“Oil and Gas Property Tax: Oil Price Issue For Royalty Owners”

By Damien Larson, Myska & Vandervoort

Tax notices of appraised value are now being sent out to royalty owners across the nation for oil and gas wells in the state of Texas.  One of the major components of the discounted cash flow methodology used to achieve fair market value is oil price.  Unfortunately, there is one appraisal firm in Texas that is not using the oil price that is clearly specified in the Texas Property Tax Code (Section 23.175) to generate a fair taxable value.

For those royalty owners who have an interest in a county that is represented by Pritchard & Abbott, there is a direct concern that you are getting over-appraised, at times significantly.

 Section 23.175 clearly states:

“If a real property interest in oil or gas in place is appraised by a method that takes into account the future income from the sale of oil or gas to be produced from the interest, the method must use the average price of the oil or gas from the interest for the preceding calendar year multiplied by a price adjustment factor as the price at which the oil or gas produced from the interest is projected to be sold in the current year of the appraisal.  The average price for the proceeding calendar year is calculated by dividing the sum of the monthly average prices for which oil and gas from the interest was selling during each month of the preceding calendar year by 12.”

The current problem with Pritchard and Abbott’s appraisal methodology is that a ‘Reference Price’ for oil is being used that can be $2-$12/bbl higher than what was actually received by the royalty owner.  The calculation of the average of the 12 months of 2015 for the lease is not being used.  Attempts by the industry and tax agents to get Pritchard & Abbott to adjust the oil price to what is specified in the Tax Code have so far been ignored.

Royalty owners are encouraged to do their homework and find out which appraisal firm is handling the county that their interest is located.  Pritchard & Abbott handles approximately half of all counties in Texas.  If Pritchard & Abbott is involved with your lease, royalty owners should contact them to ask what oil price is being used on their appraisal and prepare for a possible protest.

Damien Larson is a partner in the firm Myska and Vandervoort, which specializes in oil and gas property tax.  Larson is a licensed tax consultant in the state of Texas and a registered engineer in Texas. Any royalty owners who have further questions about this methodology or need assistance in this matter may email [email protected].