Jeff Horwich: Reuters reports that Chesapeake Energy and Encana Corporation are facing a Justice Department investigation for colluding with each other. Chesapeake is the nation’s number two natural gas driller. The allegation is that the companies communicated to fix prices on land in Michigan back in 2010.
Marketplace’s Scott Tong has been basically manning our Chesapeake Energy Desk lately, and he’s here live with some details. Hi Scott.
Scott Tong: Hi Jeff.
Horwich: What are these specific allegations here?
Tong: Well anti-competitive behavior is what the Justice Department is reportedly investigating, according to Reuters. Let’s say you and I are shopping for a house in the same town. I shop, you shop, and we agree we’re not going to compete with each other to hold the price down. That’s the idea here. Oil and gas companies also shop for land to negotiate a leasing price so they can drill on someone’s property. The allegations, as you say, they came from Michigan, where Chesapeake and Encana based in Canada have both been gobbling up drilling leases. They think the geology under there has a lot of natural gas and possibly oil. Reuters reports one email from Chesapeake founder Aubrey McClendon, who’s been in the news a lot as you know, to an Encana executive, and reportedly the email talks about ‘smoking a peace pipe.’ Jeff?
Horwich: Is this one of those things where folks will say, though, ‘Come on, Chesapeake — everybody gabs about these deals. It’s just how business is done in the industry.’ Is that true?
Tong: Yeah, the Wild West? No. I spoke to a number of industry folks this morning; one of them said this is odd. These companies are known for gobbling up land to secure as much as they can so they can drill at large scale — and overpay, if they have to. And in the industry, Chesapeake Energy is the ultimate overpayer, according to a lot of people I talked to. And that got them in some of this financial trouble in the first place. So this sounds a little off-key, according to the industry folks I’ve talked to, Jeff.
Horwich: And very quickly, Scott: If they are colluding, who’s harmed by that?
Tong: Well, it’d be the owners of the mineral rights of the land. In parts of the oil and gas patch, some people get $100 per acre from the gas companies; some get $5,000 per acre. So this is real money here.
Horwich: Marketplace’s Scott Tong. Thanks very much.
Tong: You’re welcome.
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