Editor’s note: In Sunday’s Great Bend Tribune, we reported how the falling price of oil will result in a lower valuation for Barton County in 2015, which will result in less tax being collected on leases. We asked the Kansas Department of Revenue - Property Value Division (PVD) to explain the process for setting the value of oil each year. The following in a summary of the response.
In Kansas, oil and gas leases are considered personal property for ad valorem tax purposes. The valuation of an oil or gas lease is based on an estimate of income of the reserves — the oil or gas remaining in the ground — along with all equipment used to produce it over a specific period of time.
As with all property in Kansas, the value of the lease is to be determined as of Jan. 1 each year with taxes imposed at the end of that year. There are adjustments if a well does not produce for a full year, and if a new oil or gas lease begins production after Jan. 1, it is not valued or taxed for that year.
For oil leases, the established production amount is multiplied by the price of oil as of Jan. 1, as issued by the director of Property Valuation with relevance to oil gravity and Kansas severance tax.
There is no specific formula to determine price. Before 1986, the price was set using the Jan. 1 Kansas postings. However, drastic price changes just a few days after Jan. 1, 1986, indicated a change in methodology was warranted. That year, the director of Property Valuation changed the price estimation in the early spring, taking in as many known factors as could be gathered. Several counties tested this change at the Board of Tax Appeals, since the decrease in price made a substantial decrease in county valuations. The Board ruled in favor of the PVD, and the new method of using multiple data sources at the beginning of each year, especially the futures market, has been in place since.
The accompanying chart shows the yearly average price of Kansas Common crude oil from 2004-2014, and the guide price set by the PVD each year. The chart also shows the percentage of difference between the annual average and the guide price.
For 2013 and 2014, the guide price was $84 a barrel. However, with Kansas Crude now selling for about $50, a lower value is expected for 2015.