GAYLORD, MICHIGAN Under the direction of CEO Aubrey McClendon, Chesapeake Energy Corp. plotted with its top competitor to suppress land prices in one of America's most promising oil and gas plays, a Reuters investigation has found.
In emails between Chesapeake and Encana Corp, Canada's largest natural gas company, the rivals repeatedly discussed how to avoid bidding against each other in a public land auction in Michigan two years ago and in at least nine prospective deals with private land owners here.
In one email, dated June 16, 2010, McClendon told a Chesapeake deputy that it was time "to smoke a peace pipe" with Encana "if we are bidding each other up."
The Chesapeake vice president 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."
That exchange - and a dozen other emails reviewed by could provide evidence that the two companies violated federal and state laws by seeking to keep land prices down, antitrust lawyers said.
"The famous phrase is a ‘smoking gun.' That's a smoking H-bomb," said Harry First, a former antitrust lawyer for the Department of Justice. "When the talk is explicitly about getting together to avoid bidding each other up, it's a red flag for collusion, bid-rigging, market allocation."
Chesapeake and Encana say they discussed forming a joint venture in Michigan but opted against it. Partnerships can defray the steep costs of shale development, which include amassing thousands of acres of land and drilling dozens of wells.
In response to questions from Reuters, Encana said it was undertaking an internal investigation, saying it "is committed to conducting its business in an ethical and legal way."
It acknowledged that its U.S. branch "discussed, but did not go forward with, a joint venture with Chesapeake Energy," but added that it "cannot specifically address the questions posed at this time."
Chesapeake spokesman Jim Gipson also said there had been discussions with Encana about "forming an ‘area of mutual interest' joint venture" in Michigan. But he said "no such agreement was reached between the parties…. Nor did Encana and Chesapeake make any joint bids."
The revelation of the discussions between Encana and Chesapeake, the second-largest natural gas producer in the United States, comes at a time when McClendon is under fire.
The company's board stripped him of his chairmanship after Reuters reported that he took out more than $1.3 billion in personal loans from a firm that also finances Chesapeake. The IRS and the Securities and Exchange Commission have launched inquiries.
Private industry cartels are forbidden in the United States, where price-fixing between competitors is illegal under the Sherman Antitrust Act. Companies can be fined up to $100 million and individuals up to $1 million for each offense. Victims can also seek triple the amount of damages.
Antitrust lawyers said the fact that the companies discussed a formal joint venture wouldn't dispel legal concerns.
"Nothing in the documents suggests any benefit to the joint venture other than making the price fall," said Darren Bush, a former attorney in the Antitrust Division of the Department of Justice and a law professor at the University of Houston. "If it has no other purpose, then it's just a shell and doesn't change the liability for illegal conduct."
(Editing by Michael Williams)