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 ,of this,. off~lce ttiO:, qtieEtlon8 

presented in your ‘letter of ‘Febtiuatiy 20, .ig58. ,-For’s comprehensive statement of the problem presented ire deem It 

desirable to quote your oplnldn requeat in full, whl,ch 18 

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 varlotis Independent 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 conjunction with 

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 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:.lt owns 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,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 pipeline gas. 

"This aperatlon 18 covered-by Contracts which provides that a portion of the-separated liquids dnd' 

gas sold &s pipeline gas are 'sold by 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'.8 portion.' 

"Sun retains as "plant .operator's portion': 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'ed from 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 

Caslnghead 

Pipeline Gas 

9,304,319, MCF worth 716,430 

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 operator's portion', (which in 1956 amounted to approximately $2,165,120), described above, maintaining 

that It Is not subject to any property tax; Including 

ad valorem taxes. They argue that the 'plant operator'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 lntention of said officials to make such levy (applying 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 Stin 011 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 described 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 contracts 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 producers 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,contracts. 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 pqoceased (up to l/3 of proceeds) and up to 50s of net proceeds 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 cqntract 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 tlils processing ,oontqact 

Sun agree8 to process the gas, remove all liquid8 arid lmpurities and deliver the residue gas back to the producer. 

This contract further provides 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 delivered under the contract”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 proportion to their respective Interest. 
Hon. Prank P. 

Article 

property for 

Nye, Jr., page 5, Opinl-n No. 

7146, Verr,o:i's Civil Statutes, 

the purpose of taxation: This 

defines real 

is as follows: 

"seal property for the purpose of taxation, shall be 

construed to include the ?~and itself, 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 ,in any wise appertaining 

t,heretc, and. . ,. minerals. . . in and under the same." Gas 

Ian p1ar.e under 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'Dose of taxation. This has bec,ome weli established as the-law of this state in such cases 

3s Sheflield v. 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., 134 Tex. 179, 133 S.W.(2d) 112. If therefore, "plant operator's portion" @ the gas is gas In place 

It Is taxable to the operator, otti&wlse not. 

I,n view 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 

r,,j.jc.atle interest must 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 forbidden by 

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 tax purPOQC!S* To put a value on the gas In place and then attempt 

t,o add 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, within 
Hon. Frank R. Nye, Jr., page 6, Opinion No. WW-431 

itself, constitute a double assessment and would be unconstitutional 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 processing plant. Reverting to the contr~act between Sun, the processor, 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~ocessor may 

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 processing. 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 obligated 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 .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 

sure psi 

Sun hkes delivery Into its gathering lines at the 

point near the well and transports it under low 

to its processing plant. The contract further 

a junction charge for transporting the gas. The 

be compressed to from 800 to 1.,000 pounds of presin 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 contracted. 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 produced 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 casinghead 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 , ,such residue.gas being 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/8 of said 

25% The royalty owners brought suit against the lessee 

and the processor for l/8 of the, totals value ,of then gasoline 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.ed Its obligation by selling the 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:o manufacture ,the gasoline 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 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 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 performance of the Gordon covenant in so far as 881118 relates 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 beconte chargeable 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?iw gas 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 gasoline 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 ,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 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 processing. 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's portion" and the products derived from 

~Sun bjr processing 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 '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- 

,severed and 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