Kern County dodged a bullet, and maybe a bankruptcy, last week when the California Fifth District Court of Appeal ruled that Chevron USA, Inc. had to pay higher property taxes on land it owned after drilling new oil wells.

“If this case had gone against us, and we could not put new construction on the assessment roll . . . in my opinion, this county would go broke very fast,” county Assessor-Recorder Jim Fitch told the Bakersfield Californian.

Chevron claimed that the county should refund $3.5 million in property tax it paid since 2006 because the new drilling only preserved the land’s value, rather than increased it. The county calculated that if Chevron won the case, the government would have to pay the oil giant and others $17.8 million, about 4% of the county general fund’s discretionary spending.

Chevron filed the lawsuit in October 2010, after shelling out $3.5 million in additional property taxes between 2006 and 2008, a three-year period during which the company drilled 1,500 wells. The county did not issue supplemental assessments for new drilling prior to 2006.

Kern County Superior Court Judge David R. Lampe agreed with Chevron and the county appealed.

Chevron divided its wells into two categories: infill and replacement. Infill wells are meant to increase of improve the drainage volume, while replacement wells are regarded by the company as taking the place of a failed well while not increasing product.

Kern County used to exempt 30% of the costs for all drilling and didn’t count replacement wells at all. But after 2006, the county taxed them all at 100%. It valued the new wells at the cost of drilling them.

Chevron argued that drilling entirely new replacement wells should be considered the “equivalent of normal repairs and maintenance.” The company likened new replacement wells in an oil field to new plumbing in a house. The county board of assessors rejected that reasoning and so did the appellate court.

Chevron also argued that a significant number of replacements were made as a result of damage through misfortune or calamity and constituted new construction that is protected by the law. “The board found this contention unsupported by the law or the facts” and the court agreed. The judges said Chevron budgets for these kinds of losses and they hadn’t been proven excessive.  

Industry observers told the Californian that Chevron’s claim in court that new wells don’t increase property value broke new legal ground and if validated by the courts would set a precedent that could be extended far beyond the oil and gas industry. The newspaper said thousands of similar claims have been made by other energy companies in cases filed with the county’s Assessment Appeals Board and were on hold waiting to see the disposition of Chevron’s case.

Chevron can appeal the decision to the California Supreme Court.     

–Ken Broder

To Learn More:

County Defeats Chevron in Landmark Tax Case (by John Cox, Bakerfield Californian)

Chevron Wells Not Exempt From Calif. Tax (by Eric Kroh, Law 360)

Chevron USA, Inc. et al v. County of Kern (California Fifth District Court of Appeal) (pdf)