for the well's production;

7.4.6. Penalties incurred as shipper. -- These penalties include, but are not limited to:
7.4.6.a. Over-delivery cash-out penalties. -- This includes the difference between the price the pipeline pays for over-delivered volumes outside the tolerances and the price received for over-delivered volumes within the tolerances;

7.4.6.b. Scheduling penalties. -- This includes penalties incurred for differences between daily volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point;

7.4.6.c. Imbalance penalties. -- This includes penalties incurred (generally on a monthly basis) for differences between volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point; and

7.4.6.d. Operational penalties. -- This includes fees incurred for violation of the pipeline's curtailment or operational orders issued to protect the operational integrity of the pipeline;

7.4.7. Intra-hub transfer fees. -- These are fees paid to hub operators for administrative services (e.g., title transfer tracking) necessary to account for the sale of gas within a hub;

7.4.8. Fees paid to brokers. -- This includes fees paid to parties who arrange marketing or transportation, if such fees are separately identified from aggregator or marketer fees;

7.4.9. Fees paid to scheduling service providers. -- This includes fees paid to parties who provide scheduling services, if such fees are separately identified from aggregator or marketer fees;

7.4.10. Internal costs. -- This includes salaries and related costs, rental costs, space costs, office equipment costs, legal fees, attorneys' fees and expenses, and other costs to schedule, nominate, and account for sale or movement of production; and

7.4.11. Other costs. -- 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 natural gas or oil shall not be included as operating costs.

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