Chesapeake, Encana face criminal antitrust charges in Michigan

Oil and gas giants Chesapeake Energy and Encana Corp were charged on Wednesday with colluding to keep oil and gas lease prices artificially low in Michigan, state Attorney General Bill Schuette said.

The criminal charges follow a lengthy investigation by Schuette's office into whether the firms -- the biggest land leasers during a speculative oil and gas leasing boom in Michigan's Collingwood Shale region during 2010 -- colluded to keep prices from rising as they acquired land leases from landowners.

Michigan began looking into the companies' activities in 2012 after a Reuters investigation found that executives from the two firms discussed proposals to divide bidding responsibilities in the state for nine private landowners and counties in Michigan.

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"I will aggressively prosecute any company who conspires to break the law," Schuette said in a statement.

Workers prepare for adding pipe at a Chesapeake Energy natural gas drilling site.
Daniel Acker | Bloomberg | Getty Images

The companies are being charged with one count each of antitrust violations "relating to a contract or conspiracy in restraint of commerce," and one count each of attempted antitrust violations.

Under Michigan law, an antitrust violation is considered a misdemeanor, which carries penalties that can include fines and prison terms of up to two years for individuals, and up to a $1 million fine for a corporation.

Encana and Chesapeake still face a separate, federal antitrust investigation by the Department of Justice.

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"This action has no merit and we will vigorously contest it," said Chesapeake spokesman Gordon Pennoyer.

Encana denies the charges and will "vigorously defend" them, company spokesman Jay Averill said in a statement.

The boards of both Chesapeake and Encana previously conducted internal investigations and said they found no collusion. The companies have acknowledged holding talks about forming a joint venture in Michigan during 2010, but said no agreement was ever reached.

"No agreement was reached and no violation of antitrust law occurred," Averill added.

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In emails reviewed by Reuters in its investigation, then Chesapeake CEO Aubrey McClendon and other high-ranking Chesapeake and Encana executives discussed in 2010 how to keep lease prices on both state and private lands from rising by avoiding "bidding each other up."

The discussions occurred after a land lease frenzy pushed Michigan prices on private lands as high as $3,000 per acre in mid-2010. Lease prices subsequently fell sharply in the state later that year.

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After prices rose sharply amid intense bidding at a Michigan state land auction in May 2010, "Chesapeake and Encana agreed not to bid against each other in future lease auctions," the Michigan Attorney General alleges in its complaint, reviewed by Reuters. A subsequent state auction in October 2010 "raised just $10 million on the lease of 273,000 acres, or less than $40 per acre—over $1,000 per acre less than the May 2010 prices," the complaint says.

Documents reviewed by Reuters, and first reported in June 2012, show that former Chesapeake CEO McClendon and Jeff Wojahn, the former president of Encana's U.S. unit, were aware of the proposed auction bidding strategy. "Understand our teams are working on a cooperative approach to state leasing, that's good I think. Anything else out there encouraging to talk about?" McClendon wrote in an email to Wojahn on October 17, 2010.

That chain of internal communications between Chesapeake and Encana executives could help Michigan's case, one legal expert said.

"I think the Michigan Attorney General has a strong hand in this case. They have strong evidence and some strong documents," said Darren Bush, a former antitrust attorney for the U.S. Department of Justice and a professor of antitrust law at the University of Houston.

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A spokesman for McClendon declined comment. McClendon left Chesapeake last April and now runs a new company, American Energy Partners.

Market allocation agreements between competitors are illegal under the Federal Sherman Antitrust Act and Michigan's Antitrust Reform Act.

Encana and Chesapeake executives had been hoping for a civil resolution in Michigan.

As recently as Feb. 14, an attorney representing Encana Corp told a judge in a civil antitrust-related case in Michigan that both Encana and Chesapeake were working toward a settlement with the state attorney general that could end his office's criminal investigation into the firms.

The U.S. Department of Justice has been looking into the possibility of anticompetitive practices in the purchase and lease of oil and gas properties in Michigan and elsewhere. That investigation is ongoing, the DOJ told Reuters last month.

"Michigan is out in front, but the big question now is what the DOJ will do," said Harry First, an antitrust law professor at New York University. "That inquiry could be more serious in terms of fines, and what happens in Michigan could affect the companies' ability to defend against a federal case."

DOJ spokeswoman Gina Talamona declined comment.

Chesapeake and Encana are expected to be arraigned on March 19 in a Michigan state court in Cheboygan County, the Attorney General's office said.

By Reuters