            THEATTORNEY
                    OFTEXA~



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

Dear Sir:                         Opinion    No. V-97

                                  Re:   Effect which House Bill 67,
                                        allowing agreements     for co-
                                        operative exploration,    de-
                                        velopment,  and operation of
                                        oil and gas properties,    and
                                        marketing of gas, would have
                                        on the Texas antitrust laws.

            We have your letter   of March    5; 1947,   a portion   of which
reads :

           “Would the passage of the proposed legislation   as
     outlined in House Bill 67 endanger the validity of the
     antitrust laws of this State, and what, in your opinion,
     would be the effect of this legislation upon our anti-
     trust statutes from the standpoint of both validity
     and enforceability?”

          The portion of H. B. 67 touching on the antitrust laws
declares  it to be lawful for two or more “persons”         which would
include partnerships    and corporations,   owning, claiming,      or con-
trolling production,  royalties,  leases,  or other interest,    in the
same oil or gas field, to enter into and perform agreements           for
the purpose of bringing about cooperative      explorations,    devel-
opment, and operation of any part or all of such field.        Among
other things, such agreements      may provide for joint exploration;
location and spacing of wells; for cycling,     re-cycling,   repressur-
ing, and pressure    maintenance;   for the storage of gas; for the
marketing of gas, but not the marketing of oil; for the joint ex-
traction of casinghead    gas and the return of the gas to the earth.

          The bill allows agreements  “for the equitable distribu-
tion 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 ,otl nor gaatr .produeed tn any part of the
field covered by the agreement.      In ,&her words, if the-agree-
ment covered a whole field, every privately owned lease in ,the
field c~ould be held indefinitely by production from one well
therein, wherever located.

           The agreements    are to become operative ,when ~approv-
ed by the Railroad Commission,       after notice and hearing, after
a finding that they will prevent waste, or “tend” to promote con-
servation,   and will protect correlative   rights.

          Section 5 provides that neither the making nor perfor-
mance of such agreements     shall be unlawful or violate the anti-
trust laws of the State.

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

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


          “2.   ~To fix, 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 a contract.*     * *
               to preclude a free and unrestricted    competi-
               tion 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 com-
               modity * * * *
Hon.   L. OR. Pearson,   Page   3, V-97



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

           It is obvious from a reading of then above statutes that H.B.
6.7 is inconxistent   with all’of the above quoted sections of the anti-
trust laws in the following particulars:

           1: The”above quoted antit,r.ust ,laws (Ses: 1, 3, 5) ,prohibit
agreements     which restrict trade, lessen or preclude free and unre-
stricted competition.     H. B. 67 makes such agreements         lawful when
they are made by persons       “owning:,~ claiming,   or controlling  pro-
duction, leases”’ , etc., in the ,“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 a field.

          3. The antitrust laws (Sec. 2 and 4) prohibit ag,reements
which fix or maintain prices or standards whereby prices or cost
of production oft any product are affected, controlled or establish-
ed. Hi 8. 67 permits such agreements      aa to cost of production
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 a desirable   pr,ogram as the conservation   of oil
and, gas bears scrutiny.    No production at all, or small production,
would certainly conscrve’,the    resources.   But it would also lend
itself to monopoly and’price fixing, a@ other ends which the anti-
trust, laws were specifically  enac,ted to ,prevent.,

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



           There is no direct authority of the Courts on what ef-
fect thisparticular  enactment   would.have on the antitrust laws.
There is now a Texas Statute, Art. 6008, Set; 21, which permits
voluntary unitization of gas fields, including the marketing of
gas, with the approval of the Attorney General.      This law has not
been tested in the courts on the antitrust feature,.   H. B. 67
expressly   provides for the repeal of Section 21 of Article 6008 in
its entirety and rewrites   such law omitting the now-required    ap-
proval of the 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, 1 to 17;
Arkansas   Laws, 1939, p. 219, Act 105, Sec. 15.) Each of these
statutes has a provision that such agreements     shall not be con-
strued to violate the antitrust statutes.   These laws have not
been tested on their antitrust provisions.

          “Monopolies    are contrary to the. genius of a free govern-
ment, and shall never be allowed:”       Tex. C,onstitution, Art. I, Sec-
tion 2,6. Whether the subject bill will create m,onopolies cannot
be determined   at this time.  If it creates monopolies,     the stat-
ute 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 of the laws” clauses of
the Texas and Federal Constitutions.       If exceptions 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 anti-
trust laws would be held void, because such citizens would not be
receiving   “equal’protection   of the laws.”

          When then, and under what circumstances       may the Legisla-
ture make valid exceptions to the antitrust statutes 7 Articles
1643 and 1644 of the,Penal ‘Code make certain exemptions       for labor
and trade unions; ,and Article   1642 of the Penal Code makes an ex-
ception in favor of agricultural   products or live stock while in
the hands of producers   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 ex-
ceptions.  The Courts’~have, held that the above exceptions were
Hon. 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
     of the same class.~ The state is not, however, pre-
     ciuded from classifying   persons and things for the
     purpose of legislation,  provided the, classification     is
     reasonable.”

         In Hollingsworth  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 of trade or
     an illegal monoply; or an attempt to lessen competi-
     tion or fix prices arbitrarily;     nor shall ‘the market-
     ing 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 of the state
                       ,,
may not be so declared.”

          It was decided in State 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
note render invalid the: antitrust
                            ,I       laws under the “equal protection”.
clauses of the 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 classifi-
cations of subjects and persons;       but such cl,as,,sifications must not
be arbitrary or unreasonable<,”        C,hief Justice Cureton, expressing
the minority view of the then three,-judge       Court,, stated that to
exempt cooperative     marketing associations       from the antitrust laws
rendered such laws null and void because of the provision              of Sec.
3, Art. I, of the 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 in the hands of
the producer or raiser,   the Texas antitrust Iaws were void.       The
Court of Criminal Appeals refused to follow such contention, Andyup-
held the antitrust laws.   After an exhaustive opinion, the Court con-
cluded:

           “‘The question is whether the legislature,         in deal-
     ing with the economic policy with which the statute
     is concerned,    has adopted a classification      which can
     be said to have no reasonable       relation to the promotion
     of the 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 rea-
     sonable, not arbitrary,    and must rest upon some ground
     of difference   having a fair’and substantial      relation to
     the object of the legislation,    so that all persons simi-
     larly circumstanced     shall be treated alike.      In select-
     ing some classes,     and leaving out othersthe legislature,
     while it keeps within this principle of classification,          is
     allowed wide discretion.     * * * Before a court can in-
     terfere with the exercise     of the judgment of the legis-
     lature in making a reasonable       classification    it must
     be able to say ‘that there is no fair reason for the law
     that would not require * * 4 its 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,         1~30 A. L. R.
1321.   Throughout the opinion, holding the exception to be rea-
sonable and not arbitrary,    Justice Frankfurter:     pointed out the
differences   between agriculture    and industry; that a different
concept of price and production policy existed for agriculture;
that farmers    were widely scattered,    modestly financed, and in-
ured to the habits of individualism;    and that legislators   may
well have thought t~hat combinations     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 a classi-
fication is reasonable or arbitrary,   the reasoning of the Tigner
Hon. L. R. Pearson,    Page   7, V-97



case is not applicable to the oil industry.      Such industry is
highly organized,    closely integrated,   and of tremendous    power
and wealth.    Further,   an exception in its favor would not be like
making a broad distinction between industry and agriculture,           or
industry and labor, but would be carving out a particular        classifi-
cation within industry inself.     Would exemption to the oil industry
give “equal protection of the laws” to other industries        subject
to prosecution   if they make similar agreements 7 Is it fair and
reasonable   to require prosecution     of fishermen,   retail druggist,
wholesale   grocers,    or persons engaged in the production of lumber
or sulphur, while the oil people are exempt?          These are matters
the courts will look into in determining      whether the exception
is reasonable   or arbitrary.

           In considering  the reasonableness   of the exceptions to
the antitrust laws made by H. B. 67, and also considering       the
constitutional   questions of freedom of contract and due process,
the courts will undoubtedly look to reasoning and holding of deci-
2ions which have upheld statutes and orders requiring compulsory
pooling of oil and gas properties.     Four of the 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; and Arkansas       (Laws 1939, Act 105, Sec. 15,
as amended by Act 86, 1941).

          Without considering   the effect on the antitrust laws,
forced pooling has been upheld in these states.     Patterson v.
Stanolind 0. & G. Co. (1939), 305 U. S. 376, affirming the Okla-
homa Supreme Court, 77 P (2d) 83, noted with approval 16 Tex. L.
Rev. 597, 37 Mich. L. Rev. 955 and 2 La. L. Rev. 191; Placid Oil
Co, v. North Central Tex. Oil Co., (La. Sup. 1944), 19 So. (2d)
616; Hunter Co. v. McHugh, (La. Sup. 1942), 11 So. (2d) 495,
noted 16 Tulane L. Rev., 477, (Upholding a compulsory       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
in the South Houston field.   Tysco Oil Co. v. Railroad Commission,
(1935)  12 F. Supp. 195.


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



conservation    and the protection of correlative     rights.   1 Summers,
 Oil and Gas 275 Sec.104; Walker,       “The Problems     of the Small
 Tract Under Spacing Regulations,”         17 Tex. L.Rev.   (Bar No.) 157,
 169; Ely, “The Conservation      oft Oil,” 51 Harv.L.Rev.     1209,1235;
‘German, “Compulsory      Unit Operations      of Oil Pools,”   17 A.B.A.
 Journal 393; and Moses,     “Some Legal and Economical         Aspects
 of Unit. Operations, ” 21 Tex. L. Rev. 748, 765. Only the last men-
 tioned article deals with the antitrust problem.

           Under the above authorities,      because of the peculiar
nature of oil and gas as natural resources,         we are of the opinion
that an exception to the antitrust laws allowing voluntary pooling
by both lessors   and lessees,   based solely on the necessity        of same
for conservation   of natural resources,       the prevention of waste,and
the protection of correlative     rights, would probably be upheld by
the Courts as valid and reasonable;        and as such, would not endanger
the validity of the antitrust laws.     It is understood that such was
the only intent of the author of this Bill.       From a discussion     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 a unit large enough to meet Railroad Commission              spacing
rules, (2) to establish units necessary       to effect secondary    recov-
eries through repressure      methods, water flooding, and pressure
maintenance;    and (3) to establish a co-operative       gas re-cycling
system for a field in order to strip the wet gas and other hydro-
carbons,   and return the dry gas to the sands by common input
wells.

           If this Bill were limited to the above operations,        and agree-
ments thereunder were made lawful only when reasonably               necessary
for prevention of waste, conservation        of oil and gas, and protection
of correlative    rights, (such necessity    to be determined by the Rail-
road 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 and would not invalidate
or endanger future enforcement        thereof.    (In this connection it
should be pointed out that both the Oklahoma and Arkansas             statutes
allow or re,quire such pooling units only when reasonably           ~“necessary”
to carry on conservation      measures,    prevent waste, and afford great-
er ultimate r’ecovery.)

         However, as now written, H. B; 67 is much broader than
the above reasonable   exception. It does 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      of the agreements,
H. B. 67 simply provides:                                               So,


              “* * * Therefore,       it shall.be lawful for two~or
        more persons owning, claiming,            or controlling produc-
        tion, leases,   royalties,     or’other inte~rests in separate
        properties    in the 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 com-
        mon accumulations       of oil or gas, or both, to enter into
        and perform agreements           for the purpose of b~ringing about
        cooperative    explorations,      developm~ent, and operations   of
        all or any part or parts of such field. * * *”

          The provision  for Railroad Commission    approval before the
agreement   becomes operative ‘requires a mere finding that the agree-
ment will prevent waste or “tend” to promote conservation.       It does
not require a finding that such unitization is reasonably  necessary
for conservation.

          In other words, to be a reasonable       exception from the anti-
trust laws so as not to invalidate them; in this instance the excep-
tion should be necessary      in the public interest,  and should not in-
clude or permit,such      agreements   merely for the convenience       of or
monetary savings to the oil and gas producers.          It is believed that,
as written, some of the provisions      of Hi B. 67 could and would be
used,primarily     for the convenience    and profit of lessees    without any
necessary    relation to oil and gas conservation.

           For instance, H. B; 67 would ,allow pooling agreements       for
exploration   of a prospective  field evenbefore   a test well is drilled.
Surely it would save money and restrict       competition to allow oil
operators   to conduct a joints geophystcal exploration   and to drill the
first test well as a joint 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 of wells), with
conservati’o   n of resources  ~8s merely an incidental or secondary
consideration.
                    ,..                  .>o .‘).    Z’
             For the reasons      stated,    it is our opinion that the Bill as
Hon. L. R. Pearson,    Page    10, V-97



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

           With regard to the enforceability  of the antitrust laws,
it is unquestionable  that this statute will make the task of this
office infinitely more difficult.   For example,    if the 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 of marketing and fixing the price of gas.

           In that connection,   your attention is directed to the case
of Shamrock Oil b Gas Corp. v. Coffee, 140 F. (Zd) 409, (CCA 5th
1944) cert. den. 323 II. S. 737.     The lease contract in that case pro-
vided that the lessor should receive the “market price at the well
of l/8 of the gas.”    There was but one purchaser       in the field who
purchased the gas; and it bought from all wells at a price between
l/2 and 4/5 a cent per thousand feet, thus establishing        “a market
pric~e in the field.”   Because many products, butane, propane, etc.
were made from such gas, the proof showed that the gas was reason-
ably worth from 1 to 1.4 cents.       The Court held that the lessor was
limited under his contract to the lower market price offered and paid
by the pipe line company,      “in the absence of collusion,   combination,
conspiracy,    or combination in restraint of trade 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 de-
clared to be in violation of the antitrust laws.     Here again the diffi-
culty of prosecuting    persons or companies who combined to fix the
price paid becomes     obvious.

          If the oil and gas    industry is exempt, it would be under-
standably harder to get a      conviction against another industry which
is prosecuted   for making     an agreement   which the oil and gas companies
can legally make.     Courts    and juries would understandably   question the
prosecution   of merchants     where farmers,    laborers,and  now the oil
industry are exempt.

          Before closing, it must be mentioned that H. B. 67 express-
ly repeals Art, 5368b (Acts 49th Leg., p. 507, c. 309), authorizing
the Commissioner      of the General Land Office to enter into pooling
agreements    and fixing a minimum 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 pro-
posed legislation   rewrites this statute and expands it to include ad-
ministrators,   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 ‘of gas,
    without the requirement     that the same be necessary
    for the prevention of waste and conservation     of natural
    resources,   if enacted as written, would constitute a
    serious threat to the antitrust laws of this State.
    Its enactment as written would make more difficult
    the enforcement    of the antitrust laws.

                                         Yours   very truly,

                              ATTORNEYGENERALOF                TEXAS




                              BY
                                             oe R. Greenhill
                                                 Assistant
JRG/lh




           The foregoing opinion was considered and approved in a
conference   composed of the 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    of the Conference
