BEFORE THE LOUISIANA TAX COMMISSION LTC DOCKET NO. RR-2017

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2 BEFORE THE LOUISIANA TAX COMMISSION LTC DOCKET NO. RR-2017 IN RE: IN CONSIDERATION OF AMENDING AND/OR ADOPTING PERSONAL PROPERTY RULES AND REGULATIONS FOR CHAPTER 9: OIL AND GAS PROPERTIES LOUISIANA CHEMICAL ASSOCIATION S MEMORANDUM IN REBUTTAL TO THE PROPOSAL OF THE LOUISIANA ASSESSORS ASSOCIATION Pursuant to the Commission s Notice regarding its annual Rules and Regulations Hearings, the Louisiana Chemical Association ( LCA ) submits this memorandum in response to the proposal submitted by the Louisiana Assessors Association (the LAA ) regarding the method for determining the fair market value of injection wells permitted for, and used exclusively for the solution mining of salt ( Brine Mining Wells ). The LCA was formed in 1959 to promote a positive business climate for chemical manufacturing in Louisiana and to ensure the long-term economic growth opportunities for its 63 member companies that operate more than 100 sites throughout the state. LCA members employ over 27,000 Louisiana residents. In addition, LCA members annually remit approximately $670 million in state and local taxes in Louisiana. Brine solution mining is among the many operations of LCA s members. Brine mining uses fresh and recycled water injected through a well usually between 2,000 to 5,000 feet deep. Dissolution of the salt forms a void or cavern in the salt deposit. The salt brine created is withdrawn from the cavern and transported by pipeline to an onsite evaporating plant to make dry salt, or to a chemical processing plant for chlor-alkali or other chemical production. The LAA proposal will have a significant impact on the tax liability owners of brine mining operations in Louisiana, including LCA members, without the benefit of any meaningful discussion among the stakeholders regarding the salient facts and law. In its proposal, the LAA proposes a watershed change for the determination of the fair market value of Brine Mining Wells and also with respect to the taxation of the cavern that results as a result of brine mining operations. INTRODUCTION. In the past, there was been a significant dispute regarding the proper valuation of salt cavern storage facilities, including the associated wells and the actual cavern. For example, the {N }

3 LAA during the last several years has proposed utilizing Chapter 25 to determine the fair market value for all salt cavern wells, including both Brine Mining Wells and cavern storage wells. As the LAA has admitted to the Commission, such a revision to the Commission s Rules and Regulations would result in a significant increase in the fair market value of these wells and a potential times increase in taxes based upon a preliminary and ongoing survey of potentially affected taxpayers. At the request of Louisiana Mid-Continent Oil & Gas Association ( LMOGA ), the Commission formed a study group to review the issue as it related to cavern storage facilities. This was done in Representatives of LMOGA and LAA did meet and did find common ground. The LAA and LMOGA jointly made a proposal to the Commission regarding the methodology to determine the fair market value of the wells and underground salt dome caverns used in underground commercial storage operations. However, that joint proposal did not include Brine Mining Wells or the caverns that remain in the salt mass as a result of brine solution mining. Notably, no representatives from the chemical industry, which engages in the solution mining of brine, participated in the LMOGA/LAA study group in cavern storage properties. This critical point was recognized by LMOGA, which noted in the proposal made as a result of the cavern storage well study group: [R]epresentatives met to discuss this issues and found that there was common ground to develop a uniform methodology for underground storage wells/caverns as classified by the Louisiana Department of Natural Resources, Office of Conservation under the Underground Injection Control Well Class Type as Class II Type 10, 11-L, and 11-N ( storage wells ). Based on these discussions, below is a summary of the agreed upon proposed changes for Chapter 25, thus establishing a uniform methodology for valuing storage wells in salt domes. Yet, the LAA still proposed to change to the Commission s Rules and Regulations for both cavern storage wells and Brine Mining Wells. Specifically, the LAA proposed to define injection wells for the 2016 Rules and Regulations as follows: 901. Guidelines for Ascertaining the Fair Market Value of Oil and Gas Properties C. Explanations Injection Wells wells completed as single or wells reclassified by the Louisiana Office of Conservation after a conversion of another well. Wells are used for gas and water injection for oil and gas formation production purposes, also used for disposal wells. Injection or brine wells used for solution mining or underground {N } 2

4 salt dome cavern storage should be assessed referring to the general business assets section (Chapter 25) of these guidelines. (Emphasis added). While the LAA acknowledged that the study group did not address all types of salt cavern property, specifically Brine Mining Wells, the LAA still proposed to change the method for valuing Brine Mining Wells, and to make the cavern that is created as a result of brine mining separate taxable property. The Commission rejected the LAA proposal for the 2016 Rules and regulations, as it had done in prior years with respect to Brine Mining Wells. In an effort to provide a similar forum for discussions between industry and the LAA, during the Rules and Regulations hearings for 2016, the LCA proposed that the Commission establish a study group to gather data and potentially make recommendations regarding the valuation and taxation of Brine Mining Wells and the associated caverns. The Commission, in fact, agreed with the LCA and directed that such a group be formed and meet to discuss these issues. Unfortunately, no substantive discussions were had between industry and the LAA. And although industry has continued to reach out to the LAA regarding possible discussions, no formal discussions have occurred and no common ground has been found. Thus, for the reasons set forth herein, LCA requests that the Commission (1) reject the LAA s proposal, not modify the Commission s current approach in its Rules and Regulations and continue to value Brine Mining Wells under Chapter 9 for the 2017 property tax year. The LCA submits that the LAA has simply not offered sufficient data to justify the watershed change that it proposes in the approach to the valuation of Brine Mining Wells., I. TAXPAYERS AND ASSESSORS ARE REQUIRED TO ABIDE BY THE COMMISSION S RULES AND REGULATIONS. The Commission administer[s] and enforce[s] all laws related to the state supervision of local property tax assessments. 1 This centralized authority ensures that each assessor is in compliance with the constitutional mandate that all property in Louisiana is valued uniformly. 2 The Louisiana Legislature has specifically delegated the responsibility to provide uniform methods and standards for valuing property in Louisiana: The criteria for determining fair market value shall apply uniformly throughout the state. Uniform guidelines, procedures and rules and regulations as are necessary to implement said criteria shall be adopted by the Louisiana Tax Commission only 1 La. R.S. 47:1837(A). 2 See Bonvillain v. La. Land & Exploration Co., 702 F. Supp. 2d 667 (E.D. La. 2010); Williams v. Belle of Orleans, L.L.C., (La. App. 4 Cir. 12/01/2004); 890 So. 2d 670; Metrailer v. Granger, (La. App. 1 Cir. 11/14/1989); 552 So. 2d 720. {N } 3

5 after public hearings held pursuant to the Administrative Procedure Act. 3 La. R.S. 47:2323(A). Therefore, the Commission s Rules and Regulations, as administrative rules promulgated pursuant to the Louisiana Administrative Procedure Act (La. R.S. 49:950, et seq.) (the APA ), have the full force and effect of law. 4 In accordance with this authority, Chapter 9 of the Commission s Rules and Regulations ( Chapter 9 ) provides the guidelines to be used by all assessors in valuing oil, gas and other wells, including Brine Mining Wells. Chapter 9 was properly promulgated by the Commission in accordance with La. R.S. 47:1837, La. R.S. 47:2326 and the Louisiana Administrative Procedure Act (La. R.S. 49:950 et seq.). 5 The Commission has previously determined that injection wells, including Brine Mining Wells, should be valued as oil, gas and other wells. 6 II. BRINE MINING WELLS SHOULD NOT BE VALUED UNDER CHAPTER 25. The LAA s proposal neglects to recognize that there are critical differences between Brine Mining Wells and cavern storage wells, including technical, legal and operational factors that can have a substantial effect on their respective costs. Thus, it is crucial that stakeholders, both Industry, the LAA, and Commission staff engage in discussions regarding those cost factors and the methods for determining the fair market value of Brine Mining Wells before making such a dramatic change to the Commission s Rules and Regulations as proposed by the LAA. A. Under the Commission s Property Classification Standards, Brine Mining Wells are Classified as Oil and Gas Wells. In its Property Classification Standards, in Sub-Class Code 6820, injection wells/service wells are included under class code 68 which includes Oil & Gas Wells. Sub-Class Code is defined to include: Injection wells, service wells, salt water disposal, brine wells, water wells. As such, under the Commission s current Rules and Regulations and Property Classification Standards, Brine Mining Wells are classified as Oil & Gas Wells to be valued under Chapter 9. 3 See also La. R.S. 47:1837(D). 4 See La. R.S. 47:1837; Women s & Children s Hosp. v. Dep t of Health & Hosps., , p. 17 (La. 01/21/2009); 2 So. 3d 397, 406 (holding that rules and regulations promulgated pursuant to the APA must be applied and given the force of law. ). 5 See L.R. 39:490 (March 2013). 6 LAC 61:V.304(B). {N } 4

6 That, in fact, is how Brine Mining Wells have been classified by the Commission for valuation purposes for years. The Commission s rulings in administrative hearings on this issue are consistent with that conclusion as discussed more fully below. B. The Commission, and Even Assessors, Have Recognized the Distinction Between Brine Mining Wells and Cavern Storage Wells. The LAA proposal is inconsistent with the Commission s treatment of Brine Mining Wells in administrative hearings. For example, in In Re: Protest/Appeal of Jefferson Island Storage & Hub, LLC, one of the issues before the Commission was the proper method of valuing an injection well used at an underground storage facility. 7 Both the taxpayer and the assessor testified not only that Brine Mining Wells are classified differently from cavern storage wells for DNR permitting purposes, but also that Brine Mining Wells clearly should be included in Chapter 9 because the Brine Mining Wells, like Oil & Gas Wells, are used in production of natural resources. Moreover, the assessor in that case argued that Chapter 25, on the other hand, was appropriate for wells used as part of an underground storage business, but not for property used for production purposes, such as Brine Mining Wells. This is the exact methodology that the Commission adopted, based on joint proposal by the LAA and LMOGA regarding storage cavern wells for Indeed, the representative for the assessor, Rodney Kret of the consulting firm Pritchard & Abbott, testified that Brine Mining Wells should be valued under Chapter 9. His testimony follows in part: Q: And if you go back to RP-13 and look at Item 92, would you agree that the guidelines are defining injection wells is that entry? A: It says injection wells, service wells, saltwater disposal, brine wells, water wells. Q: And brine wells are how the wells in this case began; right? A: That s what they formerly were, yes. Q: They were used to inject and extract brine or I m sorry, inject salt and extract brine; correct? A: Inject water and what s raw brine. Q: And is it your testimony at that time they did satisfy the LTC s definition for injection wells? A: Under the Chapter 9 tables, yes. 7 LTC Docket Numbers: , and A copy of the decision is attached as Exhibit A. {N } 5

7 Q: So they would have fallen at that time into the Chapter 9 tables? A: Right. Q: And because of the re-permitting, your testimony is that now they do not? A: Well, the re-permitting and the different use that they re actually involved in, yes. 8 Through his own testimony, Mr. Kret establishes that Brine Mining Wells and cavern storage wells should be treated differently under the Commission s Rules and Regulations. In its decision, the Commission continued to treat cavern storage wells as oil and gas properties valued under Chapter 9 of its Rules and Regulations. 9 Considering the differences that exist between the two types of property, as noted by the Commission in its prior decisions, and even the LAA s own consultant, the LCA believes that the Commission should not adopt the LAA s proposal as it applies to Brine Mining Wells and the associated caverns. C. Louisiana Law Distinguishes Brine Mining Wells from Cavern Storage Wells. To begin with, injection wells, including Brine Mining Wells and cavern storage wells, are classified and permitted by the Louisiana Department of Natural Resources, Office of Conservation (the DNR ). Importantly, the DNR classifies them differently. The relevant classifications are: 2. Class II. Wells which inject fluids:... c. for storage of hydrocarbons which are liquid at standard temperature and pressure. 3. Class III. Wells which inject for extraction of minerals or energy, including:... c. solution mining of salts or potash. Louisiana Administrative Code ( LAC ) 43:XVII.103(C). In addition, in its Underground Injection Control Well Class Type ( ICWCT ) table, Brine Mining Wells are identified with the 8 Jefferson Island Storage & Hub, LLC, LTC Docket Nos , & , Testimony of Mr. Rodney Kret, 220:5-25; 221: 1-3. A copy of the testimony is attached hereto as Exhibit. 9 In its decision in Jefferson Island concluded as follows with respect to the wells used in underground storage operations as follows: As to the WELLS, the Taxpayer properly computed their value in accordance with the guidelines contained in Chapter 9 of the Rules and Regulations. Slip-Op at 11. {N } 6

8 ICWCT code of 12-B. Wells utilized for hydrocarbon, liquefied petroleum gas and natural gas storage and salt domes are identified with ICWCT codes 10, 11-L, and 11-N. Importantly, the DNR has promulgated separate regulations for each class of well: LAC 43:XVII.301 et seq. (hydrocarbon storage wells in salt dome cavities) and LAC 43:XVII.3301 et seq. (Class III (Solution Mining) Injection Wells). DNR requires different Permit Application Forms for each. 10 Consequently, Brine Mining Wells, permitted as Class III injection wells, can only be used for brine solution mining. Any change in the use of the brine solution mining well, including a conversion to a cavern storage well, requires repermitting by the DNR. Conversion of a brine solution mining well and the associated cavern to a storage facility also involves a significant additional investment. Further, in addition to assuming all salt cavern injection wells are comparable, the LAA s proposal does not recognize that in some instances Brine Mining Wells, and the associated caverns cannot be converted to cavern storage wells due to various regulatory limitations, such as minimum spacing requirements. All of these factors and costs that distinguish Brine Mining Wells from cavern storage wells need to be considered by those with the specific expertise to address these fundamental issues. III. THE COMMISSION SHOULD ALSO REJECT THE LAA S PROPOSAL TO VALUE CAVERNS CREATED AS A RESULT OF BRINE SOLUTION MINING AS A SEPARATE PROPERTY. In its proposal, the LAA also proposes that the cavern that results from brine solution mining be considered separate property and taxed under Chapter 25 of the Commission s Rules and Regulations. Undoubtedly, the LAA relies upon the decision by the Court of Appeal, Third Circuit and PBGS, LLC v. Duplechain, 11 which concluded that an underground storage cavern that had been developed specifically to be a commercial storage facility (and not as a result of brine solution mining) did constitute other property for purposes of ad valorem taxation. The issue of whether the void created in a salt dome mass as a result of brine solution mining constitutes other property under the Louisiana Civil Code was not decided by the Court of Appeal, Third Circuit in the PBGS decision. 10 The permit for a Class 2 hydrocarbon storage well is UIC-2HSW, while the Permit Application Form for a Class 3 solution mining well is UIC-3BR (LA 04/03/2002); 813 So. 2d 351. {N } 7

9 In fact, in the pending case of Axiall, LLC v. Blanchard, 12 the issue is still in litigation. In that case, the District Court in Assumption Parish considered the precise issue of whether a void in the salt mass created as a result of brine solution mining operations constituted other property. The Assessor relied heavily on the decision in the PBGS case. After considering a motion for partial summary judgment filed by the Assessor for Assumption Parish, the Court concluded as follows: After a thorough review of the record and the parties arguments, it is this Court s decision that the Motion for Partial Summary Judgment is DENIED. This Court finds that there are genuine issues of material fact as to whether [or] not the salt caverns are separate property and that the Third Circuit s decision in PBGS, LLC v. Duplechain, is easily distinguishable from the current matter. 13 As the District Court in Assumption Parish concluded, there are material facts that must be considered before a determination regarding whether the caverns created as a result of brine solution mining should be considered other property for ad valorem tax purposes. As such, the LCA suggests that as this issue is ongoing litigation that the Commission maintain the status quo until that litigation is finally resolved. CONCLUSION For the reasons set forth above, the Louisiana Chemical Association, on behalf of its members, opposes the proposal made by the LAA to value Brine Mining Wells under Chapter 25 of the Commission s Rules and Regulations for the year The LAA s proposal would, without justification, constitute a significant departure from long-standing practice, and the law as embodied in the Commission s Rules and Regulations. 12 No. 34,744 (23 rd JDC, Div. A). 13 See Slip-Op. attached as Exhibit C. {N } 8

10 LOUISIANA CHEMICAL ASSOCIATION S MEMORANDUM IN REBUTTAL TO THE PROPOSAL OF THE LOUISIANA ASSESSORS ASSOCIATION SUMMARY Solution mining of salt (brine mining) provides a critical raw material for chemical production in Louisiana. The LAA s proposal could result in a significant, multi-fold increase in taxes for affected parties. LCA opposes LAA s recommendation that brine production wells be treated as storage wells under Chapter 25 instead of as natural resource production wells like oil and gas wells under Chapter 9. There has been no formal discussion of this watershed change proposed by LAA and the affected taxpayers as was directed by the Commission last year. The Commission and Assessors have previously recognized the distinction between brine mining wells and salt cavern storage wells Brine production wells and salt cavern storage wells are classified and permitted under different sets of LDNR regulations. Brine production wells that are repurposed as storage caverns must be repermitted as storage wells. LAA also proposes that the cavern void created from the brine mining process be considered other property for ad valorem tax purposes even though the brine mining void is not (and cannot be) used as storage. Conclusion: LAA s proposal is unjustified and would constitute a significant departure from long-standing practice and rule. LCA urges the Commission to reject moving the valuation of brine production wells to Chapter 25 and maintain their regulation under Chapter 9.