. . . 

Honorable George H. Sheppard 

Comptroller of Public Accounts 

Austin, Texas 

Dear Sir: Opinion No. O-3698 

Re: Construction of Article 16, 

House Bill No. 8, Fortyseventh Legislature, with 

reference to whether or not 

services performed in a “dry 

hole’” are subject to the tax, 

and whether or not certain 

particular’services are taxable. 

Th.is is in answer to your request for our opinion in regard to Article 16, 

House l3ill No. 8, Forty-seventh Legislature, which imposes a tax 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 in wells 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 to this tax. Please tell me whether or not services performed in wells 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 of the earth’ a service known as 

‘side wall sampling.’ This is the use of a power propelled hollow bullet fastened to the gun by a wire so that when drawn to the 

surface it will yield a small core of the earth taken from the 

side of the uncased drill hole. 

Pl.ease tel.1 me whether or not the service would be subject to this tax? 

“3. There is performed in drilling for oil and gas, a service 

known as ‘water locating.’ This becomes necessary when a water 

bearing formation is drill.ed through or into, and the exact location 
Honorable George H. Sheppard, Page 2, O-3698 

of this formation must be known. In the mstrument used in this 

service the mud in a well is permi,tted to pass betbeen a light 

sourc,e and a selenium cell while the mstrument i,s lowered into 

the well. When it passes through clear water, the cell reacts 

and records the location of the 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 of a graph all its readings, the temperature of 

the entire length of the well is available. By deduction from the 

known cooling effects of flowing gas, the l,ess cooling effects of 

flowing oil, the heat generative effects of hardening 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 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? 

‘“5. There is performed F,n dril.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 of bottom plug; location of parted casing; and, locatri.or, of fikh (by “fish’ i,s meant the object or tool lost in the 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 bn drilling for oil and gas a s,ervice 

kn0w.n as ‘dip surveys.” This is the determination of the di.rection 

and roughly the extent of the dip or departure from the horizontal 

plane of the strata penetrated by the dri.ll by measuri.ng their electricalconductivi~ty. Please de],1 me whether or not this service would 

be subject to this tax? 
Honorable George H. Sheppard, Page 3, O-3698 

The a.nswers to your questions depend on the construction to be placed 

upon paragraph (b), Section 1, of said Article 16, House Bill No. 8, which 

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 compensation, with the use of any device, tools, 

instruments or equipment, electrical, mechanical, or otherwise, 

or by means of any chemical, electrical, or mechanical process 

when such service is performed in connection with (1) the cementing of the casing seat of any oil or gas well or (2) the shooting or 

acidizing the formations 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 of each month and pay to the 

Comptroller, at his office in Austin, Texas, an occupation tax 

equal to two and two-tenths (2.2) per cent of the 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 a tax 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 in connection with the cementing of the casing seat of any 

oil or gas well or the shooting or acidizing the formation of such wells or 

the surveying or testing of the sands or other formations of the earth of any 

such oil or gas wells;” and, according to the terms of the statute, the tax is 

measured by the gross amount received from said service furnished and is 

payable the 20th day of each month following the month said gross amount is 

received. It is a well known fact that sometimes it takes several months to 

drill an oil or gas well. Some of the services taxed under this statute, such 

as the cementing of the casing seat, are occasionally performed and the money 

paid for said services a month or two before oil or gas is discovered; and, according to the provisions of the statute, the taxes on said services measured 

by the payment of said money would be payable the 20th of the following month, 

even though oil or gas had not been discovered. We do not believe that it was 
Honorable George H. Sheppard, Page 4, O-3698 

intended by the Legislature that the concern who performed one of said 

services on a well in the process of being drilled is entitled to hold up 

the payment of the taxes until oil or gas shows in the well, but we feel 

that it was intended that said concern pay the taxes on the 20th of the 

month following the month in which the payment of the money was made~. 

Such is the .provision of the 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 of financial difficulties or other reasons the drilling of the well would be suspended for a 

year or more. The words of the statute do not i.ndicate that the payment 

of the taxes on said service performed would be suspended. We believe 

that when the Legislature referred to an “of.1 or gas well” in this statute 

it had 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” in construing a contract in the case of Br~own v. Homestake 

Exploration Corporation, 98 Mont. 305, 39 Pac. 2nd 168, in which the 

court said: 

“It is arg,ued that an ‘oil well” means a well which produces oil, and that the dri,lling of a well 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 a contract are to be understood In their ordinary and popular sense, unless used i.n a technical sense. 

Section 7335, Rev. Codes 1921,; Solberg v. Sunburst Oil & Gas 

Co., 73 Mont. 94, 235 p0 761. 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, a wel.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 a well being drilled for oi.1 or gas does not depend on whether oi,l or gas is 

ultimately discovered in sai.d well. 

The remainder of your questi,ons are concerned with that part of the 

statute whi,ch refers to ““surveyi.ngn or ‘“testing of the sands or other formations 

of the earth of . . 0 oil or gas wells.” The tax i,s on service furnished “when 

such service is performed in connection with* certain oil and gas well operations. Two, of those operations are (a) “surveying” and (b) “testing of the sands 
Honorable George H. Sheppard, Page 5, O-3698 

or other formations of the earth of . . . oil or gas wells,” The answer to your 

remaining questions depends on whether 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 of deviation. 3. Temperature of the bottom of the 

hole. 4. Temperature gradient; i.e., rate of increase of temperature per unit of depth. 5. Electrical conductivity and resistivity of the strata in the hole in order to distinguish and locate highly electrical resistive layers such as dense marls, dense limestones, coal beds, etc., an d distinguish these from electrical potential between mineral water bearing and non-mineral water 

bearing layers in order to establish the position in the hole of 

formation contacts and the content and character of the porous 

layers.” 

See also “Elements of the Petroleum Industry,” edited by E. DeGolyer, 1940, 

pages 161 to 180, and “Surveys of Well Wanderings Aid to Engineers,” by 

Alexander Anderson, Oil Weekly (Apr. 19, 1929). 

Testing of the sands or other formations of the earth of oil and 

gas wells is the taking of samples of the 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 of the well 

through a device attached to the drill stem. See “Use of Recording 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 a core or sample of soil 

or other formation is taken from the wall or the bottom of the well by a special 

coring device and removed to the surface, and then analyzed as explained in 

“Elements of Petroleum Industry,” pages 186 and 187,*, as follows: 

“* * * Upon removal, the core is laid out on a flat surface 

in the same position it held in the core barrel, so that the 

amount of recovery and formation depths can be determined. 
Honorable George H. Sheppard, Page 6, O-3698 

13y visual examination, the geologist then makes a detailed 

description of the core. Sand cores are further tested by 

taste or smell to determine the presence of oil, gas or water. If the core shows oil, a afield saturation test with ether 

is usually made to determine the perc.entage by volume of 

oil present in the 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 of porosity, permeability, percentage 

of connate water and oil saturation, the cores are immediately coated in paraffin or sealed in a container upon removal 

from the core barrel and shipped to the laboratory.” 

We will not take up your second question, which concerns “side 

wall sampling.” This is clearly a modern method for securing samples for 

“testing the sands or other formations of the earth of . D a oil or gas wells,” 

which is one of the taxable operations. Any service done ‘in connection with” 

one of the taxable operations is a taxable servi.ce. Our answer to your second 

question is that the service of taking cores of earth 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 a taxable service. 

We will now take up your third questton, which concerns ‘water 

locating.” It is sometimes highly important that the driller of a well 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 * in the written articles by experts 

on this subject. In an article entitled *Photoelectri.c Cell. is Appli.ed in Locating 

Water Intrusions,” by H. Ciuyod (Chief Engineer of the Schlumberger Well Surveying Corporation), in the Oil 81 Gas Journal (June 10, 1937), the water locating 

method you ask about is described, and in explaining the actual example of the 

use of said method the author in that 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 in Making Well Repairs,“, by C. R. 

Dale and H. Cuyod, Oil & Gas Journal (November 18, 1937). Our answer to your 

third questi,on is that the service of ‘water locating’” by the means you ask about 

is a survey within the meaning of the statute and is therefore a taxable service. 
. ” 

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

We will now take up your 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 of well survey, 

See ‘Petroleum Production Practice,” Part I, supra. In a booklet entitled 

‘Schlumberger Auxiliary Services,” recently published by Schl~umberger Well 

Surveying Corporation, on page 2, is a discussion of “temperature determination” in wells, and the discussion is headed ‘Temperature Surveys” and reads 

in part as follows: 

/ 

“It has long been realized that the study of temperature 

in a drill hole could be of great valw if it could 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 of the insulated cable used for electrical 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 accomplished 

in several hundred temperature surveys which, in conjunction with 

electrical logging, located the pay and differentiated between oil 

a.nd gas.” (Underscoring ours) 

Our answer to your fourth question is that the service of “temperature determination” in the manner you describe is a survey within the meaning of the statute and 

is therefore a taxable service. 

We will now take up your fifth question, which concerns ‘depth determination.” This operation consists of locating the depth in the well of certain 

objects or pqarts of the well equipment, and it clearly comes within the definition 

of a survey. See *Elements of the Petroleum Industry,” pages 161 to 171, supra. 

Our answer to your fifth question is that the service of “depth determination” described by you is a survey within the meaning of the statute and is therefore a taxable service. 
Honorable George H. Sheppard, Page SE> O-3698 

We will now take up your sixth question, which concerns “dip 

surveys.” This operation consists of ascertaining the angle, slope and direction of the formation traversed by the drill hol.e, and we believe that it clearly 

comes within the meaning of the word *surveyw in the statute. In fact the name 

by which the process is known, to-wit, ‘dip survey,* shows that it is a form of 

survey. In the booklet entitled ‘Schlumberger Auxiliary Services,” pages 8, 

z, this process is described and referred to in the 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 of the statute and is therefore a taxable 

service. 

We hope that the foregoing has answered 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