On April 9, 2005 the State Legislature approved a Legislative Rule for the appraisal of oil and gas properties (See § 110 CSR 1J-1 et seq.). This notice will address one of the valuation variables referenced in the Rule, oil and gas operating expenses, setting forth procedures used in developing these expenses and their application against receipts for the working interest of oil and gas producing properties.

DISCUSSION

In 2005, the Tax Department received responses from over 9,600 producing wells. This information involved the average annual operating expenses for a "typical" West Virginia well under present economic conditions. The Tax Department has developed the following criteria for the direct ordinary operating expenses as a result of this research activity. Direct ordinary operating expenses will be estimated to be 30% of the gross receipts derived from gas production, not to exceed $5,000, 35% of gross receipts derived from oil production, not to exceed $5,750, and 35% of the gross receipts derived from enhanced recovery oil wells, not to exceed $9,000. As required in the amended Rule, the Tax Department will review such rates every five years.

In instances where the well is producing both oil and gas, the allotted maximum ordinary operating expense will vary between $5,000 and $5,750 depending on the percentage of gas versus oil receipts involved.

In the event a producer's ordinary expenses, as a direct result of the production, exceeds the stated maximums for oil and gas production, the Tax Department will accept and review documentation on wells for the previous five years that is provided by the producer. This information must be submitted on or before August 1, the due date for the Oil and Gas Producer/Operator return in order that it may be considered for any given tax year.

For additional information concerning oil and gas annual operating expenses see § 110 CSR 1J-1 et seq. or call the State Tax Department at (304) 558-3940.

January 31, 2006

Virgil T. Helton Acting Tax Commissioner West Virginia State Tax Department

State Tax Department Property Tax Division P.O. Box 2389 Charleston, WV 25328-2389

Operator on Duty 8:30 am - 5:00 pm Monday through Friday Phone: (304) 558-3940 FAX: (304) 558-1843