Wyoming High Court Nixes $3 Million Power Tax Break For Oil Producer — But Law Changes Going Forward

Wyoming’s Supreme Court has shut down a $3 million tax refund request from oil and gas producer Merit Energy, ruling the company isn’t entitled to a sales tax exemption on electricity it used in its operations, Oil City News reports.

In a 20-page decision written by Justice Robert C. Jarosh, the court said Merit’s power bills from 2020 to 2023 don’t qualify under a Wyoming tax break meant for businesses engaged in “transportation.”

Merit had argued that the electricity it bought should be exempt because it was used to move oil and fluids through pipelines. But the court said the power was mostly used for production-related work, not transporting finished product to market.

That includes things like:

• Running submersible pumps to bring oil and water to the surface;
• Pushing that mixture to separation facilities.

“Across its units, Merit produces over 1,000,000 barrels of water daily to yield 15,000 barrels of crude oil,” the justices noted. “The fluid arriving at the wellhead is not marketable crude oil … it is a commingled stream requiring processing before custody transfer.”

Bottom line: the exemption only covered electricity used to move already marketable product by pipeline for custody transfer, not the power needed to get it out of the ground and ready for sale.

The decision overturns an earlier ruling from the Wyoming State Board of Equalization that had sided with Merit. It also eases fears in some counties that they might have to pay back millions in tax revenue if other operators jumped in with similar refund claims.

Even though Merit lost this particular fight, the rules have already changed for future bills.

A new law, House Bill 311, took effect July 1 and expands the existing tax exemption for fuel and power used to transport goods. It now clearly includes: Power or fuel used by someone transporting tangible property by railroad or pipeline, when it’s consumed directly to generate motive power for actual transportation — no matter who owns the product.

Oil and gas groups argued the old law was fuzzy and didn’t clearly cover many gathering pipelines — the smaller lines that collect oil and gas from wellsites and send it toward larger trunk lines and refineries.

“Our argument was, some pipelines are already exempt, but not all pipelines,” said Petroleum Association of Wyoming President Pete Obermueller, who helped push the bill.

That, he argued, put Wyoming operators at a disadvantage when they rely heavily on gathering systems to move product.

Exactly how Wyoming compares to other oil states, though, isn’t clear. Obermueller acknowledged he didn’t know how other states tax similar power use.

Expanding the exemption will reduce tax revenues for oil- and gas-producing counties, according to the Wyoming Department of Revenue, though no one’s sure yet by how much.

The bill’s own fiscal note shrugged: there wasn’t enough time to calculate a precise impact.

Obermueller called the exemption relatively targeted — it only applies to electricity tied directly to transportation, not every power bill in the oil patch.

“It’s pretty small in the sense that it only affects a certain amount of electricity purchased for a very specific reason,” he said. “And the only way to get the exemption is if you know how much electricity you’re using for that specific purpose.”

Even so, he estimates the expanded break could cost governments about $10 million a year in lost revenue.

He also noted that power is one of the biggest expenses for Wyoming producers, second only to labor. That’s a problem, he argued, when commodity prices are soft and margins are thin.

Recent data back up the squeeze: Industrial electricity costs in Wyoming were actually down 2.3% year-over-year in August, even as they rose nationally — but the spot price for Wyoming crude was down 15.4%, and natural gas production was off nearly 5% year-over-year.

For Merit, the Supreme Court decision closes the door on past refunds. For everyone else in the industry, though, the new law means future electricity used to move product by pipeline will now qualify for a tax break the court just made very clear didn’t apply before.