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Exclusive: Chesapeake, Encana near settlements on Michigan collusion probe

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, April 17, 2012. REUTERS/Steve Sisney
Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, April 17, 2012. REUTERS/Steve Sisney

By Joshua Schneyer and Anna Driver

NEW YORK/HOUSTON (Reuters) - Encana Corp and Chesapeake Energy Corp are negotiating civil settlements with the state of Michigan to try to end its criminal investigation into whether the energy companies colluded to keep oil and gas lease prices artificially low in the state.

Encana is hopeful that a settlement will be finalized within a few weeks, said Gregory Curtner, a lawyer representing Encana in a separate civil antitrust lawsuit, during a February 14 court hearing.

"I can fill you in on the status of the Michigan Attorney General investigation because I'm handling that," Curtner told Michigan Western District Magistrate Judge Joseph Scoville.

"We are at a stage, as is Chesapeake, of hopefully reaching a civil resolution which will close the criminal investigation," he said, according to a transcript of the hearing. The comments had not been previously reported.

Encana and Chesapeake have been the subject of state and U.S. Department of Justice antitrust probes since 2012, when Reuters published an investigation showing the companies' executives exchanged emails to discuss how they could cooperate to suppress lease prices in the state. (http://r.reuters.com/deg27v)

Encana and Chesapeake have denied any collusion.

The potential terms of the settlements remain unclear. Encana and Chesapeake declined to comment. Curtner, a Michigan-based partner at law firm Schiff Hardin, did not respond to requests for comment.

Legal experts said the oil and gas companies may be required to pay fines to settle the probe, though the size of any monetary penalties remain unclear.

One potential benchmark: in April 2013, a federal judge approved a Justice Department settlement which levied $550,000 in fines against two drilling companies - Gunnison Energy and SG Interests - related to a 2005 agreement not to bid against each other for natural gas leases on federal land in Colorado. The companies paid another $451,000 in fines to settle violations of the federal False Claims Act.

"There could be a civil fine," said Harry First, an antitrust expert and law professor at New York University. Depending on the terms, a deal that ends Michigan's criminal probe might be considered a victory for the companies, he said.

"If the defendants have reason to believe the state may have a strong criminal case soon, they would be inclined to come to a settlement to avoid that," said First, a former antitrust chief at the Office of New York's Attorney General.

Joy Yearout, a spokeswoman for Michigan Attorney General Bill Schuette, said the investigation is ongoing and declined to offer more details.

Calgary-based Encana and Oklahoma City-based Chesapeake were the top lease-buyers in Michigan's Collingwood Shale during a speculative land boom in 2010.

After a land lease frenzy pushed Michigan prices as high as $3,000 per acre in mid-2010, the executives discussed proposals to divide bidding responsibilities for nine private landowners and counties in Michigan, according to emails reviewed by Reuters.

In emails, then Chesapeake CEO Aubrey McClendon and other high-ranking Chesapeake and Encana executives discussed how to keep lease prices from rising by avoiding "bidding each other up." Michigan land lease prices fell sharply following the email exchanges, Reuters found.

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

LOOMING DEADLINE

Michigan's Attorney General wants to resolve the matter before a four-year criminal statute of limitations deadline expires this spring or summer, Curtner said at the February 14 hearing.

"I think we are close to a deal, but we don't have a deal yet," Curtner told Scoville. He said he was negotiating the terms with an Assistant Attorney General in Michigan.

At least two large Michigan landowners are suing Encana, alleging that its collusion with Chesapeake led them to lose money in their attempts in 2010 to lease land to the companies. Curtner's briefing to Judge Scoville came during a hearing in one of the civil cases.

In that case, McClendon and three other Chesapeake and Encana executives asserted their Fifth Amendment right against self-incrimination during depositions, citing Michigan's ongoing criminal investigations, according to court documents and sources familiar with the matter.

Encana and Chesapeake may still face risks from a federal investigation into their land leasing activities.

"The Antitrust Division's investigation into the possibility of anticompetitive practices in the purchase and lease of oil and gas properties is still open," Washington-based Department of Justice spokeswoman Gina Talamona said last Friday.

Michigan began its antitrust probe in 2012. Last November, Chesapeake said in a regulatory filing that it had received a new subpoena from Michigan, which is also investigating whether the company violated the state's criminal solicitation law.

Market allocation agreements between competitors are illegal under the Federal Sherman Antitrust Act and state laws. In criminal solicitation, a person engages another to commit a crime. A conviction can occur even if the crime never took place if the intent was demonstrated.

Four years ago, Northern Michigan became a hot energy prospect after new drilling suggested its Collingwood Shale held big oil and gas reserves, prompting Encana and Chesapeake to snap up acreage.

In one email from June 2010, reviewed by Reuters, McClendon wrote to a Chesapeake Vice President that it was time to "smoke a peace pipe" with Encana "if we are bidding each other up." The Chesapeake VP responded that he had contacted Encana "to discuss how they want to handle the entities we are both working to avoid us bidding each other up in the interim." McClendon replied: "Thanks."

In other emails later that year, the companies' executives discussed a proposal for each to bid for leases in separate Michigan counties at an upcoming state land auction.

McClendon, who departed Chesapeake last April and now runs a new company, American Energy Partners, declined requests for comment.

(Reporting by Joshua Schneyer in New York and Anna Driver in Houston; Editing by Terry Wade and Tiffany Wu)

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