Puckett, Phillips propose legislation seeking to resolve dispute over coalbed methane ownership

Two state lawmakers on Wednesday introduced bills that would dramatically alter Virginia mineral law and potentially release millions of dollars in natural gas royalties currently held in state-run escrow accounts to landowners.

Twin bills patronized by Sen. Philip Puckett and Delegate Bud Phillips also would require that the state Auditor of Public Accounts audit 20 years of payments by energy corporations into more than 750 accounts in escrow, which collectively hold $25 million.

The proposed legislation seeks to resolve a lingering dispute over who owns coalbed methane – a gas that inhabits coal seams – when coal and gas are separately owned for the same tract of land. In such cases, the Virginia Gas and Oil Board funnels coalbed methane royalties into escrow, requiring owners to sue to collect the money or agree to split it with the conflicting claimant. About 83 percent of the funds in escrow landed there because of a conflict over coalbed methane, according to a recent state estimate; the rest of the money belongs to people whom gas companies have been unable to locate.

The proposed bills by Puckett and Phillips declare that landowners own all of the gas, including coalbed methane, beneath their surface unless the gas rights have been severed from their property. The legislation represents an attempt to codify a 2004 ruling by the Supreme Court of Virginia that surface owner plaintiffs who sold only their coal retained rights to all coalbed methane. To the dismay of many landowners, that ruling has not been broadly applied because state officials interpret it as applying strictly to the specific deeds in the case.

“The goal is to open up the escrow account for people who have a deed that has not severed the gas rights,” Puckett, a Lebanon Democrat, said by phone Wednesday. “Hopefully, we’ll have people who can present that kind of deed to the Gas and Oil Board and ask it to release their funds from escrow.”

The second prong of Puckett and Phillips’ legislation would require that state auditors perform an audit of all individual accounts in escrow “from inception through July 1, 2010,” and submit a report to the governor and committees in the Senate and the House of Delegates by December 2010. The audit provision is partly a response to a Bristol Herald Courier investigation revealing that hundreds of thousands of dollars were missing from escrow.

“We’re doing it because of what you already found,” Puckett said. “I’m convinced we’re going to find some more, maybe.”

Dedicating state resources for an extensive audit also is a reflection of Puckett’s disappointment with an audit recently authorized by the Gas and Oil Board, which provides for a basic reconciliation of gas corporations’ deposits with the bank’s receipts. An accountant for the firm that will perform the audit has said it also will perform a detailed analysis of select accounts in escrow, but so far the board has signed off only on the basic verification audit.

“I personally think it ought to be broader,” Puckett said of the scope of the audit approved by the board.

Finding a way to release the millions in escrow is a high priority for area legislators. It is Puckett’s single most important bill, he said, and it ranks in the top two or three for Delegate Terry Kilgore, a Gate City Republican who chairs the Commerce and Labor Committee.

“We’ve got to do this,” Kilgore said in a phone interview Wednesday. “All of the Southwest Virginia legislators are focused on this.”

Kilgore is still preparing legislation that would allow the Gas and Oil Board to refer gas ownership disputes to a third-party arbitrator, such as a circuit court judge. It will be one of five bills he is allowed to file after the pre-filing deadline, which was Wednesday.

“We’re trying to figure out how best to achieve that, to make [the system] quicker and more efficient. As your stories show, it’s not working that well,” he said.

“I think everybody is saying we’ve got to do something,” Kilgore continued. “I’ve been going to some of the gas company lobbyists, and they agree, they know something has to be done. I think this is the year to get something done.”

But there is one factor that could derail legislative action, Kilgore said: a lawsuit filed in December by a Richlands, Va., lawyer challenging the constitutionality of the Virginia Gas and Oil Act.

“That’s the biggest problem we would have,” Kilgore said, noting that the attorney general’s office may request that his committee not act because of the ongoing litigation.

“I’ve seen it happen before,” he said.

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