The Michigan Department of Natural Resources (DNR) has begun working with the state’s Attorney General’s Office to review allegations that Chesapeake Energy Corp. and Encana Corp. worked together to avoid competing in state lease auctions two years ago.

Using emails pieced together between top executives of Chesapeake and Encana, Reuters alleged in a report on Monday that the operators colluded to suppress land prices in the state. There had been discussions at one point between the two operators to form an area of mutual interest (AMI) to develop a leasehold in Michigan or even a joint venture (JV) but no joint bids were ever made, according to records.

Encana officials said Monday they were aware of the article and that they take “compliance with all laws very seriously and [are] committed to ethical business conduct in all that we do.” Encana Chairman David O’Brien said, “In accordance with Encana’s policies, an investigation of this matter was immediately initiated.”

The Michigan DNR now is working with the state’s top law officers on the allegations. “Our department is committed to ensuring the integrity of its auctioning process and to receiving fair market value for resources on public land,” said DNR spokesman Ed Golder.

Reuters, which obtained emails between Chesapeake officials, including CEO Aubrey McClendon, and Encana management, said executives discussed how to avoid bidding against each other in a 2010 auction held by the Michigan Department of Natural Resources (DNR). An auction in May 2010 netted the state $178 million in bonus payments, which at the time exceeded projections and broke a record for previous auctions.

Encana at the time noted that it was a stealthy land buyer in the state, but Chesapeake was even quieter. According to the DNR, Chesapeake spent about $138 million at the auction through an intermediary, while Encana spent about $27 million — together nearly $165 million of the $178 million bid — for a total of 84,000 net acres of land.

Encana by that point had amassed close to 250,000 net acres by buying up land in the Collingwood and Utica shales. Subsidiary Petoskey Exploration LLC of Denver had drilled the first well in the play, a 5,000-foot horizontal at 9,500-foot true vertical depth. The initial production rate over 30 days averaged 2.5 MMcf/d. Today the producer has around 425,000 net acres in the state (see Shale Daily, April 21, 2011).

Reuters reported that Chesapeake’s CEO and his management team were concerned about Encana’s pace in the play.

“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.'”

If the emails are accurate, along with “at least a dozen other emails” that Reuters reviewed, it may be evidence of price fixing between competitors, which is a violation of the Sherman Antitrust Act. Violators may be fined up to $100 million and individuals face up to $1 million for each offense, according to the law. Collusion between competitors also may result in wire fraud penalties.

Private landowners in Michigan also were targeted by the two producers, Reuters investigation found.

“Some landowners were being offered more than $3,000 per acre in June 2010…Top executives from Chesapeake and Encana were growing weary of the rapidly escalating prices. In early June, Chesapeake Vice President Doug Jacobson reached out to Encana to discuss what the emails characterized as an ‘area of mutual interest’ [AMI] in Michigan — regions where the two companies would have the option to share mineral leases equally after they were purchased.” The officials “discussed ways to prevent land prices from escalating,” and decided to divide up the state’s counties and the private landowners.

“From June 6 to June 15, 2010, the two companies swapped proposals. In many of the emails, officials refer to the companies by their three-letter stock abbreviations: CHK for Chesapeake and ECA for Encana. On June 6, Chesapeake vice president Jacobson sent an email with the subject line ‘CHK/ECA — MI’ to Encana Vice President John Schopp. It was copied to McClendon and to Jeff Wojahn, Encana’s U.S. president. ‘Our proposal is pretty simple, but hopefully should be effective for us both,’ Jacobson wrote.

A strategy was outlined that included “swapping land already leased in Michigan and dividing up counties and private landowners where new leases might be secured. Both Chesapeake and Encana ‘will have the option of acquiring 50% of the acreage acquired by the other’ within the area of mutual interest ‘on the same terms as the initial acquiring party,'” he wrote. The companies also apparently worked together to deal with Dallas-based energy company Merit, which owned more than 200,000 net acres in Michigan. Chesapeake executives apparently met with them twice, Reuters disclosed.

In mid-June 2010 “Jacobson reiterated Chesapeake’s desire to strike a deal with Encana. In an email to Schopp…Jacobson suggested they discuss plans to split up where, and from whom, each company would lease land in Michigan. The reason, the email shows, was to ensure each company could acquire more land without bidding against the other. ‘Also, when you are back in the saddle, I’d like to visit with you about the implications of the impact of our competition on acreage prices and whether or not the sooner we do this the better shot we have of keeping acreage prices from continuing to push up,’ Jacobson wrote to Schopp.”

A couple of minutes later Jacobson apparently forwarded the email to McClendon and three other Chesapeake executives. The following day McClendon sent the “peace pipe” email to Jacobson.

Motley Fool’s Brian Stoffel said Monday it’s “common practice” to have JVs and AMI agreements between competing companies but “it does not appear that either one of these mechanisms was in place” in the bidding cited in the Reuters investigation.

“It could take months or years for this to play out in court, but the markets need not wait to factor in such risks. Chesapeake has already been plagued by bad behavior from McClendon, ranging from leveraged bets that exposed him to conflicts of interest to running a secret hedge fund with current SandRidge Energy CEO Tom Ward. I wouldn’t be surprised to see McClendon shown the door soon at Chesapeake. For Encana, one of Canada’s largest natural gas companies, it’s more difficult to see how things will play out.”