May 21,., 1958

Hon. Frank R. Nye, Jr. County Attorney Starr County Rio Grande City, Texas Opinion No. WW431

Re: Questions ooncerning the ad valorem taxability against Sun Oil qompany as processor of c,ertaln gas designated as plant Dear Mr. Nye:

:,,. : .~ ” 6perato,r%,. pc&lon.. .,.,,:.:‘,..:,:

,,“.,‘,‘.,,

‘~,‘,.,, ‘. ,. You submit for’

the,Opinion ,ofthis,. off~lce

ttiO:, qtieEtlon8 presented in your ‘letterof ‘Febtiuatiy 20, .ig58.,-For’scomprehensive 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 purpose have been built; and it la In conjunctionwith them that the offlzclals of 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 theyear 

### 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&) IndependentSchool, District 7/8 determinable fee estate of all such leases as:.lt

owns In that proportion. The owner of the larid,

or lessor, 18 assessedhi8 l/8. En determining the value8 accepted engineerlnqmethods are employed.

"In the operation of Its gas plant,mentioned above, wet gas Is taken by Sun from the wells on various 1eases;~lnol~dlngIts own. Thi,8 gas Is processed In the plant and the~&ripped gas Is returned and re-lnjedted into the gaelproducing formation fork rbcycllng,.'or..

801d a8 pipelinegas. "This aperatlon 18 covered-byContractswhich provides that a portion of the-separated liquidsdnd' gas sold &s pipelinegas 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 'plahtoperator'.8 portion.'

"Sun retains as "plant .operator'sportion': 75% of the liquids extracted from casingheadgas; 75% of &venue derived from sales of pipelinegas frQm caslngheadpr~oces.aed; 25s of .theliquid8 extracted from sweetgas; and 25s of revenue derlv'ed from sales of pipeline .drysweetgas. "During 1956;productI& at Sun's San Isldrogae processingplant; according to officialproduction figures on'fllewith the Railroad Commission and the State Comptrollerof PublicACcount8, amounted to:

'LHCfrom Gas Well Gas 409,609 bbls. worth $1,290,270 LHC from CasingheadGas,452,726bbls. worth @,426,,090
Total 862,335 bbls. worth 2,716,360

Gas Well PipelineGas Caslnghead Pipeline Gas 9,304,319, MCF worth 716,430 10,283,720MCF worth 7g1,18fso 22,904,654MCF worth $&,508~280
orAUtttotalgross revenueworth $4,224,640. Of this

, $2,059,520,qr approximately50$, wa8 returnedHon. FrankR. Nye, Jr., page 

### 3,OpinionNo. WW-431

to the lease opexator as his lease share and was taxed the same as 011 produced.
"Sun, in rendering theirproperties In Starr County for ad valorem taxes, have omitted the 'plantoperator'sportion', (which in 1956 amountedto approximately $2,165,120),described above,maintaining that It Is not subjectto anyproperty tax; Including ad valorem taxes. They argue that the 'plantoperator'sportion' Is a mere process+g charge.
"The Commissioners1Court of Starr County and the Board of Trustees of the San Isidro Independent SchoolDistrict of Starr County feel that said 'plant operator'sportion' Is subjectto the ad valorem taxes to be leviedby the State and County and said School District for theyear 1958; and It Is the lntention of said officialsto make such levy (applying the same ratio of assessmentas 18 applied to all other real property owned and renderedby Sun) If said 'plantoperator'sportion' Is propertywithin the meaning of the law subjectto ad valorem taxes.
"Said officialshave also Indicatedthat It 18 thel'r Intention, if It can be legallydone, to retroactively assess such 'plantoperator'sportion' for theyears I the samehas been omitted from the Stin 011 Company's renditions subsequentto the oonstructLonof Its gas processingplant.

"In analyzing these facts It appear8 to this office that two questionsarise:
(a). Is said 'plantoperator'8portion', as described above, realproperty subject to ad valorem taxes?
(b). If the answer to (a) Is In the affirmativethen: Is said 'plantoperator'sportion' subjectto retroactiveassessment for any years It may have been omittedby Sun from Its renditionof property for ad valorem taxation?"
The Sun 011 Company is designated In this opinion as "plant operator." The lessees (whetherowing an 

### l/8royalty or 

### 7/8 working Interest)will be designated the "producer."
The questionwe must answer Is whether or not under contracts between Sun 011 Company, the plant operator,and various owners of gas leases, the portionwhich you have:

Hon. Frank R. Nye, Jr., page 4, Opinion No. WW-431

designated as “plant operator’sportion” 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 producers o? owners of the leasesfrom which the gas is produced.

It appears that Sun 011 Company,plant operatqr, processes gas from the leases Involvedunder two types of contracts. We have been furnished copies of these,contracts. The first Is a casingheadgas contract. Under ‘the terms of this contract Sun agrees to buy the casingheadgas produced by the lessee owner. The title to the gas Is transferred to Sun at a certain deliverypoint, usually ,at the caslngheadat the well. Sun agree8 to pay for saidgas, a price basedupon what Sun receives for the gasoline pqoceased (up to l/3 of proceeds) and up to 50s of net proceeds from the sale of the residue gas, and we construenet proceeds to mean gross proceeds less cost of purifying, boost%ng:,ghd

:transportlngthe gas. Also, the’prlcepaid 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, eitherparty having the right to terminate the cqntract on any anniversary date by thirty days)’ notice.
The second contract as related to the problemhere involves a processing of the gas by Sun fromvarious leases, none of which are owned by Sun. Intlils processing,oontqact Sun agree8 to process the gas, remove all liquid8 aridlmpurities and deliver the residue gas back to the producer. This contract furtherprovides that title to the gas remains In the producer who deliver8 the gas to Sun at the. junct~lon

point 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 deliveredunder the contract”when, as and If recovered. The price paid for the products Is the price received for suchproducts 01) the, basis of a &ale attached to the contract showinggasoline content of the raw gas processed. There Is by terms of, the cohtri&t also a permissiblededuction fromproducer18 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’ noticeprior 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 ‘inproportion to their respectiveInterest.Hon. Prank P.

Article property for Nye, Jr., page 

### 5, Opinl-nNo.



### 7146,Verr,o:i's

Civil Statutes, the purpose of taxation: This defines real is as follows:
"seal property for the purpose of taxation, shallbe construedto include the ?~and itself,whether laid out in town lots or otherwls,e,, and ,a11buildings, structuresand improvements, or other. fixtures oft whatsoever kind thereon, anb.'&il.,the~rightti and

The pertinentportlon of this statute to this problem is ,I

. and privilegesbelonging or ,inany wise appertaining t,heretc,

and.

. ,.

minerals.

. . in and under the same." Gas Ian p1ar.e under land Is a right and privilege belongingto the land and constituteminerals. It Is therefore real property subject to taxationunder the foregoingdefinition of real uroaertv for the uur'Dose of taxation. This has bec,ome weli established as the-law of this state in such cases 3s Sheflieldv. Ho v. Ddnn,mTex. 124 Tex. 290 

### 77 S.W.(2d) 1021; Tennant

--&, 110 S.W.(2dj 

### 53; and State v. Quintana F'etroleum

Co., 

### 134Tex. 179, 

### 133 S.W.(2d) 112. If therefore, "plant operator'sportion" @ the gas is gas In place It Is taxable to the operator, otti&wlsenot.
I,n view of the statementthat the 

### l/8royalty and the .7/'8 working interesthave been rendered and assessed for taxation for eachyear the plant has been in operationwhich constitutesthe whole 

### 8/8 Interest in the gas, any other r,,j.jc.atle

interestmust of necessity be carved out of the royd.lt:y

or the 7/8 working Interest, or both. 

### l/8 Otherwise,we would run into the question of double taxation forbiddenby Artl.cle

VIII, 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 taxpurPOQC!S* To put a value on the gas In place and then attempt t,oadd ther~eto

the value of the separated constituent elements of said gas after it has been manufactured or separation process has made it morme valuable as personalty, would, withinHon. Frank R. Nye, Jr., page 

### 6, OpinionNo. 

### WW-431

itself, constitute a double assessment and would be unconstitutionalunder Article VIII, Section 1 of the Texas 'cl, Constitution. It Is therefore apparent that the gas as real property was or shouldhave been fully assessed before it was.severed and processed as persbnalty In Sun's processing plant. Reverting to the contr~act between Sun, the processor, and the lessee,producer, It Is noted that several functions are necessarilyperformed by the processor from the time the gas is delivered to Its gathering lines to the time the residue gas Is delivered to Interstatepipe lines. Under certain circumstancesthe contractmay be cancelled. For example, if the water or sulphur content Is too high or the ilquldhydrocarbon content is too low, the pr~ocessor may cancel the contract. The contract runs fromye;;sko ;;z only, terminableat the will of eitherparty. processor Is not obligated to take all of the gas firprocessing. It may take casingheadgas from otherwells other than the producer'swells, or If Its capacity is insufficient Itmay take gas ratably. Conversely,the lessee Is not obligated to deliver the full amount of the gas contracted for, If it would Injure the efficiencyof lessee'swell or wells. These facts do not, in our view, partake of a vested title to gasas realty in place, for .elther party may terminate such alleged title at will. Where Sun, the processor, takes delivery of the gas is likewise Important. Under the contract junction pressure provides gas must surepsi Sun hkes delivery Into its gathering lines at the

point near the well and transports it under low to its processingplant. The contract further a junction charge for transportingthe gas. The be compressedto from 800 to 1.,000 pounds of presin order to enter Sun's transslsslon line. A charge Is made for this service. Instead of lesseepaylng Sun, the processor, in cash for all the serviceswhich are necessary to make the gas merchantable andprofitable, these service:chargesare 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'sportion", and this we think is personalty andnot realty. The fact that the contractprovides that Sun is

. compensated for the servicesperformedby a portion of the productsproduced from the gas, rather than in money does not constitute Sun the holder of any right 

### or privilege in the leasehold estate of the lesseeswith whom they have contracted. Under the following cases, Stephensv. Stephens, 292 S.W. 290, Writ Dism.; Choicev. 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 removedHon. FrankR.Nye, Jr., page 

### 7, Opinion No. WW-431

from the land they become personalty. We think ttiht“plant operator’sportion” received and retained by it under the contract constitutespersonalty and not realty, and may not be taxed as realty. The courtshave construed contracts somewhatanalonous to the one involvedhere, 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 contracthere between Sun, the processor, and lessees, the producer, and they hold that no interest In the realty from which raw gas Is produced Is acquired by the proce,ss.or.
The case of Martinv. Amls’ deserves furthernotice. The lease consideredby the court in this caseprovided that the lessorwould receive

### J/S of’all 011 and casinghead gas and gas pro$tced;minufaotured, and saved from the leasepremlses. Qordon, the lessee, contracted to sell the gas to Chestnut-SmithCorporationto 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.gasbeing determined 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/8of said 

### 25% The royalty owners brought suit against the lessee and the processor for l/8 of the,totals value ,ofthen

gasoline extracted. The courtheld that’under the lease the lesseehad to either sell the,raw gas or process it and that lesseehad filfilj.ed Its obligationby sellingthe raw~gas. The royalty owners,. however, contended as expressed in the opinion of the court,, as follows:

“The obntentitin

of 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:omanufacture ,thegasoline as.the servant of the producer. of the raw gas;‘butthis co.ntetitlon i# untenable,.The terms of said contracthave been stated. An examins-~ tion thereof leaves no doubts of their legal effect. They evidence an executory contract of sale of raw gas, as personalty

. . . Such tlt,le or 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 gasolinewag manufactured from It; the Chestnut-SmithCorporationheld it.

Hon. FrankR. 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 chargeablewith liability in that respect under the Gordon covenant.
“Amis (royaltyowner) in his pleadings, seeks tQ hold the Chestnut-SmithCorporationto performance of the Gordon covenant in so far as 881118relates to gasoline. Said corporationcannot be held to performance of such covenant In any respect, for the reason the oorporatlondoes not stand in prlvlty with the estate In 011 and gas in place, that was granted the Gordon Companyunder the Gordon lease;nor has It assumed any of that company*s obligationsor beconte chargeable In 6quitywith performance thereof. Its acqul8ltionof raw gas Droduced from the realty granted in the Gordon iease occurred’aftersuch-gashad becomepereonalty by a severance from the soil. Itholds no interest in the realty fromwhich such r?iw gas was produoed.” 7Emphasls Supplied.)
The court concluded that the royalty ownerswere entitled only to 

### l/8of 25$ of the net &our& received for the gasoline sold. In the case of Saulsbury.O1lCo. v. Phi Petroleum Co:.,,-

142 F(2) 27, Cert. Denied; 323 U 6 *

. 89 L Ed >@$

. . 1 there was Involved a ,caslnghead gas c tract between lessee and Phillips to process ttie gas 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 oasinghead gas passed to Phillipsupon the delivery thereof into its gathering lines.”

Sun owns somegas leases from which it processes its
own gas. This, however, does not present in principle a differentproblem from that posed with respect to the leases not owned but fromwhich,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 andmust render and pay taxes upon It In place until it Is severedand , processed. As to this gas wholly owned by Sun, “plant operator,;

s.,~pQrtiion’?.

i.S inQt, Il!DVQ?.ved,.

Sun, ,.ownlhg.

the gas, likewisewould own all of theproducts derived fromprocessing. A question quite ahalogousto the one presented by you Is answered In a former opinion of this office,O-3938, a copy of which is herewith enolosed’foryour Information.Hon. FrankR. Nye, Jr., page 9, Opinion No. WW-431

This opinion is not to be construed as holding that "plant .operator'sportion" and theproducts derived from ~Sunbjr

processing its own gas are exempt from taxation. It should be taxed as personal property as other personal property is taxed.

We therefore conclude thatyour 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 certainproducers of natural gas which Sun, as processor, retains
as a processing 'charge does 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,on

Richardsor? Tom MoFarllng

REVIEWED FOR THE ATTORNEY GENERAL
By W. V, Geppert