CHEYENNE -- In a ruling that will likely cost state and local governments millions of dollars, the Wyoming Supreme Court on Thursday sided with Exxon Mobil Corp. in a long-running tax dispute with the state.

In a 4-1 decision, the court ruled in Exxon Mobil's favor over the point of valuation for its natural gas production from the company's LaBarge Project in southwestern Wyoming in 2005. The ruling reversed a decision by the Wyoming Department of Revenue and the State Board of Equalization.

Justice William Hill wrote a separate dissenting opinion.

The Supreme Court said a 1990 state law that attempted to clarify the point of valuation for natural gas production is ambiguous. The court agreed with Exxon Mobil that its Black Canyon facility is a processing facility under the law.

The Department of Revenue set the point of valuation at Black Canyon as the "initial dehydration" plant under the law. Exxon placed the point of valuation farther upstream and said Black Canyon was a legally a processing facility.

Because companies cannot deduct expenses upstream from the point of valuation to the wellhead, the change will allow more deductions of Exxon Mobil's expenses in calculating mineral severance taxes.

The Supreme Court majority also ruled in Exxon Mobil's favor on post-plant transportation cost deductions.

Exxon Mobil has been paying its property taxes in Sublette County but not the taxes on natural gas production that are under appeal, said Sublette County Treasurer Roxanna Jensen. She estimated the unpaid production taxes totaled about $14 million.

She said she is assuming the schools and the counties will not get that money now.

Jensen said she wasn't surprised at the ruling, however.

"The Supreme Court routinely rules for Exxon Mobil," she said.

Department of Revenue Director Edmund Schmidt said his agency does not yet have an estimate of the state mineral severance taxes affected.

"It's going to be a lot of money," he said.

The ruling, he said, is "very discouraging to people who have been working with this type of issue or issues."

Sarah Gorin, chairwoman of the Equality State Policy Center, said the decision demonstrates that the state needs to hire more assistant attorneys general, budget more for litigation costs and perhaps hire an expert to give the state more equal footing when facing a big, rich corporation like Exxon Mobil.

The state also needs to invest more in mineral tax collection and enforcement, she said.

"It's not like Exxon is a little old lady trying to figure out her tax bill," Gorin said.

The court's majority opinion, written by Justice James Burke, said the Board of Equalization erred in refusing to consider evidence that industry considered Black Canyon to be a processing facility.

Because the court majority found the law to clarify the point of value ambiguous, the court ruled in favor of the taxpayer, the opinion said.

From 1986 through 2004, severance taxes for the LaBarge Project were calculated according to a method as part of a negotiated settlement.

In May 2004, the Department of Revenue canceled the settlement agreement and directed that 2005 taxes for the project be calculated using the proportionate profits valuation method adopted by the Legislature.

Exxon sued over the way the department applied the method.

The LaBarge Project includes 18 natural gas wells in three federal gas units in the Bridger-Teton National Forest in Sublette County, said the majority opinion, written by Justice James Burke.

Gas from the project is unique and lethal due to its high concentration of hydrogen sulfide. In addition, when in contact with water, both the hydrogen sulfide and carbon dioxide form corrosive acids which can destroy a carbon steel pipeline.

The raw natural gas stream is piped about five miles to the Black Canyon facility, where the gas is dehydrated. From Black Canyon, it is piped another 40 miles to the Shute Creek facility, where the gas is processed and separated into marketable products, the opinion said.

At other sour natural gas projects in the state, raw gas is delivered from the wells directly into a processing facility without any intervening dehydration.

Originally Exxon Mobil planned that all processing and dehydration would be done at Black Canyon, but because of the environmental sensitivity of the site, the company had to locate the main processing facility about 40 miles south to the Shute Creek site.

Because of safety and other constrains, the sour natural gas had to be dehydrated first to remove the water vapor before he can be moved to Shute Creek.

Exxon said its dehydrator is unique because it covers more than 2 million square feet and the facility employs 35 full-time workers.

The state Board of Equalization found that most Type 1 dehydrators are "not significantly larger than a truck," the opinion said.

Contact Joan Barron by e-mail at joan.barron@trib.com or by phone at (307) 632-1244.