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The Environment Report
Wed March 19, 2014
Big energy companies face conspiracy, anti-trust violations in Michigan
The state of Michigan alleges energy giants Encana Oil and Gas USA and Chesapeake Energy worked together to get cheaper prices to lease land to drill for oil and gas.
Michigan’s attorney general filed charges against the companies earlier this month. Today, the companies were arraigned on conspiracy and anti-trust violations.
Today, representatives for the companies pleaded not guilty to attempted antitrust violations, a misdemeanor punishable by up to one year in prison and/or a $1,000 fine. They stood mute on the charge of conspiracy in restraint of commerce, a high court misdemeanor punishable by up to two years and/or a $10,000 fine for an individual or up to $1 million for a corporation. That’s treated as a not-guilty plea by the court.
Even though the charges are only a couple misdemeanors, there’s a lot of buzz around this case.
The federal government is investigating similar allegations. How this case works out at the state level could be an indicator of charges these companies might face at the federal level. Plus, if the allegations are true, the state probably got cheated out of a bunch of money.
Four years ago, oil and gas companies were all excited about this area in northern Michigan where gas reserves were discovered. Gas companies wanted to secure the rights to the land. That way they could be the ones to get the gas out of the shale and presumably make a big profit getting the gas to market.
The state held an auction in May 2010. It offered drilling rights on almost 120,000 acres of public land in northern Michigan. There was a bidding frenzy.
The average bid per acre ended up being $1,510. It’s by far the highest price ever paid for drilling rights on public land in Michigan. Check out the average prices in the last 30 years here.
That one auction brought in $178 million. In 2010, my colleague Lester Graham reported that’s almost as much as all the revenue from all the leases from 1929 until now, combined.
Patty Birkholz was a state senator at the time.
“I remember some of the people from the Department of Natural Resources came to me and said, 'you’re not going to believe the prices we got this year.' I mean, they were totally shocked too,” Birkholz recalled. “Now, it was the beginning of the gas boom so it was not unexpected that the money would go up. It was not expected that the money would go up that high.”
It was right after that auction in May that the alleged conspiracy happened.
Props to Reuters news agency here. They broke a story on this a couple of years ago when they managed to get copies of a bunch of emails between high level executives at both Chesapeake Energy and Encana. You can read the story and the detailed emails here.
Reuters says the emails show executives at the gas companies may have decided to play nice, “smoke the peace pipe” and split up which areas they wanted to lease ahead of the next public auction in Michigan. That way they wouldn’t go into that bidding frenzy and drive up the prices to that crazy high level again. But, natural gas prices were edging down by the time the October auction arrived; some argue it may have just been a bubble.
Either way, at the next public auction just five months later, the average price per acre went back down to a much more normal $35. That’s like having a 97% off coupon from the previous auction.
Both companies are adamant they didn’t break any laws. Both declined to comment for this story, as did the state attorney general’s office.
Encana issued this statement:
Encana denies and will vigorously defend the charges put forth by the Michigan Attorney General’s office. In 2012 Encana’s Board undertook a comprehensive investigation into the allegations of collusion with competitors relating to land transactions in Michigan, and concluded that Encana did not engage in such conduct. The independent investigation completed by Encana’s Board, as well as all evidence provided by Encana to the Michigan Attorney General, clearly show that no agreement was reached and no violation of antitrust law occurred. Such charges have no merit.
Chesapeake issued this statement:
It is disappointing that the Michigan Attorney General has filed these charges against Chesapeake regarding leasing activity in Michigan in 2010. No agreement was ever reached between Chesapeake and Encana. As previously disclosed, a thorough investigation conducted by independent counsel retained by Chesapeake’s Board in 2012 concluded that Chesapeake’s activities in Michigan did not violate antitrust laws. This action has no merit and we will vigorously contest it.
Patty Birkholz is now the West Michigan director of the League of Conservation Voters.
The league and others are pretty disappointed because the money the state makes from these auctions support parks, recreation and conservation efforts.
“We as a state, yes, missed out on a whole lot. I mean if Reuters’ numbers are correct it’s $200 million. You know that’s a lot of money. It should be a big deal to every citizen of this state,” Birkholz said.
At the time of the auction, the money would’ve gone to the Michigan Natural Resources Trust Fund. But that fund has since met its $500 million cap. At this point, that money would have gone to a fund to improve state parks.
Even if the companies are found guilty, they’d face up to a $1 million fine, which could still be a heck of a lot cheaper than what it may have cost the companies if they had gotten into another bidding frenzy over the drilling rights.
“If (the allegations) are true, I’m very saddened that the penalty is only $1 million,” Birkholz said.
Politics & Government
Politics & Government