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. 

42ad Leg;;-: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,.-~ 

that may.-bk,pFqelaced ansaved* aad tiet less 

than.oae&gbth (l/8) of ,the gross pro&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 royalty to be paid the 

Stater '- 

"1. Oae-eahth of the gross production 

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.be based 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:gaa coata%aingltclaLd /-. 

hgd~oarbens,,.Zc$looverable $lp comDierol;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&.means ail1 be Ceoevered."'. : 

.By th+.pro$i&ae tb+.pro$i&a~ of the th& lease; a& &I~mwi 

abdve, .th~first.all~a'~~h~.:~~te.to .th~first.all~a'~~h~.:~~te.to take poesesaloa poesesaloa of -. 

dtti'fraetioakl dtti'fraetioakl mrt'of the.&ae the.&ae ~zmoduoed~la ~zmoduoed~la kinQ 8~ to reoclve l?em the ieissee~~%he vii16the-of. 4%e seioad aad 

third p%ovS.sS.ow do .-aot prqvtde that the:gtate may%+ 

coive ifs rey&liq ia Had, but provide that t&e less& : 

@MA1 &ax the Stat&.the,.oaeb:valne. It ,mtast be mmembexyd, 

h*YZvCr, ,that.tihe laagaageof the statate coatels o'iierthe 

tidnsef the.leasee,..aaiLtWt saoh leasea.ean ne$.ther 

.diplialsh ner enlarge the'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 three as set .out above, which set&~ out 

how the value 6f malet: gas ls'to be 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 being petitted to charge something bauk 

against the lessbr. he lessee owes a duty te the~lessor to 

use dlllgenoe In marketing the product of 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+ 

anlt held that.the peeper reyalty In suoh,oases flas one- 

~lghth~of.the proce&ed .of ,the &itual.sale, less a p&pep 

3311 & iwflniig co. 0. Ram111 Dnilitig 

at the well,..or $tti value after such gas had Wen proaesaed 

'into other.prodaots, the-aeu& held that the ro$alty ewner; 

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 oourts in th$s State tlould~fo&Xew the *well head.ii&l.tblng 

pointa rule ln'the federal eases hetiin~al*ed na%33s~%he 

contra& oleaTlj showed a 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 passes 
to bhe pnrohaa&r. 'Thi~.&eai&&~& wheti the.value of the 

gloss produotlon of gas-la computed 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.. 

. . 

Because of 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 

anaBle te.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. ported glwn~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 General of Texas 
Ronorable J. Earl Rudder, page 6 (WI?-196.) 

APPRCvmx 

OPINIOI?C~TEE 

H. Grady Chandler, Chairman '. '. 

Larry Jones 

Joe Rollins 

Milton Richardson 

paEi&ogOR THE ATT&m 

: 

Geo. P, BlackbUrn ..: