Daniel Gilbert, a staff writer for The Bristol Herald Courier of Bristol Va/Tn, wrote a series that won the Pulitzer Prize for Public Service for exposing a system that allowed corporations to drain natural gas from landowners' property without paying royalties.
Corporations used a Virginia State law written to expedite production of coalbed methane without getting delayed by legal entanglements. It allowed them to produce gas that belongs to landowners and pay royalties into an escrow account when there was a dispute or the owners could not be found. The escrow accounts were perhaps willfully mismanaged, and few landowners are seeing any royalties.
The story remains unresolved.
The 1990 Virginia Gas and Oil Act authorized gas companies to produce gas that belonged to landowners and pay royalties into escrow if there is a dispute or they could not identify the owners. Once royalties are paid into escrow, it is difficult for a landowner to claim entitlement or even monitor the account -- a feat that requires a lengthy legal battle against a corporation with enormous resources.
Part 1: The Money Prison.
The law created an eminent domain (forced pooling), which in this case allows companies to produce gas or oil under private property without an explicit lease from the landowner. It isn't known how many people in Virginia have a claim to this money, but some are entitled to hundreds of thousands. The companies had little oversight in handling the royalties, and they have yet to produce good records.
There are two primary scenarios that require gas companies to escrow royalties. The first arises when the well operator cannot locate mineral owners entitled to a share of production and then successfully petitions the board to lease those owners’ rights.
The second scenario kicks in when different people own the coal and the gas for the same tract of land – a common occurrence in Southwest Virginia, where many landowners sold the coal beneath their surface a century ago. Splitting a mineral estate like this has created a conflict between the coal owner and the gas owner over who is entitled to royalties from coalbed methane – a gas developed by fracturing and stimulating the coal seam that accounted for 80 percent of all gas produced in Virginia in 2008.
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[If landowners want to retrieve their royalties from escrow] state law requires a gas owner to sue to prove ownership, or agree to split royalties with a coal owner – generally a corporation. These requirements effectively force mineral owners to give up a portion of their royalties, either to an attorney or to a coal company, and the process can drag on for years.
The Herald Courier compared the corporate deposits into escrow vs the production numbers tehy report between January 2008 and June 2009, and found significant discrepancy.
Most commonly, escrow accounts connected to wells that produced gas received no royalty payments -- 30 percent of them, on average. There were 94 sub accounts that recieved no royalties during the entire 18 month periods, even though the wells they corresponded to produced gas.
The corportions sometimes failed to file necessary paperwork required for royalties to be escrowed, giving accounts false dormant status. The accounts are also full of accounting and clerical errors.
Part 2: No Right of Refusal
Jamie Hale is landowner whose property sits above coalbed methane. He hasn't received a cent for the gas that's been extracted from his property -- his money gets deposited into escrow every month, which he cannot access or monitor without a costly lawsuit. Why? He refused to lease his mineral rights to CNX Gas; he didn't realize that they could take his gas without a lease. Refusing CNX a lease put his land in disputed status, so his royalties are paid into escrow.
In 1990, the Virginia legislature resolved that it could not allow stubborn individuals to hamper the development of coalbed methane – an abundant resource whose peculiar characteristics had prevented it from being commercially produced. Up to this point, state law provided that surface owners like Hale owned all the migratory gases beneath the surface of their land, unless they had previously sold the rights to their gas.
This statute had been unpopular with gas corporations eager to exploit the coalbed gas; they feared that doing so could trigger civil penalties for taking gas owners’ property, according to a 1990 report by the Virginia Coal and Energy Commission.
The property owners have no choice according to the 1990 law. The gas companies are sanctioned to summarily take their gas whether they like it or not.
Part 3: The Virginia Supreme Court Weighs In
The Gas and Oil Act rigourous avoids the question of ownership when creating a legal way to develop coalbed gas. This leaves the courts largely able to decide where royalties get paid. In 2004, a circuit county court decided that a landowner did own the gas beneath their property,
In Buchanan County Circuit Court, Glubiak argued that Graham and another family, the Ratliffs, had severed only the coal from their land and owned all of the gas beneath it, including coalbed methane. Opposing him was a North Carolina-based coal company, Harrison-Wyatt, represented by J. Scott Sexton, a prominent mineral lawyer out of Roanoke, Va.
Glubiak prevailed in the trial court and in 2004, the Supreme Court of Virginia unanimously affirmed the lower court’s decision.
but the gas companies argue that the decision does not apply generally. It didn't change very much about how the gas companies treat the royalties. They maintain that gas ownership is deed specific, and the precedent does not affect but three tracts of land in the state.
Part 4: Coal Goes on the Offensive
The gas companies maintain that ownership can be decided only after there is a trial for each and every tract of relevant land. This posture is considerably to their advantage, and battles are costly for regular folk. The landowners must sue to prove ownership, or arrive at an agreement to split the royalties with the gas company in order to get their money out of escrow.
Part 5: From Crisis to Sustained Loss
The escrow fund did not do well beginning September 2008, when the ecomony collapsed -- and the following interst rates suffered to the point where the bank's service fees were greater than the accounts' earnings. Because of the defecit, the board that controlled the account chose to move half of the account into a money market fund. It's lost money every month since April 2009.
The board has since hired a different bank to provide escrow services.
Part 6: What is Missing from Escrow?
Because payments were sporadic throughout the escrow account and paperwork often wasn't properly filed, the account is in a state that is not well understood.
The Division of Gas and Oil has offered a series of evolving explanations in response to the Herald Courier’s analysis. Initially, the DGO posited on Nov. 6 that the discrepancies were the result of changes in the status of a well, such as when a coalbed methane well is swallowed up into a larger unit and owners begin receiving royalties in a separate escrow account. Or, the DGO suggested, gas companies were waiting to pay royalties until they reached a $1 threshold.
When presented with specific examples of escrow sub-accounts with very low balances – from 12 cents to $2.30 – despite high production from corresponding wells, the DGO responded that they were reasonable given the small amount of acreage subject to escrow. That explanation, however, ignored the fact that in several of the cases, no royalties were escrowed because the necessary paperwork has never been filed.
T. Shea Cook, an attorney, audited 24 gas units belonging to a client and found that the accounts were missing close to $750,000.
Part 7: An Audit Long Delayed
The last audit of the escrow fund was in 1999, where the auditor stated that providing an opinion about compliance with state or board regulation was not an objective of the audit, and refused to offer an opinion as such.
It is clear that a contemporary audit is needed, and as of the article's publication there was still much gnashing of teeth about how thorough an audit was needed and how to choose a contractor.
Part 8: Sue, Split, or Do Nothing
In the end, the people whose royalties are trapped in escrow are left with the option of taking on a costly law suit, splitting their royalties with the company, or getting no no compensation for their gas.
The Bristol Herald Courier also provides a tool to help people determine if they are entitled to any of these royalties.
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