Untitled Texas Attorney General Opinion

May 21,.,
1958
Hon. Frank R. Nye, Jr. Opinion No. WW431
County Attorney
Starr County Re: Questions ooncerning the
Rio Grande City, Texas ad valorem taxability
against Sun Oil qompany
as processor of c,ertaln
gas designated as plant
Dear Mr. Nye: 6perato,r%,.
pc&lon..
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You submit for’the,Opinion ,of this,.
off~lcettiO:, qtieEtlon8
presented in your ‘letter of ‘Febtiuatiy
20, .ig58. ,-For’scom-
prehensive statement of the problem presented iredeem It
desirable to quote your oplnldn requeat in full, whl,ch18
a3 fO11OW8:
“There are a large number of 011 and gas wells in
Starr County, Texas, In active production, an4 which
are subjected to ad valorem taxee by the State,
County, and varlotisIndependent School DIstrIcta.
BaElCally, in assessing their taxes, the County (lri
behalf of Itself and the State of Texas) and School
Districts treat each lease producing oil and gas a8
a separate entity, so that the lessee is aseeqsed
7/8 as a determinable fee estate, and the le,sBor,
or landowner, 18 assessed the usual l/8 royalty as
a fee estate.
“Where 011 alone (and no casinghead gas or ottier
liquid hydrocarbons) 1s produced evaluation peses
. no problem. But where casinghead gas and liquids
from gas production are processed off the lease8 a
compl1catlon arIses. Plants designed for this pur-
pose have been built; and it la In conjunction with
them that the offlzclalsof Starr County are In doubt
about whether all property subject to taxation Is
being effectively reaohed.
“SpecIfically, the Sun Oil Company oonstruote~ a
plant in the San Ieldro Commuqity of Starr County
In 1949 which during the year 1956 took the gas from
575 wells. That plant handled z&904,654 MCF of
such gas during the calendar year of 1956, producing
therefrom 862,335 bblo. of llqUld8.
. I
Hon. Frank R.~Nye, Jr., page 2, Opinion No. WW-431
"Sun has been randerlng to Starr County (for Itself
and the State) and to San ISid&) Independent School,
District 7/8 determinable fee estate of all such
leases as:.ltowns In that proportion. The owner
of the larid,or lessor, 18 assessed hi8 l/8. En
determining the value8 accepted engineerlnq methods
are employed.
"In the operation of Its gas plant, mentioned above,
wet gas Is taken by Sun from the wells on various
1eases;~lnol~dlng Its own. Thi,8gas Is processed
In the plant and the ~&ripped gas Is returned and
re-lnjedted into the gaelproducing formation fork
rbcycllng,.'or..
801d a8 pipeline gas.
"This aperatlon 18 covered-by Contracts which pro-
vides that a portion of the-separated liquids dnd'
gas sold &s pipeline gas are 'soldby Sun for.the'
accounts of the leasor and,owner of the lease,.the
Sun retELln!ing
a Epecifi'e'd
portion,of such,liquids
a8 the 'plaht operator'.8portion.'
"Sun retains as "plant .operator'sportion': 75%
of the liquids extracted from casinghead gas; 75% of
&venue derived from sales of pipeline gas frQm
caslnghead pr~oces.aed;25s of .the liquid8 extracted
from sweet gas; and 25s of revenue derlv'edfrom sales
of pipeline .dry sweet gas.
"During 1956; productI& at Sun's San Isldro gae
processing plant; according to official production
figures on'flle with the Railroad Commission and
the State Comptroller of Public ACcount8, amounted
to:
'LHC from Gas Well Gas 409,609 bbls. worth $1,290,270
LHC from Casinghead Gas,452,726 bbls. worth @,426,,090
Total 862,335 bbls. worth 2,716,360
Gas Well
Pipeline Gas 9,304,319,MCF worth 716,430
Caslnghead
Pipeline Gas 10,283,720 MCF worth 7g1,18fso
22,904,654 MCF worth $&,508~280
orAUtttotal gross revenue worth $4,224,640. Of this
, $2,059,520, qr approximately 50$, wa8 returned
Hon. Frank R. Nye, Jr., page 3, Opinion No. WW-431
to the lease opexator as his lease share and was taxed
the same as 011 produced.
"Sun, in rendering their properties In Starr County
for ad valorem taxes, have omitted the 'plant opera-
tor's portion', (which in 1956 amounted to approx-
imately $2,165,120), described above, maintaining
that It Is not subject to any property tax; Including
ad valorem taxes. They argue that the 'plant opera-
tor's portion' Is a mere process+g charge.
"The Commissioners1 Court of Starr County and the
Board of Trustees of the San Isidro Independent
School District of Starr County feel that said 'plant
operator's portion' Is subject to the ad valorem
taxes to be levied by the State and County and said
School District for the year 1958; and It Is the ln-
tention of said officials to make such levy (apply-
ing the same ratio of assessment as 18 applied to
all other real property owned and rendered by Sun)
If said 'plant operator's portion' Is property within
the meaning of the law subject to ad valorem taxes.
"Said officials have also Indicated that It 18 thel'r
Intention, if It can be legally done, to retroactively
assess such 'plant operator's portion' for the years I
the same has been omitted from the Stin011 Company's
renditions subsequent to the oonstructLon of Its gas
processing plant.
"In analyzing these facts It appear8 to this office
that two questions arise:
(a). Is said 'plant operator'8 portion', as des-
cribed above, real property subject to ad
valorem taxes?
(b). If the answer to (a) Is In the affirmative then:
Is said 'plant operator's portion' subject to
retroactive assessment for any years It may
have been omitted by Sun from Its rendition of
property for ad valorem taxation?"
The Sun 011 Company is designated In this opinion as
"plant operator." The lessees (whether owing an l/8 royalty
or 7/8 working Interest) will be designated the "producer."
The question we must answer Is whether or not under con-
tracts between Sun 011 Company, the plant operator, and
various owners of gas leases, the portion which you have
:
Hon. Frank R. Nye, Jr., page 4, Opinion No. WW-431
designated as “plant operator’s portion” Is real property
subject to ad valorem taxes. To answer this question It
becomes necessary to examine and construe the contracts
between the Sun 011 Company~,the processor and the pro-
ducers o? owners of the leases from which the gas is
produced.
It appears that Sun 011 Company, plant operatqr,
processes gas from the leases Involved under two types of
contracts. We have been furnished copies of these,con-
tracts. The first Is a casinghead gas contract. Under ‘the
terms of this contract Sun agrees to buy the casinghead gas
produced by the lessee owner. The title to the gas Is
transferred to Sun at a certain delivery point, usually ,at
the caslnghead at the well. Sun agree8 to pay for said gas,
a price based upon what Sun receives for the gasoline pqo-
ceased (up to l/3 of proceeds) and up to 50s of net pro-
ceeds from the sale of the residue gas, and we construe net
proceeds to mean gross proceeds less cost of purifying,
boost%ng:,ghd:transportlng the gas. Also, the’prlce paid
shall be based on a percent of the price received for sale
of butane and propane. The contract Is for a term of tdn
years, either party having the right to terminate the cqn-
tract on any anniversary date by thirty days)’notice.
The second contract as related to the problem here
involves a processing of the gas by Sun from various leases,
none of which are owned by Sun. In tlilsprocessing ,oontqact
Sun agree8 to process the gas, remove all liquid8 aridlm-
purities and deliver the residue gas back to the producer.
This contract further provides that title to the gas re-
mains In the producer who deliver8 the gas to Sun at the.
junct~lonpoint on the gathering line In close proximity,
to the gas wells. The producer assigns to Sun 100s of t,he
plant products recovered from gas delivered under the con-
tract”when, as and If recovered. The price paid for the
products Is the price received for such products 01)the,
basis of a &ale attached to the contract showing gasoline
content of the raw gas processed. There Is by terms of,
the cohtri&t also a permissible deduction from producer18
credit for a dehydration fee. This processing contract IS
or.a year to year basis, terminable at the option of either
party on sixty days’ notice prior to the end of any calendar
year.
It Is stated In the opinion request that the i%ll l/8
royalty and the 7/8 working lntereet In the gas has been
rendered and a8SeSEed for taxation for each year the plant
has been In operation. In other words, 8/8 or all of the
gas has been rendered for taxation by the owners ‘in propor-
tion to their respective Interest.
Hon. Prank P. Nye, Jr., page 5, Opinl-n No.
Article 7146, Verr,o:i's
Civil Statutes, defines real
property for the purpose of taxation: This is as follows:
"seal property for the purpose of taxation, shall be
construed to include the ?~anditself, whether laid
out in town lots or otherwls,e,,
and ,a11 buildings,
structures and improvements, or other.fixtures oft
whatsoever kind thereon, anb.'&il.,the~rightti
and
The pertinent portlon of this statute to this problem is
,I . and privileges belonging or ,inany wise appertaining
t,heretc,and. . ,.minerals. . . in and under the same." Gas
Ianp1ar.eunder land Is a right and privilege belonging to
the land and constitute minerals. It Is therefore real
property subject to taxation under the foregoing definition
of real uroaertv for the uur'Doseof taxation. This has be-
c,omeweli established as the-law of this state in such cases
3s Sheflield v. Ho 124 Tex. 290 77 S.W.(2d) 1021; Tennant
v. Ddnn,mTex.--&, 110 S.W.(2dj 53; and State v. Quintana
F'etroleumCo., 134 Tex. 179, 133 S.W.(2d) 112. If there-
fore, "plant operator's portion" @ the gas is gas In place
It Is taxable to the operator, otti&wlse not.
I,nview of the statement that the l/8 royalty and the
.7/'8
working interest have been rendered and assessed for
taxation for each year the plant has been in operation which
constitutes the whole 8/8 Interest in the gas, any other
interest must of necessity be carved out of the l/8
r,,j.jc.atle
royd.lt:y
or the 7/8 working Interest, or both. Otherwise, we
would run into the question of double taxation forbidden by
Artl.cleVIII, Section 1 of the Texas Constitution.
Clearly, under Article 7146, V.C.S., the value of the
gas, Bs realty, for ad valorem tax purposes, IS Its value
in place, prior to severance. Natural gas in place must:and
,does, of"necessity,,Include all Its component elements.
Chemicals
ar Gas. Co. v.
arrls, 45 S.W.(2)
Therefore, If the gas has a value In place It Includes
a:: the constituent elements thereof for ad valorem tax pur-
POQC!S* To put a value on the gas In place and then attempt
t,oadd ther~etothe value of the separated constituent ele-
ments of said gas after it has been manufactured or separation
process has made it mormevaluable as personalty, would, within
Hon. Frank R. Nye, Jr., page 6, Opinion No. WW-431
itself, constitute a double assessment and would be uncon-
stitutional under Article VIII, Section 1 of the Texas 'cl,
Constitution. It Is therefore apparent that the gas as
real property was or should have been fully assessed before
it was.severed and processed as persbnalty In Sun's process-
ing plant. Reverting to the contr~actbetween Sun, the proc-
essor, and the lessee, producer, It Is noted that several
functions are necessarily performed by the processor from the
time the gas is delivered to Its gathering lines to the time
the residue gas Is delivered to Interstate pipe lines. Under
certain circumstances the contract may be cancelled. For
example, if the water or sulphur content Is too high or the
ilquld hydrocarbon content is too low, the pr~ocessormay
cancel the contract. The contract runs from ye;;sko ;;z
only, terminable at the will of either party.
processor Is not obligated to take all of the gas fir proc-
essing. It may take casinghead gas from other wells other
than the producer's wells, or If Its capacity is insufficient
It may take gas ratably. Conversely, the lessee Is not ob-
ligated to deliver the full amount of the gas contracted
for, If it would Injure the efficiency of lessee's well or
wells. These facts do not, in our view, partake of a vested
title to gasas realty in place, for .eltherparty may termi-
nate such alleged title at will. Where Sun, the processor,
takes delivery of the gas is likewise Important. Under the
contract Sun hkes delivery Into its gathering lines at the
junction point near the well and transports it under low
pressure to its processing plant. The contract further
provides a junction charge for transporting the gas. The
gas must be compressed to from 800 to 1.,000pounds of pres-
sure psi in order to enter Sun's transslsslon line. A
charge Is made for this service. Instead of lessee paylng
Sun, the processor, in cash for all the services which are
necessary to make the gas merchantable and profitable, these
service:charges are paid In kind out of the plant producte
extracted, and this la what is designated as "plant operator's
portion."
The only title that passes to Sun Is the title to "plant
operator's portion", and this we think is personalty and not
realty. The fact that the contract provides that Sun is .
compensated for the services performed by a portion of the
products produced from the gas, rather than in money does
not constitute Sun the holder of any right or privilege in
the leasehold estate of the lessees with whom they have con-
tracted. Under the following cases, Stephens v. Stephens,
292 S.W. 290, Writ Dism.; Choice v. Texas Company 2 F. Supp.
160; Chafin v. Hall, 210 S.W.(2) 289, rev. on other grounds
276 S.W. (2) 774, ft Is held that when 011 or gas are removed
Hon. Frank R.Nye, Jr., page 7, Opinion No. WW-431
from the land they become personalty. We think ttiht“plant
operator’s portion” received and retained by it under the
contract constitutes personalty and not realty, and may not
be taxed as realty. The courts have construed contracts
somewhat analonous to the one involved here, in cases such
as Martin v. A&s, (Corn.App.) 288 S.W. 431; Lone Star Gas
Co. v. X-Ray Gas Co., 139 Tex. 546, 164 S.W. (2) 504 These
cases do not Involve questions of ad valorem taxatioh, but
do bear upon the charicter of estate or ownership resiltlng
from contracts quite analogous to the contract here between
Sun, the processor, and lessees, the producer, and they hold
that no interest In the realty from which raw gas Is pro-
duced Is acquired by the proce,ss.or.
The case of Martinv. Amls’deserves further notice.
The lease considered by the court in this case provided
that the lessor would receive J/S of’all 011 and casing-
head gas and gas pro$tced; minufaotured, and saved from
the lease premlses. Qordon, the lessee, contracted to sell
the gas to Chestnut-Smith Corporation to be processed by It
and the extracted gas and residue gas was to be sold. The
processor agreed to pay the lessee 25% of the net amotin+j
received from the sale &the gasoline and 50% of the price
received for the re.sldue&Ei , ,suchresidue.gas being deter-
mined by scale attached to the contract. The proos&3or
paid the lessee 7/8 of the amount received for the 25s of
the gasoline extracted and the royalty owners l/8 of said
25% The royalty owners brought suit against the lessee
and the processor for l/8 of the,totalsvalue ,of thengaso-
line extracted. The court held that’under the lease the
lessee had to either sell the,raw gas or process it and that
lessee had filfilj.edIts obligation by selling the raw~gas.
The royalty owners,.however, contended as expressed in the
opinion of the court,, as follows:
“The obntentitinof MS Is to the effeot that
the written contract, under.whioh the raw gas ~was reh
oelved by such corporation, Is In legal effect a
contract for the hire of said corporation t:omanu-
facture ,thegasoline as.the servant of the producer.
of the raw gas; ‘but this co.ntetitlon
i# untenable,. The
terms of said contract have been stated. An examins- ~
tion thereof leaves no doubtsof their legal effect.
They evidence an executory contract of sale of raw
gas, as personalty . . . Such tlt,leor property as
(lessees) nela ln said raw g&s DaSSed to said
corporation: The former dia .no% own w part of
the raw gas when gasoline wag manufactured from
It; the Chestnut-Smith Corporation held it
.
Hon. Frank R. Nye, ‘Jr.,page 8, Opinion No. WW-431
under claim of ownership. The manufacture of such
gasoline, therefore, Is not imputable to (lessees)
and they are not chargeable with liability in that
respect under the Gordon covenant.
“Amis (royalty owner) in his pleadings, seeks
tQ hold the Chestnut-Smith Corporation to perform-
ance of the Gordon covenant in so far as 881118
re-
lates to gasoline. Said corporation cannot be
held to performance of such covenant In any respect,
for the reason the oorporatlon does not stand in
prlvlty with the estate In 011 and gas in place,
that was granted the Gordon Company under the Gordon
lease; nor has It assumed any of that company*s
obligations or becontechargeable In 6quity with
performance thereof. Its acqul8ltion of raw gas
Droduced from the realty granted in the Gordon
iease occurred’after such-gas had become pereonalty
by a severance from the soil. It holds no interest
in the realty from which such r?iwgas was produoed.”
7Emphasls Supplied.)
The court concluded that the royalty owners were entitled
only to l/8 of 25$ of the net &our& received for the gaso-
line sold. In the case of Saulsbury.O1l Co. v. Phi
Petroleum Co:.,,-142 F(2) 27, Cert. Denied; 323 U *6 .
89 L .Ed . >@$1 there was Involved a ,caslngheadgas c
tract between lessee and Phillips to process ttiegas and
return the residue to the lessee and to market the rest.
In this case the court said:
“We condlude that the title to the oasing-
head gas passed to Phillips upon the delivery
thereof into its gathering lines.”
Sun owns some gas leases from which it processes its
own gas. This, however, does not present in principle a
different problem from that posed with respect to the leases
not owned but from which, under the contract, it processes
the gas for a portion of the products extracted. The only
difference is that Sun owns all of the gas and must render
and pay taxes upon It In place until it Is severed and ,
processed. As to this gas wholly owned by Sun, “plant
operator,;
s.,~pQrtiion’?.
i.S
inQt,
Il!DVQ?.ved,.
Sun, ,.ownlhg.
the gas,
likewise would own all of the products derived from proc-
essing. A question quite ahalogous to the one presented by
you Is answered In a former opinion of this office, O-3938,
a copy of which is herewith enolosed’for your Information.
Hon. Frank R. Nye, Jr., page 9, Opinion No. WW-431
This opinion is not to be construed as holding that
"plant .operator'sportion" and the products derived from
~Sun bjrprocessing its own gas are exempt from taxation.
It should be taxed as personal property as other personal
property is taxed.
We therefore conclude that your question (a) should be
answered in the negative. This renders unnecessary an
answer to your question (b).
SUMMARY
The portion of the products received and
retained under a processing contract between
the Sun Oil Company and certain producers of
natural gas which Sun, as processor, retains
as a processing 'chargedoes not constitute
gas in place, and Is not taxable as real
property but ia taxable as personal property.
Gas owned by Sun under leases which it holds
Is subject to ad valorem taxation as real
property so long as Jt remains in place un-
,severedand unprocessed, but after severance
and processing the products derived therefrom
do not constitute real property subject to
taxation, but should be taxed as personal
property.
Very truly yours,
WILL WILSON
Attorney General of Texas
LPL:db
APPROVED:
OPINION COMMITTEE:
Jack Qoodman, Acting Chal.rman
Milt,onRichardsor?
Tom MoFarllng
REVIEWED FOR THE ATTORNEY GENERAL
By W. V, Geppert