(Adds details and comment from hearing, context on criminal
By Brian Grow
CHEBOYGAN, Michigan May 5 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
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. (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
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
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
Chesapeake and Encana recently received letters from the
U.S. Justice Department informing 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)