..   .




     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




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