By Devan Flahive
While the term antitrust as it relates to the energy industry may evoke thoughts of the Roosevelt administration’s historical campaign to break up Standard Oil, antitrust laws are not a relic of the past. Oil and gas exploration and production companies that contemplate joint bidding or other collaborations for acquiring leases of state-owned land in West Virginia must first consider the importance of federal and state antitrust laws.
Photo by John Fontenot
In response to proposals from oil and gas exploration and production companies seeking to drill horizontal wells with laterals crossing state-owned land, the West Virginia Division of Natural Resources (DNR) and the West Virginia Department of Commerce developed a competitive bidding process for awarding oil and gas leases on nominated land. Under West Virginia law, the DNR has the authority to lease the oil and gas resources that lie under wildlife management areas, state parks and waterways, including the Ohio River.
Pursuant to this development, the bidding process is initiated after the governor approves the nominated land for prospective lease. The Department of Commerce receives and reviews the bids, awarding the lease to the highest responsible bidder. Since a gross royalty of 20 percent is mandated by the program, bidders only compete on the basis of bonus per acre.
Josh Jarrell, general counsel for the Department of Commerce, has overseen this program since its inception in 2014. “Despite the downturn in natural gas prices, approximately $18 million has been added to the DNR’s coffers solely from up-front bonus payments,” he says of the program’s success.
Royalty revenue still remains largely on the horizon, as lessee oil and gas companies are only now in the process of drilling and completing wells.
In order to gain efficiencies in these state-owned land development opportunities, oil and gas companies may collaborate to acquire leases by bidding jointly. Joint bidding entails one party bidding with or on behalf of another party. Because joint bidding tends to reduce the number of firms competing for interests being sold, such agreements inherently reduce competition between potential acquirers and, accordingly, raise concerns under antitrust laws.
Photo by John Fontenot
Antitrust laws forbid concerted activity that harms competition and conclusively presumes bid rigging—when competitors agree not to compete against each other—to be unlawful without any inquiry into whether competition was actually harmed. A joint bidding agreement that is ancillary to a pro-competitive or efficiency-enhancing collaboration, however, may be lawful under a more lenient rule of reason analysis. That analysis requires the court to balance the potential competition-reducing effects of the agreements against its competition-enhancing benefits. If, on balance, the agreement is competitively neutral or pro-competitive, the agreement passes muster under the antitrust laws; if not, the agreement is condemned as unlawful.
In 2012, the U.S. Department of Justice (DOJ) Antitrust Division challenged, for the first time, a joint bidding arrangement between two oil and gas companies for federal leases offered by the Bureau of Land Management (BLM). The case, filed in Colorado district court and styled U.S. v. SG Interests I, Ltd. et al., illustrates the antitrust risk linked to joint bidding. The DOJ alleged that a Memorandum of Understanding (MOU) between SG Interests (SGI) and Gunnison Energy Corporation (GEC) constituted an illegal restraint of trade in violation of the antitrust laws. The MOU provided that SGI would submit bids as the nominee for both itself and GEC. If successful, SGI would then assign a 50 percent interest in the acquired leases to GEC at actual cost. The DOJ argued that this collusion between SGI and GEC resulted in the government receiving substantially less revenue than it would have had SGI and GEC competed at the BLM auctions. Ultimately, the court approved a final judgment without trial or final adjudication of any issue of fact of law, mandating that SGI and GEC each pay $275,000.
The program for leasing oil and gas rights owned by West Virginia’s DNR does not expressly address joint bidding, but both federal and West Virginia antitrust laws prohibit anticompetitive collusion in the market for oil and gas leaseholds and prohibits certain collaboration in the acquisition of state-owned land leases. Hence, before entering into such an agreement, parties should ensure that their collaboration has been vetted by experienced antitrust counsel.
About the Author
Devan Flahive is a West Virginia-licensed attorney. Her practice focuses on litigation involving the oil and gas industry, and she has particular emphasis in antitrust matters. Her work includes the preparation of antitrust compliance programs for corporations and trade associations. Flahive can be reached at Devan1037@icloud.com.
