Euro zone financial ministers agreed to a 130-billion-euro ($172 billion) rescue for Greece to avert a chaotic default, firming the euro and making dollar-denominated commodities cheaper for foreign buyers.

Iran’s top customers in Asia moved to cut back on supplies from the Islamic Republic due to tighter sanctions by the west.

China, India and Japan — which normally take almost half of Iran’s exports — were planning to cut Iranian crude purchases by 10 percent or more, several sources told Reuters.

Europe has already agreed to cut buying of Iranian crude, and Iran formally halted sales to Britain and France this week.

U.S. crude futures for March delivery, which expired at the end of trading on Tuesday, rose to a new nine-month high, gaining $2.60 to $105.84 per barrel.

In London, Brent crude for April delivery was up $1.61 at $121.66, also a nine-month high settlement.

Oil prices also were supported by intraday gains in U.S. equities, as the Dow Industrial Average briefly topped 13,000 for the first time since mid-2008, before paring gains late in the day. .N

The dollar weakened 0.4 percent against a basket of foreign currencies, making oil cheaper for holders of foreign currencies .DXY. The euro traded near its highest in two weeks.

“With the Greece situation now being addressed … (it) should weaken the dollar against the euro and boost commodities,” said Chris Jarvis of Caprock Risk Management in New Hampshire.

“Add on geopolitical risks with Iran, and it provides upside to the momentum to oil prices.”

In addition to sanctions that may hurt Iran’s ability to find crude buyers, the potential for conflict to develop with Iran and tighten oil supply further means that oil investors “are reluctant to be caught short,” said Phil Flynn, analyst at PFGBest in Chicago.

SEAWAY PURGE

Brent crude’s premium over its U.S. counterpart stood at $15.41 a barrel, down from as much as $18 last week.

The spread narrowed on news that Enterprise Products (EPD.N: Quote, Profile, Research) has begun purging the Seaway pipeline ahead of a reversal that will move crude out of the glutted Midwest and into the U.S. Gulf Coast refining complex, which could bring U.S. crude futures closer in line with Brent.

The reversal will take place in stages, with an initial 150,000 barrels-per-day flowing from Cushing, Oklahoma, the delivery point for U.S.-traded oil futures, to refineries in the Houston, Texas, area by June 1, according to a schedule released by Enterprise.

“The market has been looking for any news that would point to easing the oil glut in the Midwest. The news today moves in that direction and that’s causing the Brent premium to narrow,” said Hamza Khan, analyst at the Schork Group in Villanova, Pennsylvania.

PRE-EMPTIVE ACTION

Iran would take pre-emptive military action against its “enemies” if it felt its national interests were endangered, the deputy head of the Islamic Republic’s armed forces was quoted by the semi-official news agency Fars as saying.

On Sunday, Iran announced a halt in oil sales to French and British companies, a largely symbolic step as exports to the two countries were already greatly reduced.

“Saber-rattling on the part of Iran is continuing to lend support to the price … which ‘punishes’ all EU countries for their boycott decision,” said Carsten Fritsch of Commerzbank. The euro oil price is just below its mid-2008 record high, he said.

Iran kept up the pressure on Tuesday, saying it might stop exporting to European countries that have not clarified their position on oil imports.

(Additional reporting by Janet McGurty and Jeff Kerr in New York, Peg Mackey in London and Florence Tan in Singapore; Editing by Marguerita Choy)

The filing in federal court in Campos, Brazil, will likely include a request for criminal indictment of George Buck, chief executive of Chevron’s Brazil unit, as well as other staff, three Brazilian government officials involved in the case told Reuters.

Transocean Ltd, whose rig was used in the operation, and some of its employees in Brazil are also expected to be charged, according to the officials, who requested anonymity because the case has not been presented to a judge. It is up to a judge to determine whether to accept the charges and proceed with indictments.

The backlash against the Chevron spill has highlighted the risks that energy companies face as they rush to get a piece of Brazil’s oil bonanza. Chevron’s legal troubles come as new oil rules give Brazil’s government more control over the country’s vast oil wealth. The regulatory overhaul has also delayed investment projects and new drilling licenses.

Buck and Chevron acted in a “careless and irresponsible way,” an official who investigated the 2,400-barrel spill told Reuters.

The official said it is unlikely that people facing charges will be arrested in the near term or be barred from leaving Brazil. As the case advances and more evidence is collected, however, such measures could be applied, the official added.

When Reuters informed Chevron that charges were pending, company spokesman Kurt Glaubitz said “Chevron believes that the charges are without merit.”

“Chevron is confident that once all the facts are fully examined, they will demonstrate that Chevron responded appropriately and responsibly to the incident,” he added.

Transocean spokesman R. Thaddeus Vayda declined to comment. Transocean is the world’s biggest offshore oil rig operator.

Brazilian prosecutors have become more active in going after alleged polluters, sometimes bringing aggressive charges to encourage offenders to settle cases. They are moving far more swiftly than their U.S. counterparts: BP’s 2010 spill in the Gulf of Mexico, more than 1,000 times larger in terms of oil, has not yet resulted in any criminal charges.

In Brazil, charges in cases such as these can take a decade before all appeals are exhausted. That could saddle Chevron and Transocean with years of costly litigation, said Paulo Augusto Silva Novaes, a lawyer with the Rio de Janeiro firm of Benjo, Garcia, Souto & Novaes.

The charges would come more than a month after a Federal Police investigator submitted a report saying Chevron and Transocean took “unacceptable” risks in the Frade oil field off Brazil’s southern coast, and recommended that 17 individuals be indicted.

As many as 12 of those people are from Chevron, according to legal documents reviewed by Reuters.

Chevron is also fighting a separate 20-billion-real ($11 billion) lawsuit brought by the same Brazilian federal prosecutors. Chevron also is contesting an $18 billion judgment in Ecuador related to environmental contamination from 1964 to 1992 by Texaco, which Chevron bought in 2001.

PRESSURE KICK

On November 7, a well drilled by Chevron using a Transocean rig 107 kilometers (73 miles) from the coast of Rio de Janeiro state, experienced a pressure “kick” after tapping into an oil reservoir in Frade.

An emergency blow-out preventer was activated, plugging the well 1,200 meters (3,937 feet) below the ocean surface. But days later, Chevron discovered oil seeps from the seafloor hundreds of meters from the plugged well. Pressure caused a breach of the well wall far beneath the seabed, allowing oil to infiltrate surrounding rock and work its way into the ocean, Chevron said.

Police and prosecutors allege that Chevron knew it was drilling in a high pressure area and that rock structures above the reservoir were fragile, factors that resulted in the spill and should have prompted more caution.

“This well could not and should not have been drilled,” the Federal Police said in a December 20 report.

Chevron denies taking any undue risk and says Brazilian authorities approved its drilling plans.

“The pressure was estimated using complex modeling and the data obtained from the 50 wellbores previously drilled at the Frade project,” Chevron’s Glaubitz said in a statement. “However, it is not uncommon to experience different conditions or pressures during drilling operations than those previously experienced.”

Chevron said it acted quickly and correctly to stanch the leak from the seafloor within four days. Its operations and spill response adhered to the “best practices” of the oil industry, the company said.

Brazilian prosecutors have independence to file criminal and civil charges against companies and their employees for environmental damages, said Gustavo Trindade, who was chief legal advisor to Marina Silva, a former Brazilian Environment Minister and presidential candidate.

These cases rarely result in convictions, large fines or prison sentences, said Novaes, a corporate law expert.

For example, state-run oil company Petrobras, a partner with Chevron at Frade, is still appealing convictions and more than 100 million reais of damages resulting from an offshore oil platform accident in 2001 and a giant oil spill in Rio in 2000.

Oil from the recent Chevron leak did not reach shore and was less than 0.1 percent of BP’s 4.9 million barrel Gulf of Mexico spill in 2010. The Frade leak was also much smaller than several previous spills in Brazil by Petrobras.

Petrobras owns 30 percent of Frade. Chevron own 52 percent and is responsible for field management. The rest is owned by Frade Japao, a unit of Japan’s Inpex.

Brazil’s oil regulator, the ANP, has suspended Chevron’s drilling license at Frade. The ANP and Brazil’s environmental protection agency Ibama have fined Chevron more than $50 million as a result of the spill.

Chevron says that there is no evidence the Frade leak, which prosecutors estimate was closer to 3,000 barrels, has had any impact on aquatic life or on humans.

Oil is still leaking from the sea floor, government officials said. The oil has leaked at an average rate of 1.4 liters a day for the last week and is being captured by undersea traps, Chevron said.

Recent flyovers have not detected oil on the ocean surface, Chevron added.

Brazil’s newfound oil wealth – including at least 15 billion barrels of deepwater discoveries since 2007 – puts the country among the world’s most promising oil frontiers. Since the new finds, the government has stopped auctions of oil concessions in its richest offshore areas.

Petrobras will be the operator and hold a minimum 30 percent stake in all future oil projects in those areas. Under a new system, oil producers must share their production with the government.

San Ramon, California-based Chevron has operated in Brazil for nearly 100 years. It has invested around $2 billion in the country and has plans to spend several billion more on future projects.

Chevron shares were up 0.37 percent at $108.10 on Thursday in New York. Transocean shares rose 3.62 percent to 44.39 Swiss francs ($46.73) in Switzerland.

(Editing by Todd Benson, Alix Freedman, Jonathan Leff and Bob Burgdorfer)

The filing in federal court in Campos, Brazil, will likely include a request for criminal indictment of George Buck, chief executive of Chevron’s Brazil unit, as well as other staff, three Brazilian government officials involved in the case told Reuters.

Transocean Ltd, whose rig was used in the operation, and some of its employees in Brazil are also expected to be charged, according to the officials, who requested anonymity because the case has not been presented to a judge. It is up to a judge to determine whether to accept the charges and proceed with indictments.

The backlash against the Chevron spill has highlighted the risks that energy companies face as they rush to get a piece of Brazil’s oil bonanza. Chevron’s legal troubles come as new oil rules give Brazil’s government more control over the country’s vast oil wealth. The regulatory overhaul has also delayed investment projects and new drilling licenses.

Buck and Chevron acted in a “careless and irresponsible way,” an official who investigated the 2,400-barrel spill told Reuters.

The official said it is unlikely that people facing charges will be arrested in the near term or be barred from leaving Brazil. As the case advances and more evidence is collected, however, such measures could be applied, the official added.

When Reuters informed Chevron that charges were pending, company spokesman Kurt Glaubitz said “Chevron believes that the charges are without merit.”

“Chevron is confident that once all the facts are fully examined, they will demonstrate that Chevron responded appropriately and responsibly to the incident,” he added.

Transocean spokesman R. Thaddeus Vayda declined to comment. Transocean is the world’s biggest offshore oil rig operator.

Brazilian prosecutors have become more active in going after alleged polluters, sometimes bringing aggressive charges to encourage offenders to settle cases. They are moving far more swiftly than their U.S. counterparts: BP’s 2010 spill in the Gulf of Mexico, more than 1,000 times larger in terms of oil, has not yet resulted in any criminal charges.

In Brazil, charges in cases such as these can take a decade before all appeals are exhausted. That could saddle Chevron and Transocean with years of costly litigation, said Paulo Augusto Silva Novaes, a lawyer with the Rio de Janeiro firm of Benjo, Garcia, Souto & Novaes.

The charges would come more than a month after a Federal Police investigator submitted a report saying Chevron and Transocean took “unacceptable” risks in the Frade oil field off Brazil’s southern coast, and recommended that 17 individuals be indicted.

As many as 12 of those people are from Chevron, according to legal documents reviewed by Reuters.

Chevron is also fighting a separate 20-billion-real lawsuit brought by the same Brazilian federal prosecutors. Chevron also is contesting an $18 billion judgement in Ecuador related to environmental contamination from 1964 to 1992 by Texaco, which Chevron bought in 2001.

PRESSURE KICK

On November 7, a well drilled by Chevron using a Transocean rig 107 kilometers (73 miles) from the coast of Rio de Janeiro state, experienced a pressure “kick” after tapping into an oil reservoir in Frade.

An emergency blow-out preventer was activated, plugging the well 1,200 meters (3,937 feet) below the ocean surface. But days later, Chevron discovered oil seeps from the seafloor hundreds of meters from the plugged well. Pressure caused a breach of the well wall far beneath the seabed, allowing oil to infiltrate surrounding rock and work its way into the ocean, Chevron said.

Police and prosecutors allege that Chevron knew it was drilling in a high pressure area and that rock structures above the reservoir were fragile, factors that resulted in the spill and should have prompted more caution.

“This well could not and should not have been drilled,” the Federal Police said in a December 20 report.

Chevron denies taking any undue risk and says Brazilian authorities approved its drilling plans.

“The pressure was estimated using complex modeling and the data obtained from the 50 wellbores previously drilled at the Frade project,” Chevron’s Glaubitz said in a statement. “However, it is not uncommon to experience different conditions or pressures during drilling operations than those previously experienced.”

Chevron said it acted quickly and correctly to stanch the leak from the seafloor within four days. Its operations and spill response adhered to the “best practices” of the oil industry, the company said.

Brazilian prosecutors have independence to file criminal and civil charges against companies and their employees for environmental damages, said Gustavo Trindade, who was chief legal advisor to Marina Silva, a former Brazilian Environment Minister and presidential candidate.

These cases rarely result in convictions, large fines or prison sentences, said Novaes, a corporate law expert.

For example, state-run oil company Petrobras (PETR4.SA: Quote, Profile, Research)(PBR.N: Quote, Profile, Research), a partner with Chevron at Frade, is still appealing convictions and more than 100 million reais of damages resulting from an offshore oil platform accident in 2001 and a giant oil spill in Rio in 2000.

Oil from the recent Chevron leak did not reach shore and was less than 0.1 percent of BP’s 4.9 million barrel Gulf of Mexico spill in 2010. The Frade leak was also much smaller than several previous spills in Brazil by Petrobras.

Petrobras owns 30 percent of Frade. Chevron own 52 percent and is responsible for field management. The rest is owned by Frade Japao, a unit of Japan’s Inpex.

Brazil’s oil regulator, the ANP, has suspended Chevron’s drilling license at Frade. The ANP and Brazil’s environmental protection agency Ibama have fined Chevron more than $50 million as a result of the spill.

Chevron says that there is no evidence the Frade leak, which prosecutors estimate was closer to 3,000 barrels, has had any impact on aquatic life or on humans.

Oil is still leaking from the sea floor, government officials said. The oil has leaked at an average rate of 1.4 liters a day for the last week and is being captured by undersea traps, Chevron said.

Recent flyovers have not detected oil on the ocean surface, Chevron added.

Brazil’s newfound oil wealth – including at least 15 billion barrels of deepwater discoveries since 2007 – puts the country among the world’s most promising oil frontiers. Since the new finds, the government has stopped auctions of oil concessions in its richest offshore areas.

Petrobras will be the operator and hold a minimum 30 percent stake in all future oil projects in those areas. Under a new system, oil producers must share their production with the government.

San Ramon, California-based Chevron has operated in Brazil for nearly 100 years. It has invested around $2 billion in the country and has plans to spend several billion more on future projects.

Chevron shares were up 0.37 percent at $108.10 on Thursday in New York. Transocean shares rose 3.62 percent to 44.39 Swiss francs in Switzerland.

(Editing by Todd Benson, Alix Freedman, Jonathan Leff and Bob Burgdorfer)

The filing in federal court in Campos, Brazil, will likely include a request for criminal indictment of George Buck, chief executive of Chevron’s Brazil unit, as well as other staff, three Brazilian government officials involved in the case told Reuters.

Transocean Ltd, whose rig was used in the operation, and some of its employees in Brazil are also expected to be charged, according to the officials, who requested anonymity because the case has not been presented to a judge. It is up to a judge to determine whether to accept the charges and proceed with indictments.

The backlash against the Chevron spill has highlighted the risks that energy companies face as they rush to get a piece of Brazil’s oil bonanza. Chevron’s legal troubles come as new oil rules give Brazil’s government more control over the country’s vast oil wealth. The regulatory overhaul has also delayed investment projects and new drilling licenses.

Buck and Chevron acted in a “careless and irresponsible way,” an official who investigated the 2,400-barrel spill told Reuters.

The official said it is unlikely that people facing charges will be arrested in the near term or be barred from leaving Brazil. As the case advances and more evidence is collected, however, such measures could be applied, the official added.

When Reuters informed Chevron that charges were pending, company spokesman Kurt Glaubitz said “Chevron believes that the charges are without merit.”

“Chevron is confident that once all the facts are fully examined, they will demonstrate that Chevron responded appropriately and responsibly to the incident,” he added.

Transocean spokesman R. Thaddeus Vayda declined to comment. Transocean is the world’s biggest offshore oil rig operator.

Brazilian prosecutors have become more active in going after alleged polluters, sometimes bringing aggressive charges to encourage offenders to settle cases. They are moving far more swiftly than their U.S. counterparts: BP’s 2010 spill in the Gulf of Mexico, more than 1,000 times larger in terms of oil, has not yet resulted in any criminal charges.

In Brazil, charges in cases such as these can take a decade before all appeals are exhausted. That could saddle Chevron and Transocean with years of costly litigation, said Paulo Augusto Silva Novaes, a lawyer with the Rio de Janeiro firm of Benjo, Garcia, Souto & Novaes.

The charges would come more than a month after a Federal Police investigator submitted a report saying Chevron and Transocean took “unacceptable” risks in the Frade oil field off Brazil’s southern coast, and recommended that 17 individuals be indicted.

As many as 12 of those people are from Chevron, according to legal documents reviewed by Reuters.

Chevron is also fighting a separate 20-billion-real ($11 billion) lawsuit brought by the same Brazilian federal prosecutors. Chevron also is contesting an $18 billion judgment in Ecuador related to environmental contamination from 1964 to 1992 by Texaco, which Chevron bought in 2001.

PRESSURE KICK

On November 7, a well drilled by Chevron using a Transocean rig 107 kilometers (73 miles) from the coast of Rio de Janeiro state, experienced a pressure “kick” after tapping into an oil reservoir in Frade.

An emergency blow-out preventer was activated, plugging the well 1,200 meters (3,937 feet) below the ocean surface. But days later, Chevron discovered oil seeps from the seafloor hundreds of meters from the plugged well. Pressure caused a breach of the well wall far beneath the seabed, allowing oil to infiltrate surrounding rock and work its way into the ocean, Chevron said.

Police and prosecutors allege that Chevron knew it was drilling in a high pressure area and that rock structures above the reservoir were fragile, factors that resulted in the spill and should have prompted more caution.

“This well could not and should not have been drilled,” the Federal Police said in a December 20 report.

Chevron denies taking any undue risk and says Brazilian authorities approved its drilling plans.

“The pressure was estimated using complex modeling and the data obtained from the 50 wellbores previously drilled at the Frade project,” Chevron’s Glaubitz said in a statement. “However, it is not uncommon to experience different conditions or pressures during drilling operations than those previously experienced.”

Chevron said it acted quickly and correctly to stanch the leak from the seafloor within four days. Its operations and spill response adhered to the “best practices” of the oil industry, the company said.

Brazilian prosecutors have independence to file criminal and civil charges against companies and their employees for environmental damages, said Gustavo Trindade, who was chief legal advisor to Marina Silva, a former Brazilian Environment Minister and presidential candidate.

These cases rarely result in convictions, large fines or prison sentences, said Novaes, a corporate law expert.

For example, state-run oil company Petrobras, a partner with Chevron at Frade, is still appealing convictions and more than 100 million reais of damages resulting from an offshore oil platform accident in 2001 and a giant oil spill in Rio in 2000.

Oil from the recent Chevron leak did not reach shore and was less than 0.1 percent of BP’s 4.9 million barrel Gulf of Mexico spill in 2010. The Frade leak was also much smaller than several previous spills in Brazil by Petrobras.

Petrobras owns 30 percent of Frade. Chevron own 52 percent and is responsible for field management. The rest is owned by Frade Japao, a unit of Japan’s Inpex.

Brazil’s oil regulator, the ANP, has suspended Chevron’s drilling license at Frade. The ANP and Brazil’s environmental protection agency Ibama have fined Chevron more than $50 million as a result of the spill.

Chevron says that there is no evidence the Frade leak, which prosecutors estimate was closer to 3,000 barrels, has had any impact on aquatic life or on humans.

Oil is still leaking from the sea floor, government officials said. The oil has leaked at an average rate of 1.4 liters a day for the last week and is being captured by undersea traps, Chevron said.

Recent flyovers have not detected oil on the ocean surface, Chevron added.

Brazil’s newfound oil wealth – including at least 15 billion barrels of deepwater discoveries since 2007 – puts the country among the world’s most promising oil frontiers. Since the new finds, the government has stopped auctions of oil concessions in its richest offshore areas.

Petrobras will be the operator and hold a minimum 30 percent stake in all future oil projects in those areas. Under a new system, oil producers must share their production with the government.

San Ramon, California-based Chevron has operated in Brazil for nearly 100 years. It has invested around $2 billion in the country and has plans to spend several billion more on future projects.

Chevron shares were up 0.37 percent at $108.10 on Thursday in New York. Transocean shares rose 3.62 percent to 44.39 Swiss francs ($46.73) in Switzerland.

(Editing by Todd Benson, Alix Freedman, Jonathan Leff and Bob Burgdorfer)

The S&P GSCI Index .SPGSCI and the DJ-UBS Index .DJUBS, the world’s no. 1 and no. 2 commodity indexes, announced two months ago plans to rejig their component weights to reflect growing trade in European benchmark Brent crude, at the expense of U.S. WTI, which some traders say had become detached from global prices.

The transition is now nigh: over the course of five days next week, pension funds and investors who have an estimated $180 billion (116 billion pounds) tracking those indexes will transfer their holdings from prompt futures contracts into later months. This month’s “roll”, as it’s called, is particularly important because it will also adjust for the new target weights, hiking the indexes’ exposure to Brent and cutting their WTI holdings.

In one of the biggest such re-weightings in years, funds will need to sell off more than $6 billion worth of U.S. crude futures and buy up more than $5.4 billion of Brent crude, analysts estimates, likely creating short-term tremors in the market.

Anticipation of the roll is already affecting prices, with the closely watched Brent/WTI spread expanding nearly $3 a barrel to near its widest point since mid-November, reflecting a bigger premium for European oil over landlocked U.S. crude.

“We think reweighting has an impact on pricing and widening the spread,” said Sarah Emerson, president, Energy Security Analysis Inc. in Boston. “I don’t think it will be a dramatic one, but the reweighting is a factor.”

The index roll is just the latest factor to roil the Brent/WTI spread, which gapped to a record $28 a last year as a surge in U.S. onshore “tight oil” production and a reduction in both Libyan and North Sea supplies in Europe created an unprecedented distortion between the world’s most-traded contracts.

After narrowing from record highs over $28 in October on expectations new pipelines would ease a crude glut in the U.S. Midwest, the spread widened this week from below $8 a barrel on Monday to $11 on Friday amid growing concerns about the threat of a cut off of Iranian supplies to Europe due to new sanctions against Tehran.

The reweighting toward Brent also marks another boost for the InterContinental Exchange, the primary exchange for trading the contract, in its ongoing competition with the New York Mercantile Exchange — home to most of the trade of U.S. crude oil futures — to be the premiere oil exchange in the world.

Graphics on the impact of the index shifts on oil markets:

here

here

BY THE NUMBERS

While the increased Brent weights were announced months ago, giving traders plenty of time to anticipate the switch, the shift of billions of dollars from one market to another is still likely to felt in the market, traders say.

The S&P GSCI Index, which said in November that about $100 billion in investments tracked it, will cut its holdings in WTI from 32.6 percent of its weighting to 30.25 percent, and beef up its Brent holdings from 15.9 percent to 17.35 percent.

The DJ-UBS Index, with around $80 billion in tracking funds as of mid-2011, said in October it would introduce Brent into its index for the first time, putting it at around 5 percent of its weighting, cutting WTI from 15 to 9.7 percent.

Based on current oil prices and estimates of the holdings of the S&P GSCI and the DJ-UBS indexes in 2010, the impending roll five-day period for the contacts could see 6.27 million barrels of WTI sold off — valued at $6.37 billion at Friday’s prices — in addition to whatever would have been sold without the rebalancing. For Brent, 48.4 million barrels worth $5.45 billion will be purchased to achieve the target weightings.

That would mean selling nearly 12.6 million barrels of WTI and buying nearly 9.7 million barrels of Brent each day to reweight the indexes, a relatively small proportion of daily trade that came to an average of about 700 million barrels a day on the NYMEX and nearly 500 million barrels a day of ICE Brent.

In terms of open interest, the impact of the indexes is more dramatic.

Roughly 4.5 percent of the total 1.387 million contracts of NYMEX WTI held in open interest will be sold by the indexes next week to achieve the reweighting. The indexes will purchase about 5 percent of Brent open interest of 931,000 lots — a sizeable shift over the course of a week.

The shifts will take effect during the traditional roll periods of the indexes, falling on January 9 to 13 this month. The indexes move 20 percent of their positions daily during that period.

For more details on the DJ-UBS Index and the roll period, see: r.reuters.com/mup85s

For more details on the S&P GCSI Index and the roll period, see: r.reuters.com/sup85s

BRENT APPEAL

Indexes such as the S&P GSCI Index and the DJ-UBS Index are popular with non-traditional commodity investors seeking access to the asset class. The indexes typically hold near-month contracts in a commodity, and then sell them off for later month contracts between the fifth and ninth business days of a month.

Brent’s allure for these simple, long-only indexes lies in the structure of its forward curve. The contract’s backwardated structure, where months further out are cheaper than the front month and point toward a near-term supply threat, offer profits during the roll period.

WTI, locked in the opposite structure — known as contango and indicating ample supplies — offers losses during the roll.

In addition, analysts point out that Brent — considered to be the international benchmark for crude — is a far more representative of global market conditions than WTI, which is heavily impacted by inventory levels in the U.S. Midwest.

“The obvious thing is that investors don’t want to be in WTI unless they feel that the big $10 gap is going to close,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington DC.

“The feeling in oil markets is that there are fewer problems associated with Brent, which is more responsive to geopolitical events and what’s going on in the global markets.”

Rising inventories at the delivery point of the New York Mercantile Exchange’s oil futures contract in Cushing, Oklahoma, helped weaken WTI last year, while Brent was bolstered by the loss Libyan exports to Europe.

Those factors helped send Brent to a record premium of over $28 a barrel to WTI last year, but the spread has since weakened after companies announced pipeline plans to alleviate the glut of crude in the Midwest and as Libyan exports rebound.

The impending shifts in the index weightings are not the only factor fueling Brent’s rise against WTI this week. In addition to Iranian threats to cut supplies due to new sanctions by the West, analysts noted support came from disruptions in flows from Nigeria, another important exporter to Europe.

Shutdowns in three European refineries owned by Petroplus due to a credit squeeze could, however, damp demand for crude feedstock in the region, analysts noted.

“There has been a knee-jerk reaction in Europe to Iran. These concerns about Iranian crude supply do not much affect U.S. crude supply,” said Matt Smith of Summit Energy, in Louisville, Kentucky.

(Additional reporting by David Sheppard; Editing by David Gregorio)

All had signed leases with local brokers permitting drillers to tap natural gas and oil beneath their land. All were demanding thousands of dollars in bonuses they had been promised in exchange. But none knew for certain whom to go after.

That’s because the company rejecting their leases hadn’t signed them to begin with. In fact, the company issuing the rejections wasn’t much of a business at all. It was a shell company – a paper-only firm with no real operations – called Northern Michigan Exploration LLC.

One jilted land owner, Eric Boyer-Lashuay, called to complain to the broker who had handled his lease. Northern, he recalls saying, is “a shell company … a blank door with no one behind it.”

Today, he puts it this way: “It was all a fake, all a scam.”

Northern has voided hundreds of land deals, and was indeed a facade – a shell company created so that one of America’s largest energy companies could conceal its role in the leasing spree, a Reuters investigation has found. Oklahoma-based Chesapeake Energy Corp. (CHK.N: Quote, Profile, Research, Stock Buzz), the nation’s second-largest gas driller, was behind the entire operation.

Chesapeake had created one shell company that set up another, Northern Michigan Exploration. Next, Northern hired brokers who signed leases with residents such as Boyer-Lashuay. And those brokers were under strict orders not to divulge Chesapeake’s role, records reviewed by Reuters show.

In fact, the effort in Michigan was directed from the very top – by Chesapeake’s CEO, Aubrey McClendon. In corporate filings that Chesapeake made public earlier this year – nine months after McClendon’s agents began signing Michigan land leases – McClendon is named as the chief executive officer of Northern, the shell company that voided hundreds of those leases.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic: Chesapeake lease scheme

link.reuters.com/wen75s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Chesapeake’s effort to hide its involvement isn’t illegal. To the contrary, the company’s maneuvering exemplifies how U.S. corporations routinely can conceal financial and corporate transactions through the use of shell companies.

President Barack Obama has called on other nations to improve corporate transparency, but under state laws governing corporate formation in America, privately held businesses aren’t required to disclose the individuals or companies who really own them.

Chesapeake’s own website advises land owners that their “main consideration” before leasing should be “to discover who will ultimately be producing your minerals.” But Chesapeake’s strategy made that extremely difficult for the Michigan land owners.

Legal scholars say the operation serves as an intriguing test case of the use of shell companies.

The tactics “raise moral and ethical questions about how entities can be used,” says Joshua Fershee, a contract law professor at the University of North Dakota.

Others, including Chesapeake, defend the need to use shell companies and front companies – contractors with local ties who do business on behalf of a larger corporation. John Lowe, a professor of energy law at Southern Methodist University, calls it “business as usual.”

“Shells aren’t just a device to pull the wool over land owners’ eyes,” Lowe says. “You have to weigh some of the unfortunate cases against the fact that these companies can facilitate doing business, making it easier and probably cheaper to obtain leases. If I were a regulator, I’m not sure I’d change anything or try to limit the use of shells.”

At least one lawmaker, Rep. Raul Grijalva, a Democrat from Arizona, says he will be “arguing for some intervention” to control the use of shell companies in such deals.

“Private property owners who enter into these transactions with good faith shouldn’t be getting duped by a front company,” says Grijalva, a member of the House Committee for Natural Resources. “It’s deception and you can’t call it anything else. It’s a good example where the intervention of government to require disclosure and binding contracts is needed.”

INTENT TO RENEGE?

The effort to secure leasing rights in Michigan was part of Chesapeake’s national “land grab,” a term the company has used in its filings with the U.S. Securities and Exchange Commission.

But Chesapeake’s Michigan land rush quickly ended. In court this month, lawyers for land owners alleged that lease agreements were voided after Chesapeake learned a well it drilled in the state had come up dry.

Bonuses promised to land owners went unpaid, according to court documents submitted by lawyers for the land owners. Northern Michigan Exploration, the Chesapeake-affiliated shell company, rejected more than 97 percent of the leases its Michigan agents had signed with farmers and other land owners, the documents allege.

More than 800 Michigan land owners – many of them elderly farmers – had their leases terminated by Northern, Reuters found.

As a consequence, owners missed opportunities to lease their land to other oil firms. At least 115 have sued, alleging that Chesapeake breached their contracts and defrauded them. On average, they each had been expecting $95,000 in bonuses, those lawsuits show.

The near-blanket cancellation of the contracts raises the question of whether Chesapeake ever intended to pay if it failed to find oil or gas immediately, says Mark Gergen, a contract law professor at the University of California-Berkeley law school.

“It suggests they might have had a strategy going in of not honoring their agreements,” he says. “The shells would have facilitated that” because Chesapeake could blame the shells for the cancellations, suffering no damage to its reputation.

Chesapeake says it acted properly. It says some land owners were paid bonuses. It also disputes “canceling” any Michigan contracts; rather, some contracts were “rejected” because property titles didn’t pass muster, its corporate counsel says.

In written responses, Chesapeake says it sometimes uses shell companies to “keep a low profile” and avoid tipping off competitors and “speculators” about its land-leasing and drilling efforts. Such tactics are common in real estate, scholars say.

But now, Chesapeake also is using shells as a legal defense to shield itself against land-owner lawsuits. The energy giant has said in court that it was Northern Michigan Exploration, not Chesapeake, that canceled the leases.

If land owners prove that they should have been paid, at issue is who will be held accountable: Chesapeake, a corporation with $37 billion in assets, or Northern, a shell company with no publicly documented assets.

“If Chesapeake knew from the start there was a good chance it would renege on leases and used (Northern) to avoid liability, that is improper,” says North Dakota law professor Fershee.

The burden now rests with lawyers for the land owners to prove that – to not only demonstrate that Chesapeake was directing the shell companies but also to show that Chesapeake used the shells to commit fraud.

STAYING HIDDEN

To understand the role shell companies play in Chesapeake’s business, Reuters reviewed hundreds of pages of lease agreements, rejection letters and contracts, and more than a thousand pages of court records.

Reporters also interviewed more than three dozen land owners, lawyers and “landmen,” those who scout for areas rich with oil and gas and strike deals with land owners.

The northern part of Michigan has a long history of smalltime drilling. But the three-month land-leasing frenzy here last year was driven by speculation that the state’s Collingwood Shale area might hold large amounts of oil and natural gas.

In recent years, shale drilling has created the biggest grab for resources in the U.S. since the California Gold Rush. Thousands of so-called “shaleonaires” have grown rich by leasing their land and collecting royalties from gushers.

Chesapeake is the single biggest player in that rush, employing about 4,500 landmen. Its CEO, McClendon, started his career as an oil landman, as did former President George W. Bush.

Chesapeake says it has paid more than $9 billion for land leases. Its holdings include about 15 million acres in at least 23 states – a drilling area nearly the size of Ireland. Since 2008, Chesapeake has raised $13 billion by selling off a portion of those leases to energy firms as far away as China and Australia.

The business is risky. Chesapeake often slips into a shale play early, committing hundreds of millions of dollars before it knows whether wells in the area will be gushers or dry holes.

RISKY PROFILE

The company’s filings show it spent $6.95 billion acquiring “unproved” properties last year, more than double what it spent the previous year.

Such huge spending, coupled with U.S. natural-gas prices at 27-month lows, underscores Chesapeake’s aggressive financial risk profile, according to Standard & Poor’s. It rates Chesapeake’s corporate debt BB+, a category considered junk status.

Some analysts balk at the difficulty of following the company’s land transactions, including deals made through shell companies. The use of shells can make the moves hard to trace in financial statements.

In October, Reuters asked Chesapeake about its land-leasing in Michigan. In a written response, Chesapeake said then that it had spent about $400 million to acquire leases there, a figure it has neither disclosed nor is required to disclose in SEC filings. Company spokesman Michael Kehs declined to answer other questions submitted this month.

Left unanswered: Whether shell companies affiliated with Chesapeake have any assets.

“There are red flags when it comes to Chesapeake’s transparency, convoluted ownership of shell entities and transactions shareholders can’t see,” says Phil Weiss, an equities analyst with Argus in New York, who downgraded the firm’s shares to ‘sell’ on November 16. “I’d never know what happened in Michigan by looking at Chesapeake’s filings.”

SHELL OF A SHELL

Chesapeake’s land strategy was pieced together in part from documents that emerged in the Michigan lawsuits. Since early in the legal fight, Chesapeake has denied it conducted business in Michigan. It also denied that Northern, the shell company that voided leases en masse, was its “wholly owned subsidiary.”

For months, plaintiffs’ lawyers couldn’t figure out how Chesapeake could seemingly deny direct control of Northern. The answer lies behind the corporate veil of shell companies.

Chesapeake doesn’t directly own Northern; rather, Northern was incorporated by another shell company – one that Chesapeake owns and had created a year earlier. That firm, LA Land Acquisition, is the beginning of a complicated chain of shells and front companies – local contractors – operating on Chesapeake’s behalf:

* In April 2009, Chesapeake begat LA Land Acquisition Corp., a Delaware entity with no discernible assets.

* A year later, in April 2010, LA Land formed Northern Michigan Exploration, another shell company with no known assets.

* Northern subsequently hired a local land-lease company, O.I.L. Niagaran.

* O.I.L. then hired another local company, Western Land. Both O.I.L. and Western negotiated with land owners here.

The firms agreed not to disclose the energy giant’s role to land owners, according to a May 2010 contract between Chesapeake and O.I.L. and other records reviewed by Reuters.

In incorporation papers filed in Michigan, Northern’s address is listed as the office of a law firm in Lansing. John Pirich, a Lansing lawyer listed in state records as the representative of Northern, declined comment.

The connection between Chesapeake, LA Land and Northern appears in a February 8 SEC filing, made public five months after Michigan land owners first filed suit. It shows that LA Land, which lists McClendon as a director, is the “sole member” or owner of Northern, which lists McClendon as its CEO.

Chesapeake didn’t say why it used multiple intermediaries in Michigan. Lawyers say layers of shell and front companies can be used to cap liability when the companies behind the shells face lawsuits.

“The shells can complicate and delay things,” says Gergen, the Berkeley law professor. “Chesapeake is probably betting that plaintiffs won’t have sufficient resources or staying power to collect.”

DRILLING RACE

Last year, Chesapeake was competing for land in Michigan with the Canadian driller EnCana. In May 2010, EnCana announced that it had already leased 250,000 acres in the state.

Sue Brown, who owns 370 acres near Cheboygan, Mich., was bombarded with offers. “Landmen swooped in on this area like hornets out of hell,” Brown says. “They’d be waiting in my driveway, completely paranoid that I was going to sign with somebody else.”

That month, she and her husband were among the earliest farmers to sign a lease with a local broker working on behalf of Chesapeake. They received a $500-per-acre bonus.

Brown’s contract featured a non-disclosure clause, forbidding her from revealing her offer to neighbors. She had no idea Chesapeake was behind it. The lease has been honored, she says.

As the frenzy intensified in June 2010, some Michigan bonuses rose to $3,000 an acre, up 200-fold from before the boom. Chesapeake’s decision to remain hidden may have been a legitimate attempt to keep prices from going even higher, some experts say.

“It’s common to take leases through a shell corporation or through a landman company,” says Lowe, the professor of energy law at SMU’s Dedman Law School in Dallas. “If you’re a farmer or a rancher and you see a big, deep-pocketed oil company pull up in your driveway, then your price goes up.”

‘DRY HOLE,’ ABRUPT SHIFT

After prices surged in Michigan, EnCana decided in July 2010 to pare back its leasing effort, a company spokesman says. According to allegations in several lawsuits against Chesapeake, CEO McClendon looked to take advantage of the opening.

He began to aggressively renegotiate or delay the completion of his own Michigan deals, the lawsuits allege.

The lawsuits by Michigan land owners also suggest a specific reason why Chesapeake’s interest cooled: Through an affiliate, Chesapeake drilled an exploratory well in Michigan last July that came up dry. Chesapeake has not publicly disclosed the drilling results and declined to comment on the matter. But in the weeks after the exploratory well was drilled, Chesapeake’s shell-within-a-shell – Northern – began rejecting leases en masse, letters sent to land owners show.

In some cases, Northern claimed that land owners missed a signing deadline, even though landmen had told them when to sign. Leslie and Sarah Schrier, a farming couple in their 80s who live near Brutus, Mich., had their lease voided weeks after a landman and a notary public drove to their farm to watch them sign ahead of the deadline, they say.

Also affected was John O’Hair, a former judge and chief county prosecutor in Detroit. He leased his 140-acre family farm in Antrim County, Mich., to O.I.L. in a contract that offered an $84,000 signing bonus. If successful wells were drilled, the O’Hairs would receive 12.5 percent royalties.

O’Hair had leased the same land to O.I.L. a few years earlier without a hitch. This time, months passed and no bonus check arrived.

O’Hair complained to O.I.L.’s president, Dwain Provins. The response: O.I.L. was working for another firm, whose name and role were secret, O’Hair recalls. That firm had voided the lease, he was told, because one of O’Hair’s in-laws appeared to own a stake in his property. Provins declined comment.

“It was a completely bogus claim,” says O’Hair, 82. “I’d leased the land previously to O.I.L. with no issues.”

More months passed before O’Hair learned the truth from lawyers he had hired: O.I.L. was doing the bidding of Northern and Chesapeake.

By August 10, 2010, transcripts from court hearings show, at least one of Chesapeake’s middlemen in Michigan seemed regretful that he had entered into business with the company.

The broker, David W. McGuire of O.I.L. Niagaran, voiced concern about Chesapeake’s directives, court records indicate. He told McClendon that Chesapeake was asking O.I.L. to default on contracts that Chesapeake never intended to pay, according to the court records.

McGuire told McClendon that he had “never been put in a position like this,” court records show. His comments were recounted in court this month by lawyers representing land owners.

McGuire did not respond to requests for comment on the matter.

LETTERS CONNECT SHELL, CHESAPEAKE

By mid-August, Northern began sending out rejection letters to land owners. Many were signed by the man listed as Northern’s “senior landman,” David W. Bolton. He also was a landman for Chesapeake itself. In an email exchange with local brokers, he used the address dave.bolton@chk.com – a Chesapeake address. He’s also on a 2010 list of Chesapeake employees.

Bolton did not respond to email or phone messages requesting comment.

The lease-termination letters from Northern were a giant ruse, says Kevin Koonce, a landman who worked for a Chesapeake contractor in Michigan.

Koonce says he worked in Michigan from September to November 2010. He wasn’t there to lease land. By the time he arrived, Koonce says, Chesapeake’s strategy was to abandon leases it had already signed.

“Our instructions were to flunk the title if there was a word misspelled,” Koonce says. He says he decided to speak publicly about the situation because he objected to the approach.

Emails reviewed by Reuters show Koonce’s firm was fired in December 2010 for not signing any land owners to drilling leases in another state. He has filed an affidavit on behalf of Michigan land owners who are seeking to collect on their leases.

Koonce says his instructions to flunk leases came from a supervisor at another broker working for Chesapeake in Michigan. Koonce says he and eight other brokers participated in a conference call on October 27, 2010, with the supervisor. During the call, he says, they were ordered to speed up the rate of lease cancellations.

Neither the supervisor nor the other brokers on the call responded to emails requesting comment, and Chesapeake declined to comment on Koonce or his allegations.

One land owner whose lease was rejected was Mildred Lutz, a 93-year-old widow who lives near Alanson, Mich. She says she was told her $97,000 bonus wouldn’t be paid because her late husband didn’t sign the lease and the family trust, which owned the land, is in both her name and her husband’s. Never mind that the landman drafted the lease in July 2010 – a month after her husband’s death.

“He knew my husband had passed away and I would be the sole owner of my property,” Lutz says. Chesapeake’s lawyers have said the Lutz lease had clear formatting and title flaws.

In its letters to land owners, Northern offered several reasons for voiding leases: disputes over property ownership; improper formatting of leases; and claims that properties fall outside a geographic target area.

In some cases, Northern claimed that land owners had missed a signing deadline, even though they signed leases at a time and place specified by the company’s leasing agents.

In scores of other letters, Northern says leases were void because of “unsubordinated” mortgages on property. That means a property – like the approximately 70 percent of U.S. real estate that is mortgaged – isn’t owned free-and-clear.

In a written statement, Chesapeake general counsel Henry Hood says a mortgage is a valid title defect “if the mortgage pre-dates the lease and is not expressly subject to and subordinate to the lease.” In previous filings with the SEC, Chesapeake said it generally scrutinized titles late in the process, before drilling, and not before paying out bonuses.

Chesapeake’s main competitor in Michigan, EnCana, told Reuters that it honored the vast majority of leases it signed in the state and has faced no lawsuits that allege it reneged on any leases there.

EnCana “very rarely” voids any lease it has signed, spokesman Alan Boras says.

LOW PRICES, GOOD DEALS

As Northern continued to reject leases, another company emerged in late October and went on a Michigan land-buying spree.

The hundreds of rejected leases had depressed land prices from the summertime high, and a company called Crystal Lake Resources became one of the top buyers of public land at a state auction on October 26, 2010.

The state land up for auction was also in the Collingwood Shale formation, not far from the land that Northern no longer wanted to lease from private land owners.

According to records from the Michigan Department of Natural Resources, Crystal Lake bought drilling rights on 30,000 acres for $20.97 an acre. That’s a 99 percent discount on the price promised to some land owners whose leases were canceled by Northern.

Incorporation records show Crystal Lake was formed on October 25, 2010, a day before the public auction. Its Lansing address is the same as Northern’s, the Chesapeake shell company that had been canceling private leases.

In a response to one Michigan lawsuit, Crystal Lake Resources is identified as a lease buyer for Northern.

In the months since its Michigan buys, Crystal Lake has also been busy signing land leases in at least one North Dakota county.

There, in Hettinger County, clerk Sylvia Gion says Crystal Lake’s leases have been assigned to one company: Chesapeake.

(Additional reporting by Jeff Jones in Calgary; editing by Blake morrison and Michael Williams)

All had signed leases with local brokers permitting drillers to tap natural gas and oil beneath their land. All were demanding thousands of dollars in bonuses they had been promised in exchange. But none knew for certain whom to go after.

That’s because the company rejecting their leases hadn’t signed them to begin with. In fact, the company issuing the rejections wasn’t much of a business at all. It was a shell company – a paper-only firm with no real operations – called Northern Michigan Exploration LLC.

One jilted land owner, Eric Boyer-Lashuay, called to complain to the broker who had handled his lease. Northern, he recalls saying, is “a shell company … a blank door with no one behind it.”

Today, he puts it this way: “It was all a fake, all a scam.”

Northern has voided hundreds of land deals, and was indeed a facade – a shell company created so that one of America’s largest energy companies could conceal its role in the leasing spree, a Reuters investigation has found. Oklahoma-based Chesapeake Energy Corp., the nation’s second-largest gas driller, was behind the entire operation.

Chesapeake had created one shell company that set up another, Northern Michigan Exploration. Next, Northern hired brokers who signed leases with residents such as Boyer-Lashuay. And those brokers were under strict orders not to divulge Chesapeake’s role, records reviewed by Reuters show.

In fact, the effort in Michigan was directed from the very top – by Chesapeake’s CEO, Aubrey McClendon. In corporate filings that Chesapeake made public earlier this year – nine months after McClendon’s agents began signing Michigan land leases – McClendon is named as the chief executive officer of Northern, the shell company that voided hundreds of those leases.

Chesapeake’s effort to hide its involvement isn’t illegal. To the contrary, the company’s maneuvering exemplifies how U.S. corporations routinely can conceal financial and corporate transactions through the use of shell companies.

President Barack Obama has called on other nations to improve corporate transparency, but under state laws governing corporate formation in America, privately held businesses aren’t required to disclose the individuals or companies who really own them.

Chesapeake’s own website advises land owners that their “main consideration” before leasing should be “to discover who will ultimately be producing your minerals.” But Chesapeake’s strategy made that extremely difficult for the Michigan land owners.

Legal scholars say the operation serves as an intriguing test case of the use of shell companies.

The tactics “raise moral and ethical questions about how entities can be used,” says Joshua Fershee, a contract law professor at the University of North Dakota.

Others, including Chesapeake, defend the need to use shell companies and front companies – contractors with local ties who do business on behalf of a larger corporation. John Lowe, a professor of energy law at Southern Methodist University, calls it “business as usual.”

“Shells aren’t just a device to pull the wool over land owners’ eyes,” Lowe says. “You have to weigh some of the unfortunate cases against the fact that these companies can facilitate doing business, making it easier and probably cheaper to obtain leases. If I were a regulator, I’m not sure I’d change anything or try to limit the use of shells.”

At least one lawmaker, Rep. Raul Grijalva, a Democrat from Arizona, says he will be “arguing for some intervention” to control the use of shell companies in such deals.

“Private property owners who enter into these transactions with good faith shouldn’t be getting duped by a front company,” says Grijalva, a member of the House Committee for Natural Resources. “It’s deception and you can’t call it anything else. It’s a good example where the intervention of government to require disclosure and binding contracts is needed.”

INTENT TO RENEGE?

The effort to secure leasing rights in Michigan was part of Chesapeake’s national “land grab,” a term the company has used in its filings with the U.S. Securities and Exchange Commission.

But Chesapeake’s Michigan land rush quickly ended. In court this month, lawyers for land owners alleged that lease agreements were voided after Chesapeake learned a well it drilled in the state had come up dry.

Bonuses promised to land owners went unpaid, according to court documents submitted by lawyers for the land owners. Northern Michigan Exploration, the Chesapeake-affiliated shell company, rejected more than 97 percent of the leases its Michigan agents had signed with farmers and other land owners, the documents allege.

More than 800 Michigan land owners – many of them elderly farmers – had their leases terminated by Northern, Reuters found.

As a consequence, owners missed opportunities to lease their land to other oil firms. At least 115 have sued, alleging that Chesapeake breached their contracts and defrauded them. On average, they each had been expecting $95,000 in bonuses, those lawsuits show.

The near-blanket cancellation of the contracts raises the question of whether Chesapeake ever intended to pay if it failed to find oil or gas immediately, says Mark Gergen, a contract law professor at the University of California-Berkeley law school.

“It suggests they might have had a strategy going in of not honoring their agreements,” he says. “The shells would have facilitated that” because Chesapeake could blame the shells for the cancellations, suffering no damage to its reputation.

Chesapeake says it acted properly. It says some land owners were paid bonuses. It also disputes “canceling” any Michigan contracts; rather, some contracts were “rejected” because property titles didn’t pass muster, its corporate counsel says.

In written responses, Chesapeake says it sometimes uses shell companies to “keep a low profile” and avoid tipping off competitors and “speculators” about its land-leasing and drilling efforts. Such tactics are common in real estate, scholars say.

But now, Chesapeake also is using shells as a legal defense to shield itself against land-owner lawsuits. The energy giant has said in court that it was Northern Michigan Exploration, not Chesapeake, that canceled the leases.

If land owners prove that they should have been paid, at issue is who will be held accountable: Chesapeake, a corporation with $37 billion in assets, or Northern, a shell company with no publicly documented assets.

“If Chesapeake knew from the start there was a good chance it would renege on leases and used (Northern) to avoid liability, that is improper,” says North Dakota law professor Fershee.

The burden now rests with lawyers for the land owners to prove that – to not only demonstrate that Chesapeake was directing the shell companies but also to show that Chesapeake used the shells to commit fraud.

STAYING HIDDEN

To understand the role shell companies play in Chesapeake’s business, Reuters reviewed hundreds of pages of lease agreements, rejection letters and contracts, and more than a thousand pages of court records.

Reporters also interviewed more than three dozen land owners, lawyers and “landmen,” those who scout for areas rich with oil and gas and strike deals with land owners.

The northern part of Michigan has a long history of smalltime drilling. But the three-month land-leasing frenzy here last year was driven by speculation that the state’s Collingwood Shale area might hold large amounts of oil and natural gas.

In recent years, shale drilling has created the biggest grab for resources in the U.S. since the California Gold Rush. Thousands of so-called “shaleonaires” have grown rich by leasing their land and collecting royalties from gushers.

Chesapeake is the single biggest player in that rush, employing about 4,500 landmen. Its CEO, McClendon, started his career as an oil landman, as did former President George W. Bush.

Chesapeake says it has paid more than $9 billion for land leases. Its holdings include about 15 million acres in at least 23 states – a drilling area nearly the size of Ireland. Since 2008, Chesapeake has raised $13 billion by selling off a portion of those leases to energy firms as far away as China and Australia.

The business is risky. Chesapeake often slips into a shale play early, committing hundreds of millions of dollars before it knows whether wells in the area will be gushers or dry holes.

RISKY PROFILE

The company’s filings show it spent $6.95 billion acquiring “unproved” properties last year, more than double what it spent the previous year.

Such huge spending, coupled with U.S. natural-gas prices at 27-month lows, underscores Chesapeake’s aggressive financial risk profile, according to Standard & Poor’s. It rates Chesapeake’s corporate debt BB+, a category considered junk status.

Some analysts balk at the difficulty of following the company’s land transactions, including deals made through shell companies. The use of shells can make the moves hard to trace in financial statements.

In October, Reuters asked Chesapeake about its land-leasing in Michigan. In a written response, Chesapeake said then that it had spent about $400 million to acquire leases there, a figure it has neither disclosed nor is required to disclose in SEC filings. Company spokesman Michael Kehs declined to answer other questions submitted this month.

Left unanswered: Whether shell companies affiliated with Chesapeake have any assets.

“There are red flags when it comes to Chesapeake’s transparency, convoluted ownership of shell entities and transactions shareholders can’t see,” says Phil Weiss, an equities analyst with Argus in New York, who downgraded the firm’s shares to ‘sell’ on November 16. “I’d never know what happened in Michigan by looking at Chesapeake’s filings.”

SHELL OF A SHELL

Chesapeake’s land strategy was pieced together in part from documents that emerged in the Michigan lawsuits. Since early in the legal fight, Chesapeake has denied it conducted business in Michigan. It also denied that Northern, the shell company that voided leases en masse, was its “wholly owned subsidiary.”

For months, plaintiffs’ lawyers couldn’t figure out how Chesapeake could seemingly deny direct control of Northern. The answer lies behind the corporate veil of shell companies.

Chesapeake doesn’t directly own Northern; rather, Northern was incorporated by another shell company – one that Chesapeake owns and had created a year earlier. That firm, LA Land Acquisition, is the beginning of a complicated chain of shells and front companies – local contractors – operating on Chesapeake’s behalf:

* In April 2009, Chesapeake begat LA Land Acquisition Corp., a Delaware entity with no discernible assets.

* A year later, in April 2010, LA Land formed Northern Michigan Exploration, another shell company with no known assets.

* Northern subsequently hired a local land-lease company, O.I.L. Niagaran.

* O.I.L. then hired another local company, Western Land. Both O.I.L. and Western negotiated with land owners here.

The firms agreed not to disclose the energy giant’s role to land owners, according to a May 2010 contract between Chesapeake and O.I.L. and other records reviewed by Reuters.

In incorporation papers filed in Michigan, Northern’s address is listed as the office of a law firm in Lansing. John Pirich, a Lansing lawyer listed in state records as the representative of Northern, declined comment.

The connection between Chesapeake, LA Land and Northern appears in a February 8 SEC filing, made public five months after Michigan land owners first filed suit. It shows that LA Land, which lists McClendon as a director, is the “sole member” or owner of Northern, which lists McClendon as its CEO.

Chesapeake didn’t say why it used multiple intermediaries in Michigan. Lawyers say layers of shell and front companies can be used to cap liability when the companies behind the shells face lawsuits.

“The shells can complicate and delay things,” says Gergen, the Berkeley law professor. “Chesapeake is probably betting that plaintiffs won’t have sufficient resources or staying power to collect.”

DRILLING RACE

Last year, Chesapeake was competing for land in Michigan with the Canadian driller EnCana. In May 2010, EnCana announced that it had already leased 250,000 acres in the state.

Sue Brown, who owns 370 acres near Cheboygan, Mich., was bombarded with offers. “Landmen swooped in on this area like hornets out of hell,” Brown says. “They’d be waiting in my driveway, completely paranoid that I was going to sign with somebody else.”

That month, she and her husband were among the earliest farmers to sign a lease with a local broker working on behalf of Chesapeake. They received a $500-per-acre bonus.

Brown’s contract featured a non-disclosure clause, forbidding her from revealing her offer to neighbors. She had no idea Chesapeake was behind it. The lease has been honored, she says.

As the frenzy intensified in June 2010, some Michigan bonuses rose to $3,000 an acre, up 200-fold from before the boom. Chesapeake’s decision to remain hidden may have been a legitimate attempt to keep prices from going even higher, some experts say.

“It’s common to take leases through a shell corporation or through a landman company,” says Lowe, the professor of energy law at SMU’s Dedman Law School in Dallas. “If you’re a farmer or a rancher and you see a big, deep-pocketed oil company pull up in your driveway, then your price goes up.”

‘DRY HOLE,’ ABRUPT SHIFT

After prices surged in Michigan, EnCana decided in July 2010 to pare back its leasing effort, a company spokesman says. According to allegations in several lawsuits against Chesapeake, CEO McClendon looked to take advantage of the opening.

He began to aggressively renegotiate or delay the completion of his own Michigan deals, the lawsuits allege.

The lawsuits by Michigan land owners also suggest a specific reason why Chesapeake’s interest cooled: Through an affiliate, Chesapeake drilled an exploratory well in Michigan last July that came up dry. Chesapeake has not publicly disclosed the drilling results and declined to comment on the matter. But in the weeks after the exploratory well was drilled, Chesapeake’s shell-within-a-shell – Northern – began rejecting leases en masse, letters sent to land owners show.

In some cases, Northern claimed that land owners missed a signing deadline, even though landmen had told them when to sign. Leslie and Sarah Schrier, a farming couple in their 80s who live near Brutus, Mich., had their lease voided weeks after a landman and a notary public drove to their farm to watch them sign ahead of the deadline, they say.

Also affected was John O’Hair, a former judge and chief county prosecutor in Detroit. He leased his 140-acre family farm in Antrim County, Mich., to O.I.L. in a contract that offered an $84,000 signing bonus. If successful wells were drilled, the O’Hairs would receive 12.5 percent royalties.

O’Hair had leased the same land to O.I.L. a few years earlier without a hitch. This time, months passed and no bonus check arrived.

O’Hair complained to O.I.L.’s president, Dwain Provins. The response: O.I.L. was working for another firm, whose name and role were secret, O’Hair recalls. That firm had voided the lease, he was told, because one of O’Hair’s in-laws appeared to own a stake in his property. Provins declined comment.

“It was a completely bogus claim,” says O’Hair, 82. “I’d leased the land previously to O.I.L. with no issues.”

More months passed before O’Hair learned the truth from lawyers he had hired: O.I.L. was doing the bidding of Northern and Chesapeake.

By August 10, 2010, transcripts from court hearings show, at least one of Chesapeake’s middlemen in Michigan seemed regretful that he had entered into business with the company.

The broker, David W. McGuire of O.I.L. Niagaran, voiced concern about Chesapeake’s directives, court records indicate. He told McClendon that Chesapeake was asking O.I.L. to default on contracts that Chesapeake never intended to pay, according to the court records.

McGuire told McClendon that he had “never been put in a position like this,” court records show. His comments were recounted in court this month by lawyers representing land owners.

McGuire did not respond to requests for comment on the matter.

LETTERS CONNECT SHELL, CHESAPEAKE

By mid-August, Northern began sending out rejection letters to land owners. Many were signed by the man listed as Northern’s “senior landman,” David W. Bolton. He also was a landman for Chesapeake itself. In an email exchange with local brokers, he used the address dave.bolton@chk.com – a Chesapeake address. He’s also on a 2010 list of Chesapeake employees.

Bolton did not respond to email or phone messages requesting comment.

The lease-termination letters from Northern were a giant ruse, says Kevin Koonce, a landman who worked for a Chesapeake contractor in Michigan.

Koonce says he worked in Michigan from September to November 2010. He wasn’t there to lease land. By the time he arrived, Koonce says, Chesapeake’s strategy was to abandon leases it had already signed.

“Our instructions were to flunk the title if there was a word misspelled,” Koonce says. He says he decided to speak publicly about the situation because he objected to the approach.

Emails reviewed by Reuters show Koonce’s firm was fired in December 2010 for not signing any land owners to drilling leases in another state. He has filed an affidavit on behalf of Michigan land owners who are seeking to collect on their leases.

Koonce says his instructions to flunk leases came from a supervisor at another broker working for Chesapeake in Michigan. Koonce says he and eight other brokers participated in a conference call on October 27, 2010, with the supervisor. During the call, he says, they were ordered to speed up the rate of lease cancellations.

Neither the supervisor nor the other brokers on the call responded to emails requesting comment, and Chesapeake declined to comment on Koonce or his allegations.

One land owner whose lease was rejected was Mildred Lutz, a 93-year-old widow who lives near Alanson, Mich. She says she was told her $97,000 bonus wouldn’t be paid because her late husband didn’t sign the lease and the family trust, which owned the land, is in both her name and her husband’s. Never mind that the landman drafted the lease in July 2010 – a month after her husband’s death.

“He knew my husband had passed away and I would be the sole owner of my property,” Lutz says. Chesapeake’s lawyers have said the Lutz lease had clear formatting and title flaws.

In its letters to land owners, Northern offered several reasons for voiding leases: disputes over property ownership; improper formatting of leases; and claims that properties fall outside a geographic target area.

In some cases, Northern claimed that land owners had missed a signing deadline, even though they signed leases at a time and place specified by the company’s leasing agents.

In scores of other letters, Northern says leases were void because of “unsubordinated” mortgages on property. That means a property – like the approximately 70 percent of U.S. real estate that is mortgaged – isn’t owned free-and-clear.

In a written statement, Chesapeake general counsel Henry Hood says a mortgage is a valid title defect “if the mortgage pre-dates the lease and is not expressly subject to and subordinate to the lease.” In previous filings with the SEC, Chesapeake said it generally scrutinized titles late in the process, before drilling, and not before paying out bonuses.

Chesapeake’s main competitor in Michigan, EnCana, told Reuters that it honored the vast majority of leases it signed in the state and has faced no lawsuits that allege it reneged on any leases there.

EnCana “very rarely” voids any lease it has signed, spokesman Alan Boras says.

LOW PRICES, GOOD DEALS

As Northern continued to reject leases, another company emerged in late October and went on a Michigan land-buying spree.

The hundreds of rejected leases had depressed land prices from the summertime high, and a company called Crystal Lake Resources became one of the top buyers of public land at a state auction on October 26, 2010.

The state land up for auction was also in the Collingwood Shale formation, not far from the land that Northern no longer wanted to lease from private land owners.

According to records from the Michigan Department of Natural Resources, Crystal Lake bought drilling rights on 30,000 acres for $20.97 an acre. That’s a 99 percent discount on the price promised to some land owners whose leases were canceled by Northern.

Incorporation records show Crystal Lake was formed on October 25, 2010, a day before the public auction. Its Lansing address is the same as Northern’s, the Chesapeake shell company that had been canceling private leases.

In a response to one Michigan lawsuit, Crystal Lake Resources is identified as a lease buyer for Northern.

In the months since its Michigan buys, Crystal Lake has also been busy signing land leases in at least one North Dakota county.

There, in Hettinger County, clerk Sylvia Gion says Crystal Lake’s leases have been assigned to one company: Chesapeake.

(Additional reporting by Jeff Jones in Calgary; editing by Blake morrison and Michael Williams)

(Reuters) – Suncor Energy said on Wednesday it has contained a leak of an oily substance near its Commerce City refinery in Colorado that was running into Sand Creek, which joins a river that supplies Denver with water.

The Canadian energy firm said it had not yet identified the source of the leak, but acknowledged it was likely coming from its 93,000 barrel-per-day (bpd) refinery in the area. It said plant operations were unaffected.

The leak comes a month after Colorado’s Department of Public Health warned Suncor that it needed to take stricter measures to mitigate contamination that an investigation found was coming from the site and could threaten local water supplies.

Neither Suncor nor the Environmental Protection Agency (EPA) gave an estimate on how big the leak was, which the EPA said appeared to be a petroleum product.

A spokeswoman for the company, based in Calgary, said it was not clear if there had been a leak from one of the plant’s pipelines, as reported by some media.

“Our focus is on cleanup at this point,” said Sneh Seetal, a Suncor spokeswoman at the firm’s headquarters in Calgary. “We do not see more product leaking.”

Seetal said a Suncor crew discovered an oily sheen on Sand Creek on Monday after an unusual odor was reported by one worker.

EPA spokeswoman Karen Edson said workers were using absorbent booms to contain the substance along a 200- to 300-meter stretch of the Sand Creek. Suncor workers are also building a ditch to keep it from flowing further, she said.

Sand Creek joins the South Platte River, a major source of drinking water for the Denver metropolitan area.

Suncor’s Commerce City plant recently underwent a $540 million upgrade to enable it to handle more heavy oil sands crude from Canada.

While minor spills and leaks are not uncommon near major energy facilities, a series of larger pipeline leaks in recent years and fierce resistance to a proposed major new conduit from Canada has heightened awareness of the environmental risks they pose.

PLANT CITED FOR PREVIOUS RELEASES

The EPA and Suncor said they have been managing the spill response since Monday.

Colorado’s Department of Public Health and Environment issued Suncor’s Commerce City plant a compliance order on October 26, 2011, a copy of which was sent to Reuters.

The order says that a department investigation indicated “that recent releases of hazardous waste and hazardous constituents on-site, are now migrating off-site in excess of applicable standards.”

The order set specific dates for Suncor to show it was complying with health and safety orders at its facility.

“The seeps that began on Sunday would appear to be different from the issues that are discussed in the compliance order,” said Mark Salley, spokesman for the Colorado Department of Public Health and Environment. “However, that is going to be subject to investigation.”

The notice also ordered Suncor to “routinely monitor” Sand Creek and another body of water nearby.

Suncor, Canada’s largest oil and gas producer, is the dominant oil sands player and expects output to hit 300,000-310,000 bpd this year, but the sector has been dogged by environmental concerns.

TransCanada Corp’s planned $7 billion Keystone pipeline linking Canadian oil sands production with U.S. refiners on the Gulf Coast has been vociferously opposed by environmental groups.

The Denver Post said the Commerce City leak was first reported by a local fisherman on Sunday. Workers at the Metro Wastewater plant next to the refinery have been provided with respirators due to the stench from the fluid in recent days, the paper said.

Suncor shares rose 4 percent to C$30.72 on the Toronto Stock Exchange on Wednesday, tracking higher oil prices.

(Reporting by David Sheppard; editing by Jim Marshall and Bob Burgdorfer)

The Canadian energy firm said it had not yet identified the
source of the leak, and it did not identify the substance
leaking, but said it believed it came from their 93,000
barrel-per-day plant.

“Our team installed booms in the creek to contain the
product. That was done yesterday,” said Sneh Seetal, a Suncor
spokeswoman in Calgary.

“Our focus is on cleanup at this point. We do not see more
product leaking.”

The company did not say how big they believed the leak to
be.

The South Platte River is a source of drinking water for
the Denver metropolitan area.

The Denver Post earlier reported that federal environmental
officials have been managing the spill of the
as-yet-unidentified liquid since Monday.

The newspaper said the leak was first reported by a local
fisherman on Sunday, though Colorado Department of Public
Health and Environment officials have known about hazardous
leaks in the area for at least a month, citing documents.

Workers at the Metro Wastewater plant next to the refinery
have been provided with respirators due to the stench from the
fluid in recent days, the paper said.

Suncor said refinery operations have not been affected by
the leak.

TransCanada Corp’s $7 billion, 600,000 barrel per
day (bpd) Keystone XL pipeline had been viewed as crucial to
getting Canadian and North Dakota crude out of the landlocked
region where surging stocks have driven the price of U.S. crude
to record discounts to Europe’s benchmark Brent this year.

U.S. President Barack Obama announced this week that his
administration would take at least another year to study the
project and determine if it should be rerouted to avoid a
Nebraska aquifer.

A decision on whether Keystone can be built was expected
later this year, but the delay has pushed it back to at least
2013 — when the pipeline had been expected to come online
previously.

The midcontinental crude glut has weakened West Texas
Intermediate (WTI) relative to Europe’s Brent in recent years.

But instead of losing ground to Brent following Keystone
XL’s delay this week, WTI has actually shot up in value against
the London-traded crude, both in prompt markets and further out
on the futures curve.

The move signals that traders are betting alternative
alternative crude transit methods that have sprung up in recent
months will fill the gap to ship crude out of the Midwest to
the Gulf Coast refining center.

“Oil traders anticipate that with or without Keystone XL,
there is likely to be a resolution,” said Matt Smith, analyst
for Summit Energy in Louisville, Kentucky.

“There’s a lot of talk about Wrangler as a pipeline network
that could step up and be an adequate replacement for Keystone
XL.”

The discount of U.S. crude, also called West Texas
Intermediate, to Brent expanded to a record $28 a barrel in
October, but has steadily declined since, even as the threats
to the timeline for Keystone XL mounted.

This week, when the delays were confirmed, the spread
narrowed more than $3 to $15 a barrel on Friday, an indication
that traders are betting the Midwest crude glut was still
expected to ease.
GRAPHIC:

NEW OPPORTUNITIES

The delays in Keystone XL — which some experts say could
kill the project entirely — benefit alternative proposals,
some of which have shorter timelines.

Enterprise is in talks to buy out its partner Conoco in the 350,000 bpd Seaway pipeline, which ships crude
from Freeport, Texas, to Cushing, Oklahoma, the delivery point
for U.S. crude oil futures. Enterprise could then reverse the
flow of the pipeline and send crude away from Cushing.

“One of the implications of the potential delay would be to
accelerate other pipeline solutions, including the potential
Seaway solution,” said Ed Morse, global head of commodities
research at Citigroup.

“That could mean instead of waiting until 2013 for an
evacuation of crude out of Padd 2 (Midcontinent) into Padd 3
(Gulf Coast) it might happen in 2012 instead.”

Enbridge announced this week it will likely
proceed with Wrangler, an 800,000 bpd, $2 billion pipeline that
would shift crude from the Cushing to the giant U.S. Gulf Coast
refining hub after receiving strong shipper interest.
Enterprise is also a partner in Wrangler, which could be in
service by mid-2013.

Confidence that one of these pipelines will help alleviate
the Midwest glut can also be seen further out in the oil
futures curve. The premium of December 2013 Brent to December
2013 WTI, which topped $17 a barrel in September, has dropped
more than $3 this week to $8.35 on Friday.

“There’s a growing realization that despite (Federal)
government actions, the economic imperative is to move more oil
out of Cushing, and that has been taking place.” said Mark
Routt, analyst and engineer at KBC in Houston.

MORE ROOM FOR RAILS?

Further relief to the Midwest crude glut has come from
alternative shipping methods. As the disconnect between Cushing
and Gulf Coast markets grew this year, shippers and producers
scrambled to find new ways to capture the tempting arbitrage of
more than $20 a barrel available for those who could get crude
to the coastal refining hub.

Companies have been shipping crude by rail and barge and
business is expected to be healthy in the medium term, and
potentially more profitable amid Keystone XL’s delay.

Routt said new rail terminals in North Dakota hold capacity
to ship up to 350,000 bpd and that those volumes could double
by 2013.

“If no pipeline solutions occur in the next few years, we
are likely to see a very significant build out of rail
capacity, which has higher transportation cost than pipelines,
to bring Canadian oil sands and Midcontinent tight oil to new
markets,” IHS Cera said in a note to clients.