2010Public Service

Corporations correct balances in gas royalty escrow fund

Daniel Gilbert
December 27, 2009

For six years, the natural gas royalties belonging to heirs of a Buchanan County landowner named Fielden Sanders should have been accumulating in a state-run escrow account.

Until last month, the account contained $1.56 – a seemingly small sum for the heirs’ 13 percent interest in a well that has sucked up 500 million cubic feet of coalbed methane.

It should have held more.

In November, the energy corporation draining the Sanders’ gas deposited $44,440 into the account holding their royalties. It was one of 20 accounts in escrow that received more than $700,000 in deposits that month, after a Bristol Herald Courier investigation showed they had not received payments for months when the corresponding wells produced gas.

Before November, the 20 accounts contained $4,600 combined.

In all, energy corporations deposited more than $825,000 into the escrow fund in November – five times as much as the average month in 2009 – bringing the fund’s total balance to $24.9 million. At least 10 percent of the 766 active individual accounts in escrow received their first payment in a year or longer, according to a Herald Courier analysis.

Gas well operators pay royalties into escrow whenever they produce gas belonging to people they cannot find or whose mineral ownership is in dispute. The escrow fund was established in 1990 with the aim of allowing gas corporations to develop the commonwealth’s coalbed methane reserves, regardless of who owns the gas. It is overseen by the Virginia Gas and Oil Board.

The corrective payments into escrow come just ahead of the board’s Dec. 15 vote to authorize an audit of the escrow fund, the first in a decade.

The lion’s share of the corrective payments was made by Pittsburgh-based EQT Corp., the corporate parent of Equitable Production Co., and the second-largest gas producer in Virginia.

“There were some things that had fallen through the cracks,” Kevin West, EQT’s managing director of external affairs, said in a telephone interview last week. “Once it was brought to our attention, we kind of did an audit of our accounts to make sure there wasn’t something missing that was not identified in what was brought to our attention, and immediately then made those payments into the accounts.”

The Herald Courier in late October provided EQT with a list of 100 individual accounts in escrow corresponding to gas wells that the company operated. The accounts had not received payments for months when the corresponding wells produced gas for at least 10 months during an 18-month period.

West said that his company had a program in place that periodically reviews payments into escrow, but credited the Herald Courier with expediting the process.

“I think they would have come to our attention eventually and we would have fixed it, but this helped it get done a little bit quicker,” he said.

CNX Gas Co., a subsidiary of Canonsburg, Pa.-based Consol Energy, made what appears to be a corrective payment into the account containing royalties for the Sanders heirs. The account, named for the gas well AZ-100, was one of 90 corresponding to CNX-operated wells that did not receive payments for at least 10 months when the wells produced gas.

When asked to comment, a Consol spokeswoman reiterated the company’s position that it would not engage in a “well-by-well discussion” with a reporter. The company is willing to discuss individual wells with royalty owners, said the spokeswoman, Cathy St. Clair.

“Every well has its own set of characteristics, and without looking into the history of everything to do with that well, you can’t make the inference that there’s something that should be there that isn’t there,” she said.

Two of the surviving heirs of Fielden Sanders list addresses of Gordonsville and Bedford, Va., state records show. They did not respond to phone messages left last week.

Hundreds of individual accounts in escrow have not received payments for months with the corresponding wells produced gas, the Herald Courier found.

An account might not receive monthly royalties for a variety of reasons, state regulators and industry representatives say. A mineral owner might have a tiny interest in a well, causing the corporation producing the gas to allow royalties to accumulate to at least $1 before paying into escrow. Or the well might be swallowed up into a larger unit, and a separate account is created to receive royalties.

Some discrepancies, though, are because gas corporations have failed to file the required paperwork with the state for the royalties to be escrowed. The Virginia Department of Mines, Minerals and Energy has acknowledged a “backlog” of such missing documents, and pledged to assign additional staff to clear it.

Other missing payments are the results of computer glitches and human errors.

West, of EQT, said the company’s computer system had set a threshold of $50 before royalties would appear ripe for payment into escrow.

And sometimes payments slip through the cracks, West said.

Of the 20 accounts that received large, corrective deposits in November, 11 correspond to coalbed methane wells operated by EQT. The accounts hold royalties for unknown heirs to the now defunct Yellow Poplar Lumber Co., which owns 100 percent of the gas interests in the drilling units. Until last month, those accounts contained only rental payments of $5 per acre.

In November, after the Herald Courier’s analysis, EQT deposited $537,575 into those accounts.

The November escrow statement, obtained by the Herald Courier from Virginia Division of Gas and Oil, also shows that the fund continued to lose interest income for the eighth consecutive month, bringing the loss to $18,700 so far this year.

The fund has been losing money because the bank’s fee for servicing the accounts exceeds the interest earned by the fund’s deposits. Wachovia Bank, now part of Wells Fargo, has managed the escrow fund since 2001. In January, Abingdon-based First Bank & Trust will take over the contract.