Siphoning natural gas profits from under the feet of landowners

Comment: Thanks DL!

By Daniel Gilbert,Reporter
Bristol Herald Courier
Published: December 7, 2009

The low hiss from a rusty pipeline is the sound of an energy corporation sucking coalbed methane from beneath Jamie Hale’s property.

On a hot August day, the gas is flowing out of the well at the rate of 1.2 cubic feet per second – producing in one day enough gas to satisfy the heating and cooking needs of the average American home for more than a year.

The well – one of seven that surround Hale’s 40-acre property in Buchanan County, Va. – coaxes the colorless, odorless gas to the surface by pumping water and sand at high pressure into the coal seam.

As the gas reaches the surface, it is shunted into a small pipeline, whisked off to a treatment facility, prepped for passage on an interstate pipeline to be sold to a utility provider, and ultimately delivered to homes and businesses in Virginia and other states.

The company draining Hale’s coalbed methane is CNX Gas, a subsidiary of Pittsburgh-based Consol Energy and the largest gas producer in Virginia.

In 2008, CNX operated 3,000 wells in Southwest Virginia and raked in gross income of $4.65 billion from its national operations.

Hale, 37, drives trucks and operates a silo at a power plant in Buchanan County.
The Hales are entitled to a share of the proceeds from their gas, but since the wells rimming the family land began producing in 1998, they have not received a penny.

Instead, CNX cuts a check for the royalties it owes the Hales – and countless others whose gas it produces – and transmits the money into a state-run escrow account that landowners cannot monitor or access without clearing enormous legal and administrative hurdles.

Hale himself triggered this scenario by refusing to lease his gas to CNX, unaware that Virginia did not give him that choice.

“I didn’t realize they could take your gas without a lease,” he said.

“A shot in the arm”

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 question of coalbed methane ownership is particularly nettlesome in Southwest Virginia, where many landowners sold the coal from beneath their land but retained gas rights. Splitting the mineral estate has created a conflict between the gas owner and the coal owner, each of whom lay claim to a gas that is produced by fracturing and stimulating the coal seam.

Further complicating the ownership question is that at the time most landowners sold their coal, no one knew that coalbed methane – long known as “miner’s curse” for its lethally explosive properties – would turn out to be a valuable commodity.

The General Assembly in 1990 was in a mood to stimulate development, and it had a reason to act quickly. A federal tax credit for alternative fuels was expiring at the end of the year, and industry lobbyists argued that corporations could not profitably develop coalbed methane without the benefit of the tax credit.

“The production of this gas represents a potential ‘shot in the arm’ to the economy of Southwest Virginia,” the commission wrote in its 1990 report to the General Assembly.

The legislature devised a way to develop the commonwealth’s coalbed methane resources while skirting the thorny question of ownership.

The 1990 Gas and Oil Act created one regulatory body, the Virginia Gas and Oil Board, which would apply a loose grid over the gas fields and create square units of generally 60 to 80 acres for coalbed methane wells.

Whenever different people owned the gas and the coal for a single tract of land, gas operators would be required to escrow royalties according to the owners’ interest in the unit until they reached an agreement or a court determined ownership.

This seemingly elegant solution paved the way for a massive expansion of coalbed methane production in the state’s most economically depressed region. But the 1990 law has another kind of legacy, too.

By requiring a royalty owner to sue for ownership or split proceeds with a conflicting claimant, the law set up an asymmetrical, David-versus-Goliath type of legal conflict that pits an individual owner against an energy conglomerate.

If Jamie Hale wants to retrieve his coalbed methane royalties from escrow, he’ll have to sue the coal company that owns the coal beneath his 40 acres. Or he’ll have to give up some of his royalties to the corporation.

Neither option looks good to Hale.

“They just came in here and started taking our gas, and there’s nothing that a poor man can do about that, honestly,” he said. “I may never get nothing.”

And Hale is several steps ahead of many mineral owners: He knows what he owns.

“We do not have an inkling”

Theresa Brents lives in Stuarts Draft, Va., some 250 miles from the two large tracts of land she inherited from her grandparents in Buchanan County.

About 12 or 13 years ago, Brents agreed to lease her mineral rights beneath 150 acres to CNX Gas. She’s never received a royalty payment and had never heard of the Virginia Gas and Oil Board’s escrow fund until contacted by a reporter in October.

“I’ve wondered about that, but not ever pursued the issue,” the retired librarian said by phone. “You get this paperwork that basically says there’s going to be a hearing, but it’s not cost effective or generally time effective when you don’t know what’s going on. It’s a fairly complicated matter, and I figured it was probably not worth it.”

According to Gas and Oil Board records, Brents owns the gas beneath 28 percent of the acreage in unit W-9 – an 80-acre square; a coal company owns the coal, and the corresponding sub-account in escrow contains $150,000.

Gas still flows from the original well in W-9, but the unit no longer exists as such; it is now part of a larger unit known as a gob, where multiple wells siphon coalbed methane from a mined-out panel of coal. The change in the well status required a new sub-account in escrow, in which Brents owns gas rights to 9 percent of the acreage. That account contained almost $75,000 as of October.

And these are only two units in which Brents has an interest; her two tracts of land almost certainly spill into other units, meaning she is entitled to royalties from gas production there, too.

When informed of how much money is in escrow, Brents said, “Oh, my goodness. Oh, my word.”

She would like to figure out how to collect her royalties, she said, “But I’m not even sure where to start.”

She is far from alone.

The number of people entitled to royalties in escrow stretches across the country, but even local residents and state agencies are oblivious to what they own, let alone how to collect it.

Shirley Keene, of Raven, Va., and her siblings are regulars at Virginia Gas and Oil Board hearings, and have been more or less disgruntled with gas industry practices since 1993.

By her calculation, CNX has 28 producing wells on her family’s two tracts of land – one 43 acres and the other 15 acres. Over the years, the Keene heirs have hired three attorneys to help them get their royalties out of escrow – so far, without success.

Keene, disabled from a car accident six years ago, has never seen an accounting of what goes into escrow. After 16 years, she has no notion of what her share of the escrow proceeds are.

“We do not have an inkling whatsoever of what we have in there,” she said in a recent interview. “I don’t even know how to go about it.”

Neither does the Virginia Department of Corrections, which – in addition to running the Keen Mountain Correctional Center in Buchanan County – owns gas rights to 47 percent of the acreage in unit W-9.

“We don’t have anyone who oversees our mineral interests, and we would have the Attorney General’s Office look over our contract,” said department spokesman Larry Traylor. “We’re not even sure the documents exist.”

Tommy Hudson, who runs the Richmond lobbying firm W. Thomas Hudson Associates, was part of the 1989-90 task force that proposed the 1990 act. When asked if he was surprised that the 20-year-old question of coalbed methane ownership persists, he called it an “interesting question.”

“I think the legislature set up a mechanism that will drive all parties to the negotiating table and allow a valuable resource to be developed,” Hudson, who is president of the Virginia Coal Association, said by phone.

It is unquestioned that the 1990 act expanded coalbed methane production and supercharged the mineral severance taxes that local governments receive.

In one year, 1990-91, severance taxes from natural gas production in Wise County quintupled, county records show. In Russell County, gas severance taxes have risen steadily to nearly $2 million in 2009, and Buchanan County last year banked more than $5 million from a methane tax.

Hudson was unaware of the $24 million parked in escrow that royalty owners are not getting. He also seemed unaware that the ownership of coalbed methane has been litigated at length, and that the Supreme Court of Virginia has ruled on it.

The state’s highest court in 2004 determined that a surface owner who sold only coal retained the rights to all other minerals, including coalbed methane.

And it is that ruling that keeps people like Jamie Hale and Shirley Keene away from the negotiating table, hardening their conviction that they own 100 percent of the royalties from their coalbed methane.

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http://www2.tricities.com/tri/news/local/article/siphoning_natural_gas_profits_from_under_the_feet_of_landowners/36908/