Report: Chesapeake schemed with rival to limit land prices in Michigan auction

UPDATED: see below

Chesapeake Energy Corp could be facing additional scrutiny as Reuters reported today about how the company apparently plotted with rival Encana Corp. to keep land prices under control in a promising oil and natural gas play in Michigan.

Several experts raised the possibility of antitrust violations after reviewing emails provided by Reuters.

“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.”

The report included excepts from several emails in 2010 that show how Chesapeake and Encana officials discussed ways to avoid bidding against each other in a public land auction.

The companies said they had talked about forming a joint venture in Michigan but ultimately decided against it. Chesapeake said it did not make any joint bids with Encana.

Antitrust attorneys told Reuters that won’t dispel their legal concerns.

“Nothing in the documents suggests any benefit to the joint venture other than making the price fall,” said Darren Bush, a former Justice Department antitrust lawyer who is now 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 of the illegal conduct.”

Chesapeake already is facing inquiries from the IRS and U.S. Securities and Exchange Commission, as well as an internal review by its board of CEO Aubrey McClendon’s personal finances.

The company now is looking to unload its acreage in Michigan as it tries to sell billions of dollars worth of asset to shore up its cash flow.

Chesapeake said it has spent about $400 million acquiring its acreage in Michigan.

The company ran afoul of new Oklahoma City neighbor Continental Resources Inc. in 2010 when it allegedly tried to back out of a $28 million acreage deal. Continetal filed a breach of contract lawsuit against Chesapeake that eventually was settled.

UPDATE: Reuters continued reporting this story Tuesday with the story of landowner Walter Zaremba, who is suing Encana over an aborted deal that could have earned him at least $54 million.

Zaremba owns “deep” drilling rights to about 20,000 acres of land that had interested both Encana and Chesapeake in 2010.

He signed a “non-binding” letter of intent with Encana to lease the land for $54 million in June 2010, but the deal fell apart two days later.

Encana denied any collusion with Chesapeake in a letter to Zaremba’s attorneys in August 2010.

“Encana was not cooperating with Chesapeake, or any other entity, in any manner in connection with the negotiations with the Zaremba entities,” Encana attorney Erika Enger wrote.

Now Zaremba is seeking more than $60 million in damages from Encana, which he accuses of fraud and conspiracy in a lawsuit.

Encana has filed a lawsuit against Zaremba seeking the return of most of the $2 million in earnest money it paid before the lease deal was canceled.

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