Chesapeake Operating, LLC v. State of Wyoming, Department of Revenue

IN THE SUPREME COURT, STATE OF WYOMING

2023 WY 107

OCTOBER TERM, A.D. 2023

November 7, 2023

CHESAPEAKE OPERATING, LLC,

Appellant
(Petitioner),

v.
S-23-0036
STATE OF WYOMING,
DEPARTMENT OF REVENUE,

Appellee
(Respondent).

W.R.A.P. 12.09(b) Certification
from the District Court of Converse County
The Honorable F. Scott Peasley, Judge

Representing Appellant:
Walter F. Eggers III and Kasey J. Schlueter, Holland & Hart LLP, Cheyenne,
Wyoming. Argument by Mr. Eggers.

Representing Appellee:
Bridget Hill, Wyoming Attorney General; Brandi Monger, Deputy Attorney
General; Karl D. Anderson, Supervising Attorney General; James Peters, Senior
Assistant Attorney General. Argument by Mr. Peters.

Before FOX, C.J., and KAUTZ, BOOMGAARDEN, GRAY, and FENN, JJ.

NOTICE: This opinion is subject to formal revision before publication in Pacific Reporter Third. Readers are
requested to notify the Clerk of the Supreme Court, Supreme Court Building, Cheyenne, Wyoming 82002, of
any typographical or other formal errors so that correction may be made before final publication in the
permanent volume.
GRAY, Justice.

[¶1] The Wyoming Departments of Audit and Revenue (Department) conducted a
mineral tax audit of Chesapeake Operating, LLC’s (Chesapeake) oil and gas production
for the production years 2010-2012 and 2014-2016. It issued audit assessments increasing
the value of Chesapeake’s production based on a point of valuation downstream from the
custody transfer meters located near each wellhead. Chesapeake disputed the
Department’s assessments and point of valuation. The Board of Equalization (Board)
affirmed. Chesapeake appealed, arguing the Board erred in affirming the point of valuation
because Chesapeake’s field facilities were “processing facilit[ies]” under Wyo. Stat. Ann.
§ 39-14-203(b)(iv) and that the proper point of valuation for its gas production is at the
custody transfer meters. Pursuant to W.R.A.P. 12.09(b), the district court certified the case
directly for this Court’s review. We affirm.

ISSUE

[¶2] The parties present a single issue for review:

Did the State Board of Equalization misinterpret Wyo. Stat.
Ann. § 39-14-203(b)(iv) when it found Chesapeake’s facilities
did not qualify as processing facilities?

FACTS

[¶3] The crux of this dispute is where Chesapeake’s natural gas production stops and
processing begins. Under Wyoming’s tax code, costs incurred in the production of oil and
gas are not deductible from severance and ad valorem taxes, but costs incurred for
processing are deductible. See Wyo. Stat. Ann. § 39-14-203(b) (severance taxes); §§ 39-
13-102(m)(i), 103(b)(iv) (ad valorem taxes). Accordingly, the closer to the wellhead
processing occurs, the more advantageous it is to the taxpayer. Williams Prod. RMT Co.
v. State Dep’t of Revenue, 2005 WY 28, ¶ 10, 107 P.3d 179, 183–84 (Wyo. 2005).

[¶4] Chesapeake produces oil and natural gas from horizontal wells in Converse County,
Wyoming. Initially, the gas was flared 1 and oil was sold out of storage tanks at the well
pads. Between 2010 and 2016, Chesapeake began selling the natural gas and expanded its
production by drilling more wells. Over this period, seven separately located facilities
(referred to here as “the seven facilities” or “the facilities”) were built to assist with the
expanded operations. These are known as the Pronghorn, Antelope, Gumbo Hill, No
Name, Pale Horse, Rawhide, and Appaloosa facilities. All seven facilities were essentially

1
“Flaring” describes the process of burning “in an open flame in the open air . . . . Natural gas that is
uneconomical for sale is . . . flared.” Flare, U.S. Energy Information Administration,
https://www.eia.gov/tools/glossary/?id=natural%20gas (last visited Oct. 31, 2023).

1
identical to each other for the production years in question. In these proceedings, the
parties used the Rawhide facility as the exemplar for all seven facilities.

[¶5] Chesapeake’s production system is complex. Oil and gas are extracted from the
field using wells extending from well pads. After extraction, a vertical separator near the
wellhead separates liquids from gas. Oil and water move to heater treaters. 2 The heater
treaters remove additional liquid from the gas and separate oil from water. The water and
oil are stored in tanks. Key to this discussion, after separation at the wellhead, the gas
passes through the custody transfer meter and is transported through a natural gas pipeline
to one of the seven facilities.

[¶6] Each of these facilities is large and includes multiple buildings. They are fenced
and occupy 12 acres of land. They are monitored remotely, 24 hours a day, 7 days a week
by the operators of the system, who are available to address any problems that might arise.
When the gas arrives at a facility, it first flows to separators where heavier condensate, oil,
water, and other substances are removed. From there, the liquids are piped to an onsite
slug catcher 3 for further separation. Heavier hydrocarbons are stored in tanks and
ultimately sold. The separated gas flows to compressors where gas is pressurized to meet
pipeline specifications. At the Rawhide facility there are ten compressors housed in two
separate buildings. The compressors increase the gas stream pressure from about 40
pounds per square inch (psi) to between 800 and 900 psi. The gas then moves to the
triethylene glycol (TEG) dehydrator 4 where water vapor is removed. 5 Gas exits the TEG
dehydrator and is moved through high pressure transport lines to one of two natural gas
liquids (NGL) extraction facilities for processing and eventual sale. The two NGL
extraction facilities are the Tallgrass and Bucking Horse facilities. The parties do not
dispute that these facilities are processing facilities.

2
A heater-treater is “commonly used in oilfield production processes . . . to separate water and other foreign
substances from . . . crude oil.” Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms,
at 464 (15th ed. 2012). When “temperature of the oil increases, the water and other contaminants separate
from the oil and drop to the bottom of the heater. The contaminants are discharged from the heater-treater
and the crude oil, without contaminants,” is stored for transport. Id.
3
Slug is an accumulation of liquid, for example condensed water, in a low point of a gas pipeline. Slugs
tend to accumulate when flow rate is low or interrupted. A slug catcher is “[a]n installation designed to
cause any condensed liquids in a gas line to separate from the gas.” Williams & Meyers, supra, at 976.
4
“Dehydrators are used in the oil and gas industry to remove water from gas, to meet pipeline quality
standards.” U.S. Environmental Protection Agency, Glycol Dehydrators, https://www.epa.gov/natural-gas-
star-program/glycol-dehydrators (last visited Oct. 31, 2023). The “desiccant most often utilized is
triethylene glycol (TEG). During the dehydration process, TEG absorbs water along with methane, volatile
organic compounds (VOCs), and hazardous air pollutants (HAPs) when contacted with the wet gas.” Id.
5
TEG recirculates from the TEG dehydrator to TEG regeneration equipment (which boils water out of the
TEG solution so that the TEG may be reused) located in an adjacent building, and back to the TEG
dehydrator, where it is used again to dehydrate the gas stream.

2
[¶7] The Department audited Chesapeake’s natural gas production for the years 2010-
2012 and 2014-2016. The Department first determined the point of valuation. Wyoming
statutes provide that the “fair market value for crude oil, lease condensate and natural gas
shall be determined after the production process is completed . . . [and] expenses incurred
by the producer prior to the point of valuation are not deductible in determining the fair
market value of the mineral[.]” Wyo. Stat. Ann. § 39-14-203(b)(ii) (LexisNexis 2023).
The Department concluded despite the functions described above, the seven facilities were
production facilities and production was not complete until the natural gas left the TEG
dehydrators. It used the outlet of the TEG dehydrators as the point of valuation and
determined Chesapeake owed an additional $872,838.14 severance tax and interest for the
2010-2012 production years and an additional $3,245,064.90 severance tax and interest for
the 2014-2016 production years.

[¶8] Chesapeake timely appealed to the Board. Chesapeake argued that because the
seven facilities are “processing facilities” as the term is used in the mineral tax statutes,
production is complete when natural gas enters the custody transfer meter at the wellhead,
prior to the arrival at one of the seven facilities. It asserted the custody transfer meter is
the point of valuation. The Department stood by its position that the seven facilities are
production facilities, and the point of valuation is at the outlet of the TEG dehydrator. After
a contested case hearing, the Board concluded the Department was correct and that
Chesapeake had offered “no technical evidence” supporting its contention that the seven
facilities were processing facilities. Chesapeake appealed and the parties filed a joint
motion asking that the case be certified to this Court. This Court accepted certification on
February 28, 2023.

STANDARD OF REVIEW

[¶9] “When an administrative agency case is certified to this Court under W.R.A.P.
12.09(b), we apply the standards for judicial review set forth in Wyo. Stat. Ann. § 16-3-
114(c).” Jonah Energy LLC v. Wyo. Dep’t of Revenue, 2023 WY 87, ¶ 6, 534 P.3d 902,
905 (Wyo. 2023) (quoting Wyodak Res. Dev. Corp. v. Wyo. Dep’t of Revenue, 2017 WY
6, ¶ 14, 387 P.3d 725, 729 (Wyo. 2017) (citing Wyodak Res. Dev. Corp. v. Wyo. Dep’t of
Revenue, 2002 WY 181, ¶ 9, 60 P.3d 129, 134 (Wyo. 2002))). Wyo. Stat. Ann. § 16-3-
114(c) provides:

the reviewing court shall decide all relevant questions of law,
interpret constitutional and statutory provisions, and determine
the meaning or applicability of the terms of an agency action.
In making the following determinations, the court shall review
the whole record or those parts of it cited by a party and due
account shall be taken of the rule of prejudicial error. The
reviewing court shall:

3
 (i) Compel agency action unlawfully withheld or
unreasonably delayed; and

(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) (LexisNexis 2023).

[¶10] Chesapeake does not challenge the Board’s findings of fact. It asserts the Board
incorrectly applied the law to the facts. To resolve the dispute, we must interpret Wyo.
Stat. Ann. § 39-14-203 and determine whether the Board correctly applied the statute to
the undisputed facts. Statutory interpretation is a question of law subject to de novo review.
Jonah Energy, ¶ 7, 534 P.3d at 905; Exxon Mobil Corp. v. State, Dep’t of Revenue, 2009
WY 139, ¶ 11, 219 P.3d 128, 134 (Wyo. 2009).

[¶11] When we interpret statutes, we first determine whether the statute is unambiguous.
Exxon Mobil, ¶ 11, 219 P.3d at 134 (citations omitted). A statute is unambiguous if
reasonable persons can “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.” Id. (citations omitted).

DISCUSSION

[¶12] The fair market value of natural gas for severance and ad valorem tax purposes is
determined after “the production process is completed.” Wyo. Stat. Ann. § 39-14-

4
203(b)(iv). “It is not always clear . . . just where the production process is completed and
other operations, such as transportation, are begun.” Exxon Mobil, ¶ 12, 219 P.3d at 134.
In 1990, the legislature defined the completion of natural gas production:

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) (LexisNexis 2023) (emphasis added). Essentially the
statute provides two locations at which the production process can be complete: (1) if initial
dehydration is performed in the field (other than within a processing facility), production
is complete after extracting from the well, gathering, separating, injecting and any other
activity which occurs before the outlet of the initial dehydrator; or (2) When no dehydration
occurs other than within a processing facility, production is complete at: (i) the inlet to the
transportation related compressor, (ii) the custody transfer meter, or (iii) the processing
facility, whichever occurs first. Here, Chesapeake does not dispute that the initial
dehydrators are the TEG dehydrators located in the seven facilities. It contends that the
seven facilities are processing facilities, and no dehydration is performed other than within
a processing facility. Therefore, production is complete at the custody transfer meter.

[¶13] The statutes do not define “processing facility,” but “processing” is defined as:

any activity occurring beyond the inlet to a natural gas
processing facility that changes the well stream’s physical or
chemical characteristics, enhances the marketability of the
stream, or enhances the value of the separate components of
the stream. Processing includes, but is not limited to
fractionation, absorption, adsorption, flashing, refrigeration,
cryogenics, sweetening, dehydration within a processing
facility, beneficiation, stabilizing, compression (other than
production compression such as reinjection, wellhead pressure
regulation or the changing of pressures and temperatures in a
reservoir) and separation which occurs within a processing
facility[.]

Wyo. Stat. Ann. § 39-14-201(a)(xviii) (emphasis added).

5
[¶14] The Department has not promulgated rules defining “processing facility.” Because
no definition of “processing facility” can be found in the Wyoming statutes or in the rules,
differences have arisen between taxpayers and the Department as to what activities qualify
as processing. In those cases, the taxpayer advocates for a point of valuation closer to the
wellhead. See, e.g., Williams, 107 P.3d 179; Exxon Mobil, 219 P.3d 128.

A. Precedent

[¶15] We have considered the application of Wyo. Stat. Ann. §§ 39-14-201(a)(xviii) and
39-14-203(b)(iv) in two relevant cases: Williams and Exxon Mobil.

1. Williams

[¶16] In Williams this Court addressed valuation of coal bed methane (CBM) produced in
Campbell County. Williams, ¶ 2, 107 P.3d at 181. In Williams, the Department determined
that the correct point of valuation was at the outlet to the TEG dehydrator and assessed
unpaid severance taxes. Id. ¶¶ 3, 12, 107 P.3d at 181, 184. Williams argued that because
the TEG dehydrator performed some of the functions listed in the § 39-14-201(a)(xviii)
definition of “processing,” it was a processing facility. Id. ¶ 17, 107 P.3d at 185.

[¶17] In Williams, we concluded that “[i]n reality, the definition of processing [in the
statute] is of little assistance in determining what the legislature meant by processing
facility in the context of the severance tax statutes.” Id. We turned to the statutory
definition of “natural gas” for “insight into the legislative intent as to what was meant by
‘processing’ . . . .” Id. ¶ 18, 107 P.3d at 185. Wyo. Stat. Ann. § 39-14-201(a)(xv), defines
natural gas for taxation purposes: “[T]he term natural gas includes products separated for
sale or distribution during processing of the natural gas stream including, but not limited
to plant condensate, natural gas liquids and sulfur[.]” We interpreted this “language [to]
impl[y] that the legislature understood processing would separate certain products from the
natural gas stream. Thus a processing plant logically would be a facility constructed to
perform the function of removing such products.” Id. ¶ 18, 107 P.3d at 185.

[¶18] We also looked to the meaning of “processing facility” in the oil and gas industry
and noted that a processing plant is one that “removes liquefiable hydrocarbons from wet
gas or casing-head gas.” Williams, ¶ 19, 107 P.3d at 185–86 (citing Wyo. Stat. Ann. § 8-
1-103(a)(i) (LexisNexis 2003); Amoco Prod. Co. v. State, 751 P.2d 379, 382–83 (Wyo.
1988); Howard R. Williams & Charles J. Meyers, Oil and Gas Law at 833 (2003)). While
the TEG dehydrator in Williams did separate some components from the gas stream,
because that separation was incidental to the intended dehydration function, we held the
TEG dehydrator was not a processing facility. Id. ¶ 20, 107 P.3d at 186.

6
 2. Exxon Mobil

[¶19] Also relevant is Exxon Mobil. Exxon Mobil Corp. (Exxon) challenged the valuation
of natural gas produced from its LaBarge Project in the Bridger-Teton National Forest in
Sublette County, Wyoming. Exxon Mobil, ¶ 3, 219 P.3d at 132. At issue in Exxon Mobil
was whether the Black Canyon facility was an “initial dehydrator” or a “processing
facility.” 6 Id. ¶¶ 13, 44, 219 P.3d at 134–35, 142. The Board concluded that it was an
initial dehydrator and that the gas should be valued at the outlet of Black Canyon
dehydrator. Id. ¶ 13, 219 P.3d at 134–35. On appeal, Exxon argued that Black Canyon
was a processing facility and, although dehydration occurred there, the legislature intended
the term “initial dehydrator” to “apply to facilities very different from Black Canyon.” Id.
¶ 24, 219 P.3d at 137.

[¶20] The Board found that the natural gas produced at the LaBarge Project is unique, “no
other natural gas stream in Wyoming is ‘remotely similar’”—it is not flammable before
processing; it has a high concentration of hydrogen sulfide (H2S), which makes it lethal;
and, when in contact with water, the H2S and carbon dioxide (CO2) in the gas “form
corrosive acids which can destroy a carbon steel pipeline.” Id. ¶ 3, 219 P.3d at 132. The
dehydration “of sour gas [at the Black Canyon facility] is inherently challenging and
complex, . . . the gas is extremely lethal, . . . [t]he water removed . . . is also extremely
acidic, and must be closely managed, . . . [and a]ir quality” considerations prevent burning
emissions. Id. ¶ 6, 219 P.3d at 132–33. These factors naturally affected Exxon’s
production process.

[¶21] The LaBarge gas is piped from the wells to the Black Canyon facility, where it is
dehydrated. From there, it is piped 40 miles to the Shute Creek facility where it is
processed and separated into marketable products. Significantly, Exxon had initially
planned for all processing and dehydration to occur at the Black Canyon facility, but
because of “the environmental sensitivity of that site, [Exxon] was required to locate the
main processing facilities” at Shute Creek. Id. ¶ 5, 219 P.3d at 132. The dehydration
process at the Black Canyon facility utilizes a TEG solution to remove water vapor, but the
process also removes other components from the gas stream—H2S, CO2, and heavy
hydrocarbons. Id. ¶ 7, 219 P.3d at 133.

[¶22] We first considered whether the TEG dehydrator was an initial dehydrator and
whether the size of the equipment had bearing on the answer to that question under the
statute. We recognized that “[b]oth [traditional] Type 1 dehydrators and [the] Black
Canyon [facility] use a TEG process to remove water vapor from the raw gas stream. Black
Canyon[’s dehydrator] is much larger in scale and complexity . . . .” Id. ¶ 26, 219 P.3d at

6
Black Canyon is “large and complex,” contains “more than 2 million square feet,” with “office space for
more than thirty full-time employees, a warehouse, a maintenance garage, and two separate processing train
buildings.” Exxon Mobil, ¶ 6, 219 P.3d at 132.

7
138. However, we found “no support in the statutes or our case law for the proposition
that an initial dehydrator becomes something different when it reaches a certain size or
complexity.” Id.

[¶23] Next, the Court considered whether the facility was a processing facility. Exxon
argued that because the amounts of H2S and CO2 removed were so large, their removal
cannot be considered incidental and their removal meant Black Canyon was a processing
facility. We held that:

[a] processing facility is a particular facility constructed for an
intended or specialized purpose. The purpose of a processing
facility, in simplified terms, is to remove components such as
condensate, natural gas liquids, or sulfur from the gas stream
. . . which changes the well stream’s physical or chemical
characteristics and enhances its marketability.

Id. ¶ 22, 219 P.3d at 137 (citing Williams, ¶ 19, 107 P.3d at 186 and Wyo. Stat. Ann. § 39-
14-201(a)(xviii)). We recognized that CO2 and H2S were removed from the gas stream
and then reinjected into the gas stream at the Black Canyon facility, and that this changed
the “physical or chemical characteristics” of the gas stream, and satisfied “that part of the
statutory definition of processing.” Id. ¶¶ 27, 30, 219 P.3d at 138–39 (Wyo. 2009) (citing
Wyo. Stat. Ann. § 39-14-201(a)(xviii)). Nevertheless, we held that because the removal of
CO2 and H2S (regardless of the quantity) at the Black Canyon facility was incidental to the
main function of the facility—dehydration—their removal would not qualify the facility as
a processing facility under the statute. Id. ¶¶ 27–30, 219 P.3d at 138–39.

[¶24] We next considered the removal of heavy hydrocarbons. Because of complications
arising from the separation of heavy hydrocarbons in the Shute Creek facility, Exxon
designed and installed a larger, improved carbon filtration system at the Black Canyon
facility to remove heavy hydrocarbons. Id. ¶ 31–32, 219 P.3d at 139. Those hydrocarbons
were disposed of by burning. Id. ¶ 32, 219 P.3d at 139. Exxon argued that Black Canyon’s
removal of heavy hydrocarbons from the gas stream met the criteria of a processing facility.
Id. ¶ 33, 219 P.3d at 139. The Department made two counterarguments. First, it asserted
the volume of hydrocarbons removed was so small, their removal does not constitute
processing. This Court rejected this argument, holding again that the quantity of
hydrocarbons removed was “not the determining factor.” Id. ¶ 34, 219 P.3d at 139. Next
the Department argued that processing did not occur because the hydrocarbons were not
saleable products. Id. ¶ 35, 219 P.3d at 140. We rejected the saleable products test,
holding, “The statutory definition of processing refers to ‘enhanc[ing] the marketability of
the stream, or enhance[ing] the value of the separate components of the stream.’ Removing
heavy hydrocarbons . . . clearly enhances the marketability of the gas steam.” Id. ¶¶ 37–
39, 219 P.3d at 140–41.

8
[¶25] The Court identified “contradictions” in the application of the statute to the facts
presented because it was “inclined to agree with the Department that Black Canyon
[facility] fit[] the definition of an initial dehydrator,” and it was “not convinced that [it was]
a processing facility based on its temporary removal” of H2S and CO2, but it was “inclined
to agree with [Exxon] that [the] Black Canyon [facility] fit[] the definition of a processing
facility because of its deliberate removal of heavy hydrocarbons.” Id. ¶ 40, 219 P.3d at
141.

[¶26] The Court turned to “customary usage in the industry” to assist it in determining
whether Black Hills was an initial dehydrator or a processing facility. Id. ¶ 41, 219 P.3d
at 141. Exxon had an expert who testified that “within the petroleum industry, Black
Canyon would not be considered an initial dehydrator” and that it “has all of the functional
attributes of a natural gas processing facility . . . .” Id. The Court found this testimony
“highly relevant in determining” the legislative intent when using terms initial dehydrator
and processing facility. Id. ¶ 43, 219 P.3d at 141.

[¶27] The Court concluded that Black Canyon could be an initial dehydrator under
Williams or it could be a processing facility because under customary industry usage, the
removal of heavy hydrocarbons would be considered processing. Id. ¶ 46, 219 P.3d at 142.
Faced with this ambiguity, the Court construed the statute in favor of the taxpayer, Exxon,
and held Black Canyon was a processing facility. Id. ¶¶ 47–51, 219 P.3d at 142–43.

[¶28] While in Exxon Mobil we held that the statute was ambiguous, that determination
was made under unique facts present in that case. An unambiguous statute may be
ambiguous as applied. See State v. Herman, 2002 WI App 28, ¶ 14, 640 N.W.2d 539, 544
(“Although we have concluded that Wis. Stat. § 961.50 is unambiguous on its face, we
recognize that a statute that is plain on its face may be rendered ambiguous by the context
in which it is sought to be applied.”); Schmidt v. Trademark, Inc., 506 P.3d 267, 273 (Kan.
2022) (“Under these circumstances, we conclude that the construction of the statutory
language is uncertain or ambiguous as applied to the facts of this case[.]” (quoting State v.
Walker, 124 P.3d 39, 46 (Kan. 2005))). As applied to the facts in this case, Wyo. Stat.
Ann. § 39-14-203(b)(iv) is unambiguous. See BP Am. Prod. Co. v. Dep’t of Revenue, State
of Wyo., ¶ 20, 112 P.3d 596, 606 (Wyo. 2005) (“Given this context, and the particular facts
of this case, this Court finds no necessity to construe the statutory terms[.]”).

3. Principles Gleaned from the Caselaw

[¶29] Williams and Exxon Mobil provide key precepts applicable to this matter:

1. The size or complexity of a dehydrator is not determinative in considering whether a
facility is a processing facility. Exxon Mobil, ¶ 26, 219 P.3d at 138.

9
2. An initial dehydrator is a piece of equipment and not a function. Williams, ¶ 17, 107
P.3d at 185; Exxon Mobil, ¶¶ 21–22, 26, 219 P.3d at 136–38.

3. The quantity of particles removed from the gas stream in a facility is not determinative
in evaluating whether a facility is a processing facility. Exxon Mobil, ¶ 29, 219 P.3d at
138.

4. The intended and specialized purpose of the facility is significant. Id. ¶¶ 29–30, 219
P.3d at 138–39.

5. A processing facility anticipates a deliberate attempt to remove components other than
water vapor, such as condensate, natural gas, or sulfur from the gas stream. Id. ¶¶ 22,
38, 219 P.3d at 137, 140.

6. A processing facility anticipates a deliberate attempt to change the physical and
chemical characteristics of the stream to make the gas or the products removed more
marketable. Id. ¶ 38, 219 P.3d at 140.

7. Unintended albeit beneficial side effects of TEG operations do not equate to an intended
or specialized purpose. Id. ¶ 30, 219 P.3d at 138.

8. The separation of gas from saleable products is not determinative in evaluating whether
a facility is a processing facility. Id. ¶¶ 37–39, 219 P.3d at 140.

9. Customary industry usage is highly relevant in determining whether a facility is a
processing facility. Exxon Mobil, ¶ 43, 219 P.3d at 141; Williams, ¶ 17, 107 P.3d at
185.

B. Application

[¶30] Applying these principles and our rules of statutory construction to this case brings
us to the conclusion that the seven facilities here are not processing facilities.

1. Williams and Exxon Mobil are both relevant.

[¶31] Chesapeake’s representative testified before the Board that natural gas produced by
Chesapeake requires a different kind of processing than conventional natural gas. 7

7
By emphasizing the uniqueness of its facilities and of horizontally drilled natural gas, Chesapeake attempts
to draw parallels with Exxon’s Black Canyon facility, which was determined to be a processing facility.
Supra ¶¶ 19–27. Chesapeake’s facilities differ from Exxon’s in some significant ways:

10
Chesapeake’s natural gas is produced in significantly higher volumes, contains more NGL,
and is produced at higher pressures and temperatures than conventional gas. It is
undisputed that this case involves wet natural gas produced from horizontal wells, in
contrast to conventional natural gas, CBM (in Williams), and sour gas (in Exxon Mobil).
The Board considered this argument:

Chesapeake offered yet an additional factor in support
of its position that the seven field stations were “initial”
processing facilities upstream of the two NGL Extraction
Plants. It asserted that “horizontally” drilled wells first became
prevalent in the area during the audit period and necessitated
the installation of initial processing facilities in the field.
Chesapeake more particularly argues that “[t]his rich, wet gas
production from horizontal wells in this area differs from gas
produced from conventional wells and requires a different
processing facility to handle the gas.” It continues, “the wet
gas is produced in significantly higher initial volumes, at
greater pressure, and at higher temperatures.” Unfortunately,
Chesapeake offered no technical evidence explaining why
horizontal drilling, or the nature of the gas production in
particular, should influence the analysis of whether separators,
compressors, and dehydrators in the field perform processing.

. . . It remains true today that all natural gas production,
regardless of chemical make-up, extraction method, or
circumstances under which the gas is produced, is valued under
the same statute, Wyoming Statutes section 39-14-203(b)

• Exxon’s LaBarge gas was unique in Wyoming. Exxon Mobil, ¶ 3, 219 P.3d at 132. In contrast,
while horizontal drilling is a different technique, it is not unique to Chesapeake’s wells in Converse
County and the production and processing methodologies are standard in the industry.
• Exxon’s Black Canyon is “notably large and complex” and contained office space for more than
30 full-time employees, a warehouse, a maintenance garage, two separate processing train
buildings, id. ¶ 6, 219 P.3d at 132, and was manned 24 hours a day. Chesapeake’s facilities, while
large and complex, contain no office space, and have no on-site employees. They are monitored
remotely.
• Exxon had to construct Shute Creek 40 miles from Black Canyon because of environmental
sensitivity of the Black Canyon site. Id. ¶ 5, 219 P.3d at 132. There are no external reasons,
environmental or otherwise, that forced the construction of the seven facilities here—the functions
of those facilities were originally performed at the natural gas processing facilities but were later
removed to handle the large quantities of gas produced as Chesapeake expanded its drilling.
• Exxon designed a unique carbon filtration system to adsorb and capture heavy hydrocarbon solids
that were contaminating its equipment at Black Canyon. Id. ¶¶ 31–32, 219 P.3d at 139.
Chesapeake’s facilities have no equipment uniquely designed to address anomalous characteristics
of the gas stream.

11
 (2021). See, e.g., Solvay Chem., Inc. v. Wyo. Dep’t of Revenue,
2022 WY 122, 517 P.3d 1123 (Wyo. 2022) (Trona mining
company’s capture and use of escaping “waste gas” was
taxable production of natural gas.). Moreover, the
conventional gas production paradigm governs, so variations
in how natural gas is produced, gathered, treated, handled, or
processed must be made to fit within the conventional gas
production framework for valuation purposes.

The reason for this is plain: the legislature has not
addressed the point of valuation definitional omissions since
the oft-cited Williams rulings issued in 2005 and 2008.

[¶32] This Court agrees that CBM, sour gas, and horizontally drilled gas have distinct
characteristics that require variations in the methods used to extract and produce
marketable products. In determining whether these characteristics have bearing on the
question before the Court, we turn to Williams and Exxon Mobil for guidance.

2. The presence of a TEG dehydrator does not make a facility a processing
facility.

[¶33] Unlike the dehydration and specialized carbon filtration system in Exxon Mobil, the
facilities here are composed of a separator, compressors, a TEG dehydrator, slug catcher,
fuel skids, and storage tanks. We have already held that the presence of a TEG dehydrator
does not make a facility a processing facility. Williams, ¶ 14, 107 P.3d at 184; Exxon
Mobil, ¶ 50, 219 P.3d at 143.

3. A “specialized purpose,” if not processing, does not make a facility a
processing facility.

[¶34] Chesapeake cites Exxon Mobil’s definition of a processing facility as “a particular
facility constructed for an intended and specialized purpose. The purpose of a processing
facility, in simplified terms, is to remove components such as condensate, natural gas
liquids, or sulfur from the gas stream which changes the well stream’s physical or chemical
characteristics and enhances its marketability.” Exxon Mobil, ¶ 22, 219 P.3d at 137 (citing
Williams, ¶ 19, 107 P.3d at 186; Wyo. Stat. Ann. § 39-14-201(a)(xviii)). It argues that the
facilities at issue here “were constructed for the specialized purpose of starting the
processing functions that are eventually completed at Bucking Horse and Tallgrass.” We
must determine whether the “start of the processing functions” described by Chesapeake
are processing or production under Wyoming’s tax statutes.

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 a. Volume

[¶35] Chesapeake’s representative testified that without the seven facilities, Bucking
Horse and Tallgrass would not be capable of handling the volumes of gas produced from
the wells and production would be uneconomical. The Board analyzed this testimony and
concluded that the volume of the gas did not explain why the facilities would be processing
facilities:

Another factor Mr. Armstrong offered in support of
Chesapeake’s position, the seven field stations prevented the
two downstream facilities from becoming overwhelmed as
Chesapeake increased gas production volumes sent to the NGL
Extraction Plants. . . . Mr. Armstrong did not support this
contention with engineering expertise or verifiable production
estimates. Yet, the Department did not contest or otherwise
respond to this point, possibly because it found such to be
irrelevant. It may be that many production functions must be
well performed for downstream processing facilities to operate
efficiently. That a field station might benefit the operation of
downstream equipment, or prevent bogging down of
downstream processing facilities, is a heretofore untested
reason for finding that separators and related equipment are
“processing facilities” within the meaning of Wyoming’s
natural gas valuation statutes.

We agree. In Exxon Mobil, we concluded that the size or complexity of a dehydrator is not
relevant to whether that dehydrator is an “initial dehydrator.” Exxon Mobil, ¶ 26, 219 P.3d
at 138. We also concluded that the quantity or proportion of particles removed from the
gas stream is not determinative of whether the facility is a “processing facility.” Id. ¶ 29,
219 P.3d at 138. Likewise, here, the volume of gas flowing through a facility is not
determinative of whether that facility is a processing facility.

b. Size of Separators

[¶36] Chesapeake also argues that its facilities are processing facilities because “these are
sizeable separators. There is a large amount of gas.” The Board found:

Chesapeake’s focus on the enormity of equipment does not
signify that those facilities were “processing facilities,” as
opposed to large field gathering equipment that performed a
production function. And, when asked why he considered the
equipment to be so large and substantial, [Chesapeake’s

13
 representative] offered no basis of comparison or technical
explanation, just his subjective observation.

While we note that processing and production facilities
may be very large and substantial, those characteristics occur
for different reasons, including the degree of complexity, the
accumulation of different equipment, or the type or volumes of
gas involved. This is especially true for facilities that handle
sour gas, requiring redundant environmental protection and
emergency response systems. See, e.g., In re Appeal of
ExxonMobil, 2008 WL 1692796, Doc. Nos. 2006-69, 2006-
116, ¶¶ 17-62, 81-89, ** 6-14, 17-18 (Wyo. State Bd. of
Equalization, April 3, 2008), rev’d, Exxon Mobil Corp., 2009
WY 139, 219 P.3d 128 (Wyo. 2009) (Hill, J. dissenting)
(Because the LaBarge gas reservoir was uniquely toxic and
produced at exceptionally high volumes, the Black Canyon
dehydrator was likewise uniquely large, complex, and
necessarily located many miles from the downstream
processing facility so that the gas could be more safely
transported to the Shute Creek Processing facility.). Without
further explanation of why the equipment’s size mattered from
a technical “processing” standpoint, we give little weight to
Chesapeake’s evidence of the equipment’s relative size.

[¶37] In Exxon Mobil, the size of the Black Canyon facility was not determinative. The
Court relied on the technical issues which required a unique process and development of
specialized equipment in arriving at the conclusion the Black Canyon facility was arguably
a processing facility. Exxon Mobil, ¶ 33, 219 P.3d at 139. The size of the equipment by
itself does not resolve whether a facility is a processing facility. Chesapeake provided no
technical explanation as to the significance of the separators’ size in processing. We agree
with the Board that absent an explanation connecting equipment’s size to processing, little
weight should be given to equipment’s size.

c. Separation of Heavy Hydrocarbons

[¶38] Chesapeake argues that because heavy hydrocarbons are separated from the gas
stream by separators and are then stored and later sold, the facility is a processing facility.
The Board considered this argument:

From a more technical perspective in support of
Chesapeake’s position, Mr. Armstrong repeatedly cited the
separation of significant heavy hydrocarbons from the gas. . . .
Here again, without more, this is of little significance.

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 Separators, by design and according to statutory definition,
separate gas from liquids. . . . The legislature expressly
recognized that separation may occur in the field during
production, or within processing facilities along with other less
common processes, such as cryogenics.

[¶39] While removing heavy hydrocarbons from the gas stream “changes [its] physical or
chemical characteristics” and “enhances the marketability of the [gas] stream,” separating
can only be considered “processing” when it occurs in a “processing facility.” Wyo. Stat.
Ann. § 39-14-201(a)(xviii). Wyo. Stat. Ann. § 39-14-201(a)(xxii) defines “separating” as
“the isolation of the well stream into discrete gas, liquid hydrocarbons, liquid water and
solid components[.]” Here, the heavy hydrocarbons removed from the gas stream are
“naturally entrained within the condensate” and are considered liquid hydrocarbons. 8 The
Board quoted the Department’s valuation manager who testified regarding separation:

When you produce a rich gas, you have a separator.
That’s just the way it works. These compression facilities,
most of them have some sort of TEG dehydrator, but just about
all of them have some sort of separator in order to get the gas
into a gaseous state and remove all the liquids that need to be
removed.

And each of those functions is of themselves production
functions, and so if we were to say they are no longer
production functions, but are processing functions, essentially
this whole point of valuation issue would—all of the statute
would become moot. All of the guidelines that the legislature
has determined would become irrelevant. Because, basically,
everywhere there was a separator, everywhere there was a wide
spot in the line, . . . you would magically create a processing
facility and that’s not the way the statutes are written.

[¶40] Like dehydration, separation is a function included in the definition of “gathering”
under Wyo. Stat. Ann. § 39-14-201(a)(ix). The Board explained why separation that occurs
during gathering does not create a processing facility:

Mr. Armstrong’s [assertion that separation of heavy
hydrocarbons makes the facilities processing facilities] leaves
unanswered the critical question: why the seven field stations

8
The Department’s employee explained “what you’re talking about are the natural gas liquids that go down
into the cryogenic plants and are physically removed using a pressure and temperature to physically
remove” them.

15
 upstream of the two processing facilities were “initial
processing,” rather than gathering? “Gathering” is the
“transportation of crude oil, lease condensate or natural gas
from multipole [sic] wells by separate and individual pipelines
to a central point of accumulation, dehydration, compression,
separation, heating and treating or storage.” Wyo. Stat. Ann.
§ 39-14-201(a)(ix) (2021). Were we to agree with
Chesapeake’s argument on this reasoning alone, we could find
that the separators at the well pads performed processing as
well. Yet, Chesapeake does not press that claim.

[¶41] The statute is clear that separation can only be considered processing when it occurs
within a processing facility. Wyo. Stat. Ann. § 39-14-201(a)(xviii). The fact that
separation is occurring in a facility does not in itself render a facility a processing facility.

d. Industry Classification

[¶42] The industry’s classification of a facility as a processing facility is significant.
When we interpret statutes, “[w]ords and phrases shall be taken in their ordinary and usual
sense, but technical words and phrases having a peculiar and appropriate meaning in law
shall be understood according to their technical import.” Amoco, 751 P.2d at 383 (citation
omitted). In Williams, the Board relied on “customary usage in the industry” when it
interpreted the term, “processing facility.” Williams, ¶¶ 17, 19, 107 P.3d at 185–86 n.2. In
Exxon Mobil, Exxon’s expert testified that Black Canyon has “all of the functional
attributes of a natural gas processing facility.” Exxon Mobil, ¶ 41, 219 P.3d at 141. This
Court held that the industry’s classification “is highly relevant” and was a “strong factor”
in considering whether the facility there was a processing facility. Id. ¶¶ 43, 46, 219 P.3d
at 141–42.

[¶43] Here, Chesapeake presented no evidence regarding the industry’s classification of
the seven facilities. The Board relied on testimony from Department representatives who
testified that Chesapeake’s production is “a typical production scenario in conventional gas
in the State of Wyoming,” and the Rawhide facility “is what a standard compression facility
looks like.”

[¶44] Wyo. Stat. Ann. § 39-14-203(b)(iv) has been a bountiful source of litigation, and
this is likely to continue as oil and gas production and processing technologies evolve. The
statute’s failure to define “processing facility” makes application of the statute difficult for
taxpayers, the Department, and the courts. Based on the language of the statute and our
prior application of it, see Williams and Exxon Mobil, the seven facilities are not processing
facilities. None of the arguments proffered by Chesapeake—the volume of gas, the size of
the separators, or the fact that separation is occurring—qualify the seven facilities as

16
processing facilities. Completion of Chesapeake’s natural gas production occurred at the
outlet of the initial dehydrator.

CONCLUSION

[¶45] The Board correctly interpreted and applied Wyo. Stat. Ann. § 39-14-201(a)(xviii)
when it found Chesapeake’s facilities are not processing facilities. The Board’s
determination that the point of valuation for Chesapeake’s natural gas was the outlet of the
TEG dehydrator was supported by substantial evidence and is in accordance with the law.
We affirm.

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