W.R.A.P. 12.09(b) Certification from the District Court of Sublette County, The Honorable Norman E. Young, Judge.
The opinion of the court was delivered by: Burke, Justice.
Before VOIGT, C.J., and GOLDEN, HILL, and BURKE, JJ., and KAUTZ, D.J.
BURKE, J., delivers the opinion of the Court; HILL, J., files a dissenting opinion.
[¶1] ExxonMobil Corporation‟s LaBarge Project in southwestern Wyoming has been "a prolific source of various valuable gasses," as well as "a prolific source of tax litigation." Wyoming Dep't of Revenue v. Exxon Mobil Corp., 2007 WY 112, ¶ 6, 162 P.3d 515, 519 (Wyo. 2007). The current litigation brings before us ExxonMobil‟s dispute with the Wyoming Department of Revenue over the taxation of natural gas for production year 2005. The Board of Equalization first heard and decided the dispute. ExxonMobil appealed two key aspects of the Board‟s decision to the district court. Pursuant to W.R.A.P. 12.09(b), the district court certified the case directly to us for review. For the reasons set forth in this opinion, we will reverse the decision of the Board, and remand the case for further proceedings.
[¶2] ExxonMobil states these issues for our consideration:
1. The State Board of Equalization determined that ExxonMobil‟s Black Canyon facility is an "initial dehydrator" for point of valuation purposes under Wyo. Stat. Ann. § 39-14-203(b)(iv). Did the Board err in that conclusion?
2. In applying the proportionate profits statute, the Department of Revenue deducted ExxonMobil‟s postprocessing transportation expenses from gross revenues rather than including those expenses in the denominator of the direct cost ratio as required by statute. Did the Board err when it affirmed the Department‟s creation of a direct cost ratio that is contrary to the one set forth in the proportionate profits statute?
The Department raises essentially the same issues in different words:
1. Did the State Board of Equalization correctly determine that ExxonMobil‟s Black Canyon dehydration facility is the initial dehydrator and not a "processing facility" pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv)?
2. Did the State Board of Equalization correctly affirm the Department of Revenue‟s method of deducting post-plant transportation costs and determination that post-plant transportation costs are not included in the direct cost ratio pursuant to Wyo. Stat. Ann. § 39-14-203(b)(vi)(D)?
[¶3] Because the facts in this case are essentially undisputed, we will rely largely on paraphrases of and quotations from the Board‟s Findings of Fact.*fn1 The LaBarge Project includes eighteen natural gas wells in three federal gas units in the Bridger-Teton National Forest in Sublette County, Wyoming. The natural gas stream from these wells is composed of approximately 65% carbon dioxide, 22% methane, 7% nitrogen, 5% hydrogen sulfide, and 0.6% helium, with trace amounts of various other components. As described by the Board:
The LaBarge gas, unlike most natural gas in Wyoming, is not flammable before processing. It is a unique gas stream, and may in fact be the lowest BTU gas produced in the world. The gas stream is lethal due to its high concentration (50,000 parts per million) of hydrogen sulfide. A concentration of 700 parts per million of H2S in a gas stream can be fatal. In addition, when in contact with water, both H2S and CO2 form corrosive acids which can destroy a carbon steel pipeline. In the view of the Department,... no other natural gas stream in Wyoming is "remotely similar."
[¶4] From the well fields, the raw natural gas stream is piped approximately five miles to the Black Canyon facility where the gas is dehydrated. From Black Canyon, it is piped another forty miles to the Shute Creek facility where it is processed and separated into marketable products. Ordinarily, sour natural gas*fn2 is not dehydrated before it is processed. At the other facilities in Wyoming where sour natural gas is processed, the raw gas stream is delivered directly from the wells into a processing facility, without any intervening dehydration. The unusual configuration of the LaBarge Project was necessary largely because of environmental constraints.
[¶5] ExxonMobil had initially planned that all of the processing and dehydration would be done at Black Canyon, but because of the environmental sensitivity of that site, ExxonMobil was required to locate the main processing facilities approximately forty miles south at the Shute Creek site. Because of safety and operational constraints, however, the sour natural gas had to be dehydrated before it was sent on to Shute Creek. That is because this gas stream contains extremely high concentrations of hydrogen sulfide and carbon dioxide along with water vapor. Such concentrations of hydrogen sulfide and carbon dioxide, in contact with water, can form acids corrosive enough to destroy a carbon steel pipeline, along with hydrates that could plug the pipeline. To prevent this, ExxonMobil dehydrates the sour gas at Black Canyon, then sends the dehydrated gas to Shute Creek for further processing. Further complicating the arrangement, the Shute Creek processing system requires wet gas, so ExxonMobil must inject water back into the gas stream before processing it at Shute Creek.
[¶6] Black Canyon is a notably large and complex facility. It is designed to handle as much as 720 million cubic feet of raw gas per day. It is more than 2 million square feet in area, with office space for more than thirty full-time employees, a warehouse, a maintenance garage, and two separate processing train buildings. As the Board noted, "dehydration of sour gas is inherently challenging and complex." With its high concentrations of hydrogen sulfide, the gas is extremely lethal. The water removed from the gas stream is also extremely acidic, and must be closely managed for safe disposal. Air quality considerations prohibit ExxonMobil from emitting any hydrogen sulfide, or from burning it, which would create sulfur dioxide. ExxonMobil must therefore recover and manage all of the contaminants removed from the gas stream.
[¶7] It is undisputed that the Black Canyon facility dehydrates the LaBarge Project gas stream. To do that, it sends the gas, in two separate streams, to dehydration towers. There, the gas rises while a triethylene glycol (TEG) solution "rains down" through the gas and absorbs water vapor. In addition to removing water vapor, the TEG solvent also removes a little of "every single component in a raw gas stream." Accordingly, the Black Canyon facility also removes hydrogen sulfide, carbon dioxide, and other components of the stream. In addition, after the LaBarge Project began operating, ExxonMobil discovered that the gas stream contained several unexpected naturally occurring contaminants, including dibenzothiophene and other heavy hydrocarbons. As will be discussed in more detail below, these heavy hydrocarbons began settling out of the gas stream and contaminating the equipment at Black Canyon, the pipeline to Shute Creek, and the processing equipment at Shute Creek. ExxonMobil was forced to develop a system for removing these heavy hydrocarbons from the gas stream, "otherwise the entire operation from Black Canyon through Shute Creek would eventually fail."
[¶8] At the Shute Creek plant, the gas is rehydrated, then stripped of hydrogen sulfide. The hydrogen sulfide is taken to sulfur recovery units and is either processed into a marketable sulfur product or reinjected back into the earth. The Shute Creek plant next removes carbon dioxide from the gas stream. The carbon dioxide that can be sold is sent through compressors and pipelines for delivery to petroleum recovery operations located a substantial distance away. Some carbon dioxide that cannot be sold is vented to the atmosphere. Finally, the remaining gas stream is separated and processed into the principal products of the gas stream, which are methane, liquefied natural gas, and helium. For all of the products processed and separated at Shute Creek, particularly carbon dioxide, methane, and sulfur, ExxonMobil incurs additional costs in transporting the products from Shute Creek to their point of sale.
[¶9] From 1986 through 2004, severance taxes for the LaBarge Project were calculated using an accounting methodology agreed to by the Department and ExxonMobil as part of a negotiated settlement of litigation. This settlement was necessary, at least in part, because of the unique chemical composition of the LaBarge gas stream and its attendant safety, transportation, and processing challenges. In May of 2004, the Department cancelled the settlement agreement, and directed that the 2005 taxes for ExxonMobil‟s LaBarge Project would be calculated using the proportionate profits valuation method set forth in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) (LexisNexis 2007). Disputes over the correct application of this valuation method generated this litigation between the Department and ExxonMobil.
[¶10] Our review of an administrative agency‟s decision is governed by the Wyoming Administrative Procedure Act, which, in pertinent part, provides that the reviewing court shall:
(ii) Hold unlawful and set aside agency action, findings and conclusions found to be:
(A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law;
(B) Contrary to constitutional right, power, privilege or immunity;
(C) In excess of statutory jurisdiction, authority or limitations or lacking statutory right;
(D) Without observance of procedure required by law; or
(E) Unsupported by substantial evidence in a case reviewed on the record of an agency hearing provided by statute.
Wyo. Stat. Ann. § 16-3-114(c)(ii). We affirm an agency‟s findings of fact if they are supported by substantial evidence. Dale v. S & S Builders, LLC, 2008 WY 84, ¶ 22, 188 P.3d 554, 561 (Wyo. 2008). In this case, however, ExxonMobil does not challenge the Board‟s findings of fact. Rather, it asserts that the Board incorrectly applied the law to those facts, so that the Board‟s conclusions are not in accordance with the law. "As always, we review an agency‟s conclusions of law de novo." Id., ¶ 26, 188 P.3d at 561.
[¶11] The basic task before us is to interpret various provisions of Wyo. Stat. Ann. § 39-14-203 and determine whether the Board correctly applied this severance tax statute to the undisputed facts. Statutory interpretation presents a question of law which we review de novo. Qwest Corp. v. State ex rel. Dept. of Rev., 2006 WY 35, ¶ 8, 130 P.3d 507, 511 (Wyo. 2006).
When interpreting statutes, we follow an established set of guidelines. First, we determine if the statute is ambiguous or unambiguous. A statute is unambiguous if its wording is such that reasonable persons are able to agree as to its meaning with consistency and predictability. Unless another meaning is clearly intended, words and phrases shall be taken in their ordinary and usual sense. Conversely, a statute is ambiguous only if it is found to be vague or uncertain and subject to varying interpretations. BP America Prod. Co. v. Department of Revenue, 2006 WY 27, ¶ 20, 130 P.3d 438, 464 (Wyo. 2006), quoting State Dept. of Revenue v. Powder River Coal Co., 2004 WY 54, ¶ 5, 90 P.3d 1158, 1160 (Wyo. 2004). If a statute is clear and unambiguous, we give effect to the plain language of the statute. State ex rel. Wyo. Dept. of Revenue v. Union Pacific R.R. Co., 2003 WY 54, ¶ 12, 67 P.3d 1176, 1182 (Wyo. 2003). To determine whether a statute is ambiguous, we are not limited to the words found in that single statutory provision, but may consider all parts of the statutes on the same subject. Mathewson v. City of Cheyenne, 2003 WY 10, ¶ 6, 61 P.3d 1229, 1232 (Wyo. 2003). If a statute is ambiguous, we may resort to principles of statutory construction to determine the intent of the legislature. Qwest, ¶ 8, 130 P.3d at 511.
[¶12] Pursuant to Wyo. Stat. Ann. § 39-14-203(a)(i), "There is levied a severance tax on the value of the gross product extracted for the privilege of severing or extracting crude oil, lease condensate or natural gas in the state." This tax is imposed on the value of the natural gas at the time "the production process is completed." Wyo. Stat. Ann. § 39-14- 203(b)(ii). It is not always clear, however, just where the production process is completed and other operations, such as transportation, are begun. See, e.g., Union Pac. Resources Co. v. State, 839 P.2d 356, 361 (Wyo. 1992) (The legislature, oil and gas producers, and agencies "have struggled over the years to determine when the mining or production process is complete.").
[¶13] In 1990, the legislature made an effort to clarify the proper point of valuation. See Kennedy Oil v. Department of Revenue, 2008 WY 154, ¶ 22 n.3, 205 P.3d 999, 1006 n.3 (Wyo. 2008). It enacted this statutory guidance:
The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.
Wyo. Stat. Ann. § 39-14-203(b)(iv). Significantly, this statute provides only two alternatives: Black Canyon is either an "initial dehydrator" as set forth in the first sentence, or a "processing facility" as set forth in the second sentence. There is no third option. The Board concluded that Black Canyon is an initial dehydrator. On appeal, we must determine whether that conclusion is based on correct interpretation and application of this statute.
2. Application of the Statute
[¶14] As explained by an expert witness for ExxonMobil during the Board‟s hearing, dehydrators can be divided into three different types. The statute quoted above is relatively simple to apply to "Type 1" and "Type 2" dehydrators. It is more difficult to apply to "Type 3."
[¶15] The Type 1 dehydrator is a relatively small piece of equipment located at or near the well. It is used to dehydrate sweet natural gas, and typically handles the gas stream from a single well or a small group of wells. The expert witness estimated that Type 1 dehydrators constitute approximately 97% of the dehydrators in use in the United States. After dehydration, much of Wyoming‟s sweet natural gas already meets commercial quality standards, and can be sent directly from the dehydrators to the pipelines without further processing. A Type 1 dehydrator appears to be precisely the sort of "initial dehydrator" referred to in the first sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv): "The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator." Applying this statutory provision, the severance tax is imposed at the outlet of the initial dehydrator. See, e.g., Williams Prod. RMT Co. v. Wyoming Dep't of Revenue, 2005 WY 28, ¶ 34, 107 P.3d 179, 189 (Wyo. 2005) (The statute "is quite clear in pronouncing that the natural gas production process is completed, for severance tax purposes, at the outlet of the initial dehydrator.").
[¶16] According to the expert witness, nearly all of the other dehydrators in use in the United States are Type 2 dehydrators. They are larger in capacity than Type 1 dehydrators, as they typically dehydrate gas gathered from a larger number of wells. Accordingly, they are generally located at a greater distance from the wells. Type 2 dehydrators are used on sour natural gas, and so are usually incorporated within a large and complex gas processing facility. Type 2 dehydrators fall under the second sentence of Wyo. Stat. Ann. § 39-14-203(b)(iv): "When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first." An example of a Type 2 dehydrator in Wyoming is the Whitney Canyon processing plant. See Amoco Prod. Co. v. Department of Revenue, 2004 WY 89, ¶ 29, 94 P.3d 430, 442 (Wyo. 2004) ("The parties to this case agree that no dehydration occurs in the field, so the point of valuation is either the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever comes first."). Other examples include the Lost Cabin plant, see RME Petroleum Co. v. Wyoming Dept. of Revenue, 2007 WY 16, ¶ 9, 150 P.3d 673, 677 (Wyo. 2007); and the Carter Creek plant, see Chevron U.S.A., Inc., ¶ 1, 158 P.3d at 132.
[¶17] There are only five Type 3 dehydrators in the world according to the expert witness, and the only one in Wyoming is ExxonMobil‟s Black Canyon facility. Unlike a typical Type 1 dehydrator, Black Canyon is a very large and complex facility, is used to dehydrate the gas gathered from several wells, and is located approximately five miles from the well fields. Like a Type 2 dehydrator, Black Canyon dehydrates sour natural gas, but unlike a typical Type 2 dehydrator, Black Canyon is a stand-alone unit, not part of the larger processing facility located at Shute Creek. As the Board recited in its findings of fact, "In Wyoming, there are no other facilities which dehydrate highly sour raw gas. At the other facilities in Wyoming where raw sour natural gas is processed, the raw gas stream is delivered directly from the wells into a processing facility, without an intervening... process." These unique characteristics make it difficult to classify the Black Canyon facility as either an initial dehydrator or a processing facility, as those terms are used in the statute. This difficulty is at the heart of the dispute between ExxonMobil and the Department over the correct point of valuation for severance tax purposes.
B. Interpretation of the Statutory Terms
1. Interpretation in Williams
[¶18] The terms "initial dehydrator" and "processing facility" are not defined in the statutes. However, we interpreted these terms in Williams Prod. RMT Co. v. Wyoming Dep't of Revenue, 2005 WY 28, ¶ 34, 107 P.3d 179 (Wyo. 2005). That opinion provides guidance in our current efforts to interpret the statutory terms.
[¶19] At issue in Williams was the proper point of valuation for coal bed methane*fn3 that was gathered from separate wellheads and sent through pipelines and compressors to a triethylene glycol (TEG) dehydrator, a fairly typical example of the Type 1 dehydrator discussed by ExxonMobil‟s expert witness. In Williams, the Department considered the TEG dehydrator to be the initial dehydrator and, under the first sentence of the statute, set the point of valuation at the dehydrator outlet. Williams disagreed, asserting that dehydration also occurred when the gas was gathered and compressed, long before the gas got to the TEG dehydrator. On that basis, Williams denied that the TEG dehydrator was the initial dehydrator, and contended that the correct point of valuation was at the ...