March 19 (Bloomberg) -- Chesapeake Energy Corp. and the U.S. unit of Encana Corp., rivals in developing American oil and gas resources, criminally conspired to avoid competing in Michigan, according to the state’s attorney general.
Company representatives are scheduled to appear today before a state court judge in Cheboygan, Michigan, to answer allegations that they agreed in which counties each would bid for oil and gas exploration rights before a May 2010 auction, violating state antitrust laws.
Collaboration between Chesapeake and Encana Oil & Gas USA may have caused lease prices to plummet from $1,510 an acre at the May auction to less than $40 an acre at an auction conducted five months later, Michigan Attorney General Bill Schuette said in announcing the charges on March 5.
Encana, based in Calgary, is Canada’s biggest natural gas producer. Oklahoma City-based Chesapeake is the second-biggest U.S. natural gas producer. They’re charged with conspiring to restrain trade, a crime punishable by a fine of as much as $1 million, and with attempting to restrain trade, which carries a $1,000 penalty.
Both companies said on the day the charges were announced that internal investigations undertaken after a 2012 news report showed the allegations had no merit.
“The independent investigation completed by Encana’s board, as well as all evidence provided by Encana to the Michigan attorney general, clearly show that no agreement was reached and no violation of antitrust law occurred,” Jay Averill, a company spokesman, said in an e-mail.
Gordon Pennoyer, a spokesman for Chesapeake, denied on March 5 that his company formed a pact with Encana.
“A thorough investigation conducted by independent counsel retained by Chesapeake’s board in 2012 concluded that Chesapeake’s activities in Michigan did not violate antitrust laws,” Pennoyer said in an e-mailed statement.
State Judge Maria Barton is set to preside over today’s arraignment in Cheboygan, a city of less than 5,000 people at the northern edge of the state’s Lower Peninsula, close to the point where Lake Michigan meets Lake Huron.
Underlying that region is Michigan’s Collingwood shale formation. Chesapeake and Encana began amassing drilling rights there in 2008. While Encana has expanded its presence there, controlling about 429,000 acres by the end of 2012, Chesapeake withdrew from the region after investing $400 million.
The internal investigations of the companies’ Michigan bidding practices were prompted by a 2012 Reuters report citing e-mails among executives from both companies, including then-Chesapeake Chief Executive Officer Aubrey McClendon and an Encana vice president.
In one exchange, McClendon said his company needed to “smoke a peace pipe” with Encana to avoid a bidding war, Reuters said, without saying where it obtained the e-mails.
Schuette referenced the Reuters investigation in announcing the charges.
McClendon stepped down as Chesapeake CEO last year after a shareholder revolt and an inquiry into whether he had used personal stakes in company-owned wells to obtain more than $800 million in private loans. He was cleared by the company of any intentional misconduct.
The cases are People v. Chesapeake Energy Corp., 14-0140-F4, and People v. Encana Oil & Gas USA Inc., 14-0141-F4, 89th District Court, Cheboygan County, Michigan (Cheboygan).
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