Paging Ken Cuccinelli....

[mahatmakanejeeves]

The 2010 Pulitzer Prize for Public Service went to the Bristol (Virginia) Herald Courier for a series by Daniel Gilbert on how royalties for extracted natural gas go not to the owners of the land beneath which the gas had been located but into a trust fund instead. Surprisingly (or not), the accounting of the funds is shaky. The landowners have no say in this. A state law requires them to participate.

Surely you recall that Virginia outlawed mandatory participation in a health insurance plan. The grounds for this were that citizens could not be required to do business with someone against their will.

The government is requiring you to do business with someone, like it or not. The only difference I can see is that, in the case of the gas royalties, the government involved is called "the Commonwealth of Virginia."

Fifth Amendment, Commerce Clause, blah, blah, blah. Well, Ken, cat got your tongue?

Siphoning natural gas profits from under the feet of landowners

“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.