Honorable.J...E%H
                Btid~er
Gemmissiomer;~'~General
                   Land
    Offtee:
          :~
Austin,Texas        .~Gppinioa..lvo;.J&r-~~~
                     lIei%'
                         -Whetheror 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
                         %tHxreatia.,the ape+xc
                          instamcos~sc..are
                                          .eutJ&mdT
                          hhreid .
                          .. .
    .
          *:
Dear Mr. EuddLici
              :




        ~e~~~~are~hhree..l~8i~~,invely~;~all~oi:ahich
                  thene.autl+oplQ
wererexecuted~uicle$          ef chapternl, Aqts.
42ad Leg;;-:1931
               ('Art;542lc,SocvlO,.V,e.~~)~..
                                            The pertl-
aemt royaJt$proyZa&oraof.the.statute'-is
                                       as rfo~~~wsr~
 __ ..:~~!'!Eh&ar&sfaoluded:.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
                                     pro-'
    dactiaa:ofotl, ec%he value of the &me,.-~
    that may.-bk,pFqelaced
                        and saved*aad tietless
    than.oae&gbth (l/8) of ,thegross 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 prodaeedamd sold off the area. . . ."
           The three leasesinvolved,reapectlvel~eonttinthe
 followingcovenaatsin regWd to the royaltyto be paid the
 Stater
                   '-
           "1. Oae-eahth of the gross production
      of gas,.orthe.valueof the s"e,. . .*
           3l& .Aea royalty&I residuegas,.one-.
      eQhth.of thenvalue of the'groea'produotien,
      sold or aeed off the prezalees.The vtilueof
      the'resLduegas te.be based upoh the highest.~
      prlae-paid.8~ .offeredfor residuegas ia.the
      genetil.are+'6r.,that'partwhich accruq to the
      lees~p,.phl~ev.er~.is~thegreater."        I   :
           -*3.1.             any gas Sacludiug ~,' '.
               'A8~-roytiity'oii
     reabdae'.g~s;;-r~ld.or.arred
                                by thg lessee for
     any,p~eeei'onCislxth.~..thevalue of suah
     gas--4M:be;seld or.wed, but in ne event shall
      the royalty-bebaq+d.upoaa price @f less..
      thaa .the;hLghest'market~prioepaid erro$fered'
*.   for-gasia   the geaeral area cm that pqt qhloh
     .acoruesto~.t+:prod~~er,  whicheveris‘the
     gzz,;-k     ,i-ti,+~rovQJed,.hewever, lessee'
                t befoM any:gaacoata%aingltclaLd/-.
     hgd~oarbens,,.Zc$looverable$lpcomDierol;al~q~nti-
      tlea~la'sold~ez+qd,.it wLl1 be PUB threugh      2.
     'anadequateMl aadgas 8eparator.W the end
      that all.-llqraid
                      hydrooarboaereaoverablef%?on-
      the gas by:sa&.meansail1 be Ceoevered."'. :
          .Byth+.pro$i&ae
              tb+.pro$i&a~ of the th& lease;a& &I~  &mwi
 abdve,.th~first.all~a'~~h~.:~~te.to  take poesesaloaof -.
dtti'fraetioakl mrt'of the.&ae~zmoduoed~la  kinQ 8~ to re-
 oclvel?em the ieissee~~%hevii16the-of. 4%e seioadaad
 third p%ovS.sS.owdo .-aot
                         prqvtdethat the:gtatemay%+
 coiveifs rey&liqia Had, but providethat t&e less&         :
 @MA1 &ax the Stat&.the,.oaeb:valne.  It ,mtast
                                              be mmembexyd,
 h*YZvCr,,that.tihelaagaageof the statatecoatels o'iierthe
 tidnsef the.leasee,..aaiLtWt  saoh leasea.eanne$.ther
 .diplialsh
          ner enlargethe'gtate'sroyalty'iatex-est  ae,.eet
 eat ip tk& &att$$e-; :' :
 '-t'c"-                             I

HonorableJ. Earl kidder, page 4 (WwI&



leasesumber two aqd threeas set .outabove,which set&~out
how the value 6f malet: gas ls'to be determiiied;
                                               follows
oloselythe method used @y the coartsin d;etenulning
                                                  such
value3 and do net cther@;e add anythingof slgnlflcance
                                                     ta
the 16ase oontraot.
          There are w oaseswhich have ever held that a    -
Limee must~oonstruot  facllitleefor transportingor ‘proceaa-
lag gas withoutbeing petitted to chargesomethingbauk
againstthe lessbr. he lessee owes a duty te the~lessorto
use dlllgenoeIn marketingthe productof the.gaswell, but
no courthaa ever held that.theSta$e or any other lessar
ls entitledto a free ride to the marketingpoint. Mr. George
SlefklaIn Rights of Lealror and LesseeWith ResPect'teSale
of Gas and %e Gas Royalty~Prevlslcna,4th Annual IlistStute
on Oil and Gas~aad%xat~on, SouthwesternLegal Foundation.
          In two simoe.rmlve
                           caseswhere the prLnolpa1Issue
was the method.tsbe used la determiningthe value-of r6Qalty
gas where the= was.110market at the wells, the:FLfthcf+
anlt held that.thepeeperreyaltyIn suoh,oasesflasone-
~lghth~of.the proce&ed.of,the&itual.sale,less a p&pep




                    3311& iwflniigco. 0. Ram111Dnilitig


at the well,..or$ttivalue after such gas had Wen proaesaed
'intoother.prodaots, the-aeu& held that the ro$altyewner;
was bound to a&oep%ypafmetit.eutsf the'valfleof the g&&at
the well au&was lnot&&ltled to have It xeflnedintO ~geme
other tmamdlty. It is believedthis case indIaate 't@t
the oourtsin th$s State tlould~fo&Xew the *well head.ii&l.tblng
pointarule ln'the federaleases hetiin~al*ed na%33s~%he
contra& oleaTljshoweda ocsmtrary   Intent el..&heprt$esi
         "Xii-tl&efore appoazs.,thaithe'State~mayl&ally
be clqsrged~~&sp&i zata'shar6Of t*uapertatloi costs~~f3om
the well head wh$ehts the pi$olugpoint fsr.valaeef
rOgalty'ga@, $o.that:polntwhere tptlq to the gaa passes
to bhe pnrohaa&r.'Thi~.&eai&&~& wheti the.valueof the
gloss produotlonof gas-lacomputedfrom a'prlckpa+d for
sucti gas at a $cin$ nct:at the welJ,.thenIn arrlving'at
$he:reyalty, td~be.p$d the State, a ??eaSonab;e,.?Wrge,m&y        ..
be zkiesrkdfor the‘use:ofnecessaryplpelltied           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 comnierclalq~~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 &%lqotpim~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     reqtirlngthe les,g+to build trans-
poHlng and prodessleg&q~lpmetlt          l~~marl&t%ig'gBb, we are
anaBlete.liiy   down @yg‘eneral.-Puleti.for      assessingsuch ..
ehatig+.againat   th+.State;irndaaeh.)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   properlydetermined
~'45~~ Sta$~'Audlkok




            tinder .&l.le&& executedby the
         Ge~tiralLaud Gffiae@der th6 authority'~
         of.,Cwpter271, Aetts.42nd~izeg.,
                                        1931;.
         ihere'thevalue~oftialts'.gaaIs com-
         puted cu the'basi8efyg p-i.&aSeprice. -
   '.   .,paldfor sriahgas.aiterlt.hasbeen trans-
      A. portedglwn~thewell.site,the State53
         lesseemay leg(rlly~.deduot
                                  fron,theroyalty
         paymentsfor'costbf~transpktatlanand
         processingbetweenthe well head and the
         purchasing'pointwhen these costs.are   -
        :"computed.aoetirdlng
                           to standardand accept-
         able accountingprlriclples.
                                   Yours very truly,


                                   wII3, WILSON
                                   Attorney   Generalof Texas
RonorableJ. 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               ..:
