Case Information
*1 . - .
. . .-
The Attorney General of Texas December 31, 1982 MARK WHITE
Attorney General
Supreme P. 0. Box 12546 TX. 76711.2548 Austin. Telex Telecopier 9101674-1367 Court Buildmg [51214754266] General Land Office Stephen F. Austin Building Comr4issioner Austin, Texas 1700 North Congress 78701 Opinion No. MW-550 Re: provisions School lands dedicated Interpretation Funds to the Permanent and of leases Permanent or
University Fund 1607 Main St., Suite Dallas, TX. 752014709 [1400] Dear Mr. Armstrong:
214/742-6944
You have requested an opinion office regarding 4624 Alberta Ave.. Suile 9151533-3464 El Paso. TX. 799052793 [160] that the purchaser regard to the production of royalties lessee sells reimburse of that gas. the gas pursuant due for gas produced the lessee for any severance to a contract which provide: from state leases where tax paid ir :220 Dallas Ave., Suite 202 HOUS,O”, TX. 77002-6966 9-81 ,‘I provides: The current General Land Office lease form, “Revised Lease Fore
The Lessee agrees to pay... (B) Non-Processed gas: 606 Broadway. Suite 312 As a royalty on gas.. . part of the gross Lubbock, TX. 79401-3479 or the market value thereof. at 6061747-52?6 option the Lessor, such value to be based on
the highest market price paid or offered for gas of comparable quality in the general area where 4.109 N. Tenth. Suite B McAllen. TX. 785c1.1665 produced and when run. the price 5 I21362~4547 offered producer, whichever
greater.... 200 Main Plaza, Suite 400 The instant question arises only where the state has elected to takl San Antonio. TX. 762052797 5121225-4191 cash rather in kind. Although question
concerning the effect controls have been raised ant will be addressed, this opinion will initially address issues 01 An Equal Ooportunityl the assumption that prices are not governmentally established. Affirmative Action Employer
A hypothetical may help explicate the analysis these. issues Assume that “A” leases permanent school fund lands productive of ga at a one-fifth royalty. In relevant month “A” produces on, thousand mcf of gas. “A” has a contract with “B” for the sale of al gas produced at the price of $5.00 per mcf plus any severance tax pai, by “A” as a result of such production. *2 - -__ -I (MW-550)
A brief discussion of the Texas severance tax on gas is necessary Section of the prior to pursuing that hypothetical further.
Tax Code provides: “There imposed a tax on each producer of gas.” Section 201.052 further provides:
(a) The tax imposed by this chapter is at the rate of 7.5 percent market value of gas produced and saved in this state by the producer.
Sections 201.101 and 201.102 respectively provide:
The market value of gas its value at the mouth of the well from which is produced.
If gas is sold for cash only, the tax shall be computed on the producer’s gross cash receipts.
Payments from the purchaser of gas to a producer the purpose reimbursing the producer taxes due under chapter are not part of the gross cash receipts.
Section 201.001(5) defines owner. The state, however, has been held to be exempt from severance even though as a royalty owner it falls within the statutory definition of producer. Group Number 1 Oil Corporation v. Sheppard, 89 S.W.2d 1021 (Tex. Civ. App. - Austin 1935. writ ref’d). Under 201.051, the tax collection obligation imposed on the gas producer.
Returning to the above hypothetical. further assume that there has been no increase in severance tax since the execution between “A” and “B”. Cf. Attorney General Opinion H-176 (1973). Thus, we see the followingpayments made:
Price:
Total Production mcf Times Base Price x$5 mcf $5000 Total Base Price Total Base Price $5000 x.081 Times X Necessary to Yield $5/mcf Net of Severance Tax
Equals Severance Tax Due on Entire Production $ 405 Times Non-Exempt Producer’s Share of Production x.80 Equals Total Severance Tax Paid and Reimbursed S 324.00 Plus Total Base Price $5000.00 Equals Gross Price (NW-550)
State’s Royalty:
GLO Method:
Gross Price $5324.00 x.20 Times Royalty Percentage Equals Minimum Amount of Royalty
Producer’s Method:
Total Production 1000 mcf x.20 Times Royalty Share Equals State’s Share of Production mcf Times Base Price x$5 mcf Equals Minimum Amount of Royalty $1000 tinder either method of royalty calculation both the gross price and the severance tax amount remain the same.
Under the assumed facts, where the price is a negotiated one. “the gross price paid or offered to the producer” is $5.324.00 for one thousand mcf of gas. Thus, the state’s royalty of twenty percent the market value of the gross production is a minimum of $1.064.80, not $1.000.00. The royalty due may be higher than that if comparable sales dictate that result but it cannot be less.
Certain producers, in advocating the second royalty method noted above, have contended that it is inequitable to reach the foregoing conclusion because to do so results in the state receiving more for its portion of total production than the producer receives.
Under the approach advocated by those producers, both the state and the producer would be compensated at a rate of $5.00 per mcf net of tax. This result strikes those producers as the only just The result, however, that the state receives a lower result. Severance than the producer who is liable for severance tax. tax is a cost of doing business to which the state is not subject. Adopting a formula to protect producers from that expense no more justified than adopting one which takes into account, example, income tax liability.
The argument made by those producers seems premised on misapprehension the severance is paid on particular units of gas, like an ad valorem tax. It is not. It is a tax on the privilege of engaging in the business of producing gas in Texas which computed on the basis of the amount of gas produced.
The conclusion advocated by those producers does not, in any event, follow from the analysis which they make. If fractional part of production, is. the percentage of production reflected in is. as those producers advocate should be. segregated from
measuring royalties due the state is a higher the calculation advocated by (Mw-550) General Land Off ice. The result that analysis is that there are. one sale of 200 mcf of gas at $5.00 per two sales of gas:
in effect. mcf reflecting share, and one sale of 800 mcf of gas at Since the producer’s $5.405 per mcf, reflecting the producer’s share is a directly comparable sale under free market conditions, characterization of the transaction between “A” and “B” in that manner results in the state receiving 200 mcf times $5.405 per mcf or $1,081.00 rather than the $1,064.80 from the General Land That result, however. is artificial Office’s method of calculation.
since transaction is, fact, only one sale of gas. purchaser has agreed to pay and the producer baa agreed to accept for 1000 mcf of gas, not $1.000.00 for 200 mcf and $4.324.00 $5.324.00 for 800 mcf. state’s to be absent price controls,
Thus, calculated on the basis the entire to lessee for the production the state lease including tax reimbursement. Whether the existence of the Natural Gas severance Policy Act of 1978 (hereinafter NGPA). 15 U.S.C. section 3301 et seq., alters as to production covered by terms will be discussed. next.
The NGPA sets ceiling prices on initial sales of natural gas.
Title 15, section 3320 of the United States Code provides: a price the first sale of natural gas
(a) shall not be considered to exceed the maximum lawful price.. . if such first sale price exceeds the maximum lawful price to the extent necessary recover -- State Severance taxes to (1) attributable to the production of such natural gas borne by the seller....
Thus, one who has natural gas which has not previously been sold can sell that gas the applicable ceiling price plus any applicable taxes for which individual liable. The fact the Tax Code defines to owner and that the state, although nominally a producer where it owns interests, is exempt from severance does not make the state a seller within the meaning of the NGPA and. therefore, subject to the price limitations.
If we amend the foregoing hypothetical so that the gas produced by “A” is subject to the NGPA’s price ceiling and the base contract price of $5.00 per mcf of gas is the ceiling price, we have the same economic result between “A” and “8”. The royalty calculation issue.
however, requires additional analysis due to the supreme court’s holding in Exxon v. Middleton. 613 S.W.2d 240 (Tex. 1981).
stat”8 g=s under control relevant determination of market value for royalty purposes. (NW-550)
As noted above, the transaction between “A” and “B” can be characterized as, in effect, two sales: one of the state’s 200 mcf of gas, as to which no severance tax is due for the $5.00 ceiling price; and one of “A’s” 800 mcf of gas, as to vhich severance tax is due for the ceiling plus $.405 per mcf as severance tax If this characterization legitimate’ then the reimbursement. gas sold for $5.00 per mcf and the sale of ‘A’s” gas
$5.405 per mcf is not a comparable sale under the Middleton analysis.
From “B’ a” perspective, however’ transaction appears different.
‘B’ purchases 1000 mcf of gas for $5’324.00, or for $5.324 per mcf.
As noted above, the severance tax is an occupation tax not an ad valorem tax. The use in our hypothetical of 80% of production as a basis of calculating the severance tax due from “A” That calculation does not imply there are two sales of gas.
merely reflects an allocation of the tax liability from that The is necessary because activity. The tax statute defines to owner. NGPA does not purport to limit the amount of royalty which may be paid for gas produced.
The state owns a royalty interest. A royalty owner’s right receive payment of the money due upon production is a contractual right to a money judgment. Shell Oil Company v. State, 442 S.W.2d 457 (Tex. Civ. App. - Houston [14th Dist.] 1969, writ ref’d n.r.e.).
result in that case is not inconsistent with the taxability interest as an interest in real property under the ad valorem tax statutes.
We note that a federal district court in Oklahoma has construed section 3320 of the United States Code differently. See Hoover and Bracken Energies, Inc. v. United States Department ofthe Interior, No. 81-461-T (W.D. Okla., filed Nov. 18, 1981). However, ruling is not binding upon us, on appeal, and appears to be inconsistent with Mobil Oil Corporation v. Federal Power Commission, 463 F.2d 256 (D.C. Cir. 1972).
In summary, there is only one sale of 1000 mcf of gas and the is entitled, as royalty, to a minimum of 20% of paid by “8” and received by “A” in that sale. “A” is making, just as in the free market situation, one sale of gas $5.00 per mcf plus any severance taxes due.
The foregoing is to be distinguished from the result under the NGPA, 15 U.S.C. 3316(b), Intrastate Rollover Contracts.
Part (2)(A) of that subsection provides:
In case first sale under any any [intrastate] roll-over of natural gas... which constitutes a State government’s... natural production, share other w* *6 (MW-550) interests... in natural gas production...
maximum lawful price... shall be the maximum lawful price... under section 3312.
This constitutes an exception to a general rule under section 3316(b) which provides for a maximum price of $1.00 (adjusted for inflation) old contract price, whichever is higher, This price will generally be less intrastate rollover gas.
than that allowed for the natural gas constituting the state's royalty The effect of section 3316(b) the NGPA is to create tvo categories of gas, is. to work the kind of segregation hypothetical 100 mcf of gas which certain producers have advocated. fact terms of the NGPA do not alter law
regarding the obligations among the parties irrelevant. By its 3316 segregates, the purpose of determining very terms, price, the gas attributable to the state's interest from the remainder of the gas produced.
SUMMARY The state's on gas is calculated on the basis of the market value of the gas produced, but in no event less "the price offered to the producer." There is no basis law for the treatment of the sale as, in effect, two sales at different prices' one percentage of the gas equal to the state's percentage and one of the remainder the gas produced. The state is entitled to' at minimum, its royalty percentage of the total including any severance tax reimbursement received by the lessee/producer without regard to how that is calculated. MARK WHITE Attorney General of Texas JOHN W. FAINTER, JR.
First Assistant Attorney General
RICHARD E. GRAY III
Executive Assistant Attorney General
Prepared by Carl Glaze
Assistant Attorney General olw-550)
APPROVED:
OPINION COKMITTEE
Susan L. Garrison, Chairman
Jon Bible
Rick Gilpin
Carl Glaze
Patricia Hinojosa
Jim Moellinger