Is Texas sales or use tax due on a microbial enhanced oil recovery (MEOR) process, in which bacteria are injected into a crude oil reservoir to produce organic by-products that improve oil mobility?

Plain-English summary

A company asked the Comptroller's office whether its microbial enhanced oil recovery (MEOR) process is taxable. In the MEOR process, bacteria are injected into an oil reservoir, where they migrate deep into the formation and reside with residual, immobile crude oil trapped in pore spaces. The microbes metabolize a small percentage of that immobile crude oil, producing organic by-products — solvents, surfactants, acids, and carbon dioxide — plus new microbial cells. These by-products improve the mobility of the residual crude oil: surfactants reduce interfacial tension between oil and rock/water surfaces, solvents reduce oil viscosity and dissolve hydrocarbons clogging pore throats, acids dissolve carbonate deposits and etch rock surfaces (while the carbon dioxide produced in that reaction further reduces oil viscosity), and the new microbial cells physically displace oil by growing between the oil and the rock/water surface.

The Comptroller ruled that this process is not a taxable service under Rule 3.324. The MEOR process does not involve repairing, remodeling, maintaining, or restoring tangible personal property, so it does not fall under that taxable-services rule. It also is not Real Property Repair or Remodeling or a Real Property Service. Because the process doesn't fit any of the taxable service categories, no Texas sales or use tax is due on it.

What this means for you

Oil and gas operators and enhanced-recovery service providers

If your company performs or purchases a microbial enhanced oil recovery process — injecting bacteria into a reservoir so that the microbes' metabolic by-products improve the mobility of residual crude oil — this letter indicates the Comptroller does not treat that process as a taxable repair, remodeling, maintenance, or restoration service on tangible personal property, nor as a real property repair/remodeling or real property service. As with any letter ruling, the conclusion is tied to the specific facts described; if your process differs materially, the tax treatment could differ too.

Accountants and tax professionals

This letter shows the Comptroller's reasoning for classifying a specialized oilfield service (MEOR) as outside the scope of Rule 3.324 (repair, remodeling, maintenance, and restoration of tangible personal property) and outside real property repair/remodeling and real property services. It's a useful reference point when analyzing whether similar enhanced-recovery or reservoir-treatment processes performed by microbes, chemicals, or other injected agents might likewise fall outside these taxable service categories.

Common questions

Q: Is the microbial enhanced oil recovery (MEOR) process subject to Texas sales or use tax?
A: No. The Comptroller ruled that the MEOR process described in this letter is not taxable because it does not involve repairing, remodeling, maintaining, or restoring tangible personal property, and it is not a real property repair/remodeling or real property service.

Q: What is the MEOR process, as described in this letter?
A: Bacteria are injected into a crude oil reservoir, migrate into the formation, and metabolize a small percentage of the residual, immobile crude oil there, producing organic by-products (solvents, surfactants, acids, carbon dioxide) and new microbial cells that together improve the mobility of the remaining crude oil.

Q: Does this ruling mean all oilfield services are non-taxable?
A: No. This letter addresses only the specific MEOR process described, based on the facts presented. The Comptroller noted the opinion is based on the facts presented and may change if there are additional or different facts.

Citations and references

No specific statutes are cited in the text of this letter, though it references Comptroller Rule 3.324 (governing taxable repair, remodeling, maintenance, and restoration services) and the concepts of Real Property Repair/Remodeling and Real Property Services.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9412L1329B08

Original ruling text

December 30, 1994

Dear ***:

Thank you for your letter to Mr. John Bolin regarding the taxability of Company A's
microbial enhanced recovery (MEOR) process.

The MEOR process utilizes an oil release mechanism which may be summarized as
follows: The Company A MEOR bacteria are injected into the target reservoir. They
then migrate deep into the reservoir and reside with the residual, immobile
crude oil with is trapped in pore spaces. The microbes metabolize a very small
percentage of the immobile crude oil to produce organic, biochemical
by-products like solvents, surfactants, acids, and carbon dioxide. Finally, new
microbial cells are produced.

The process improves the mobility of residual crude oil in the following manner:

By-product: Surfactant
Affect: reduces interfacial tension between oil and rock/water surfaces

By-product: Solvent
Affect: reduces oil viscosity; improves permeability by dissolving and
removing long chain hydrocarbons from pore throats

By-product: Acids
Affect: improve permeability by dissolving carbonate precipittes from pore
throats and by chemically etching quartz and carbonate surfaces; carbon dioxide
produced from chemical reaction between acid and cabinet reduces oil viscosity
and causes oil droplet to swell

By-product: Carbon Dioxide
Affect: dissolves in oil to reduce viscosity; encourages physical displacement
of oil droplet by causing it to swell

By-product: New Cells
Affect: Physically displace oil by growing between oil and rock/water surface

The MEOR process is not a taxable service under rule 3.324 because it does not
involve repairing, remodeling, maintaining or restoring tangible personal
property; nor is it Real Property Repair or Remodeling or a Real Property
Service.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Tom Soto
Tax Administration Division

NOTE: Previous Accession Number 9412795L