Just beyond the edge of Kathy and Kenneth Street’s 30-acre homestead in Rowe, Va., three gas wells have drained 384 million cubic feet of coalbed methane from beneath the couple’s land in the past five years.
The Streets have not received any royalties for their gas, and the state-controlled escrow accounts where their money should have been accumulating were all but empty two months ago.
The Virginia Gas and Oil Board in 2004 leased the Streets’ mineral rights to an energy corporation against their will, and deemed them in conflict over coalbed methane with the company that owns the coal beneath their land.
The board directed the gas well operator, CNX Gas Co., to pay the Streets’ royalties into escrow pending a resolution of ownership.
But the accounts didn’t receive any royalties until January. In the last two months, CNX – the largest gas producer in Virginia – dropped almost $125,000 into two escrow accounts corresponding to wells that are harvesting the Streets’ gas. The account corresponding to the third well is still empty, even though the well has drained 46 million cubic feet of coalbed methane since 2007, according to production figures CNX reported to the state.
These accounts were among those the Bristol Herald Courier identified as lacking royalty payments for at least two years. Since October 2009, when the newspaper first alerted gas companies and state energy officials to discrepancies between gas production and escrow payments, CNX and EQT Corp. – the two Pennsylvania-based corporations that dominate the industry in Southwest Virginia – have combined to pay more than $1.1 million into 45 accounts that had held $5,000 total.
These years-late deposits aren’t the only revelations that continue to raise questions about how much is missing from the $25.3 million in escrow. Some escrow accounts that should hold royalties still have nothing in them, while other accounts simply don’t exist.
Most notably, the Herald Courier has identified a behemoth gas unit covering thousands of acres where at least 42 wells produce coalbed methane belonging to landowners whose royalties should be in escrow. These wells have produced more than 1.5 billion cubic feet of coalbed methane since July 2007 – enough to meet the natural gas needs of about 15,000 American homes for a year. But there is no escrow account to receive royalties from this production.
Such questions may or may not be addressed by an accounting firm that is conducting the first audit of the escrow accounts in a decade.
The firm’s contract allows the Gas and Oil Board to adjust the scope of the audit according to how much it is willing to spend; all expenses will be paid from royalties in escrow.
These developments coincide with the passage of new legislation aimed at releasing royalties in escrow to landowners; the legislation is on track to become law as early as next week.
Twin bills backed by Delegate Bud Phillips, D-Castlewood, and Sen. Phillip Puckett, D-Lebanon, seek to end the ownership dispute that has trapped royalties in escrow by declaring that landowners who sold only coal retained coalbed methane. This legislation – along with a bill sponsored by Delegate Terry Kilgore, R-Gate City, that creates an arbitration mechanism for deciding ownership – passed the General Assembly with almost unanimous support.
Like multitudes of Southwest Virginia mineral owners, the Streets have never investigated their stake in the coalbed methane flowing from beneath their land.
“All we know is it’s supposed to be put in escrow,” Kathy Street said when asked about the royalties she and her husband are owed.
Kathy works for Buchanan County Headstart; her husband, Kenneth, is disabled. The Streets believe that collecting royalties from escrow would require them hiring a lawyer, which they have not done. The reason is simple, Kathy Street said: “Money.”
“You have to know you have enough [in escrow] to hire a lawyer to get it,” Street said by phone. “Really, you shouldn’t have to pay a lawyer to get what’s yours to start with.”
Two months ago, the accounts holding the Streets’ royalties contained $187.58.
When informed of the recent deposits into escrow, Street said, “I guess we’ll check it and see what we can do. And get a lawyer.”
Missing accounts
In December, the Herald Courier reported that 30 percent of the 750-plus accounts in escrow were not receiving royalties even though they corresponded to wells producing gas.
In some cases, the energy corporations had failed to file the necessary paperwork for royalties to be escrowed. Other missing payments were the result of computer glitches and clerical errors, CNX and EQT representatives said at the time.
Industry and state officials also pointed out another explanation for why certain accounts weren’t receiving royalty payments. Some gas wells are swallowed into larger units when the coal panels beneath them are extracted and allowed to collapse – a process that releases huge volumes of coalbed methane and alters the way gas is drained.
Whenever such a unit, known as a gob, is formed, the Gas and Oil Board establishes a new account in escrow to receive royalties from all of the wells that previously corresponded to separate, individual accounts. The old individual accounts receive no royalties but stay active until all of their contents are disbursed.
But not all royalties that come from a gob find a home in escrow.
In March 2006, the Gas and Oil Board approved the creation of a gob spanning 4,550 acres in Buchanan County’s Oakwood gas field, operated by CNX. The new production unit, known as the Virginia Pocahontas No. 8 Sealed Gob Unit 3, includes at least 42 wells corresponding to nine accounts in escrow. The nine accounts ceased to receive royalty payments after the gob was approved. A new account to hold royalties from the gob production was never created.
A spokesman for the Virginia Department of Mines, Minerals and Energy, and the Gas and Oil Board, would not respond to questions about the missing account, citing the advice of legal counsel and the anticipation of pending litigation.
A CNX spokeswoman repeated the company’s refusal to have a “well-by-well discussion” with a reporter when asked about the status and amount of royalties from gob production that have not been deposited into escrow.
“If our royalty owners have questions, we will be glad to sit down with them to answer any questions they have,” the spokeswoman, Cathy St. Clair, e-mailed.
Dorlis Cook has questions.
The Abingdon resident and retired telephone repairman owns 22 acres in a gas unit formerly known as X-11, which is now part of Sealed Gob Unit 3.
“At one time, I was told I had a fortune in escrow,” the 68-year-old said by phone, remembering a conversation with a gas company representative years ago. “Whether it’s still there or what I got in it, I don’t know.”
Cook still has royalties in the escrow account for X-11, which holds about $141,000. But that account hasn’t received royalty payments in years. The new payments should be based on Cook’s acreage in the gob unit, for which no escrow account exists.
“Now how would anyone be getting into that escrow?” Cook wondered. “Who do you go to? You can’t afford lawyers, the way they charge. My brother’s tried that. You can’t fight somebody like a gas outfit,” he said.
“I appreciate what you have told me, I really do,” Cook said. “I knew nothing about nothing about it.”
Cook is not alone among landowners with mineral rights in Sealed Gob Unit 3. Theresa Brents, a retired librarian who lives in Stuarts Draft, Va., owns 21 acres near the western edge of the unit. Buchanan County owns 18 acres. The Virginia Department of Highways has half an acre. They are among hundreds of people with gas rights to the gob production.
An explanation of sorts
Sealed Gob Unit 3 isn’t the only gob with no account in escrow. It’s just the biggest.
On Jan. 29, a family of disgruntled landowners met with the state director for the Division of Gas and Oil at a Lebanon, Va., breakfast joint. The Herald Courier obtained and reviewed a video recording of the meeting.
One of the heirs, Kenneth Osborne, pointed out that an escrow account in which the family has an interest hadn’t received royalty payments in more than a year.
David Asbury, the DGO director, explained to Osborne and his relatives how creating a gob unit changed the way their gas is being produced, and that royalties should go into a new escrow account. Before the account can be created, Asbury said, he and his programs administrator must review each individual unit in the gob to ensure that each owners’ acreage is accurately rendered.
This particular gob, known as Buchanan No. 1 Sealed Gob Unit 2, covers 3,400 acres and was approved by the Gas and Oil Board in November 2008.
“The reason this isn’t recorded yet is there’s 77 pages of owners in this SGU,” Asbury said, using the common shorthand for sealed gob unit. “We have to cross-check every individual that’s in those single units, and make sure that each one that’s in those single units – that they haven’t missed acreage.”
This did not placate Osborne.
“The problem is, the escrow account doesn’t exist,” he said.
“It will,” Asbury replied, when the necessary paperwork is vetted and recorded.
“The monies for each of these gob units – there will be a deposit made, once we get everything agreed, with interest,” Asbury said.
dgilbert@bristolnews.com | (276) 645-2558
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