1. 1 Louisiana Assessors’ Association Oil & Gas Committee Recommendations LTC Rules and Regulations Tax Year 2010 Louisiana Assessors’ Association Oil & Gas Committee Recommendations LTC Rules and Regulations Tax Year 2010 Presentation of Proposals June 23, 2009 Baton Rouge, LA Presentation of Proposals June 23, 2009 Baton Rouge, LA

2. 2 Chapter 3: Real and Personal Property Section 307: Personal Property Report Forms

3. 3 Years moved forward by one to current.

4. 4 New form beginning 2010. Taxpayer has option to group all items in a related facility.

5. 5 Chapter 9: Oil and Gas Properties

6. 6 Replacement Cost New (RCN) Replacement Cost New (RCN)

7. 7 All RCN values for all three regions (Tables 907.A-1, 2, and 3) have been derived with most currently available API cost data (2003-2007) and represent 100% cost including all installation (i.e., drilling and completion). OG-9

8. 8

9. 9 Depreciation (Physical Deterioration) Depreciation (Physical Deterioration)

10. 10 Comparison of Depreciation Curves OIL & GAS ABC Type Property:O&G Method:Straight-Line with Sustaining CapitalStraight-Line Source:LTCLAA Service Life (yrs):25 Floor Rate:20%10%20% Salvageable Amt:0%10%20% Depreciable Amt:100%90%80% Amt per Year:4.0%3.6%3.2% Floor Rate (called):20%30%20% Proposed by LAA in Recommendations book.

11. 11 Age (yrs) Depreciation Percent Good Factor - OIL & GAS ABC 196.0%96.4%96.8% 292.0%92.8%93.6% 388.0%89.2%90.4% 484.0%85.6%87.2% 580.0%82.0%84.0% 676.0%78.4%80.8% 772.0%74.8%77.6% 868.0%71.2%74.4% 964.0%67.6%71.2% 1060.0%64.0%68.0% 1156.0%60.4%64.8% 1252.0%56.8%61.6% 1348.0%53.2%58.4% 1444.0%49.6%55.2% 1540.0%46.0%52.0% 1636.0%42.4%48.8% 1732.0%38.8%45.6% 1828.0%35.2%42.4% 1924.0%31.6%39.2% 2020.0%30.0%36.0% 2120.0%30.0%32.8% 2220.0%30.0%29.6% 2320.0%30.1%26.4% 2420.0%30.0%23.2% 2520.0%30.0%20.0% Proposed by LAA in Recommendations book.

12. 12 30% Floor

13. 13 Year is moved forward to current. OG-11 LAA disagrees with straight 4% per year depreciation which is derived by dividing 100% by 25 years (floor is reached in 20 years versus 25). LAA proposes either: a)3.6% per year (= 90% total depreciation / 25 years) with 30% floor; or b)3.2% per year if 20% floor is adopted again (floor is reached in 25 years). LAA disagrees with straight 4% per year depreciation which is derived by dividing 100% by 25 years (floor is reached in 20 years versus 25). LAA proposes either: a)3.6% per year (= 90% total depreciation / 25 years) with 30% floor; or b)3.2% per year if 20% floor is adopted again (floor is reached in 25 years). Floor rate is greater than 20% due to effect of “sustaining capital.”

14. 14 Economic Obsolescence

15. 15 Economic obsolescence should be expanded to begin sooner in the productive life of the well, IF the LTC concurrently adopts 100% RCN as proposed by LAA. OG-6

16. 16 Economic obsolescence should be its own area under Section 907. Fundamental change from current methodology: economic obsolescence should be considered for ALL wells, not just wells below 10 bopd or 100 mcfpd. LAA makes this obsolescence recommendation only with the concurrent recommendation that RCN be adopted at 100%. OG-7

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23. 23 Surface Equipment

24. 24 Values in Table 907.C-1 do not currently include installation costs. In lieu of a proposed schedule, LAA proposes new attachment to rendition Form LAT 12. Installation costs are legitimate components of RCN which must be trended and depreciated accordingly. OG-4

25. 25 LAA recommends that Form LAT 12 be amended to include rendition of installation cost (see Chapter 3). OG-12

26. 26 All RCN values derived by trending 2006 vintage costs. These RCN values do not include installation cost. OG-13

27. 27 Rendered installation costs, if not current, must be trended to current (2008). Maximum trend factor is for oldest vintage shown in table (1976). Trend data source is Chemical Engineering and Marshall & Swift. OG-23

28. 28 Other Chapter 9 Issues

29. 29 Correct spellings for these three words. There is no basis for LTC’s current exclusion of lateral component of total production depth for horizontal wells. OG-1

30. 30 Summary, Chapter 9 RCN values for subsurface property should be adopted basis on actual cost data through most recently available API survey (2007). –I–Installation costs necessarily include drilling and completion; therefore LTC should adopt 100% of RCN as proposed. –H–Horizontal wells should be valued on basis of total depth (feet) drilled, not just vertical portion only. Annual rate of depreciation should be derived by dividing only the depreciable amount of property (the amount above the floor) by the service life. –F–Floor % good should be raised to 30% to account for sustaining capital invested in this type of property. Economic obsolescence should be granted to more wells sooner in their producing lives, to achieve more realistic RCNLD values for all wells. RCN values for surface equipment should be trended to current every tax year to avoid falling behind market (i.e., don’t forget the “N” in RCN).

31. 31 Chapter 11: Drilling Rigs and Related Equipment

32. 32 Data source: Hadco International newsletter, which gives sales data for drilling rigs (interpreted as current FMV) and current cost data for service rigs (interpreted as RCN). For drilling rigs, LAA continues to recommend “Good Condition” as default for appraisal. DR-2

33. 33 Order increased to more accurately follow and reflect Hadco data.

34. 34

35. 35 These notes deleted from area immediately following service rigs to area immediately following drilling rigs, because they only apply to drilling rigs. DR-5 Hadco newsletter only gives conditions for drilling rigs, and not service rigs.

36. 36 RCNLD values proposed by LAA for service rigs are at 40% good by default. Therefore, additional adjustments for condition are not warranted (or possible via the Hadco data). DR-6

37. 37 Summary, Chapter 11 The most recent Hadco sales and cost data should be honored as in the past. Notes regarding condition of drilling rigs (for depreciation purposes) should be relocated away from service rigs section to avoid confusion.

38. 38 Chapter 13: Pipelines

39. 39 Replacement Cost New (RCN) Replacement Cost New (RCN)

40. 40 RCN values ($/mile) for ONSHORE “other” pipelines. PL-4

41. 41 y = 141950e 0.1554x R 2 = 0.9759 y = 141950e 0.1554x R 2 = 0.9759

42. 42 RCN values ($/mile) for OFFSHORE “other” pipelines. PL-5

43. 43 y = 5369.3x 2 - 14824x + 1280000 R 2 = 0.9734 y = 5369.3x 2 - 14824x + 1280000 R 2 = 0.9734

44. 44 Depreciation (Physical Deterioration) Depreciation (Physical Deterioration)

45. 45 LAA disagrees with straight 4% per year depreciation which is derived by dividing 100% by 25 years (floor is reached in 20 years versus 25). LAA proposes either: a)2.6% per year (= 90% total depreciation / 35 years), if 30% floor is adopted; or b)2.3% per year, if 20% floor is adopted again (but with 35- year life). LAA disagrees with straight 4% per year depreciation which is derived by dividing 100% by 25 years (floor is reached in 20 years versus 25). LAA proposes either: a)2.6% per year (= 90% total depreciation / 35 years), if 30% floor is adopted; or b)2.3% per year, if 20% floor is adopted again (but with 35- year life). PL-6

46. 46 Comparison of Depreciation Curves PIPELINES ABC Type Property:PIPELINES Method:Straight-Line Straight-Line with Sustaining CapitalStraight-Line User:LTCLAA Service Life (yrs):2535 Floor Rate:20%10%20% Salvageable Amt:0%10%20% Depreciable Amt:100%90%80% Amt per Year:4.00%2.57%2.29% Floor Rate (called):20%3020% Proposed by LAA in Recommendations book.

47. 47 30% Floor

48. 48 Summary, Chapter 13 RCN ($/mile) figures are derived using actual construction cost data (estimated or actual) provided by pipeline owners to FERC. Trending to current has resulted in about 5.5% increase from last year. Depreciation considerations: –Only the depreciable amount of property (the amount above the floor) should be depreciated. –A typical service life for pipelines for valuation purposes is 35 years. –The floor % good for these types of properties should be raised to 30% to account for the effect of sustaining capital.