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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     fro<m gas,:and as stated above the
condensate     is being taxed and not the gas. Therefore,~ the oil rate will
apply and not the gas rate.      The taxable value of the condensate,         accord-
ing to the statute, shall be three-fifths       of the gross value of such conden-
sate.

             Article   7047b in Subdivision (5) of Section 2 thereof recognizes
a distinction between natural and casinghead gas. Prior to the amend-
ment by the 53rd Legislature,      the statute provided that.the amount of, tax
on sweet and sour natural gas shall never ‘be less than 121/1500       of one
cent (l$) per thousa00)           cubic feet.  The amendment omitted the
word natural.     Section 2 (S) of Article  7047b defines the term “sweet
gas ” to mean “all natural gas except sour gas and casinghead gas .*’
Section 2 (7) of this statute defines the term “sour gas” to mean “any
natural gas c~ontaining . . .”

            Since the definitions for the terms “sweet gas” and “sour gas”
 themselves   limit these terms to natural gas, the omission of the word
,“natural” does not subject casinghead gas to the minimum value, provided
 in Section 1: (1) of ,Article 7047b.

                                     SUMMARY

            In all instances  where condensate is separated from
       produced gas, 100% of the condensate value should be
       taxed at the oil rate,  If the condensate is never separated
Hon. Robert     S. Calvert,   page 6 (S-144)




       from the gas, the value      of the wet gas should be taxed
       at the gas rate.

            The tax on condensate is only levied upon the con-
       densate that is produced and saved.    If a portion of the
       condensate,  that is the light ends,is lost by evaporation,
       such condensate is not saved and is not taxable.

            In cycling operations,    only the extracted liquids are
       taxable and the residue gas which is returned to a gas
      formation    is not taxable.   The condensate recovered      is
      taxable at the oil rate;     The taxable value of condensate
      recovered     in cycling operations   is three-fifths of the
      gross value of such condensate.

           The omission of the word “natural” in the 1954
      amendment of Section 1 (1)~ of Article    7047b does not
      subject casinghead gas to the minimum value as set out
      in Section 1 (1) of Article 7047b. V.C.S.

WVG:hp                                         Yours   very   truly,

APPROVED:                                  JOHN BEN SHEPPERD
                                             Attorney General
Phillip ~Robinson
Reviewer

ldary K. Wall
Reviewer                                          W. V. Geppert
                                                       Assistant
Robert S. Trotti
First Assistant
