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Honorable George H. Sheppard Comptroller ofPublic Accounts Austin, Texas Dear Sir: Opinion No. O-3698 Re: Construction ofArticle 16, House Bill No. 8, Fortyseventh Legislature, with reference towhether or not services performed in a “dry hole’” are subject tothe tax, and whether or not certain particular’services are taxable. Th.is is inanswer toyour request for our opinion in regard toArticle 16, House l3ill No. 8,Forty-seventh Legislature, which imposes atax on the furnishing of certain oil well services. Your Gequest embodies several questions, and reads in part as follows:

“1. The question has been raised that services taxable under this Article would only be taxable inwells drilled which ultimately produced oil or gas, and that services performed in wells which proved dry or non-productive of oil or gas would not be subject tothis tax. Please tell me whether or not services performed inwells which are being drilled for oil and gas, which ultimately proved dry and non-productive, would be subject to this tax? ““2. There is performed in connection with the ‘testing of the sands or other formations ofthe earth’ a service known as

‘side wall sampling.’ This is the use ofa power propelled hollow bullet fastened tothe gun **by** awire so that when drawn to the surface itwill yield a small core ofthe earth taken from the side ofthe uncased drill hole. Pl.ease tel.1me whether or not the service would be subject tothis tax? “3. There is performed in drilling for oil and gas, a service known as ‘water locating.’ This becomes necessary when awater bearing formation is drill.ed through or into, and the exact locationHonorable George H. Sheppard, Page 2, O-3698

ofthis formation must be known. In the mstrument used in this service the mud in awell is permi,tted to pass betbeen a light sourc,e and a selenium cell while the mstrument i,slowered into the well. When itpasses through clear water, the cell reacts and records the location ofthe water intrusion. Please tell me whether or not this service would be subject to this tax? “4. There is performed in dri~lli.ng for oil and gas a service known as “temperature determin.ati.on.’ By lowering into the well an electrical resistance thermometer and recording at the surface in the form ofa graph all its readings, the temperature of the

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length ofthe well is available. By deduction from the known cooling effects offlowing gas, the l,ess cooling effects of flowing oil, the heat generative effects ofhardening cement, the following results are made possi.ble: “a. Location of oil and gas bearing formations and differentiation between the two. “b. Location of cement top behind the casing.

**“ C.**  Determination ofthe base ofthe gas to permit the casing to be set at the proper depth. “Please tell me whether or not this service would be subject tothis tax?

‘“5. There is performed F,ndril.l.i.ng for oi,l.and gas a service known as “depth determi.nati.on.” By measuring with cable of known length the following can be determined: depth ofbottom plug; location of parted casing; and, locatri.or, of fikh (by “fish’ i,smeant the object or tool lost inthe well. which must be “fished out.‘) Please tell me whether or not thi.s service wou1.d be subject to this tax? “6. There is performed bndrilling for oil and gas a s,ervice kn0w.n as ‘dip surveys.” This is the determination ofthe di.rection and roughly the extent ofthe dip or departure from the horizontal plane ofthe strata penetrated by the dri.ll by measuri.ng their electricalconductivi~ty. Please de],1me whether or not this service would be subject to this tax?Honorable George H. Sheppard, Page 3, O-3698

The a.nswers toyour questions depend onthe construction to be placed upon paragraph (b), Section 1, of said Article 

## 16,House Bill No. 8,which reads as follows:

“(b) Every person inthis State engaged inthe business of furnishing any service or performing any duty for others for a consideration or compensation, with the **use** ofany device, tools, instruments or equipment, electrical, mechanical, or otherwise, or by means ofany chemical, electrical, or mechanical process when such service is performed in connection with (1) the cementing ofthe casing seat of any oil or gas well or (2) the shooting or acidizing the formations of such wells or the surveying or testing ofthe sands or other formations ofthe earth in any such oil or gas wells, shall report onthe 20th of each month and pay to the Comptroller, at his office inAustin, Texas, an occupation tax equal totwo and two-tenths (2.2) per cent ofthe gross amount received from said service furnished or duty performed, during the calendar month next preceding. The said report shall be executed under oath on a form prescribed and furnished by the Comptroller. ”
We have heretofore held that ‘this is atax on service furnished or or duty performed” and that “the persons taxed are those persons ‘furnishing any service or performing any duty

.. .when such service is performed in connection with’” certain oil and gas well operations. (See Attorney General’s Opinion No. O-3627, dated June 27, 1941.)

Whether or not the tax accrues and becomes due does not depend on oil or gas being ultimately produced in the well. The services taxed are those “performed inconnection with the cementing ofthe casing seat ofany oil or gas well or the shooting or acidizing the formation of such wells or the surveying or testing ofthe sands or other formations ofthe earth of any such oil or gas wells;” and, according to the terms ofthe statute, the tax is measured by the gross amount received from said service furnished and is payable the 20th day ofeach month following the month said gross amount is received. It is awell known fact that sometimes ittakes several months to drill an oil or gas well. Some ofthe services taxed under this statute, such as the cementing ofthe casing seat, are occasionally performed and the money paid for said services a month or two before oil or gas is discovered; and, according tothe provisions ofthe statute, the taxes on said services measured by the payment of said money would be payable the 20th ofthe following month, even though oil or gas had not been discovered. We do not believe that itwasHonorable George H. Sheppard, Page 4, O-3698

intended by the Legislature that the concern who performed one of said services onawell inthe process ofbeing drilled is entitled to hold up the payment ofthe taxes until oil or gas shows in the well, but we feel that itwas intended that said concern pay the taxes onthe 20th ofthe month following the month inwhich the payment ofthe money was made~. Such is the .provision ofthe statute. There cou1.d very likely be instances where taxable services on an oil or gas well would be performed and paid for before oil or gas was discovered, and then because offinancial difficulties or other reasons the drilling ofthe well would be suspended for a year or more. The words ofthe statute do not i.ndicate that the payment ofthe taxes on said service performed would be suspended. We believe that when the Legislature referred to an “of.1or gas well” inthis statute ithad reference to any well which was being dr(lled for the purpose of discovering oil or gas. The court placed such a meaning on the term “oil well” inconstruing acontract inthe case of Br~own v.Homestake Exploration Corporation, 98Mont. 305, 39Pac. 2nd 168, inwhich the **court** said: “It is arg,ued that an ‘oil well” means awell which produces oil, and that the dri,lling of awell seeking the diacovvery of oil is not an oil,well; and hence the covenant is only operative after the discovery of 0%

“‘The words of acontract are to be understood Intheir ordinary and popular sense, unless used i.natechnical sense. Section 7335, Rev. Codes 1921,;Solberg v. Sunburst Oil &Gas Co., 73Mont. 94, 235 p0761. An “061. well.’ is defined as a

‘well or boring for petrol.eum.’ Funk &Wagnall’s Di.ct%onary.

‘A boring made for petroleum.’ Century DicUonary.

++ * * Perhaps, technicall,y, awel.1.is not an oil wel,l until the discovery of oil is therein made; but, in common parlance, any well which is drE.Lled for the purpose of discovering oi.1 (petroleum) is an oil well, aMhough no oil may be found therein.“”
**Our** answer to**your** first question is that the taxability of services performed on awell being drilled for oi.1or gas does not depend onwhether oi,l or gas is ultimately discovered in sai.d well.

The remainder ofyour questi,ons are concerned with that part ofthe **statute** whi,ch refers to ““surveyi.ngn or ‘“testing ofthe sands or other formations ofthe earth of

. .0oil or gas wells.” The tax i,son service furnished “when such service is performed in connection with* certain oil and gas well operations. Two, ofthose operations are (a) “surveying” and (b) “testing ofthe sandsHonorable George H. Sheppard, Page 5, O-3698

or other formations ofthe earth of

. . .oil or gas wells,” The answer toyour remaining questions depends onwhether or not the acts about which you ask constitute “surveying” or “testing” or are done in connection with “surveying” or “testing. ” Surveying of oil and gas wells is explained in “Petroleum Production Practice,” Part I, by F. B. Plummer, 1939, Section 24, as follows: “Purpose of**Survey:** Drill holes are surveyed for the following purposes: 1. To determine deviation from vertical. 2. Direction ofdeviation. 3. Temperature ofthe bottom ofthe hole. 4. Temperature gradient; i.e., rate of increase oftemperature per unit of depth. 5. Electrical conductivity and resistivity ofthe strata in the hole in order to distinguish and locate highly electrical resistive layers such as dense marls, dense limestones, coal beds, etc., anddistinguish these from electrical potential between mineral water bearing and non-mineral water bearing layers in order to establish the position inthe hole of formation contacts and the content and character ofthe porous layers.” See also “Elements ofthe Petroleum Industry,” edited by E. DeGolyer, 1940, pages 161 to 180, and **“ Surveys**  ofWell Wanderings Aid to Engineers,” by Alexander Anderson, Oil Weekly (Apr. 19, 1929). Testing of the sands or other formations ofthe earth of oil and gas wells is the taking of samples ofthe earth formations and fluid contents from the walls OCR

the bottom of the well and analyzing the same so as to ascertain the composition of said earth formations and fluid contents. See “Fundamentals of the Petroleum Industry,” by Dorsey Hagar, 1939, pages 226 to 231, and “Drilling Practices,” by Charles Cyrus, 1939, pages 182 to 195. One method is known as “drill-stem testing,” by which samples are taken from the bottom ofthe well through a device attached **to** the drill **stem.** See “Use ofRecording Pressure Gauges in Drill Stem Tests,” by R. S. Christie,.Oil and Gas Journal (June 18, 1936) Another method is known as “coring,” by which acore or sample of soil or other formation is taken from the wall or the bottom ofthe well by a special coring device and removed to the surface, and then analyzed as explained in “Elements ofPetroleum Industry,” pages 186and 187,*, as follows: “* * * Upon removal, the core is laid **out** on a flat surface in the same position itheld inthe core barrel, so that the amount of recovery and formation depths can be determined.Honorable George H. Sheppard, Page 6, O-3698

13yvisual examination, the geologist then makes adetailed description ofthe core. Sand cores are further tested by taste or smell to determine the presence of oil, gas or water. Ifthe core shows oil, aafield saturation test with ether is usually made to determine the perc.entage by volume of oil present inthe core. After the geologist has completed his field examination, 

### cores are usually sacked or boxed for shipment to a paleontological laboratory for analysis. For accurate determination ofporosity, permeability, percentage of connate water and oil saturation, the cores are immediately coated inparaffin or sealed ina container upon removal from the core barrel and shipped to the laboratory.” We will not take upyour second question, which concerns “side wall sampling.” This is clearly a modern method for securing samples for “testing the sands or other formations ofthe earth of

. Daoil or gas wells,” which is one ofthe taxable operations. Any service done ‘in connection with” one ofthe taxable operations is a taxable servi.ce. Our answer toyour second question is that the service oftaking cores ofearth from the wa1l.s of an oil or gas well by means of the device you describe for the purpose of examining and analyzing said cores is ataxable service. We will now take up**your** third questton, which concerns ‘water locating.” It is sometimes highly important that the driller ofawell locate at what levels water is coming into the wel.1.in order to shut off the water by the proper use of casing and cement. In our opinion the process by which the point where wate:r comes into the well is ascertained constitutes a survey. In fact such processes are referred to as “surveys * inthe written articles by experts onthis subject. In an article entitled *Photoelectri.c Cell. is Appli.ed in Locating Water Intrusions,” by **H.** Ciuyod (Chief Engineer ofthe Schlumberger Well **Sur** veying Corporation), inthe Oil 81Gas Journal (June 10, 1937), the water locating method you ask about is described, and in explaining the actual example ofthe **use** of said method the author inthat article used this language:

‘A water-flow **survey** was made and the water was found to be entering around the lead plug at 4,198 fe,et.” (Underscoring ours) See also “Locating Water **Source** is Initial Step inMaking Well Repairs,“, by C. R. Dale and H. Cuyod, Oil &Gas Journal (November 18, 1937). **Our** answer toyour third questi,on is that the service of ‘water locating’” by the means you ask about is a survey within the meaning ofthe statute and is therefore ataxable service.**”**

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Honorable George H. Sheppard, Page 7, O-3698

We will now take upyour fourth question, which concerns ‘temperature determination.” Ascertaining the temperature in the various parts of the well is clearly a form of survey, according to the definttions ofwell survey, See ‘Petroleum Production Practice,” Part I,supra. In abooklet entitled

‘Schlumberger Auxiliary Services,” recently published by Schl~umberger Well Surveying Corporation, on page 2, is a discussion 

### of“temperature determination” inwells, and the discussion is headed ‘Temperature Surveys” and reads inpart as follows: / “It has long been realized that the study oftemperature in a drill hole could be ofgreat valw if itcould be accurately and practically measured

. . .

‘In the last few years an electrical-resistance thermometer has been devolved which responds to temperature variations rapidly and records them within 0.2 degrees Fahrenheit of **accuracy.** This thermometer is lowered into the well at the end ofthe insulated cable used for electrical logging and all temperature readings are recorded atthe surface, inthe form of a continuous graph. *The most profitable purpose served by this type oftempera**ture** survey is the location of oil and gas bearing formations in limestone. In West Texas and Kansas this has been accomplished in several hundred temperature **surveys** which, inconjunction with electrical logging, located the pay and differentiated between oil a.ndgas.” (Underscoring ours) Our answer to**your** fourth question is that the service of “temperature determination” inthe manner you describe is a **survey** within the meaning ofthe **statute** and is therefore ataxable service. We will now take upyour fifth question, which concerns ‘depth determination.” This operation consists oflocating the depth inthe well of certain objects or pqarts ofthe well equipment, and itclearly comes within the definition of a survey. See *Elements ofthe Petroleum Industry,” pages 161 to 171, supra. Our answer toyour fifth question is that the service of “depth determination” described by you is a survey within the meaning ofthe statute and is therefore ataxable service.Honorable George H. Sheppard, Page SE> 

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We will now take upyour sixth question, which concerns “dip surveys.” This operation consists of ascertaining the angle, slope and direction ofthe formation traversed by the drill hol.e, and we believe that itclearly **comes** within the meaning ofthe word ***surveyw** in the **statute.** In fact the name by which the process is 

### known,to-wit, ‘dip survey,* shows that it is aform of survey. In the booklet entitled ‘Schlumberger Auxiliary Services,” pages 8, z, this process is described and referred to inthe heading as ‘surveys.” **Our** answer to **your** sixth question is that the service of *dip **surveys ”**  described by you is a survey within the meaning ofthe **statute** and is therefore a taxable service. We hope that the foregoing 

## hasanswered your six questtons. Yours very truly ATTORNEY GENERAL OF TEXAS

Cecil C. Rotsch Assistant

FIRST ASSISTANT ATTORNEY GENERAL CCR:EJ APPROVED OPINION COMMITTEE
**BY&~** Chairman