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A October 20.. 1,954~”
Hon. Robert.S;,.daivert opinion No. s- 144
Comptroller of Public Accounts,. ,.,
Capitol Station ., Re: Construction of Article 7047b. V.C.S.
Austin, Texas : (the gas.production tax) since its
amendment by Acts 1954;.53rd Leg.,
Dear Mr. Calvert: 1st C. S., p. 3. ch. 2, Artfcle 1.
Your letter requesting our opinion relative to the captioned
matter reads, in part, as follows:
.Y
Sub-Section 3 of Section 1 (1) of Article 7047b, V.C.S.
as amended effective September 1, 1954, reads as follows:
“~‘AAIIcondensate recovered from gas r&all be .
taxed at the same rate as oil and shall beg
valued for. the purpose of computing the tax
due thereon at the prevailing market price for
condensate in the general area where the same
is recovered. The term “condensate” shall
include all liquid hydrocarbons that are or can
be recovered from ga,s by means of a separator
but shall not include any liquid hydrocarbons
which can only be.recovered from gas by re-
frigeratfon or absorptionand separated by a
fractionating process,;
“‘where additional liquid hydrocarbons other ..
than .c.ondensate are recovered from gas the
taxable value .of such additional liquid hydro-
carbons. shall~ be determined by ~deducting from
the total receipts of the producer for all liquid
hydrocarbons recovered from his gas the tax-
able.value assigned to the condensate and the
applicable rate set forth in ~sub-section (1) of
this Section 1 (l), shall be applied to, the dfffer-
ence to determine the tax due hereunder 01%
such additional~ liquid hydrocarbons.’
I.
. . .
“A number of questions have arisen in connection with
the amendment which I submit for your opinion.
Hon. Robert S. Calvert, page 2 (S-144)
Question No. 1
“Substantial quantities of gas are sold by the
producer to the purchaser under contracts provid-
ing that the produce~r receives payment for his gas
based on a percentage of the liquids extracted by a
plant, plus all or some portion of the value of the
residue gas sold. Where the producer sells his gas
on this basis, is he entitled under the law as amended,
to calculate the quantity of condensate that could have
been recovered by a separator and pay tax on such
condensate at the oil rate even though his contract
: does not refer to the sale of condensate?
.a
. . .
Question No. 2
“If the producer is entitled to determine the
amount .of condensate that could have been recovered
by a separator should the tax be paid at the oil rate,
based eon ‘100% of the prevailing area price for con-
densate, or should he pay the tax at the oil rate based
on the percentage. of products mentioned in his contract
with the purchaser ? *
Question No. 3.
“It is my understanding that when condensate is
recovered by.separators and run to lease frrirba that
some of the light.ends are lost. These ,light ends are
captured where the full gas stream is processed through
a processing plant. In those cases where the producer
is entitled to pay tax at the oil rate on the condensate
which could have been recoveied through a separator,
shonld the tax be based on the greatest volume,of.con-
densate pet‘the test, or should it be based on the
quantity of condensate that would have normaily been
recovered through a separator and run to lease tanks?
“The third paragraph of Sub-section ‘c’ of Section
1 (1) of Article 7047b, V.C.S. reads in part as follows:
“‘Provided. however, that the amount of tax.
on sweet and sour gas shall never .be less
than 121/1500 of One Cent (l#) per thousand
(1000) cubic feet.’
Hon. Robert S. Calvert, page 3 (S-144)
“Prior to the September 1, 1954 amendment
this part of the law read asfollows: : ”
“‘Provided.that the amount of such tax on
sweet and sour natural gas shall never be
,less than 12l/J500 of Qne Cent (I{) per
,thousand (1000) cubic feet.‘”
Question No. 4
YSub-section (2) of Section 1 (1) of Article 7047b,
V.C.S. provides that where gas is ~processed for its
liquid hydrocarbon content and the residue gas returned
by cycling methods to a gas producing formation that
the taxable value of ~such gas shall be 3/5ths of the gross
value of all liquids extracted, separated and saved from
such gas, such value to be determined ‘upon separation
and extraction and prior tomabsorption, refining or
processing such hydrocarbons.
“Please advise me whether or not Sub-section (3)
applies to that part of Sub-section (2) relating to cycled
gas, if so, is the tax to be paid at the oil rate on the
condensate that cqhld have been recovered,~ based on
100% of the area price, or is the tax to apply on 3/5ths
of the area price for condensate?”
Question No. 5
“Please advise me if the omission of the word
‘Natural’ in the amended law means that the minimum
value will apply to casinghead gas as well as natural
gas.”
For clarity, we have numbered your questions from 1 to 5.
Subsection 3 of Section 1 (1) of Article 7047b, V,C.S.. before
its amendment by the 53rd Legislatur~e, read as follows:
“All liquid hydrocarbons that are recove,red from
gas by means of a separator or by other non-mechanical
methods, incidental to the production of said gas,~ shall
be taxed at the same rate as oil.” (1953 amendment)
As amended, said subsection 3 now reads as quoted on Page 1
of this opinion.
Condensate can be recovered from gas (,that is, separated
from the gas) by a separator, which is a non-mechanical process, and
Hon. Robert S. Calvert, page 4 (S-144)
by processing plants (including cycling plants), which are mechanical
processes. Separators can be installed at the well and the condensate
recovered therein and run into ,lease tanks and sold as crude oil. Such
a recovery in our opinion would be a recovery incidental to the produc-
tion of the gas. However, if the condensate is not separated upon the
lease by a separator;but is run to a processing plant, which is located
at various distances from the lease and there separated, along with the
other liquefiable hydrocarbons, such recovery of the condensate could
be construed to be a recovery incidental to the processing of the gas and
not to the production thereof. (See Att’y Gen. Opinion No. V-879). By
the amendment, it is evident to us that the Legislature intended in all
events where the condensate was actually separated from the gas that
the condensate value should only be taxed at the lower oil rate. Of course
if condensate is never separated from the stream of wet gas, the tax upon
the market value of the wet gas will be computed at the gas rate.
Your Question No. 1 is, therefore, answered in the affirmative.
You will note that Subsection 3 of Se&ion 1 ,(l) of Article
7047b, V.C.S., as amended by the 53rd Legislature, states that “all con-
densate recovered from gas shall be taxed at the same rate as or
Your Question No. 2 is answered as follows:
The oil irate should be applied to 100% of the market value of
the condensate.recovered from the -gas.
We will now consider your question which we have designa,ted
No. 3.
As provided in Section 1 (1) of the statute, the tax is levied
upon gas that is produced and saved. If the condensate is recovered by
a separator, the light ends youired to are not saved in that they
evaporate into-the atmosphere. The tax should be calculated only upon
the market value of the saved condensate. If the condensate is recovered
fn a processing plant these light ends are saved, that~ is, they are not
lost by evaporation. In such event the tax should be based upon the actual
volume of the condensate, including the light ends, as reflected by the
testing apparatus.
We will now consider your Question No. 4.
Subsection’(Z) ‘of Section 1 (1) of Article 7047b, V.C.S., pro-
vides, in part,,as follows:
Y
. . . provided that notwithstanding any other
provision herein to the contrary, where gas is pro-
cessed for its liquid hydrocarbon content and the
residue gas is returned by cycling methods, as dis-
tinguished from repressuring or pressure main-
tenance methods, to some gas producing formation,
the taxable vaIue of such gas shall be three-fifths
Hon. Robert S. Calvert, page 5 (S-144)
(3/5) of the gross value of all liquids extracted,
separated and saved from such gas. such value to be
determined upon separation and extraction and prior
to absorption, refining or processing of such hydro-
carbons and the quantity of the products shall be
measured by the total yield of the pr~ocessing plant
from such gas.”
Although the quoted portion of subsection (2) states that “the
taxable value of s-as shall be three-fifths (3/5) of the’gross value
of all liquids extracted7 _ . ” it is clear to’us that only the extracted
liquids are taxed, in that the residue gas is returned to some gas
producing formation and is not saved within. the meaning of this taxing
statute. In cycling operations the same gas may be reproduced numerous
times. The residue gas is practically dry when re-injected into the
formation and will upon its reproduction return as wet gas, that is, gas
that contails liquefiable hydrocarbons. If the statute in fact taxes the
gasas di;tiriguish&d from the liquefiable hydr.ocarbons, then upon a re-
production of this residue. gas which returns laden with liquefiable hydro-
carbons, the gas having already been taxed.: the liquefiable hydrocarbons
recovered from the reproduction of the gas would escape taxation. The
Legislature could not have intended such an absurd result. In cycling
opetations.condensate is recovered froUntitled Texas Attorney General Opinion
Combined Opinion