TABLE III.-Summary of proved preserves as reported for 1946 and thereafter-Continued

TABLE IV.—Drilling activity in the United States since 1945

[Report No. 16-8]

REPORT OF THE ATTORNEY GENERAL PURSUANT TO SECTION 2 OF THE JOINT RESOLUTION OF SEPTEMBER 6, 1963, CONSENTING TO AN INTERSTATE COMPACT TO CONSERVE OIL AND GAS, MAY 1965

This report is submitted pursuant to the Joint Resolution of September 6, 19631 according Congressional consent to the Interstate Compact to Conserve Oil and Gas for a further period of four years. Section 2 of that resolution requires that the Attorney General report annually to the Congress

"whether or not the activities of the States under the provisions of such compact have been consistent with the purpose as set out in article V of such compact.*

8

Previous reports have described in detail the structure and operation of the conservation regulatory system, administered primarily by the individual producing States, supported and supplemented by federal action. This report, therefore, briefly refers only to changes in the pattern previously discussed. While review of the direct impact of the system in limiting competition in the petroleum industry by State action, the required subject of these reports, has likewise been customarily made in detail, in previous reports, this report necessarily withholds discussion. With increasing degree over the past few years, particularly the current year, these investigations have unavoidably impinged on areas subject to antitrust complaints in crude oil production, purchase and transportation. Complaints now under active investigation inhibit any current discussion which would prejudice the rights of possible defendants or jeopardize the effectiveness of the investigation.

I.

GOVERNMENT CONSERVATION ACTIVITY

The statutory requirement for inquiry and report, directs consideration of the effect of State activities on competition within the petroleum industry. As previous reports have related in considerable detail, the State activity concerned consists both of individual and collective State action. On the one hand, it includes the rules, regulations and administrative decisions of the individual producing States, specifying the practices to be followed in prospecting and drilling for oil, and in the operation of producing wells. These rules also include those limiting the amount of production by individual wells and fields to an amount determined by the State to be the appropriate "market demand" for that producing unit. Comprised also within this area are the actions by federal officials deferring to State regulation of production in those areas where State regulatory action is effectively restrictive, or supplying such restrictions where no effective State regulation exists.

Supplementing these direct controls over the operation of the petroleum industry at the producing level, and analytically inseparable in determining effect, are a number of activities whose only purpose is to support and strengthen the direct controls. These include mainly the federal statistical services and the statutory provisions consenting to and supporting the State interference with interstate commerce incidental to direct control but impermissible without such consent. Most important as an aid to the State regulatory effort are the limitations imposed on he import of oils of foreign production. Finally, the system as described includes the Interstate Oil Compact Commission, to provide machinery for cooperative exchange of ideas and information.

177 Stat. 145 (1963).

2 Article V of the Compact states: "It is not the purpose of this compact to authorize the states joining herein to limit the production of oil or gas for the purpose of stabilizing or fixing the price thereof, or create or perpetuate monopoly, or to promote regimentation, but is limited to the purpose of conserving oil and gas and preventing the avoidable waste thereof within reasonable limitations."

The reports filed under previous Compact extension resolutions, 69 Stat. 385 (1955). and 73 Stat. 290 (1959) were: Atty. Gen., Report Pursuant to Section 2 of the Joint Resolution of July 28, 1955 (Sept. 1, 1956); Atty. Gen., Second Report Pursuant to Section 2 of the Joint Resolution of July 28, 1955 (As of Sept. 1, 1957); Atty. Gen., Third Report Pursuant to Section 2 of the Joint Resolution of July 28, 1955 (As of Sept. 1, 1958); Atty. Gen., Fourth Report Pursuant to Section 2 of the Joint Resolution of July 28, 1955 (As of Sept. 1, 1959); and Atty Gen., Report Pursuant to Section 2 of the Joint Resolution of August 7, 1959 (May 15, 1963); Atty. Gen., Report Pursuant to Section 2 of the Joint Resolution of September 6, 1963 (June 1964). They are hereinafter referred to as the First, Second, Third, Fourth, Fifth and Sixth Reports, respectively.

A. GOVERNORS' STUDY COMMITTEE

This context of governmental regulation, essential to review of the competitive effects of conservation regulation, continued for the most part in the pattern discussed at length in previous reports. The completion and publication of the report and recommendations of the Interstate Oil Compact Commission's Governors' Study Committee was an especially significant event which, though it does not change the pattern of the regulatory system provides a new basis for informed appraisal of its basic purpose of conservation and its effectiveness to further that purpose. Last year's report noted that the Interstate Oil Compact Commission had undertaken an extensive appraisal of the methods and effectiveness of State conservation. In part this was a response to a request by the Secretary of the Interior for a study of means to make domestic oil production more efficient in comparison with foreign production; in part it was response to critics of the system challenging its fairness; and in great part was a reaction to the desire of the State officials who make up the Commission for thorough review of the direction and details of the conservation effort for their own purposes.

The study, completed for presentation to the Commission in September and, with the Committee's recommendations, issued publicly at the December meeting of the Commission, relied heavily for basic research on the regular standing committees of the Commission. Their work product was consolidated by the special staff of the Governors' Study Committee.' As consolidated, the study was used by the Committee for its formal conclusions.

Unquestionably, the study and conclusions will be of great and continuing importance to the oil conservation system. They provide a conscientious and comprehensive statement by the participants in the operation of the conservation system of their common view as to the purposes, effect and operation of that system. As such it must be taken into careful account in any effort, sympathetic or hostile, to alter the complex system of conservation regulation. While the study relates primarily to the technicalities of the highly technical task of regulating oil production, it discusses also, in general terms, the business of crude oil transportation and marketing. Particularly relevant to our responsibilities for survey and report on the competitive aspects of the system, as well as the more important and related task of antitrust enforcement, the study strongly recommends the continued reliance on competition in regulating the business aspects of crude oil production and purchase.

Especially in point are the conclusions reached by the Committee that:

The amount of oil to be produced in the United States at any time to add to other sources of supply to meet the total demand depends upon many factors, but it can be forecast with reasonable accuracy. Many forces operate to influence the amount of production of oil in each state required to supply a part of the total national demand. Shifts in demand for production occur, and are caused by many factors, largely competition. The interests of the consumer have been and can be served best by the existing interplay of free competition not by any allocation of total national demand. Recommendation

The public interest will continue to be served best by competition rather than by any system of national allocation.

Again, the recommendations noted, in summary, that:

Adequate, just, and reasonable regulation by the states stimulates competition and permits the small producer to compete with the large oil companies in the search for and the production and sale of the oil and gas he discovers.

Of course, as discussions with Committee members and staff have made plain. this does not represent any statement of opinion that the competitiveness existing in this level of the industry is in all respects adequate to meet the standards set by the Federal or State antitrust laws. On the contrary, they point to this as demonstrating the importance of forceful, fair antitrust enforcement to the functioning of the conservation system.

The Committee appointed by Governor Welsh in 1963, consisted of the following mem bers: Matthew E. Welsh, Chairman, Governor of Indiana: Otto Kerner, Governor of Illi nois; John Anderson, Jr., Governor of Kansas; John J. McKeithen, Governor of Louisiana; Jack M. Campbell, Governor of New Mexico: Henry L. Belimon, Governor of Oklahoma; John B. Connally, Governor of Texas; and Clifford P. Hansen, Governor of Wyoming.

B. IMPROVEMENT OF FETROLEUM STATISTICS

Aiming for improvement of Government activity in relation to this industry was the completion of the study of petroleum statistics undertaken under the direction of the Federal Bureau of the Budget as reported last year. This study was aimed to mitigate business burdens under the present system, both by relieving some of the task of supplying duplicate statistical reports as well as reducing the risk of uninformed Government action.

In order to insure that responsible industry members might have the fullest opportunity to guide the Government effort, a tentative draft of the study was circulated widely with request for comments. A large number of suggestions were received and the study group redrafted the report to accommodate those suggestions it found appropriate. At present, the report is being circulated to agencies for comment.

C. CONNALLY ACT ADMINISTRATION

A third event of importance in relation to the regulatory system was a prospective change in procedure under the Connally Act, reducing somewhat the participation of the Federal Government in the State regulatory activity.

6

By order dated January 29, 1965, the Secretary of the Interior directed the amendment of the regulations of the Department of the Interior under the Connally Act, to limit the active enforcement of the Connally Act. This order is to be effective as of June 30, 1965. It will be recalled that the basic purpose of the Connally Act is to prohibit interstate shipments of oil produced in violation of State proration orders. As previous reports have set out in detail, this act thus provided a federal consent to State controls over oil production and marketing, and their consequent direct impact on interstate commerce."

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At the same time, the act authorized extension of even more direct aid to the enforcement of State orders in particular problem areas, including requirement of special reports by producers and transporters, issuance of "certificates of clearance" for movement of oil or oil products, and the establishment of a "board or boards" for issuance of such certificates. In the early years of the act's existence, these powers were extensively utilized, and, at one time or another, the "designated areas" included the principal fields in the Southwest, and all oil in those areas moved only on "tenders," certificates of clearance issued under the act.

However, since 1942, active enforcement has been limited to a described area consisting of Southeast New Mexico, most of Texas and all of Louisiana. Within that area special report requirements as to oil production and movement were established, and it is from that area that the great bulk of the federal enforcement cases have originated in the years since the act was passed."

12

By executive order, the Secretary of Interior had long been designated under the act, with delegation of the authority conferred on the President under the statute, save for the power under section 4 of the act 13 to suspend its operations in the event of over-stringent State crude oil supply limitations. Utilizing the authority so delegated, the Secretary's order of January 29, 1965 limited active enforcement of the Connally Act by revoking the designation of the specific areas in which the special enforcement procedures had been applicable. This action, the amending order noted, was taken as a result of the increased capability of the States to enforce their own conservation regulations.

However, the order does not alter the basic operation of the act as consent to the State conservation regulation affecting interstate commerce. Neither, of course, does it preclude re-establishment of such special enforcement aids if necessary.

II.

COMPETITIVE PROBLEMS

Previous reports have consistently noted that the responsibility of this Department under the statute which requires us to report, is primarily to investigate the activity of the petroleum business community competing at the level covered by conservation regulation. We are directed to report whether, in relation to that area directly affected by such State regulation, evidence appears of anticompetitive behavior in the industry, which can be related to State action. However, as previous reports have also consistently noted, this closely coincides with our more important basic responsibility for antitrust enforcement, and creates special problems both to reporting and enforcement.

Thus, where specific complaint is made of possible antitrust violation, and our ensuing investigation involves the level of industry also subject to report, full report would obviously involve premature disclosure of the matters under investigation. This could both jeopardize the effectiveness of the investigation and prejudice the rights of the parties involved to an objective trial should litigation be brought.

One of my predecessors noted in relation to this problem :

This Department is, of course primarily concerned with enforcement activity. Obviously, there are occasions when report of facts resulting from a general investigation may prejudice pending or projected litigation. Where possible, therefore, this report avoids disclosure of information directly concerned in such litigation, pending full report when the problem of premature disclosure no longer exists.1

During the year, an enlarged number of specific complaints have been received concerning possible restraints in crude oil purchasing and transportation, involving a number of companies and activity over a wide area.

It seems a responsible course of action to undertake full investigation now, and, if it appears that actual violations are involved, to proceed by traditional methods of antitrust enforcement to establish clear guidelines separating the permissible from the forbidden. As noted, however, this defers report on the competitive problems of crude oil purchase and transportation until discussion becomes appropriate.

Respectfully submitted,

NICHOLAS DEB. KATZENBACH,
Attorney General.

14 Second Report at 3.