# THEATTORNEY OFTEXA~

,Honorable L. R. Pearson, Chairman Oil, Gas &Mining Committee House ofRepresentatives Austin, Texas

Dear Sir: Opinion No. V-97

Re: Effect which House Bill 67, allowing agreements for cooperative exploration, development, and operation of oil and gas properties, and marketing of gas, would have
onthe Texas antitrust laws.

We have your letter ofMarch 5; 1947, aportion ofwhich reads :
“Would the passage ofthe proposed legislation as outlined in House Bill 67 endanger the validity ofthe antitrust laws ofthis State, andwhat, inyour opinion, would be the effect ofthis legislation upon our antitrust statutes from the standpoint ofboth validity and enforceability?”
The portion of H. B. 67 touching onthe antitrust laws declares it to be lawful for two or more “persons” which would include partnerships and corporations, owning, claiming, or controlling production, royalties, leases, or other interest, in the
same oil or gas field, to enter into andperform agreements for the purpose ofbringing about cooperative explorations, development, and operation of any part or all of such field. Among other things, such agreements may provide for joint exploration; location and spacing ofwells; for cycling, re-cycling, repressuring, and pressure maintenance; for the storage of gas; for the marketing of gas, but not the marketing of oil; for thejoint extraction of casinghead gas and the return ofthe gas to the earth.

The bill allows agreements “for the equitable distribution on an agreed basis of oil and gas produced therefrom.” It provides that no royalty shall be required to be paid on gas re-- .
Hon. L. R. Pearson, Page 2, V-97

**turoed .ta**  ***he eaa-th.~**  **Lt-providre** for~ths imbdinite extensions (h&?ing) ob.leases coveting aqpart .of.the lands committed thereto so long as ,otlnorgaatr .produeed tnany part ofthe field covered by the agreement. In,&her words, ifthe-agreement covered awhole field, every privately owned lease in,the field c~ouldbe held indefinitely by production from one well therein, wherever located.

The agreements are tobecome operative ,when~approved bythe Railroad Commission, after notice and hearing, after
afinding that they will prevent waste, or “tend” to promote conservation, andwill protect correlative rights.

Section 5provides that neither the making nor performance ofsuch agreements shall be unlawful or violate the antitrust laws ofthe State.

The portions ofthe antitrust laws most closely affected
are Art. 7426, R. C. S. 1925, and Art. 1632 P. C., both ofwhich define a “trust” as acombination by two or more persons or corporations :

“1.~ To create, or which may tend to create, or carry out restrictions intrade or commerce *****

“2. ~Tofix, maintain, increase or reduce the price * * * * *

“3. ,To prevent or lessen competiti,on * * * * *

“4. To fix or maintain any standard or figure whereby the price of any article * * * * * or the preparation of any product for market or transportation, shall be in any manner affected, controlled or established.

“5~. To make * * * or carry out acontract.* * * to preclude a free and unrestricted competition among themselves * * * or by’which they shall agre,e to pool, combine or unite any interest they may have in connection with the sale or purchase of any article or commodity * * * *Hon. L. OR.Pearson, Page 3, V-97

“6. To.regulate;fix or limit the:qutput of,any article or commodity which may be manufactured, mined, p~roduced.or,sold.”

Itis obvious from a reading of thenabove statutes that H.B. 6.7is inconxistent with all’of the above quoted sections ofthe antitrust laws inthe following particulars:

1: The”above quoted antit,r.ust ,laws (Ses: 1, 3, 5),prohibit agreements which restrict trade, lessen or preclude free and unrestricted competition. H. B. 67 makes such agreements lawful when they are made by persons “owning:,~ claiming, or controlling production, leases”’ , etc., inthe ,“s~ame,oil field, gas field, or oil and gas field. ” The proposed Bill not,only,les~sens competition but legalizes combined production agreements which will preclude competition between parties to the agreements.

2. The antitrust laws (Sec. 5) prohibit pooling, combin- ,ing, or uniting of interests in connection with sale or purchase of any commodity~~ H. BG,67 (get. Id) expressly allows agreements among oil Companies and others in,connection with the marketing of gas from afield.

3. The antitrust laws (Sec. 2and 4) prohibit ag,reements which fix or maintain prices or standards whereby prices or cost ofproduction oftany product are affected, controlled or established. Hi 8. 67 permits such agreements aa to cost ofproduction of oil and gas and as to the price,,for which gas may be marketed.

4. The antitrust.laws (Seer 6) prohibit agreements which fix or limit the output,,of any article or commodity which may be mined, produced ,or.sold. : Under H. B. 67 such agreements would be legal as to production within the unitized area.

Even such adesirable pr,ogram as the conservation of oil and,gas bears scrutiny. No production at all, or small production, would certainly conscrve’,the resources. But itwould also lend itself to monopoly and’price fixing, a@ other ends which the antitrust, laws were specifically enac,ted to,prevent.,

Since ICB. 67 is inconsistent with the antitrust laws, and sinc~eSection 5there,of~,states thatthe making ofsuch agreements shall not be~declared unlawful, the subject matter ofthis oil1 is made an outright exceptionto the antitrust laws.Hon. L. R. Pearson, Page 4, v-97 ,:

There is no direct authority ofthe Courts on what effect thisparticular enactment would.have onthe antitrust laws. There is now aTexas Statute, Art. 6008, Set; 21, which permits voluntary unitization of gas fields, including the marketing of gas, with the approval ofthe Attorney General. This law has not been tested inthe courts onthe antitrust feature,. H. B. 67 expressly provides for the repeal ofSection 21 ofArticle 6008 in its entirety and rewrites such law omitting the now-required approval ofthe Attorney General. (Sec. 21, Ch. 120, Acts 44th Leg. R. S. p. 318).

Arkansas and Oklahoma have laws ,similar to H. B. 67 (Okla. Laws, 1945, pp: 162-170; Title 52, Sec. 286, 1to 17; Arkansas Laws, 1939, p. 219, Act 105, Sec. 15.) Each ofthese statutes has aprovision that such agreements shall not be construed to violate the antitrust statutes. These laws have not been tested ontheir antitrust provisions.

“Monopolies are contrary to the.genius of afree government, and shall never be allowed:” Tex. C,onstitution, Art. I, Section 2,6. Whether the subject bill will create m,onopolies cannot be determined at this time. Ifitcreates monopolies, the statute will be unconstitutional, and agreements made thereunder will be void.
The danger to the.antitrust laws about which you show
concern is doubtless “the equal protection ofthe laws” clauses of the Texas and Federal Constitutions. Ifexceptions are made to the antitrust laws to the extent that one group is authorized to do acts for which another could be fined and imprisoned, the antitrust laws would be held void, because such citizens would not be receiving “equal’protection ofthe laws.”

When then, and under what circumstances may the Legislature make valid exceptions to the antitrust statutes 7 Articles 1643 and 1644 ofthe,Penal ‘Code make certain exemptions for labor and trade unions; ,andArticle 1642 ofthe Penal Code makes an exception infavor of agricultural products or live stock while in the hands ofproducers or raisers. ,Art. 5762 R.C.S. exempts marketing associations from such act.

The Texas Courtsand the United States Supreme Court have upheld the Texas antitrust laws notwithstanding the above exceptions. The Courts’~have, held that the above exceptions wereHon. L. R. Pearson, Page 5, V-97

reasonable, and.were warranted by,economic canditions. The general rule is stated in,36 Am, Jur. 5~79‘:

“The cons&utional prohibition against dis- criminatory class legislation requires ,that an,anti; trust act apply alike to all persons and corporations ofthe same class.~ The state is not, however, preciuded from classifying persons and things for the purpose of legislation, provided the,classification is reasonable.”

InHollingsworth v; Texas Hay Association, (1923). 246 S;Wr 106s (writ refused), the ,Court had before it an agrerment made under the Cooperative ,Marketing Act, which provides:

“No association,organized hereunder shall be deemed to be’a combination in rest,raint oftrade or an illegal monoply; or an attempt to lessen competition or fix prices arbitrarily; nor shall ‘themarketing contracts or ag,re.e.ments, between the association ,, and its’members no.;‘any agreements authorized in this act be considered illegal, or in>restraint of trade.”
The Court tersely disposed of.the matter by saying, “We know of no constitutional r.eason why the public policy ofthe state

,, may not be so declared.”

Itwas decided inState v.‘Standard Oil Co., ‘130 Tex. 313, 107 S.W. ~(2$)550, ,that the ,exelnptiqn from the antitrust laws of agreements made by persons engaged in agricultural pursuits did noterender invalid the:antitrust laws under the “equal protection”

. ,I clauses ofthe State and Pede,ral Constitutions. The majority view, (Justices Sharp and Crits),:,stated that “The Legislature has the right, within the exercise of its power, to make certain classifications ofsubjects and persons; but such cl,as,,sifications must not be arbitrary or unreasonable<,” C,hief Justice Cureton, expressing the minority view ofthe then three,-judge Court,, stated that to exempt cooperative marketing associations from the antitrust laws rendered such laws null and void because ofthe provision ofSec. 3, Art. I, ofthe Texas Constitution; which decla,res that “All free men, when they form a social,compact, have equal rights. * * *”

‘

. ‘The latest Texas case involving exemptions from the anti-Hon. L. R. Pearson, Page 6, V-97

trust laws is Ex parte Tigner, 139 Tex. Crim. 452, 132 S.W. (2d) 885. Tigner was charged with conspiring to fix the retail price of beer. His defense was that since the antitrust laws exclude those dealing in agricultural products and livestock while inthe hands of the producer or raiser, the Texas antitrust Iaws were void. The Court of Criminal Appeals refused to follow such contention, Andyupheld the antitrust laws. After an exhaustive opinion, the Court concluded:

“‘The question is whether the legislature, indealing with the economic policy with which the statute is concerned, has adopted aclassification which can be said to have no reasonable relation to the promotion ofthe general welfare. The equal protection clause of the Fourteenth Amendment does not preclude the states from resorting to classifications for the purpose of legislation. * * * But the classification must be reasonable, not arbitrary, andmust rest upon some ground ofdifference having afair’and substantial relation to the object ofthe legislation, so that all persons similarly circumstanced shall be treated alike. Inselecting some classes, and leaving out othersthe legislature, while it keeps within this principle of classification, is allowed wide discretion. * * * Before a court can interfere with the exercise ofthejudgment ofthe legislature inmaking a reasonable classification itmust be able to say ‘that there is no fair reason for the law that would not require * * 4its extension to others whom it leaves untouched.’ ”
The above holding was affirmed by the U. S. Supreme Court in Tigner v. Texas (1940), 310 U. Sl41, 1~30A. L. R. 1321. Throughout the opinion, holding the exception to be reasonable andnot arbitrary, Justice Frankfurter: pointed out the differences between agriculture and industry; that adifferent concept ofprice and production policy existed for agriculture; that farmers were widely scattered, modestly financed, and inured to the habits of individualism; and that legislators may well have thought t~hatcombinations of farmers presented no threat to the community.

While the above distinctions are not considered to be the only items to be considered in determining whether aclassification is reasonable or arbitrary, the reasoning ofthe TignerHon. L. R. Pearson, Page 7, V-97

case is not applicable to the oil industry. Such industry is highly organized, closely integrated, and oftremendous power and wealth. Further, an exception in its favor would not be like making abroad distinction between industry and agriculture, or industry and labor, butwould be carving out aparticular classification within industry inself. Would exemption to the oil industry give “equal protection ofthe laws” to other industries subject to prosecution ifthey make similar agreements 7 Is itfair and reasonable to require prosecution of fishermen, retail druggist, wholesale grocers, or persons engaged inthe production of lumber
or sulphur, while the oil people are exempt? These are matters the courts will look into indetermining whether the exception is reasonable or arbitrary.

Inconsidering the reasonableness ofthe exceptions to the antitrust laws made by H. B. 67, and also considering the constitutional questions of freedom ofcontract anddue process, the courts will undoubtedly look to reasoning and holding ofdeci2ions which have upheld statutes and orders requiring compulsory pooling of oil and gas properties. Four ofthe states bordering Texas allow such compulsory pooling. The States are Louisiana (R.S. 1940, p. 610; Act 157, Sec. 9a); New Mexico (Laws 1935, Ch. 72, p. 137, Sec. 12; N. M. Stat. Anno. official ed. Sec. 69- 213); Oklahoma (Laws 1945, p. 157, Sec. 4, amending Title 52 Sec. 87, Laws 1941; andArkansas (Laws 1939, Act 105, Sec. 15,
as amended by Act 86, 1941).

Without considering the effect onthe antitrust laws, forced pooling has been upheld inthese states. Patterson v. Stanolind 0. &G. Co. (1939), 305 U. S. 376, affirming the Oklahoma Supreme Court, 77 P (2d) 83, noted with approval 16 Tex. L. Rev. 597, 37Mich. L. Rev. 955 and 2La. L. Rev. 191; Placid Oil Co, v. North Central Tex. Oil Co., (La. Sup. 1944), 19So. (2d) 616; Hunter Co. v. McHugh, (La. Sup. 1942), 11 So. (2d) 495, noted 16Tulane L. Rev., 477, (Upholding acompulsory unitization allowing only one gas well to each 320 acres); Croxton v. Oklahoma, (1939). 97 P.(Zd) 11; Marrs v. City of Oxford, 32 F. (2d) 134 (CCA 8th 1929) cert. den. 280 U; S. 573. A three-ju$ge Federal District Court upheld compulsory pooling under a city ordinance inthe South Houston field. Tysco Oil Co. v. Railroad Commission, (1935) 12 F. Supp. 195.

The text writers are almost uniformly ofthe view that pooling ofnatural resources is desirable from the standpoint ofHon. L. R. Pearson, Page 8, v-97

conservation and the protection ofcorrelative rights. 1Summers, Oil and Gas 275 Sec.104; Walker, “The Problems ofthe Small Tract Under Spacing Regulations,” 17 Tex. L.Rev. (Bar No.) 157, 169; Ely, “The Conservation oftOil,” 51 Harv.L.Rev. 1209,1235;

‘German, “Compulsory Unit Operations of Oil Pools,” 17A.B.A. Journal 393; and Moses, “Some Legal and Economical Aspects of Unit.Operations, ” 21 Tex. L. Rev. 748, 765. Only the last mentioned article deals with the antitrust problem.

Under the above authorities, because ofthe peculiar nature of oil and gas as natural resources, we are ofthe opinion that an exception to the antitrust laws allowing voluntary pooling by both lessors and lessees, based solely onthe necessity of same for conservation ofnatural resources, the prevention ofwaste,and the protection ofcorrelative rights, would probably be upheld by the Courts as valid and reasonable; and as such, would not endanger the validity ofthe antitrust laws. Itis understood that such was the only intent ofthe author ofthis Bill. From adiscussion of the Bill with the author we learn that its primary purpose is to recognize as lawful any pooling agreements necessary for operators (1) to have aunit large enough tomeet Railroad Commission spacing rules, (2) to establish units necessary to effect secondary recoveries through repressure methods, water flooding, and pressure maintenance; and (3) to establish aco-operative gas re-cycling system for afield in order to strip the wet gas and other hydrocarbons, and return the dry gas tothe sands by common input wells.
Ifthis Bill were limited to the above operations, and agreements thereunder were made lawful only when reasonably necessary for prevention ofwaste, conservation of oil and gas, andprotection of correlative rights, (such necessity to be determined by the Railroad Commission upon application, notice and hearing) then it is our opinion that the Bill would not constitute an unreasonable or arbitrary exception to the antitrust laws andwould not invalidate
or endanger future enforcement thereof. (Inthis connection it should be pointed out that both the Oklahoma andArkansas statutes allow or re,quire such pooling units only when reasonably
~“necessary” to carry on conservation measures, prevent waste, and afford greater ultimate r’ecovery.)

However, as now written, H. B; 67 is much broader than the above reasonable exception. Itdoes not limit the making of such agreements to instances when same are found necessary by,Hon. L. R. Pearson, Page 9, V-97 .i j .:,,,,.

the Ra~iiroad Commission. Concerning the making ofthe agreements, H. B. 67 simply provides: So,

“* * * Therefore, it shall.be lawful for two~or more persons owning, claiming, or controlling production, leases, royalties, or’other inte~rests in separate properties inthe same oil field, gas field, or oil and gas field, when it appears from geologic or other data that such properties ar’e underlaid by one or.more common accumulations of oil or gas, or both, to enter into and perform agreements for the purpose ofb~ringing about cooperative explorations, developm~ent, and operations of all or any part or parts ofsuch field. * * *”
The provision for Railroad Commission approval before the agreement becomes operative ‘requires amere finding that the agreement will prevent waste or “tend” to promote conservation. Itdoes not require afinding that such unitization is reasonably necessary for conservation.

Inother words, to be a reasonable exception from the antitrust laws so as not to invalidate them; inthis instance the exception should be necessary inthe public interest, and should not include or permit,such agreements merely for the convenience of or monetary savings to the oil and gas producers. Itis believed that,
as written, some ofthe provisions of Hi B. 67 could andwould be used,primarily for the convenience andprofit of lessees without any necessary relation to oil and gas conservation.

For instance, H. B; 67 would ,allow pooling agreements for exploration of aprospective field evenbefore atest well is drilled. Surely itwould save money and restrict competition to allow oil operators to conduct ajointsgeophystcal exploration and to drill the first test well as ajoint project, but can it be said that same is reasonably necessary to promote conservation when, at the time, oil
or gas has not even been discovered? ,.

Another instance: As written, H. S&7 would-permit the convenience of oil and gas producers to be served by agreeing to limit production and to hold an.entire field under lease through production from only’one well (or a--limited ;n&-ober ofwells), with conservati’o nof resources ~8smerely an incidental or secondary consideration.

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For the reasons stated, it is our opinion that the Bill asHon. L. R. Pearson, Page 10, V-97

now written provides unreasonable exceptions which would seriously endanger. the validity ofthe antitrust laws of Texas when applied to other persons or corporations.

With regard to the enforceability ofthe antitrust laws, it is unquestionable that this statute will make the task ofthis office infinitely more difficult. For example, ifthe oil industry
were charged with fixing the price of gas throughout the State, the condemning proof would be extremely difficult where such companies may legally combine within individual fields for the purpose ofmarketing and fixing the price of gas.

Inthat connection, your attention is directed tothe case ofShamrock Oil b Gas Corp. v. Coffee, 140 F. (Zd) 409, (CCA 5th 1944) cert. den. 323 II. S. 737. The lease contract inthat case provided that the lessor should receive the “market price at the well of l/8 ofthe gas.” There was but one purchaser inthe field who purchased the gas; and itbought from all wells at aprice between l/2 and 4/5 acent per thousand feet, thus establishing “a market pric~einthe field.” Because many products, butane, propane, etc. were made from such gas, the proof showed that the gas was reasonably worth from 1to 1.4 cents. The Court held that the lessor was limited under his contract to the lower market price offered andpaid by the pipe line company, “in the absence ofcollusion, combination, conspiracy, or combination in restraint oftrade among the buyers fixing the market price. ” H. B. 67 says agreements as to marketing of gas by oil companies and others within the field shall not be declared to be in violation ofthe antitrust laws. Here again the difficulty ofprosecuting persons or companies who combined to fix the price paid becomes obvious.

Ifthe oil and gas industry is exempt, itwould be understandably harder to get aconviction against another industry which is prosecuted for making an agreement which the oil and gas companies
can legally make. Courts andjuries would understandably question the prosecution ofmerchants where farmers, laborers,and now the oil industry are exempt.

Before closing, it must be mentioned that H. B. 67 expressly repeals Art, 5368b (Acts 49th Leg., p. 507, c. 309), authorizing the Commissioner ofthe General Land Office to enter into pooling agreements and fixing aminimum royalty. H. B. 67 rewrites this statute omitting the provisions for the minimum royalty to the State.Hon.’ L. R. Pearson, Page 11, V-97

H. B. 67 also repeals Art. 4192a (Acts 49th Leg., p. 117, c. 80) allowing guardians to enter into pooling agreements. The proposed legislation rewrites this statute and expands itto include administrators, executors and other fiduciaries administering estates.
SUMMARY

H. B. 67 authorizing unitization agreements for cooperative explorations, development, and ope’ration of oil and gas properties, and the marketing ‘ofgas, without the requirement that the same be necessary for the prevention ofwaste and conservation ofnatural resources, if enacted as written, would constitute a serious threat to the antitrust laws ofthis State. Its enactment as written would make more difficult the enforcement ofthe antitrust laws.

Yours very truly,
ATTORNEYGENERALOF TEXAS

JRG/lh BY oe R. Greenhill Assistant

The foregoing opinion was considered and approved in a conference composed ofthe Attorney General, First Assistant Attorney General Fagan Dickson, and Assistant Attorneys General Ocie Speer, James D. Smullen, Ned McDaniel, Elton Hyder, Jr. and J. A. Amis, Jr.
g~D&&4 Chairman ofthe Conference