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Chesapeake, Encana Accused of Collusion in Michigan Lease Auction

A Michigan landowner has filed a lawsuit alleging that Chesapeake Energy Corp., Encana Corp. and a state-based operator conspired to rig a state oil and gas leasehold auction in 2010.

NorthStar Energy LLC, which filed the lawsuit on Monday, alleges that the producers entered into an anti-competitive agreement that had the effect of forcing NorthStar to sell oil and gas leases at prices less than they were worth. The acreage included mineral rights that allowed for exploration and development of the Utica-Collingwood shale formations in northern Michigan.

NorthStar has asked for a jury trial in the lawsuit, which was filed in U.S. District Court for the Western District of Michigan (NorthStar Energy LLC v. Encana Corp. et al, 1:13-cf-00200-PLM). In addition to Chesapeake and Encana, Michigan-based producer O.I.L. Niagaran LLC is also a defendant.

Using information pieced together from emails between Encana and Chesapeake executives, Reuters in a report last year alleged that the operators colluded to suppress land prices in a Michigan leasehold auction held by the state's Department of Natural Resources (DNR) in 2010 (see Shale Daily, June 26, 2012). Chesapeake and Encana acknowledged that they had discussions at one point to form an area of mutual interest or even a joint venture to develop a leasehold, but no joint bids were ever made, according to Michigan records.

According to the lawsuit, NorthStar in early June 2010 put out for bid about 9,838 net lease acres in Michigan's Antrim, Charlevoix, Cheboygan, Montmorency, Kalkaska and Otesgo counties. The bids were offered following promising reports earlier that year by Petoskey Exploration, an affiliate of Encana, in Missaukee County, MI. The competitive state auction by DNR in May 2010 netted the state $178 million -- a record breaking number.

"Around the time of the auction, several potential buyers contacted NorthStar expressing interest" in acquiring its oil and gas leases, which could be used to explore the shale formations. Included in the group of those expressing an interest were Encana Oil & Gas USA Inc. and O.I.L., NorthStar claims. The producers agreed to avoid bidding against each other to keep the bids on certain leases low, and "formed an anti-competitive agreement and shared competitive and proprietary information," which is in violation of U.S. federal antitrust law and Michigan statutes, according to the lawsuit.

NorthStar is seeking treble charges, or triple the amount the plaintiff said it lost because of the alleged collusion. Chesapeake said it could not comment on litigation. Encana in a statement said it intended to "vigorously defend any lawsuit which may be brought..."

Internal investigations by Chesapeake and Encana boards found that no price collusion ever existed (see Shale Daily, Feb. 21; Sept. 7, 2012). An investigation into the collusion allegations remains ongoing by DNR and the U.S. Department of Justice.

"The importance of independent -- rather than internal -- investigations cannot be emphasized enough in a case involving antitrust bid-rigging allegations," said Michigan Attorney General Bill Schuette. "Our thorough, independent investigation into these serious allegations will continue."

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