Encana Corp. (ECA), Canada’s biggest natural gas producer by volume, is investigating a news report of e-mails between it and Chesapeake Energy Corp. (CHK) regarding land-lease bidding in Michigan.
The e-mails included an exchange between Chesapeake Chief Executive Officer Aubrey McClendon and a company vice president referring to a call with Encana to discuss oil and gas leases being auctioned off in northern Michigan in 2010, according to Reuters, which didn’t state from where it obtained the e-mails.
Encana, based in Calgary, “immediately initiated” an investigation of the allegations, David O’Brien, chairman of the company’s board of directors, said yesterday in a statement. “Encana therefore will not provide any further information at this time,” he said.
The e-mails include discussions between the companies about of divvying up Michigan counties for an October 2010 auction of state-held land leases with Encana bidding on some and Chesapeake on others, according to the Reuters report, which paraphrased those e-mails.
McClendon said in one internal e-mail in June 2010 that the company needed to “smoke a peace pipe” with Encana (ECA) to prevent the rivals from “bidding each other up,” Reuters said.
One e-mail from a Chesapeake vice president sent in June 2010 to an Encana vice president suggested each company would have “the option of acquiring 50 percent of the acreage acquired by the other,” Reuters said. This e-mail was also sent to McClendon and to Jeff Wojahn, president of Encana’s U.S. division, according to the story.
As the October auction date approached, Wojahn and McClendon were e-mailing each other directly, Reuters said. Wojahn referred in an Oct. 20, 2010, e-mail to Encana and Chesapeake executives working on “arranging a bidding strategy,” according to Reuters.
Chesapeake dropped the “joint-bid strategy,” according to a subsequent e-mail reported by Reuters. Average winning bids for the leases dropped from $1,413 an acre in a similar state auction in May 2010 to $46 per acre in the October auction, Reuters said, citing its own analysis.
The Michigan Department of Natural Resources also is “evaluating” the Reuters report citing the e-mails, a department spokesman said.
“We’re evaluating the information,” Ed Golder, a spokesman for the department, said yesterday in an interview. “We’re very much interested in the auction process and assuring fair market value.”
The department also asked the state attorney general to review the matter, Golder said. There is no formal investigation, he said. Joy Yearout, a spokeswoman for Michigan Attorney General Bill Schuette, said she couldn’t confirm or deny whether there was an investigation.
Chesapeake, based in Oklahoma City, denied any collusion with Encana over bidding for Michigan leases.
“While there were discussions between Encana and Chesapeake in 2010 about forming an ‘area of mutual interest’ joint venture (an ‘AMI’) regarding leases in Michigan, no such agreement was reached between the parties and no AMI was formed,” Jim Gipson, a Chesapeake spokesman, said yesterday in an e-mail.
“Nor did Encana and Chesapeake make any joint bids,” Gipson said. “Chesapeake has invested approximately $400 million to acquire leases in Michigan.”
Chesapeake fell 8.5 percent to $17.03 yesterday in New York. Encana fell 3.7 percent to C$19.61 yesterday in Toronto.
Chesapeake and Encana may be vulnerable to government action even if they were only talking about engaging in a joint venture, said Darren Bush, professor at the University of Houston Law Center and a former federal prosecutor in the Justice Department’s antitrust division. “The joint venture would have to revolve around something other than lowering prices,” he said.
“If they’re divvying up markets or agreeing that only one company will make a bid, that’s bid-rigging or naked price- fixing,” Bush said in a phone interview.
“Given the nature of the documents, it would be hard to walk away from this,” he said. “They’re likely to settle.”
Encana operates in the U.S. in states including Texas and Colorado, as well as the Collingwood shale area in Michigan. The company has interests in 2.4 million acres of land across the country, of which 1.9 million acres are undeveloped.
Encana spun off its oil operations, which then formed Cenovus Energy Inc. (CVE), in 2009. Natural gas, used for heating and cooking, has since fallen to decade-low prices as demand stagnates and supply surges, helped by hydraulic fracturing technology.
Last week, Encana said it will spend $600 million more this year to develop so-called liquids-rich wells, which produce butane and other higher-priced fossil fuels, to help offset low gas prices. The company’s shares have gained 3.8 percent this year.
Encana CEO Randy Eresman said on June 21 during a presentation to analysts that the company is trying to sell a joint venture stake in its U.S. portfolio. That may include “a possible interest” in the Tuscaloosa, Eaglebine, Mississippi Lime as well as Collingwood and Utica formations, he said at the time.
In Michigan, where Encana is targeting the combined Utica and Collingwood formations, the company holds 432,000 undeveloped net acres, said Wojahn, who heads the company’s U.S. operations, at the same presentation. In 2011, Encana drilled two horizontal wells into the Utica/Collingwood formations, he said.
Encana is planning to drill five to seven additional wells in 2012 and it has also initiated the process of seeking joint venture partners to further develop the company’s land position in the U.S., Wojahn said.