Untitled Texas Attorney General Opinion ( 1952 )

December 23, 1952
Hon. Robert S. Calvert
Comptroller of Public Accouka
Austin, Texas Opinion
Re: Reconsideration of Att’y
Gen. Op. V-1353 (1951)
and all related prior
Dear Sir: opinions.
You have requested a reconsideration of Attorney
General Opinion V-1~353 (1951) and.of all related prior Attorney
General Opinions. Opinion V-1353 passed upon the taxability
under Article 7060a, V.C.S., of certain well servicing operations.
Subsection (b) of Section 1 of Article 7060a, was amended by Sec-
tion XIV of House Bill 285, Acts 52nd Leg., R.S. 1951, ch. 402,
p. 695, reads as follows:
“(b) Every person in this State engaged in the
business of furnishing any service or performing
any duty for others for a consideration or compensa-
tion, with the use of any devices, tools, instruments
or equipment, electrical, mechanical, or otherwise,
or by means of any chemical, electrical or mechani-
cal process when such service is performed in con-
nection with the cementing of the casing seat of any
oil or gas well or the shooting or acidizing the forma-
tion of such wells or the surveying or testing of the
sands or other formations of the earth in any such oil
or gas wells, shall report on the 20th day of each month
and pay to the Comptroller, at his office in Austin, Texas,
anoccupation tax equal to 2.42% of the gross amount re-
ceived fr&m.said service furnished or duty performed,
during the calendar month ne?rt preceding. The said re-
port shall be,executed under oath on a form prescribed
and furnished by the Comptroller .”
In connection with your request, there has been submit-
ted a report, compiled by various; members of the oil industry, de-
fining terms’, explaining various operations involved in drilling,
testing and surveying wells, an d giving reasons why each of said
operations is ,or is not embraced by the provisions of Subsection
kon. Robert S. Calvert, page 2 (V-1567)
(b) of Section 1 of Article 706Oa above~,quoted. Likewise, a legal
brief has been furnished us). This brief discusses the submitted
report in the light of court decisions and prior opfnions of this
office.
We wit1 firat consider operations which might or
might not be taxable as a service ,performed “in connection with
the cementing of the casing seat of any oil or gas well 0 $ *”
The bottom of the producing or oil string of casing,
the last column of casing placed in a well, is commonly referred
to as the *casing aeat.” Placing cement between the oil string
and the sides of the well bore is, of course, the exact operation
named in the statute and is a taxable service, Cementing ‘liners’
(strings of casing whose tops are situated below the surface) is
also a taxable service if the linere are used a6 extensions of the
oil string as distinguished from liners used to repair defective
strings of casing. Various other cementing services ape explained
and classified in the report as nontaxable. We quote the following
therefrom.
“Cementing conductor, surface, intermediate or
protective casisg striags
“In oilfield terminology, the casing seat of an oil
or gas well is the bottom of the producing strfng of
casing in the well. In the course’ of drilling, it may
be found desfrable to run a string or s,everal strings
of casings jdor to the running of the producing’string.
These casing string6 are commonly referred to as
conductor, surface, intermediate OP protective strings.
-A conductor string is a rhort string of casing
extending from tha surface to a comparatively shallow
depth used to support loosely consolidated surface
formations, to keep the top of the well bore open, and
to provide a means of conveyfng fluid used in drilling
from the well bore.
“A surface string is a string run to greater
depth than a conductor string and fulfills the same,
requirements outlined above for a conductor 6tring.
In addition, it excludes waters, and may provide sup-
port for strings of casing subsequently rus in the well.
“Intermediate and protective strings, when em-
ployed, are run to facilitatedrilling operations for
various reasons: (1) to exclude water; (2) to reduce
Hon. Robert S. Calvert, page 3 (V-1567)
the cost of ,drilling fluid by keeping contaminants
such as salt from entering the yell bore; (3) to
eliminate, the loss of drilling fluids in ‘thiefing’
formatioti.9; (4) as a precautiondry measure to pro-
vide a means of, controlling pressure in the event
excessive pressures are encountered; and (5) to
prevent caving.
“Conductor, surfa&, intermediate and pro-
tective strings of casing, When used, are used to
facilita,t+ drilling operations. Cementing of these
strings .cannot be considered bs Fementing the cas-
in Geat in an oil or g&s well, and therefore is not
Tzkixz
*Cementing to control wells
Eementmg for lost circulation
“On bccasion, it may be found necessary to
pump cement into a well for the urpose of: (1)
bringing the well undei control; P2) shutting, off
undesirable flows of fluids; or (3) sealing off
intervalS in the hole where drilling fluid is being
lost. These operaticins are under,taken to facili-
tate drilling and are not, the”operdtion of cement-
ing of the ca,sing seat, ixi an.oWor~ gas~well.
“Plug back opdrations
“A plug back operation is one in which the
bottom section of the well bore is cement&d off
to prevent the ,inflow ,of fluid from that,portion
of’the hole.’ Mariy. types of @lugs are used. This
operation is ‘not the c&rienting of the casing seat
in &n oil,or gas well.
“Ccmentin(i for abanddnment
“Before abandoning a well; cement plugs are
placed in the hole to prevent escape of fluids from
one formation to another and to protect fresh water
sands. The dperation of placing a cement plug in a
well is ndt the cementing of the casing seat in an oil
or gas well.
‘Squeeze cementing bperations
” ‘Squeeqe cementing’ is an opera&n in which
a fluid cement, after being placed in the desired
Hon. Robert S. Calvert, page 4 (V-1567)
position in a well, is subjected to high pump
pressure to force some of the cement into the
surrounding formations. This operation is not
the cementing of the casing seat in an oil or gas
well.
“Cementing to repair defective casing
Cementing liners for remedial or repair
operations
“Casing that is defective when run in the
hole or becomes defective after being in the hole
(becomes corroded, etc.) may permit unwanted
fluids to enter the well or allow well fluids to ex-
cape from the well, When such defects cannot
be repaired by cementing alone, then a liner may
be cemented through tha defective section. Such
operations are not cementing of the casing seat in
an oil or gas well.
“Cementing for whipstock operations
“In the course of drilling operations, it fre-
quently becomes desirable to deflect or change
the direction of the hole for one of several reasons:
(1) to complete drilling in a predetermined target
area; (2) to correct a ‘crooked hole’ condition that
has developed during the course of drilling; or (3)
to drill around an obstacle (lost tools, pipe, etc..)
that cannot be removed from the hole, A deflect-
ing tool which permits directing the course of a
well, is known as a whipstock. It is a long, slender,
tapered steel wedge which is supported in the well
in such a position that the drilling tools are deflected
from their previous course and in the desired direc-
tion. Whipstocks are sometimes cemented in place,
Cementing of a whipstock is not the cementing of -the
casing seat in an oil or gas well,”
We agree with the foregoing classifications for the
reasons stated in the report.
In Attorney General Opinion O-3627 (1941) the follow-
ing questions were considered:
“1. A party takes a contract from the operator
to cement a well for a stipulated price (perhaps he
uses 500 sacks ,of cement). Will he be permitted to
Hon. Robert S. Calvert, page,5 (V-1567)
deduct the cost of cement before computing
the tax?
“2. There is a tool known as a ‘cement
packer’ which is used in cementing liners in
wells. This tool is leased or rented to the
owner of the well or contractor {for a fee of
$12 per day operators time, plus car mileage
to location and operator’s expenses, Would the
party who receives rent for the ‘packer’ be sub-
ject to the tax on the rental received or rental
plus expenses of the operator? )I
The first question on its face seems to imply that all
cementing operations are taxable: however, the Opinion’s answer
thereto limits its scope to “a party who cements a casing seat
of an oil or gas well u e aR The cost of the cement w-held to
be deductible from the gross receipts before computing the tax
on this service. The Opinion also held that the furnishing of the
“cement packer” was. the furnishing of a material and that “if
the furnishing and installing of the ‘cement packer’ in questi=
is one of the four taxable operations named in th,e statute [or is
performed in connection with one of said operations] , the charge
for furnishing the ‘cement packer’ should not be included in the
receipts on which the tax is computed and the charge for furnish-
ing the operator should’be included,” The previously quoted
classification of the various cementing services is consistent
with the results reached in Opinion O-3627.,
This office has also specifically ruled that a temperature
survey made to locate the top of the cement behind the casing for
the purpose of determining the success of the cementing is a taxable
service since it is performed in connection with the cementing of
the casing seat. Att’y Gen, Op.. V-1353 (1951).
We will next consider whether certain operations are
taxable as services performed “in connection with the shoot-
ing D . . the formation of such wells j i We quote the following
discussion from the submitted report.,
“Open hole shooting with explosives, pro-
jectiles, shaped charges, or jets
“Shooting of the formation is done in order
to commence or increase the flow of flui,ds into
the well bore. It is done by detonating an explosive
charge in an open hole below the casing seat. This
operation can be performed with the use of explosives,
Hon. Robert S. Calvert, page 6 (V-1567)
projectiles, shaped charges, or jets, The opera-
tion may be performed any time during the life
of the well when the operator believes he can com-
mence or increase the flow of oil or gas into the
well bore.
“This process is ‘shooting the formation’ in
the language and meaning of the act, Article 7060-a;
hence, is taxable,
II
. . .
“Perforating pipe to provide opening in pipe
“In oil field terminology, shooting for the pur-
pose of perforating pipe is the creation of openings
or holes in the pipe by explosive means. There are
several methods:
1) The use of projectiles, and
t 2) The use of shaped charges or jets.
“The operation is performed any time during
the life of a well when it is believed production may
be commenced or increased by providing means of
fluid flow from a formation into the casing.
“The operation is performed as follows:
“A device called a gun which contains a number
of explosive charges is lowered on an insulated cable
to a, predetermined depth in a well, Electric current
sets off the charges. In the case of a perforating gun,
openings or holes are created by detonation of the
charges causing projectiles to pierce the pipe, In the
case of shaped charges or jets, openings or holes are
created by detonation of explosives which generate
jets of high temperature, high velocity gases. These
gases disintegrate the metal of the pipe, This opera-
tion is not the shooting of the formation in an oil or
gas well, and therefore is not taxable.
*Shooting off pipe or casing
Shooting
“These terms mean, generally, salvage opera-
tions,
Hon. Robert S. Calvert, page 7 (V-1567)
“Salvage operations may be necessitated
by several. occurrences, notably:
(1) In a dry hole where casing has been in-
s,talled and cemented in the well bore and it is
desirable to recover as much of the casing as
possible for use elsewhere;
(2) When drill pipe has been stuck in the
well due to the slaughing of the formation into
the well bore, and it is desirable to recover as
much of the string of pipe as possible;
(3) When a well has produced its ultimate
recovery and can no longer be produced economi-
cally, and it is desirable to recover as much of
the casing as possible for use elsewhere.
In all of these cases, the casing or pipe is
cut with an explosive charge lowered on a wire
line. The form,of the explosive charge may
vary widely, consisting of dynamite, solid or
liquid nitroglycerin, or specially designed shaped
charges known as jet’ casing cutters.
‘Since these operations concern salvage of
materials rather than action on productive forma-
tions, they are non-taxable.
“Shooting to recover or remove fish in fish-
ing operations
” ‘Fish’ are any obstructions in a well bore
which are not natural. These may include drill
bits or parts of them which have’been broken off
or otherwise disconnected from the drill pipe.
The fish may be any number of sections of pipe
and drill collars which have twisted off in the
threads or broken in two along their length. The
fish may be hand tools or other metal objects
which have fallen into the well bore from the sur-
face.
*Shooting to recover or remove fish is done
for the purpose of breaking these obstructions
into small pieces with an explosive charge. The
smaller pieces are picked up more readily by
magnets or special baskets.
Hon. Robert S. Calvert, page 8 (V-1567)
“The disintegration can be accomplished
by an ordinary nitroglycerin charge lowered
on a wire line and exploded on contact with the
fish. This usually causes sloughing of the forma-
tion. The preferred method is to use the shaped
charge, similar to that used in casing perforations.
In this case, it is pointed directly downward and
the jet effect is concentrated directly on the ob-
struction which is under attack.
“The procedure of using an explosive charge
to clean out obstructions is not concerned with
any formation fracturing and is not taxable.
“String shot shooting to open screen or per-
forations
u ‘String Shot’, ‘Cord Shot’, or ‘Primacord
Shot’ are similar terms used to describe a light
explosive charge lowered into the well to clean
‘.
the plugged openings of the screen or perforations.
” ‘Cord’ is an abbreviation of ‘Primacord’.
u ‘Primacord is the trade name for an im-’
pregnated fuse cord which has explosive power.
Normally used as a booster explosion for detonat-
ing dynamite, it has enough power of its own to do
cleanout jobs without rupturing screens or casing,
” ‘String Shot’ is a colloquialism which des-
cribes the cord.
“When the string shot is detonated, fluid is
forced through the openings in the screen or the
perforations, removing the solid matter from the
exterior surfaces so that flow of oil will resume.
“This is a cleaning out or restoring of fluid
flow through the screen slots and not an action of
shooting the formation, and, therefore, is a non-
taxable service.”
The above quoted conclusions as to the taxability of the
described, operations are ins accord with prior rulings of this of-
fice, In Attorney General Opinion O-3627 (1941) it was held that
perforating the casing with a cutting tool called a *‘perforator” did
not constitute “shooting” in the sense attributer! to that word by the
Hon. Robert S. Calvert, page 9’(V- 1,567)
oil and gas industry. It is suggested in the brief that was furnished
us that Opinion G-3627 holds that shooting for the purpose of clean-
ing out an oil well is subject to tax even though it was not shown
that a formation of the earth was shattered. We do not so interpret
Opinion O-3627 since we think such interpretation would be incon-
sistent with the discussion of “sho4ting” given at ppe 7-9 of the
Opinion. Shooting for the purpose of cleaning out a well is subject
to tax only if the shooting operation is done in connection with one
of the named taxable operations. Attorney General Opinion O-3784
(1941) held that the use of a gun perforator in an open hole to fire
bullets into the formations of the edrth served the purpose of ‘shoot-
ing” even though the use of a mechanical perforator or a gun perfo-
in its ordinary maxmer and note in connection with a named taxable
operation was not d taxable’ service. Attorney General Opinions
04261 (1942) and V-1353 (1951) also recognize that perforating is
nontaxable unless performed in connection with a taxable service.
L
. . * acidis- the formation of such wells e e .*, as
well. of course, as services performed ‘in connection with” acid-
laing formationa. la a taxable service. The submitted report
classifies as aontaxable the following services: acidizing to re-
cwer duck fkh OP stack drill pipe or casing; acidiaing to clean
screens; acidlmimg to dissolve mud sheaths; and acidizing soluble
metals. With this we agree since no formations of the earth are
acidiced. It ho been suggested that Opinipn O-3627 holds that
acidimiag to clean out a well is taxable without any showing that
a formation of the earth was acidized. We do not think that the
OpMoncan be so interpreted in view of the definition of acidiz-
fng, quoted at page 9, as a “process of intro,ducing acid into the
pore space of an acid-soluble producing formation D D .n; how-
ever, that there m%y be no doubt on this point, we expressly hold
that acidizing which does not have for its purpose the dissolution
of a formation is.not a taxable service unless it is performed in
connection with a taxable service,
The report has classified as taxable as services *per-
formed in cdn&ecti4n with . . 0 the surveying . . e of the sands or
other formations of the earth in any . . 0 of1 or gas wells” the fol-
lowing operations: electric logging to record geological forma-
tions, radioactive logging, magnetic logging and dip recording.
Radioactive logging is separated~into gamma ray logging and
neutron lo&ng. Magnetic logging is still in the experimental
stage. In Attorney General Opinion O-3698 (1941)) it was held
that a dip surrey was h taxable serrica.~ A!1 of the other above
enumerated msrvices are clearly ‘surveys” 4f the formations
of ths earth and are taxable. See Petroleum Production Prac-
tice by F. EA. Pbmme r, Part I, Sec. 24, (1939) 0
Hon. Robert S. Calvert, page 10 (V-1567)
Deflection or deviation surveys are explained in
the submitted report an follows:
“A aurveyy made in a well while drilling which
utiline~ an inetrument on a wire line, or on pipe to
record an angle of thedrill hole from vertical, The
purpose of tbie rurvey i.s to determine the course of
the drill bole in order to reach the desired objective
and not to survey formations.”
Consistently with aome of the conclusions reached in
opinion O-3698, thin seryike would be considered taxable; how-
ever, we are of the opinion that the above described operation is
in fact a survey of the drjll hole rather than a survey of the’forma-
tions of the earth and is not a taxable service under Article 7060a.
“Depth measurement’ is described in the report, as
“a suryey for the purpose of determining the depth of a point in
a well bz the use of a weighted wire and a calibrated measur~inS
device. Opinion O-3698 said of -depth determination”:
‘This operation consirrts of locating the depth
in the well of certaimobjects or pa& of the well
equipment. and it clearly come6 within the defini-
tion of a survey.”
We agree that the operation is a “survey* but think
it properly should be treated as a survey of a portion of the well
bore. Since it is not a survey “of the aantla or other formations
of the earth,* it is not a taxable aerviceg and Opinion O-3698 is
overruled on this point.
Surveys to locate the free point of stuck pipe ar’e ex-
plained in the report as follows:,
‘A hrvey of this type involved the use of in:
strument8 to measure the’&retch of the pipe so that
the pomt of seimtre can be determined. An inatru-
ment is lower,ed into the pipe and measures the
rtretch of the pipe. This operation is ,repeated at
variow depth8 until no further .&retch i.s indicated.
Thiaiirdikates the point of seisure.”
we do not consider Wt thbopeiation constitutes a
survey “of the sands or other formations of the earth” and there-
fore hold that it ,is not taxable under Article 7060a. For the same
reason, we hold that the following operationa, as explained~in the
report, are not subject to: tax.
Hon. Robert S. Calvert, page 11 (V-1567)
“Caliper logs
‘This BUrViy (sometimes called section Sage)
involves the use of instruments with mechanical
feelers or arms run in an uncased hole on a wire
line or insulated electric cable to determine the
siae or diameter of the hole which has been drilled.
The recording can be made at the surface simul-
taneous with the running, or it can be made by means
of mechanical stylus contained within the instrument
itself. This survey is for theprimary purpose of as-
sisting drilling operations by knowing the diameter
of the hole being drilled.
*Collar location
“A survey run in the well to locate the depth
of the collars in the producing casing string. It is
performed by means of mechanical feelers run on
a wire line. This type survey is often run in con-
junction with radioactive logs for the purpose of
substantiating or measuring the depth of the col-
lars.
“Electric log to locate junk or fish in the hole
“This survey involves the use of electric log
or ‘Schlumberger’ to determine by means of surface
recording of depth and electrical resistivity the point
antwhich pipe,‘tools, or other objects have been lost
and embedded in the wall of the bore hole. The elec-
tric log in this case iS a useful tool to the drilling
operator as a substitute for mechanical feelers.
*Corrosion surveys
%urveys run inside pipe of an oil or gas well
to determine the extent of corrosion of the metal.
These surveys involve the use of an instrument with
mechanical feelers run on a wire line with record-
ings at the surface or within the instrument-itself.
”
.. 0 .
*Fluid level surveys
“Fluid level surveys are made after a well has
ceased to flow naturally and is being produced by
Hon. Robert S. Calvert, page 12 (V-1567)
artificial means. The level of the fluid is usually
obtained by a sonic device which measures the
period of time for a sound wave to travel from the
surface to the fluid level and back to the surface.
By knowing the speed of the sound wave and the
time for the reflected wave to return, it is possible
to calculate the height of the fluid in the well. The
data obtained are of value in determining if a de-
crease in production is due to the pump or gas lift
valves being set too high or if the equipment is not
functtoning properly. If the fluid level is near or
at the depth where the pump or gas lift valve is set,
the equipment is Bet too high. On the other hand,
if the fluid level is found relatively higher than where
the pump or gas lift valve is set, the decreased pro-
ductton may be due to the equipment not operating
properly.”
We are urged to reconsider and overrule the holdings
of Opinbm Q-3698 and V-1353 on the taxability of “temperature
surveys”. The following question was considered in Opinion
O-3698.
“4. There:is performed in drilling for oil and
gas a service known as ‘temperature determination.’
By lowering into the well an electrical resistance
thermometer and recording at the surface in the
form of a graph all its readings, the temperature
of the entire length of the well is available. By de-
duction from the known cooling effects of flowing
gas, the less COO1ing effects of flowing oil, the heat
generative effects of hardening cement, the follow-
ing results are made possible:
“a. Location of oil and gas bearing forma-
tions and differentiation between the two.
“b. Location of cement top behind the Casing.
“c. Determination of the base of the gas to
permit the casing to be set at the proper
depth.
“Please tell me whether or not this service would
be subject to this tax?”
The following reply was made to the above quoted query.
Hon. Robert S. Calvert, page 13 (k-1567)
“Ascertaining the temperature in the various
parts of the well is clearly a form of survey, ac-
cording to the definitions of weil survey. See ‘Pe-
trOieUm Production Practic,e,’ Part I, su ra. In a
booklet entitled ‘Schlumberge~r Auxiliary--%- ervices,’
recently published by Schlumberger Well Surveying
Corporation, on page 2, iS a diSCuSSiOn Of ‘tempera-
ture determination in wells, and, the diSCUSSiOn is
headed ‘Temperature Surveys’ and reads in part as
fOllOW9:
* ‘It has ,long been realized that the
study of temperature in a drill hole could
be of, great value if it could be accurately
and practically ‘meas,ured e 0 e
” ‘In the last few years an electrical-
resistance thermometer has been evolved
which responds to temperature variations
rapidly and records ,them within 0.2 degr,ees
Fahrenheit of accuracy. This thermometer
is lowered into the well at the end of the in-
sulated cable used for electr,ical logging and
all temperature readings are recorded at the
surface, in the form of a continuous graph.
” ‘The most profitable purpose served by
this type of temperature survey is the location
of oil and gas bearing formations in limestone.
In West Texas and Kansas this has been ac-
complished in several’hundred temperature
surveys which, in conjunction with electrical
logging, located the pay and differentiated
between oil and gas.’ (Underscoring ours)
“Our answer to your fourth question is that, the
service of ,‘temperature determination’ in the manner
you describe in a survey within, the meaning of the
statute and is therefore a taxable service.’
In so far as this answer goes, we believe it is correct;
but we do not think it covered the entire question. The quoted
authority was dealing with a type tempeiature survey which re-
sulted in locating and defining various formations of the earth.
It thus accomplished a survey of the sands or other formations
of the earth, just as electric logging does, and is, in our opinion,
a taxable service. However,,we do agree with the proposition
submitted in the brief and report that not all temperature surveys
Hon. Robert S. Calvert, page 14 (V-1567)
are surveys of the formations of the earth. Temperature surveys
made in the course of producing operations to check the mechanical
condition of equipment in the hole are not surveys of the formations
of the earth and are not taxable. A temperature survey made to
check the success of a nontaxable cementing job is not taxable for
the same reason. To the extent that Opinion O-3698 holds to the
contrary, it is hereby overruled. However, as we have previously
stated, we think that a temperature survey made for the purpose
of determining the BUCC@BB of the cementing of the casing seat is a
taxable service since it is a service rendered in connection with one
of the enumerated taxable services. This, as we interpret it, is the
holding of Opinion V-1353; and it is hereby affirmed. We believe a
general test of the taxability of temperature surveys can be stated
in these terms: Temperature surveys are taxable only if made for
the purpose of surveying the sands or other formations of the earth
or if they are made in connection with one of the named taxable
services.
In Opinion O-3698 it was held that a “water-flow survey”
was a taxable service. As stated in the submitted report:
“Fluid ingress surveys are obtained whenever
’ it 19 suspected fluid 19 entering a well at a point
where such flow is not. desired or when it is sus-
pected certain sections. of a horizon are taking a
disproportionate volume of the injected fluid. Exit
surveys are run whenever it is thought fluid is
leaving a well at a point where such flow is not
wanted or when it is thought certain strata of a
horizon are producing a disproportionate volume,
principally water, of the produced fluid. This
may be determined in various ways but probably
the moat common. method is by use of a mechanical
device lowered in the hole to measure the relative
volume of fluid flowing at any given point. One of
the principal methods used is called a ‘spinner
3urvey’.n
We think that a determination of the relative volume of
fluid flowing at a given point or in a given formation constitutes a
survey of that formation within the meaning of the statute, and
Opinion O-3698 is affirmed on this point.
The last .enumerated taxable service is ‘testing of the
sand: or other formations of the earth in any D 0 . oil or gas wells
. . . The submitted report has defined “sands” and “formations”
as not including the “fluids” - liquid and gaseous materials - which
Hon. Robert S. Calvert, page 15 (V-1567)
may be contained in or produced from the porous space of the
formation or sand. If this definition is the correct guide to the
meaning of the statute, Attorney General Opinions O-3698, O-4188
and V-1353 are erroneous either in part or in toto.
We quote the following excerpt from Attorney General
Opinion O-4188 (1942).
“The services described in paragraphs II,
III and IV all relate to tests of the properties of
fluids and gasin wells as distinguished from tests
of solid materials found in the wells. The statute
expressly enumerates ‘the surveying or testing of
the sands or other formations of the earth in any
such oil or gas wells.’ We believe that this lan-
guage is intended to embrace not only the solid
material actually composing the sand, but the gas,
oil or water with which the sand may be saturated
or other formations permeated. It is to be re-
membered that the purpose of drilling oil and gas
wells is to produce oil or gas. It would be strange
indeed if a statute, patently designed to tax technical
services customarily rendered by persons other
than the driller in connection with the efficient corn-
pletion and operation of oil and gas wells, were con-
strued so as to tax the testing of non-productive
formations through which the drill must necessarily
pass, and exempt the testing of the properties of the
very product, i.e., gas and oil, ‘which is sought to be
produced. We therefore are of the opinion that analysis
of bottom-hole fluids, the testing of pressures at various
points in the well and ascertainment of the productivity
index of the well are all services which come within the
intended scope of the statute under consideration.”
In Opinion O-3698 (1941) the following ruling was made:
“Testin of the sands or other formations of
the eart
---Ii-+o oil and gas wells is the taking of samples
of the earth formations and fluid contents from the
walls or bottom of the well and analyzing the same so
as to ascertain the composition of said earth forma-
tions and fluid contents. See ‘Fundamentals of the
Petroleum Industry,’ by Dorsey Hogar, 1939, pages
226 to 231, and ‘Drilling Practices, by Charles Cyrus,
1939, pages 182 to 195;”
Hon. Robert S. Calvert, page 16 (V-1567)
Bottom hole pressure tests, depth pressure tests, pro-
ductivity index tests, gas-oil ratio testing, bottom hole sampling
and analysis, open flow potential tests and gas-condensate well
tests were held taxable services in Opinion V-1353 (1951). All of
these tests are tests of “fluids”.
In Sheppard Co., 208 S.W.2d 656
(Te~.Civ.App. 1948), the court held that the service of operating a
portable laboratory, set up on the well location, for the purpose of
analyzing drill cuttings was a taxable service under Article 7060a.
We quote the following excerpts from page 657 of the opinion:
“The service performed is the analysis of
drill cuttings whCch are taken possession of by
appellee after the same have been brought to the
surface and separated from the drilling fluid by
means of a shale-shaker. . . . The test made on
the drill cuttings is to determine the gas and oil
contents of the strata or formations of the earth
encountered by the drill bit. The laboratory find-
ings are furnished to the well owner and appellee
is paid for the service.
“It is not necessary to here further set out
the methods employed by appellee since it is not
material to the issue to be here~decided; except
it may be added the’ laboratory of appellee con-
sists of such equipment as enables it to make the
analysis of the cuttings it takes possession of.”
An examination of the record before the court in this
case shows that the plaintiff taxpayer performed, among others, the
following tests:
“A We take the cuttin& and put them in a quart
container. We put one pint of cuttings in this
container, and we put one-quarter of the vol-
ume of water. . . . We seal this container and
put it in what we call an agitator . . .then we
hook two hoses to this container. One is a
suction hose, and the other is the return. There
is a compressor motor in this system, and we
pull a vacuum on these cuttings equivalent to
four inches of mercury. By leaving the return
valve closed, and opening up the suction side,
we create a vacuum, and reduce the cuttings
below atmospheric pressure, which is sufficient
with four inches of mercury to release any
Hon. Robert S. Calvert, page 17 (V-1567)
contained gases that are in the pore spaces
or interstitial spaces. [S.F., pp- 6 & 71
“Q Now, what is the diagram, Plaintiff’s Ex-
hibit No. 27
“A This is a diagram of a Wheatstone Bridge
gas analyzer. [ S.F., p. g]
u
. . .
‘Q So you arrive at two conclusions by the
use of this device; namely, the volume
of the gas contained in the cuttings, and
some notion of the quality of the gas?
“A It is a qualitative analysis, that’s right.
. . .
“Q After you have completed the gas analysis,
what is your next step?
“A We take these samples and wash them very
thoroughly and subject them to ultra-violet
ray radiation. . e.
‘Q What is the purpose of that process7
“A Ultra-violet rays coming in contact with
liquid hydro-carbons will cause them to
be energized and to fluoresce and become
visible to the naked eye. D L)D [S.F., pp”
11,121”
The following further details as to these tests were
also included fin the record:
“Q And then you take those cuttings into the
portable laboratory and you test these
samples to determine the volume of the
gas in it, and also to test whether or not,
if there is gas there, it is high or low
fraction gas ?
“A Yes.
“Q And you test it for that purpose?
Hon. Robert S. Calvert, page 18 (V-1567)
“A Yes.
“Q And if you think it is in what you think is
oil -- liquid hydro-carbons, I believe you
call it?
“A Yes.
“Q If you find some evidence of that, or if
you believe it should be there, you put
it through the other part of your labora-
tory, which you call ultra-violet radiation?
*A Yes, sir.
“Q And you look at it and you can tell from that,
in a general way, at least, as to whether or
not it is a low gravity oil or a high gravity
oil, according to the difference in color?
“A That’s right.”
Thus it is apparent that at least some .of the services
which were held it be taxable in the Rotary case were test of ..“fluids”.
This being so, we think that the words “sands” and “formations”
must be interpreted as including the fluid contents of said “sands”
and “formations”. Indeed, we think the Rotary case is decisive of
this question.
In this connection, we think it pertinent that the Legisla-
ture has met twice since the decision in the Rotary case. Since it has
not seen fit to amend Article 7060a by excludvom taxable services
the testing of “fluids, ” it must be presumed to have acquiesced in the
judicial interpretation of legislative intent.
It is also submitted that analyses of cuttings are not analy-
ses but inspections. Microscopic inspections of cuttings was one of
the services performed by the taxpayer in the Rotat bley;nze. For the
reason just stated we think such service is a taxa
In Opinions O-3698 and V-1353 it was held that side wall
sampling was a taxable service. We are urged to make a distinction
between the taking of the sample and the testing of the sample for
the re~ason that many samples are never tested. There is presently
pending before the Court of Civil Appeals for the Third Supreme Ju-
dicial District of Texas Robert S. Calvert and Williati B. Davis v,
. . .
Hon. Robert S. Calvert, page 19 (V-1567)
A-1, Bit and Tool Company. A decision in this case could be
decrsrve of this questron and for that reason we deem it improper
for us to reconsider it at this time.
SUMMARY
Cementing “liners” (strings of casing whose
tops are situated below the surface) is a taxable
service under Article 7060a, V.C.S., if the liners
are used as extensions of the oil string as dis-
tinguished from liners used to repair defective
casing. The following operations are not taxable
under Article 7060a because they do ,not constitute
nor are they done in connection with cementing the
casing seat: cementing conductor, surface, inter-
mediate or protective casing strings; cementing to
control wells; cementing for lost circulation; plug-
back operations; cementing for abandonment; squeeze
cementing operations; cementing liners for remedial
or repair operations; cementing for whipstock opera-
tions . Temperature surveying done to determine the
success of cementing a casing seat is a taxable serv-
ice since it is performed in connection with cement-
ing the casing seat. Shooting operations which are
not concerned with formation fracturing and which
are not performed in connection with one of the tax-
able services enumerated in Article 7060a are not
taxable services. Acidieing operations which do not
have for~their purpose the dissolution of a formation
are not taxable services unless they are performed
in connection with a taxable service. El,ectric logging
to record geological formations, radioactive logging,
magnetic logging and dip recording are taxable serv-
ices. A deflection or deviation survey is a survey of
the drill hole rather than a survey of the formations
of the earth and such surveying is not a taxable serv-
ice. Neither depth measurement surveys nor surveys
to locate the free.point of stuck pipe, nor caliper log-
ging, nor surveys to locate the depth of collars, nor
electric logging to locate junk or fish in the hole, nor
corrosion surveys, nor fluid level surveys are taxable
surveys because they are not surveys of the formations
of the earth. Temperature surveys are taxable only
if made for the purpose of surveying the formations of
the earth or if they are made in connection with a tax-
able service. To the extent that Attorney General Opin-
ion O-3698 (1941) holds to the contrary it is overruled.
- . .
Hon. Robert S. Calvert, page 20 (V-1567)
Water-flow surveys are taxable as a survey of the
formations of the earth. The words ‘sands” and
“formations” must be interpreted as including the
fluid contents of said “sands” and “formations”.
Sheppard v. Rotary Engineering Co., 208 S.W.Zd
6 (Tex.Civ.App. 1948). Therefore bottom hole
pressure testing, depth.pressure testing, pro-
ductivity index testing, gas-oil ratio testing, bot-
tom hole sampling and analyning, open flow poten-
tial testing and gas-condensate well testing are
taxable services. Microscopic inspection of drill
cuttings is a taxable service. Sheppard v. Rotary
Engineering Co., supra.
APPROVED: Yours very truly,
W. V. Geppert PRICE DANIEL
Taxation Division Attorney General
E. Jacobson
Executive Assistant
By,$%( ;I ;i;;-1 //’
,’ .I, / i’!<, i
Charles D. Mathews Marietta McGregor Creel
First Assistant Assistant
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