Could an offshore producer deduct 25 cents per barrel for owned pipelines carrying pipeline-quality oil from central processing points to off-lease terminals?

Plain-English summary

The producer could deduct 25 cents per barrel for oil transported through its two owned 10-inch lines from central treatment points to terminals outside the lease block.

It could not take the deduction for movement through the gathering system from wells to the central accumulation points where the oil was treated or processed into pipeline-quality product.

Transportation versus gathering

The regulation treated transportation as substantial movement after gathering by producer-owned or -operated pipelines, trucks, or barges.

Movement from the well through gathering lines to a point where crude was treated or processed into pipeline quality was production or gathering, not qualifying transportation.

Producer's own facilities

The taxpayer owned, maintained, and operated the two transportation lines and had direct, immediate, and exclusive authority over them. The lines moved treated oil to off-lease terminals where it entered other pipelines and was sold.

Those facts met the “own facilities” requirement.

Reasonableness requirement

The 25-cent amount had to remain equitable and reasonable under the particular facts. The ruling described that as a case-by-case question and noted that the Secretary could prospectively redetermine the allowance if it became inequitable.

Common questions

Q: Did the deduction apply to the two transportation lines?

A: Yes.

Q: Did it apply to the gathering lines?

A: No.

Q: Why was treatment important?

A: Qualifying transportation began after the oil had been gathered and made pipeline quality at the central points.

Q: Could the producer also deduct third-party billed transportation for the same oil?

A: The regulation allowed either the 25-cent owned-facility amount or actual third-party charges, not both.

Citations and references

• LAC 61:I.2903 and 61:I.2903(A)(h) — severance-tax value and transportation deduction
• LAC 61:III.101.C — Private Letter Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 04-003

Original ruling text

Private Letter Ruling No. 04-003
Redacted Version
September 2, 2004
Severance Tax
Deduction of Transportation Costs from Value of Oil and/or Condensate
This is in reply to your request, on behalf of your client (taxpayer), for a private letter ruling with
respect to issues concerning oil production and pipeline transportation in Area X, offshore
Louisiana, in the Gulf of Mexico, for the time period mm/dd/yy (the pertinent time period), through
the date of your letter. A plat (Exhibit A) supplemented your request. The private letter ruling
applies only to the taxpayer and is based upon and limited strictly to the facts stated below.
Facts
You provided the following facts:
•

Taxpayer is engaged in oil and gas exploration and production in Area X of the Gulf of
Mexico.

•

Taxpayer’s Gulf of Mexico operations include exploration and production activities offshore
Louisiana.

•

Exhibit A is a plat depicting the extensive pipeline transportation system that taxpayer used
to transport oil and gas from wells in Area X to distribution facilities outside of taxpayer’s
lease block.

•

Highlighted on Exhibit A are the lease boundaries for taxpayer’s areas of production.

•

Contained within the lease boundaries are numerous wells and production platforms.

•

The production platforms are connected to gathering pipelines.

•

This intricate gathering line system is contained within the lease boundaries for taxpayer’s
areas of production.

•

Taxpayer owned, maintained, and operated the gathering pipelines.

•

The gathering system is set up such that all gathering lines for oil are directly or indirectly
connected to one of two central accumulation points, Platform Y or Platform Z,

•

At each of these central accumulation points, the oil is treated or processed, making it
pipeline quality.

•

At each of these central accumulation points, the oil then enters a 10” transportation line that
is wholly owned, maintained, and operated by the taxpayer.

•

The transportation lines transports the oil to terminals located outside of taxpayer’s lease
block.
617 North Third Street
Baton Rouge, Louisiana 70802
225-219-2700 ‚ 225-219-2708 Fax
www.revenue.louisiana.gov

Private Letter Ruling 04-XXX
Page 2 of 3
September 2, 2004
•

At the two off-lease terminals, the oil is then tied-in to pipelines, at which point the oil is
sold.

•

The taxpayer does not sell the oil until it reaches the export tie-in terminals.

•

Taxpayer did not own or operate the pipelines located at the tie-in terminals.

Ruling Requested
Taxpayer requests that the Department of Revenue issue a private letter ruling, which states that the
gathering and transportation pipeline system utilized by taxpayer during the pertinent time period in
Area X, as depicted on Exhibit A, entitles taxpayer to take the $0.25 per barrel deduction for all oil
produced in Area X and transported through that pipeline system.
Discussion
The provisions of L.A.C. 61:I.2903 define how the value of oil and/or condensate is to be computed
for severance tax purposes. With respect to deduction of transportation costs from the value
computed, L.A.C. 61:I.2903(A)(h) provides as follows
h. Transportation Costs there shall be deducted from the value determined under the
foregoing provisions the charges for trucking, barging, and pipeline fees actually charged
the producer. In the event the producer transports the oil and/or condensate by his own
facilities, $0.25 per barrel shall be deemed to be a reasonable charge for transportation and
may be deducted from the value computed under the foregoing provisions. The producer
can deduct either the $0.25 per barrel or actual transportation charges billed by third parties
but not both. Should it become apparent the $0.25 per barrel charge is inequitable or
unreasonable, the secretary may prospectively redetermine the transportation charge to be
allowed when the producer transports the oil and/or condensate in his own facilities.
A “producer” is any person engaging in the business of oil or gas production, including the owning,
controlling, managing, or leasing of any oil or gas property or oil or gas well capable of producing
oil or gas or both.
As contemplated by the regulation, the phrase “own facilities” means that the pipelines, trucks or
barges used to transport the oil and/or condensate are owned or operated by the producer. The
producer is considered to be the owner or operator of pipelines, trucks, or barges used by the
producer to transport oil and/or condensate when the producer has direct, immediate, and exclusive
authority over such pipelines, trucks or barges
The word “transportation” is used in the regulation in its ordinary sense and comprehends a
substantial movement of oil, after gathering, by pipelines, trucks or barges. Thus, movement of
crude oil by gathering lines or other related equipment primarily used to produce, gather, or
transport crude oil from the well to a point where it can be treated or processed to make it pipeline
quality is not the “transportation” of oil as contemplated by the regulation.
The $0.25 per barrel deduction is deemed to be a reasonable charge for transportation costs when
the producer transports oil and/or condensate in his own facilities. Reasonable or equitable costs of
transportation are costs that are fair, proper, or moderate and are ordinary and necessary expenses
incurred by the producer to transport the oil and/or condensate in his own facilities after gathering.
The reasonableness or equitableness of the $0.25 per barrel transportation charge is a question of
fact and involves a case-by-case consideration of all the facts and circumstances of the particular
case under review.

Private Letter Ruling 04-XXX
Page 3 of 3
September 2, 2004
Thus, a producer of oil and/or condensate is entitled to take the $0.25 per barrel charge from the
value of the oil and/or condensate computed in accordance with the provisions of L.A.C. 61:I.2903
only when the producer (1) transports, i.e., substantially moves, oil and/or condensate by pipelines,
trucks, or barges that are owned or operated by the producer, and (2) the $0.25 per barrel charge is
equitable and reasonable under the facts and circumstances of the particular case under review.
Ruling
With respect to the two transportation lines, it is determined that the taxpayer transported oil in his
own facilities as contemplated by the regulation. Therefore, the taxpayer is entitled to deduct the
$0.25 per barrel charge as reasonable and equitable transportation charges from the value computed
under the provisions of L.A.C. 61:I.2903 for all oil that the taxpayer transported through the two
10” transportation lines to terminals located outside of its lease block and sold during the pertinent
time period.
Gathering lines neither constitute the taxpayer’s own facilities nor transport oil as contemplated by
the regulation. Therefore, the taxpayer is not entitled to deduct the $0.25 per barrel charge for any
crude oil gathered and moved by the taxpayer’s gathering lines from the well to the two central
points of accumulation where such oil was treated and/or processed to make it pipeline quality.
Sincerely,
Cynthia Bridges
Secretary
By: Annie L. Gunn
Attorney
Policy Services Division
A Private Letter Ruling (PLR) is issued under the authority of LAC 61:III.101.C. A PLR provides guidance to
a specific taxpayer at the taxpayer’s request. It is a written statement issued to apply principles of law to a
specific set of facts or a particular tax situation and is limited to the matters specifically addressed. A PLR
does not have the force and effect of law and may not be used or cited as precedent. A PLR is binding on
the Department only as to the taxpayer making the request and only if the facts provided with the request
were truthful and complete and the transaction was carried out as proposed. The Department’s position
concerning the particular tax situation addressed remains in effect for the requesting taxpayer until a
subsequent declaratory ruling, rule, court case, or statute supersedes it.