Honorable

.J...E%H

Btid~er Gemmissiomer;~'~General Land Offtee: :~ Austin,

Texas .~Gppinioa..lvo;.J&r-~~~

lIei%' -Whether

or io&'th~~xiimt ~ef.tranap~i& gas:obt ~Itaiae&from~.s~s

leases an@. be legall~.dedu+ed from t$e St&e's reyalty %tHxreat

ia.,the ape+xc instamcos

~sc..are .eutJ&md

T hhreid

.

. . .

. * : Dear Mr. EuddLici

:

~e~~~~are~hhree..l~8i~~,invely~;~all~oi:ahich wererexecuted~uicle$ thene.autl+oplQ

ef chapter

nl, Aqts. 42adLeg;;-:1931

('Art; 542lc,SocvlO,.V,e.~~)~.. The pertlaemt royaJt$

proyZa&ora

of.the.statute'-is

as rfo~~~wsr~

__ .. :~~!'!Eh&ar&s

faoluded:.i&em&

ch+li.be

.. leased.;iom.a

.coasf~e~at~o:en;;,ill.~adqitiata $0~. the..das~.~e~t-.bld,tlie~for~::ot-.aot.Ieaa. tha~rorieieigh~a~~~~~.:of.t~e~grosc p-' dactiaa:of

otl, ec%he value of the &me,.-~ thatmay.-bk,pFqelaced an saved*

aad tiet

less than.oae&gbth (l/8)of ,the grosspro&mtiea‘-; y? c <~ .F Hensr&e.J. Earl Rudder; page 2 (WW-1%)

of gas or the value.of %he same . . . that may be prodaeed

amd sold off the area. . . ." The three leases

involved,

reapectlvel~

eonttin the following

covenaats

in regWd to the royaltyto be paid the Stater '-

"1. Oae-eahth of the grossproduction of gas,.or

the.value

of the s"e,.

. .* 3l& .Ae

a royalty

&I residue

gas,. one-. eQhth.of then

value of the'groea

'produotien, sold or aeed off the prezalees. The vtilue

of the'resLdue

gas te.bebased upoh the highest .~ prlae-paid.

8~ .offered

for residue

gas ia.the genetil.

are+'6r.,that'part

which accruq to the lees~p,.phl~ev.er~.is~the greater." I -*3.1. 'A8~-roytiity'oii

any gas Sacludiug : reabdae'.g~s;;-r~ld.or.arred by thg lessee for ~,' '.
any, p~eeei'onCislxth.~..the value of suah gas--4M:be;seld

or.wed, but in ne event shall the royalty-be

baq+d.upoa

a price @f less.. thaa .the;hLghest'market~prioe paid err

o$fered' *. for-gasia the geaeral area cm that pqt qhloh .acorues

to~.t+:prod~~er,

whichever

is‘ the gzz,;-k ,i-t

i,+~rovQJed,.hewever, lessee ' t befoM any:gaacoata%aingltclaLd /-. hgd~oarbens,,.Zc$looverable $lpcomDierol;al~q~ntitlea~la'sold

~ez+qd,.it wLl1 be PUB threugh 2. 'an adequate

Ml aadgas 8eparator.W the end that all.-llqraid

hydrooarboae

reaoverable

f%?onthe gas by:sa&.meansail1 be Ceoevered."'. :

tb+.pro$i&a~ mwi .Byth+.pro$i&ae of the th& lease;a& &I~ abdve, .th~first.all~a'~~h~.:~~te.to take poesesaloa

of -. .th~first.all~a'~~h~.:~~te.to poesesaloa dtti'fraetioakl

mrt'of the.&ae

~zmoduoed~la

kinQ 8~ to redtti'fraetioakl the.&ae ~zmoduoed~la oclvel?em the ieissee~~%he vii16the-of. 4%e seioad aad thirdp%ovS.sS.ow

do .-aot prqvtdethat the:gtate may%+ coive ifs rey&liqia Had, but providethat t&e less& : @MA1 &ax the Stat&.the,.oaeb:valne. It ,mtast

be mmembexyd, h*YZvCr,

,that.tihe

laagaageof the statatecoatelso'iierthe tidnsef the.leasee,..aaiLtWt saoh leasea.ean

ne$.ther .diplialsh

ner enlargethe'gtate's royalty 'iatex-est

ae,.eet eat ip tk& &att$$e-; :' :**'-t'c"- I** 

Honorable

J. Earl **kidder,** page 4 (WwI&

leases umber two aqd threeas set .out above,which set&~

out how the value 6f malet: gas ls'tobe determiiied; follows olosely the method used @y the coarts in d;etenulning

such value3 and do net cther@;e add anything of slgnlflcance

ta the 16ase oontraot.

There are w oases

which have ever held that a - Limee must~oonstruot facllitlee

for transporting

or ‘proceaalag gas without

beingpetitted to chargesomething bauk against

the lessbr. he lesseeowes a duty te the~lessor to use dlllgenoe

In marketing

the productof the.gas well, but no court

haa ever held that.the Sta$e or any other lessar ls entitled

to a free ride to the marketing point. Mr. George Slefkla

In Rights of Lealror and Lessee With ResPect'te

Sale of Gas and %e Gas Royalty ~Prevlslcna,

4th Annual IlistStute on Oil and Gas~aad%xat~on, Southwestern Legal Foundation.
In two simoe.rmlve

cases where the prLnolpa1 Issue was the method.ts

be used la determining the value-of r6Qalty gas where the= was.110 market at the wells, the:FLfth cf+ anltheld that.the

peeperreyaltyIn suoh,oases flas one- ~lghth~of.the

proce&ed

.of,the &itual.sale,

less a p&pep

3311 & iwflniig

co. 0. Ram111Dnilitig

at the well,..or

$tti value after such gas had Wen proaesaed 'into other.prodaots,

the-aeu& held that the ro$altyewner; was bound to a&oep% ypafmetit.eut

sf the'valfle

of the g&&at the well au&was lnot &<led to have It xeflned intO ~geme other tmamdlty

. It is believed this case indIaate 't@t the oourtsin th$s State tlould~fo&Xew the *wellhead.ii&l.tblng pointa rule ln'the federaleaseshetiin~al*ed na%33s~%he contra& oleaTljshoweda ocsmtrary Intent el..&he

prt$esi "Xii-tl&efore appoazs.,thai the'State~may

l&ally be clqsrged~~&s

p&i zata'shar6

Of t*uapertatloi costs~~f3om the well head wh$ehts the pi$olug point fsr.valae

ef rOgalty'ga@,

$o.that:polnt

where tptlq to the gaa passesto bhe pnrohaa&r. 'Thi~.&eai&&~&wheti the.value of the glossproduotlon

of gas-lacomputed

from a'prlck

pa+d for **sucti gas**  **at a**  $cin$ **nct:at the**  welJ,.then In arrlving'at $he:reyalty,

td~be .p$d the State,a ??eaSonab;e,.?Wrge,m&y

.. be zkiesrkd

**for** the‘use:of

necessary

plpelltied

and protieas-

. **Sag eqaipptent..**  It.lrj 0W fapth+r..o~$ilon t&@t,t&..pre, ti&ii-i~ Lease-B0.~ ‘ 3. ‘ clted **‘ almwi**  **‘ that**  'tiequ%kW"the lesae$. to lfemeve

hydrooarbons;

ii. ~prefi6n~ In comnierclal q~~tltlea, doed nst':change‘dr'affe,cti th& point **at** whiah **the ’**  **btate ’**  **.d ’**  nryrilt$..lntereat

18 &xnp@ted,.and

the lessee..&3

&l$led : te &%lqot

pim~the &yalty p+d'the State's'pz%"tiata~~&&l;e~ oi. thq~,$@@.~se

incarred:+.th~~

removal~il..suot!,,.hy~yocarbona..

.. Becauseof the wlde,poaalble varlatlona,'b~t~een"-'. dlfferent‘si$mations reqtirlng

the les,g+to build transpoHlng and prodessleg &q~lpmetlt

l~~marl&t%ig'gBb,

we are anaBlete.liiy

down @yg‘eneral.-Puleti.for assessing

such

.. ehatig+.againat

th+.State;

irnd aaeh.)aharges

In eaoh lndl- ~dria~,C~e.m~at~-be..dete~ned:.f~~.the,st~ndpolnt of aoo&pte&aecouhtliig prl~ciples,.,t,o~'be

properly

determined ~'45~~ Sta$~'Audlkok

tinder .&l.le&& executed by the Ge~tiral

Laud Gffiae

@der th6 authority '~ of.,Cwpter

271, Aetts.42nd~izeg., 1931;. ihere'the

value ~of tialts'.gaa

Is computed cu the'basi8

efyg p-i.&aSe

price. - '. .,pald

for sriah

gas.aiterlt.has

been transA. portedglwn~the well.site,

the State53 lessee may leg(rlly~.deduot

fron,the

royalty payments

for'cost

bf~transpktatlan

and processing

between

the well head and the purchasing

'point when these costs .are - :"computed.aoetirdlng to standard

and acceptable accounting

prlriclples.
Yours very truly,

wII3, WILSON **Attorney** Generalof TexasRonorable J. Earl Rudder,

page 6 (WI?-196.)

APPRCvmx
OPINIOI?C~TEE H. Grady Chandler,

Chairman '. '. Larry Jones Joe Rollins MiltonRichardson paEi&ogOR THE ATT&m

: Geo. P, BlackbUrn ..: