by Jon B. Dubrow and Shauna A. Barnes
Recently published reports of land acquisition activities between Chesapeake Energy and EnCana senior executives will likely expose those companies to a Department of Justice (DOJ) antitrust investigation and challenge, as well as, if accurate, civil antitrust claims. This matter highlights the risks that energy companies face when discussing lease arrangements with their competitors.
In February 2012, DOJ settled its first challenge to a bidding agreement for mineral rights, alleging that agreements between Gunneson Energy Corporation and SGI Interests to bid jointly for government mineral leases were anticompetitive. In a previous post, we explained the potential issues and pitfalls related to joint bidding for oil and gas properties. We suggested various factors that companies can use to assess, or manage, their antitrust exposure.
On June 25, 2012, Reuters published a special report indicating that Chesapeake and EnCana agreed to suppress bids for mineral rights at public and private land auctions. Citing dozens of highly inflammatory emails, the article purports to detail how Chesapeake’s CEO, Aubrey McClendon, and other senior executives at Chesapeake and EnCana discussed how to avoid creating a bidding price war in acquiring drilling rights for Northern Michigan properties.
According to Reuters, throughout 2010, EnCana and Chesapeake were the leading buyers in Michigan and they aggressively competed to acquire properties for hydraulic fracturing (fracing) operations. During a May 2010 land auction, they paid approximately $1,413 per acre. Following the auction, private landowners sought competing bids, leading to a bidding war resulting in offers of more than $3,000 per acre.
Reuters indicates that Chesapeake and EnCana discussed via email entering into a formal venture, including some areas of mutual interest that would allow the parties to share in the risks and rewards of developing properties. However, they did not enter into any venture. Instead, they purportedly discussed in emails ways, as independent bidders, to refrain from bidding up land prices, and to allocate various properties between themselves. These emails were followed by significant price reductions in the offers made by Chesapeake and EnCana.
The Chesapeake-EnCana situation, following quickly on the heels of the DOJ’s joint bidding challenge earlier this year, serves as a reminder that companies in the oil and gas industry must exercise care in situations where they may want to work with potentially competing bidders. In the oil and gas industry, firms frequently work together to acquire and develop properties, and that can often be lawfully accomplished through a legitimate collaboration. Firms, and their executives, may often have opportunities to discuss property acquisition in the context of a legitimate, integrated venture, including with firms that might otherwise be competitors. However, while some joint activities may be permissible, other conduct may create antitrust liability. Companies, and their personnel interacting with potentially competing land purchasers, need to be aware of the conditions under which a joint bid is likely to pass antitrust review, as well as when the proposed activity would likely be viewed as a simple market allocation or bid-rigging conspiracy. An individual may believe, based on prior collaborative activities, that he or she is discussing a legitimate topic without realizing that the contemplated conduct is creating substantial legal exposure in the present circumstances.
As these cases demonstrate, it is important for companies to be sensitive to the antitrust issues involved in coordinating bidding activities with competitors. In some cases, working jointly on property acquisitions can be accomplished lawfully, but if done improperly it can create substantial risks. The fact that there have been two instances arising this year in which energy companies have apparently engaged in activities creating antitrust issues indicates that companies operating in this field may not be properly sensitized to the antitrust issues.