La. Admin. Code tit. 61 § V-901
Ad Valorem Tax Allowance-the estimated tax rate levied by local taxing bodies on the taxable value of property, expressed as a percentage deduction from the DCF.
Additional Equipment-equipment on a well site not typical for production of similar wells.
Annualized-the conversion of a short-term figure or calculation into an annual or yearly rate.
Average Depth-the simple average of the depth of the wells included in the LAT-12 filing.
Capital Expense (Capex)-the major investments a company incurs to either maintain, restore, or increase production or efficiency (see Workover). Capex is generally considered non-recurring in nature because it is not a direct operating expense that affects net operating income. Instead, capital expenditures are capitalized into a depreciable asset for accounting purposes. However, capex, or some portion thereof, can be included in a DCF appraisal to the extent deemed necessary for the operator to achieve a forecasted production amount. Otherwise, capex is solely a past expense that shouldn't be explicitly recognized in a forecast of future net income. See discussion of expense forecast in §907.B.3 below.
Custody Transfer-in the oil and gas industry, refers to the passing of oil or gas from one entity to another for the other's immediate charge or control, accomplished for example by a custody transfer meter for gas and a lease automatic custody transfer (LACT) unit for oil or other liquids, installed downstream of the wellhead or central gathering location such as a tank battery.
Decline Curve Analysis-a common means of predicting future oil well or gas well production based on past production history utilizing empirical reservoir engineering equations which assume production decline is proportional to reservoir pressure decline. When used in conjunction with DCF appraisal methodology which considers the economics of this potential future production, a well's expected ultimate recovery (EUR) and remaining reserves can be reliably estimated.
Discounted Cash Flow (DCF) Analysis-discounted cash flow (DCF) is a valuation method used to analyze the economics and current or potential value of an investment based on its expected future cash flows. Although technically different from an accounting perspective, net operating income can be used as a proxy for cash flow. As a widely accepted technique of the income approach to value, DCF analysis is most useful when past and expected future cash flows will vary over time, either up or down, as opposed to the direct capitalization technique which assumes a stabilized income is available or can be estimated. A DCF appraisal involves the interaction of four basic parameters: production, price, expense, and discount rate. The first three parameters combine to create a forecasted net income stream, whereas the fourth parameter converts this future net income to a present worth equal to estimated fair market value. Cash flow projection in a DCF can proceed along any chosen time increments; yearly ("year-by-year") projections are mathematically convenient and widely used for long-lived assets related to oil and gas production.
Discount Rate-the discount rate refers to the rate of interest used in a discounted cash flow (DCF) analysis to determine the present value of predicted future cash flows. Because these cash flows are non-guaranteed, the rate should include not only the time cost of money but also all components of risk that relate to the valuation in the marketplace for oil and gas assets. The discount rate typically exceeds the weighted average cost of capital (WACC) which is the minimum rate needed to justify the cost of a new venture, because future cash flows from a project or investment must meet or exceed the capital outlay needed to fund the project or investment in the present. See discussion of discount rate in §907.B.4 below.
Disposal Well-well used for injection of waste fluids or solids into an underground formation for more or less permanent storage.
Economic Limit-in a year-by-year DCF appraisal, describes the future point in time in which forecasted net income becomes negative due to allowed direct costs of operation (not counting capital expense, if any) exceeding forecasted revenues. Economic limit can vary between properties and is most often considered a result of each property's DCF appraisal, not a known input parameter itself.
Field-the general geographic region situated over one or more subsurface oil and gas reservoirs or "pools." Fields can abut or even overlay each other if two or more vertically aligned reservoirs are assigned separate field names by the state's regulatory body.
Flowing Well-a well that produces oil and/or gas to the surface by its own reservoir pressure instead of utilizing mechanical inducement such as a downhole pump, pumping unit, compressor or gas lift.
Gathering Line/System-small to medium diameter pipelines that transport oil or gas from a central point of receipt to a transmission line or mainline. A gathering system can include compression and treatment facilities.
Inactive Wells-wells that are non-producing or "shut-in." Shut-in status becomes effective on the date the application for shut-in status is filed, consistent with the Louisiana Office of Conservation requirements.
Injection Wells-wells completed as single or wells reclassified by the Louisiana Office of Conservation after a conversion of another well. Injection wells are used for gas and water injection for oil and gas formation production purposes, as well as, disposal wells.
Lease-a legal instrument or agreement between the operator (lessee) and a landowner (lessor) which gives the operator the right to explore for and produce mineral resources such as oil and gas. Also, the term often used interchangeable with property.
Lease/Flow Lines-typically smaller diameter pipelines that directly connect one or more wells to a central accumulation point, manifold, or process equipment including all check, safety, and allocation meters up to the point of custody transfer such as a LACT unit or sales meter.
Lease Operating Expense (LOE)-the costs incurred after drilling and completion activities have ended and production activities have begun. In a DCF appraisal, LOE represents all costs deemed necessary and reasonably prudent for a property to produce oil and/or gas in the amounts desired. Allowed LOE includes direct recurring costs for items such as labor, contract services, equipment, materials and supplies, treatment and processing of gases and fluids to the point of custody transfer, and overhead. LOE can also include capital expenditures when appropriate. See discussion of expense forecast in §907.B.3 below.
LUW Code-an identification code assigned to a well by the Louisiana Office of Conservation located on a particular lease, unit, or a gas lease well.
Multiple Completions-wells consisting of more than one producing zone. Deepest or primary completion may or may not be the base well number depending upon the Louisiana Office of Conservation permits and classification.
Number of Wells-the total well count included in the DCF appraisal.
Price Adjustment Factor-the factor derived to adjust the prior year average price to a more current market price, as of the assessment date.
Primary Product-the permitted majority product (oil or gas) produced from a well.
Production-the yield or amount of hydrocarbons of an oil or gas well as reported to the Louisiana Office of Conservation. In a DCF appraisal, production is the manufactured product that is projected to be sold and create a future revenue stream. See Decline Curve Analysis.
Production Depth-is the depth from the surface to the active lower perforation in each producing zone in which the well is completed. As an example: a well completed in three separate zones is a triple completion and will have three different production depths as determined by the depth of the active lower perforation for each completion.
Production Rate Decline-the rate at which the production level of oil and gas assets change (typically reduce) over time. See Decline Curve Analysis.
Production Train-the production train includes all the leasehold equipment on site, including the oil and gas wells themselves, required for the production of oil, gas, and related water assets, subject to ad valorem taxation. Simply identified, it is all the tangible equipment from the lowest active completion through the first sales meter before gathering or pipeline entry. The production train includes, but is not limited to, water supply wells, disposal wells, platforms, pad sites, tanks, process facilities such as separators, heater treaters, amine units, etc., injection wells for oil and gas production purposes, and all improvements directly related to production activities. The production train can include inactive equipment but not ancillary equipment not directly related to production of the oil and gas wells being appraised.
Pumping Well-a well which is not a flowing well and from which oil is produced by use of any type of artificial lifting method such as a pump. Pumps are required when the formation pressure is not sufficient to allow fluids to flow to the surface.
Recompletion-any downhole operation to an existing oil or gas well that is conducted to establish production of oil or gas from any geological interval not currently completed or producing in said existing oil or gas well.
Royalty Interest-royalty interest in the oil and gas industry refers to ownership of a portion of a resource or the revenue it produces. A company or person that owns a royalty interest does not bear any operational costs needed to produce the resource, yet they still own a portion of the resource or revenue it produces.
Sales Meter-sales meter is a meter at which custody transfer takes place.
Salvage Leasehold Equipment Value-the estimated net cash value of the equipment included in the production train either when production ceases or becomes uneconomic to produce commercially.
Severance Tax Allowance-the estimated tax rate levied by the state on removal (severance) of oil and gas from the ground, expressed as a percentage deduction from the DCF.
Single Completions-
Start Rate-the daily average production level of oil or gas at the beginning of the appraisal. The start rate can be the average of a brief period of time surrounding the assessment date (January 1 of the current tax year) or the actual daily production rate as of January 1. The rate should be based on all information known and related to the actual expected production as of the assessment date. See discussion of production forecast in §907.B.1 below.
Starting Price-the actual average price received by the well/LUW/field in the immediately prior year or available 12 months. See discussion of price forecast in §907.B.2 below.
Tax Year -the year of assessment as of January 1 of any annual period.
Typical Equipment-See Production Train.
Water Wells-wells used for production purposes only, both fresh and salt water supply.
Well Serial Number-in Louisiana, the permanent identification number assigned to a well by Department of Natural Resources upon approval of the Application for (or to Renew) Permit to Drill for Minerals (MD-10R).
Working Interest (WI)-the estate or rights created from a lease agreement that grants oil and gas companies the right to explore for, drill, and produce natural resources such as oil and gas from a designated area of land. The owners of a lease's working interest (typically, the operator and contractually related parties) incur all expenses of a well's physical creation and operation and therefore own the well, as opposed to royalty interest owners who do not own any portion of the well. For DCF purposes described in this chapter, WI is the sum of all working interest net revenue interest decimals included in the LAT-12 reporting, well/LUW/field. It will be a number less than 1.0 in most cases.
Workovers-major repairs or modifications which restore or enhance production from a well. An example of a typical workover is cleaning out a well that has sanded up whereas the tubing is pulled and the casing and bottom of the hole is washed out with mud. Workovers can also involve more complex recompletion procedures such as redrilling or hydraulic fracturing (fracking) of the oil or gas formation. Workovers often involve an operator incurring capital expenditures (capex) which may or may not be applicable to a forecast of future net income. See discussion of expense forecast in §907.B.3 below.
La. Admin. Code tit. 61, § V-901