Encana Settles Michigan Antitrust Case, Chesapeake Fights On

Natural gas producer Encana Corp on Monday agreed to pay Michigan $5 million in a civil settlement that could clear the company of criminal antitrust charges stemming from its role in a 2010 land leasing spree.

Chesapeake Energy Corp, at the same hearing, vowed to fight its own criminal antitrust charges. Michigan's attorney general alleges that Chesapeake conspired with Encana to keep land lease prices artificially low in the state.

At the hearing, in a state court in Cheboygan, Encana pleaded no contest to a state charge it attempted to commit antitrust violations during a land leasing spree in 2010 in which it and Chesapeake were the biggest lease buyers. Both companies faced criminal charges of antitrust violations and attempted antitrust violations.

The court took Encana's plea under advisement and agreed to dismiss charges against the driller if it fulfilled terms of its civil settlement over the next 11 months, Encana spokesman Jay Averill said in an emailed statement.

As part of Encana's settlement, the company also agreed to cooperate with prosecutors in Michigan who are still pursuing a criminal case against Oklahoma City-based Chesapeake.

Michigan's charges against the companies, announced by Attorney General Bill Schuette in March, allege they collaborated to "avoid bidding wars against each other" in a state land lease auction and in negotiations to acquire leases from private landowners. The alleged collaboration caused "prices to plummet," Schuette's office said.

Prosecutors have said the alleged collusion may have been a factor pushing down state lease prices to $40 per acre at public auction in October 2010, from a record-high average $1,510 per acre at the prior auction five months earlier.

In opening remarks Monday, Heather Tewksbury, an attorney representing Chesapeake, described the allegations of antitrust violations against her client as "smoke. Smoke with no fire." Tewksbury, a former U.S. Department of Justice antitrust lawyer, added, "there was no agreement."

Encana's civil settlement with Michigan, and Chesapeake's pledge to defend the charges, came after both companies conducted internal investigations they said showed no collusion.

The two companies were competing for land leases in Michigan's Collingwood Shale area in 2010. A series of communications between Chesapeake and Encana executives showed they had discussed bidding strategies to acquire leases,Reuters reported in 2012. The executives discussed splitting bidding responsibilities at the October 2010 auction and how to keep prices from creeping higher, Reuters reported. (http://reut.rs/1ieHE8D)

The companies said earlier that they discussed forming a joint venture in Michigan but never reached agreement.

Tewksbury, the lawyer for Chesapeake, said that Michigan land lease prices fell during 2010 for legitimate business reasons. She said poor results from early test wells in Michigan that summer led Chesapeake and Encana to pare back on leasing, causing prices to fall. "The attorney general is trying to criminalize business decisions," she said.

NEW STATE EVIDENCE

As part of Encana's settlement agreement on Monday, Michigan prosecutors filed an affidavit containing references to several previously unreported communications. Prosecutors said these exchanges bolster the antitrust case against the energy companies.

One email exchange cited was between then-Chesapeake Chief Executive Aubrey McClendon and the former CEO of Calgary-based Encana, Randy Eresman. In it, McClendon is quoted as asking Eresman: "should we throw in 50/50 together here rather than trying to bash each other's brains out on lease buying?"

The email is dated May 4, 2010, the same day as a record-setting Michigan state land auction. The state raised $178 million at the auction, an amount equal to the proceeds from all prior Michigan state land lease auctions since 1929. Chesapeake and Encana bought the majority of the acreage.

Prosecutors also said they had evidence that a May 2010 phone conversation between the Chesapeake and Encana CEOs, documented in Eresman's "work journal notes," included setting a land lease price "goal $500/acre vs $2,000/acre and divide into leasing blocks."

Chesapeake and Encana have said previously that their discussions were related to a kind of joint venture known as an area of mutual interest (AMI) that never came to fruition.

AMI agreements are common in the oil industry. In them, two or more companies leasing land for drilling agree to let each other buy a portion of the leases the partner has acquired. Such agreements are intended to encourage development of oil and gas properties. While legal, they are not supposed to restrain trade or allow companies to avoid bidding against each other for leases.

Chesapeake and Encana recently received letters from the U.S. Justice Departmentinforming them that a separate, Justice Department-led probe into whether they violated antitrust laws in Michigan had concluded.

The Justice Department is still pursuing an investigation into potentially anti-competitive behavior in oil and gas leasing in other states.

A substantial portion of Encana's $5 million payment to Michigan will go to the Department of Natural Resources (DNR) State Park Endowment Fund, Encana said in a statement. The payment comes "in exchange for a release of the state's civil claims," Averill said.

The DNR is the state agency that runs Michigan's bi-annual auctions of public lands for oil and gas leasing.

(Reporting by Brian Grow in Cheboygan; Writing by Joshua Schneyer in New York; Editing by Jeffrey Benkoe)