The report uncovered emails showing that the two natural gas companies repeatedly discussed how to avoid bidding against each other in a public land auction in Michigan and in nine prospective deals with private land owners in the state.

Communications between the companies occurred in 2010, when Michigan's Collingwood shale formation was considered one of the nation's most promising new oil and gas plays, and Chesapeake and Encana were among the largest bidders for land leases there.

The source, who was not authorized to speak publicly, said the Justice Department probe could last for months, if not longer.

A Justice Department spokesman declined to comment.

Jim Gipson, a spokesman for Chesapeake, said the company declined to comment. A spokeswoman for Encana said the company had no comment.

The federal government's probe adds more scrutiny to the two energy companies.

Last week, the antitrust division of Michigan Attorney General Bill Schuette's office and Michigan's Department of Natural Resources, which oversees state land auctions, also opened investigations into the allegations in the report, according to three sources familiar with the matter.

"Our commitment is to ensure the integrity of the auction process and to receiving fair market value for public land," said Michigan DNR spokesman Ed Golder. Joy Yearout, a spokeswoman for the attorney general's office, declined to comment.

Congress has also expressed interest in learning more about Chesapeake and Encana's land dealings.

In a letter sent earlier on Monday to U.S. Attorney General Eric Holder, Representative Maurice Hinchey wrote: "I urge you to review this (Reuters) report, open an investigation into whether any federal antitrust laws were violated in this case, and assess whether violations may have been committed in other oil and gas lease bidding across the country."

A Democrat from New York, Hinchey is a critic of hydraulic fracturing, or "fracking," the controversial drilling technology that has opened up vast new reserves of oil and gas in the United States.

A member of the House Appropriations Committee, Hinchey is a co-author of the FRAC Act, which would require drilling companies such as Chesapeake and Encana to disclose the chemicals used in fracking fluid.

'SMOKE A PEACE PIPE'

Both Chesapeake and Encana, Canada's largest natural gas company, said they had discussed forming a joint venture in Michigan in 2010, but ultimately decided against it.

In one email, Chesapeake Chief Executive Officer Aubrey McClendon told one of his deputies on June 16, 2010, that it was time "to smoke a peace pipe" with Encana "if we are bidding each other up."

The Chesapeake vice president responded that he had contacted Encana "to discuss how they want to handle the entities we are both working to avoid us bidding each other up in the interim." McClendon replied: "Thanks."

Some of the emails were between McClendon and Encana USA President Jeff Wojahn.

Encana has pledged quick action, opening an internal investigation led by David O'Brien, chairman of the company's board of directors.

News of the discussions between Encana and Chesapeake, the second-largest natural gas producer in the United States, comes at a time when McClendon is already under fire.

The company's board stripped him of his chairmanship after Reuters reported that he took out more than $1.3 billion in personal loans from a firm that also finances Chesapeake. The Internal Revenue Service and the U.S. Securities and Exchange Commission have launched inquiries into Chesapeake.

(Additional reporting by Joshua Schneyer; Editing by Martin Howell and Lisa Von Ahn)

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