.. .
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, Forty-
seventh 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 fur-
nishing 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 serv-
ices performed in wells which are being drilled for oil and gas,
which ultimately proved dry and non-productive, would be sub-
ject 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 hol-
low 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 sur-
face in the form of a graph all its readings, the temperature of
the entirelength 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 differ-
entiation 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; loca-
tion of parted casing; and, locatri.or, of fikh (by “fish’ i,s meant the ob-
ject 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 elec-
tricalconductivi~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 cement-
ing 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 exe-
cuted under oath on a form prescribed and furnished by the Comp-
troller. ”
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, ac-
cording 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 diffi-
culties 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 pro-
duces oil, and that the dri,lling of a well seeking the diacov-
very 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 or-
dinary 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 opera-
tions. 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 Pro-
duction Practice,” Part I, by F. B. Plummer, 1939, Section 24, as follows:
“Purpose of Survey: Drill holes are surveyed for the fol-
lowing 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 temp-
erature per unit of depth. 5. Electrical conductivity and resistiv-
ity of the strata in the hole in order to distinguish and locate high-
ly electrical resistive layers such as dense marls, dense lime-
stones, coal beds, etc., an d distinguish these from electrical po-
tential 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 OCRthe 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 wa-
ter. 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 immediate-
ly 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 Sur-
veying 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 ‘temp-
erature 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 determina-
tion” 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 accurate-
ly and practically measured . . .
‘In the last few years an electrical-resistance thermom-
eter has been devolved which responds to temperature varia-
tions 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 tempera-
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, 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 determina-
tion” 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 de-
termination.” 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” de-
scribed by you is a survey within the meaning of the statute and is therefore a tax-
able 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 direc-
tion 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