March 2016, Vol. 243, No. 3
Web Exclusive
Federal Officials Say Bid-Rigging Goes Beyond Chesapeake’s Ex-CEO
DALLAS (AP) — As advanced drilling technology opened untapped sources of oil and natural gas, it triggered fierce competition among energy companies to scoop up rights to drill on vast swaths of land across the country.
The rush caused lease prices to skyrocket in the most promising fields. In a few cases, gas companies responded by cutting secret deals to rig the bidding and hold down their costs. Federal officials are now investigating to see if these shady practices are more common than believed.
The first big indictment of an executive came this week, when former Chesapeake Energy Corp. CEO Aubrey McClendon was charged with conspiring to rig bids for gas leases in Oklahoma from 2007 to 2012. Prosecutors moved Thursday to drop the charges after McClendon died in a fiery crash one day after the indictment was handed up by a federal grand jury in Oklahoma City.
Before McClendon’s death, the Justice Department said that his indictment was “the first case resulting from an ongoing federal antitrust investigation into price fixing, bid rigging and other anticompetitive conduct in the oil and natural gas industry.”
No one else was charged in the indictment but two unnamed companies and an unnamed co-conspirator were mentioned. The wording of the indictment made clear that Chesapeake was one of the companies. A Chesapeake Energy spokesman said the company does not expect to face criminal prosecution or fines.
The Justice Department accused McClendon of orchestrating a scheme in which the two companies would decide who would win a particular bid. The winner would then give the apparent loser an interest in the lease. McClendon denied the charges and vowed to prove his innocence and clear his name.
McClendon protested that he was the first person accused of a crime in relation to joint bidding on leases. Joint bidding is the practice of companies, often smaller ones, working together on a bid. It is more common in offshore leases such as the Gulf of Mexico, and the bidders disclose that they are working together, according to people in the industry.
A prominent Houston lawyer who advises energy companies told The Associated Press that he had never heard of bid-rigging of the sort described in the indictment.
An attorney who is suing the companies described the oil patch differently.
“It’s the wild, wild West out there,” said Dallas attorney Warren Burns.
Burns filed a civil antitrust lawsuit in federal court in Oklahoma on Thursday against Chesapeake, SandRidge Energy Corp. and former SandRidge CEO Tom Ward. He believes SandRidge and Ward are the other company and the co-conspirator mentioned but not identified in the McClendon indictment. Representatives of SandRidge and Ward did not respond to several requests for comment.
Landowners “can tell you that on one side of a dividing line is Chesapeake’s territory and on the other side is SandRidge’s,” Burns said.
SandRidge has disclosed in regulatory filings that it received a subpoena from the Justice Department about an ongoing antitrust investigation into land or mineral rights leases before 2012 — coinciding with the time period in the McClendon indictment. SandRidge also said it was told by the Justice Department that it was the target of a grand jury investigation in Oklahoma.
For decades, the government did not intervene in the business of how oil and gas companies bid for the right to drill. That has changed in the last few years, with some major cases.
Chesapeake Energy, the company that McClendon and Ward founded and built into the nation’s second-biggest producer of natural gas, pleaded no contest to antitrust violations and agreed last April to pay $25 million to settle charges that it conspired with Encana Oil and Gas USA to rig bids in Michigan. Encana paid a $5 million fine.
Oil and gas leases fell from $1,510 to $40 an acre, and officials said there were more than 700 victims of the scheme in Michigan.
In 2013, Gunnison Energy Corp. and SG Interests Ltd. agreed to pay $275,000 each to settle a Justice Department lawsuit accusing them of bid-rigging on federal land in Colorado. Officials said the companies agreed that only one would bid on leases but they would split the acreage after paying as little as $2 an acre.
The Justice Department said the Colorado case marked the first time it had challenged anticompetitive bidding for mineral-rights leases.
Houston lawyer Philip Hilder, a former federal prosecutor, said he expects more prosecutions. He said the energy sector has been largely ignored by the antitrust division and that bid-rigging is a widely accepted practice.
By winning an indictment of McClendon, prosecutors may have made other potential targets of the investigation more willing to cooperate, said David Weinstein, a Miami attorney and also a former federal prosecutor.
McClendon, 56, started out as a landman, someone who calls and knocks on the doors of mineral rights owners about letting oil and gas companies drill under their land. It’s a bare-knuckles business in which rivals try to beat each other to the doorsteps of residents who may have no idea of the wealth beneath their land.
If a landman moves into an area before competitors do, he can line up cheap leases that become hugely profitable if his company strikes oil or gas. Once a field becomes hot, however, landmen from different companies swarm in, driving up lease prices.
McClendon resigned as CEO in 2013 after a revolt by activist shareholders including Carl Icahn. He started a new company, American Energy Partners, less than a mile from Chesapeake’s headquarters in Oklahoma City.
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