Gas royalty bills advance, minus audit

The bills sponsored by two state lawmakers seeking to release $25 million of natural-gas royalties trapped in state-run escrow accounts to mineral owners have advanced out of committees – but stripped of an original provision that would have required the state to audit the accounts.

Backed by Delegate Bud Phillips, D-Castlewood, and Sen. Phillip Puckett, D-Lebanon, the bills attempt to resolve a 20-year-old dispute by clarifying the ownership of coalbed methane, Virginia’s most abundant natural gas, which has led a state board to divert tens of millions of dollars in royalties into escrow. In their original form, the bills also called on the state’s Auditor of Public Accounts to review each of the more than 760 accounts in escrow to make sure they contain the correct amounts.

But the revised versions of the bills state that the Auditor of Public Accounts “will not perform a detailed review of any corporate entity or individual escrow accounts,” and will instead “conduct an operational and performance review” of the Virginia Gas and Oil Board’s procedures for escrowing royalties and disbursing them. The bills are twins, with the exception of an “emergency” clause in Phillips’ bill that would make the legislation effective immediately. Puckett said he plans to incorporate that clause into his bill. Puckett’s bill moved out of committee Monday and is being considered by the full Senate; Phillips’ bill moved out of committee Wednesday.

Energy corporations operating in Southwest Virginia are required to pay royalties into escrow whenever they produce gas belonging to someone whose ownership is in dispute or who cannot be found. While the job of monitoring the escrow accounts officially belongs to the seven-member Gas and Oil Board, the work mostly falls to just two state officials at the Virginia Division of Gas and Oil.

The review by the state’s auditor would examine what the board is doing to ensure that royalties in escrow are properly accounted for in light of the best practices for collecting and disbursing funds, and consider recommendations for statutory and regulatory changes governing how the board administers the accounts. A report to the governor and legislative committees would be due Dec. 1, 2010.

The audit provisions in Puckett’s and Phillips’ bills changed after discussions with the state’s auditor, who is unsure if the funds fall under his authority. In a telephone interview Wednesday, Auditor of Public Accounts Walter Kucharski also cited the high cost of auditing all accounts in escrow and his office’s desire not to duplicate the work of a private accounting firm contracted by the Gas and Oil Board in December.

That audit – the second in the 20-year history of the escrow accounts – mandated a detailed, random review of 35 individual accounts, but the scope remains an open, evolving question.

Kucharski’s office would focus on what the optimal level of scrutiny is – how often to audit the funds, what level of accuracy is required – and who would pay for it.

“The Oil and Gas Board doesn’t have any general funds,” Kucharski said.

Noting that the cost of an audit is paid from the royalties in escrow, Kucharski said, “Is that a cost-effective way to manage these funds?”

Turning to his own office, the auditor added, “My budget’s being cut just like everybody else’s.”

If Phillips’ and Puckett’s legislation has the effect they hope – dislodging the millions in escrow – they still have concerns that the accounts might not contain the correct amount of money in the first place.

“Until you get the appropriate audit system in place, I personally would have real concerns that there are substantial deficiencies in some accounts,” Phillips said in an interview Wednesday.

Puckett struck a similar note.

“I think we all are concerned that the escrow accounts might not have everything in them that they should have, just based on what you’ve turned up,” he said, referring to a Bristol Herald Courier investigation that found hundreds of thousands of dollars were missing from escrow.

In addition to the ongoing audit and the APA review, Phillips and Puckett said that the Virginia Department of Mines, Minerals and Energy has agreed to implement a regulation that would assess a new fee to gas companies. The revenues of those fees would be earmarked to absorb the costs of an audit and hire personnel to closely monitor the royalties, the legislators said.

“I think everybody’s in agreement that that will be done,” Phillips said.

A DMME spokesman declined to comment Wednesday.

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