Two of North America’s biggest natural gas corporations, Encana and Chesapeake Energy, are under scrutiny today after the Reuters news agency intercepted at least a dozen emails from 2010 between the competing companies that might show evidence of price-fixing in Michigan’s oil and gas lease market.
Reuters alleges that the emails suggest top company officials discussed a plan to divide up counties in Michigan auctioning "prime oil- and gas-acreage" in order to avoid a costly bidding competition.
Both companies deny the allegation, though they admit to discussing the possibility of entering into a joint venture in Michigan.
Yesterday, Reuters reported:
Shares of Chesapeake Energy Corp and Encana Corp tumbled Monday after a Reuters investigation showed that top executives of the two rivals plotted in 2010 to avoid bidding against each other in a state auction and in at least nine prospective deals with private land owners.
Following the report, the state of Michigan pledged to determine whether the two energy giants acted two years ago to suppress land prices there.
In Michigan, private land owners can sell the drilling rights on their properties, and the state’s Department of Natural Resources holds auctions to sell state-owned rights called "oil and gas leases" biannually.
Around 2008, this market gained national attention when the Utica and Collingwood Shale oil and natural gas fields drew interest as potential natural gas mother lodes in northeast Michigan. Companies looking to access the reserves thousands of feet underground through a new process called horizontal hydraulic fracturing, or fracking, started purchasing these rights. Bids for the drilling rights per acre soared to record highs in the May 2010 auction.
"That's almost as much as all the revenue from all the leases from 1929 to May of this year. You can add to that even more money coming to the state for leases of privately owned land," he wrote.
The average bid per acre for that auction was $1,507, which far exceeds the average bids at any other auctions over the last 10 years, all of which have been under $100.
According to Reuters, 93 percent of the $178 million spent on leases came from Encana and Chesapeake, operating through intermediary bidders.
In the following October’s oil and gas lease auction, leases plummeted to an average of bid of $46 per acre. Although the state auctioned off twice as many acres of leases, the Michigan DNR only made under $10 million in sales.
The dramatic decline in bid amount could be explained by the drop in natural gas prices over the time period. But Reuters alleges that the disparity could stem from a possible deal struck between the two companies in which they colluded to fix prices by dividing up the leases between each other before bidding.
On October 14 - a dozen days before the state auction - Kurt S. Froistad, a land executive with Encana, emailed Gary Dunlap, Chesapeake's vice president of land. The subject line: "Michigan State Lease Sale."
Froistad told Dunlap he was "working on a draft agreement for the sale, but wanted to identify Encana's suggested contract lands and bidding responsibilities so you can take a look."
Closer to the October 2010 auction, Reuters reports that the emails suggest that Chesapeake officials backed away from a “joint-bid” strategy with Encana, and the auctioned land was not divided between the two corporations as indicated in the emails. However, the dramatic drop in average winning bid for mineral leases in 2010 still has antitrust experts wondering.
The Reuters article said:
"In a situation where there is some level of collusion going on, it's hard to get agreement on everything. It's not easy to form cartels," said [Harry First, a former antitrust lawyer for the Department of Justice]. "The fact that a cartel isn't perfectly effective doesn't mean it isn't harmful."
Encana told Reuters it was executing an internal investigation in light of their report. Neither company has yet to be charged with any illegal activity, but if found guilty of creating a private industry cartel or price-fixing, each could be fined up to $100 million, and private land owning victims can also seek triple the amount of damages.
You can read more about Encana and Chesapeake’s operations in Michigan on the Environment Report’s website, and by following Michigan Radio’s links below.
-Elaine Ezekiel, Michigan Radio Newsroom
Clarification: An earlier version of the piece referred to hydraulic fracturing as a new process for extracting natural gas. The overall method is not new but extending the wells horizontally underground is a recent innovation. The text has been updated to reflect this point.