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Taylor Frankovitch Bowles Rice

Taking the Fright out of Unknown NPRI Royalties Held in Suspense

In 2019, the West Virginia Legislature took a giant step forward for producers when it enacted the West Virginia Unknown and Unlocatable Interest Owners Act in conjunction with the Cotenancy Modernization and Majority Protection Act. Under certain circumstances, these Acts permit oil and gas production without having to resort to a missing heirs petition in order to lease unknown or unlocatable oil and gas owners. Now that you have gotten the gas to flow, where do you send the bonus money and royalty checks if you cannot locate the owner? That answer may depend on whether it is an unknown owner of the oil and gas in place or whether it is an unknown owner of a nonparticipating royalty interest.

The West Virginia Unknown and Unlocatable Interest Owners Act1 (the “Unknown Owners Act”) governs the payment of money due for an oil and gas lease to unknown and unlocatable interest owners. The Unknown Owners Act requires an oil and gas operator to file a report and remit payment of the amount due to unknown and unlocatable interest owners to the West Virginia State Treasurer’s Office (the “Treasurer’s Office”) on a quarterly basis.2 Additionally, the Treasurer’s Office requires an operator to make “reasonable efforts” at least once per calendar year to identify and locate the unknown and unlocatable interest owners prior to submitting their report and making payment to the Treasurer’s Office.3

What interests fall under the Act? The Unknown Owners Act applies to money attributable to unknown and unlocatable owners of in-place oil and gas interests, which are leased pursuant to the Cotenancy Modernization Act. Specifically, an unknown and unlocatable interest owner is defined as a “a person vested with a present ownership interest in the oil or natural gas and their constituents in place in a mineral property whose present identity or location cannot be determined . . .” (emphasis added)4 Because the definition of unknown and unlocatable interest owners provides that a person must be vested with an inplace interest, it can be argued that nonparticipating royalty interests (“NPRIs”) are not governed by the Unknown Owners Act, even if the underlying fee interests were leased though the Cotenancy Modernization Act. Notwithstanding, payments reportable under the Unknown Owners Act broadly include amounts payable for the extraction, production, and sale of minerals, including royalties.5 Therefore, it is unclear if the Unknown Owners Act applies to NPRIs if the associated inplace rights are leased through the Cotenancy Modernization Act. We believe that the legislative intent was for all payments accruing under the Cotenancy Modernization Act to be paid pursuant to the Unknown Owners Act, and there do not appear to be any policy arguments to treat royalty payments to unknown or unlocatable NPRIs owners differently from royalty payments to unknown or unlocatable in-place

owners. At the time of drafting this article, the Treasurer’s Office has not taken a position as to whether money attributable to the owner of an NPRI only, which is leased through the Cotenacy Modernization Act, is subject to the Unknown Owners Act or the West Virginia Unclaimed Property Act. The Treasurer’s Office has taken the position that the Unknown Owners Act only applies to interests that are leased pursuant to the Cotenancy Modernization Act. This means that if an operator holds a validly executed held-by-production lease, but the person entitled to receive bonus, rentals, or royalties from the lease is currently unknown or unlocatable, the provisions of the Unknown Owners Act do not apply. In that case, an operator is required to hold those monies and remit payment to the Treasurer’s Office pursuant to the provisions of the West Virginia Uniform Unclaimed Property Act (the “Unclaimed Property Act”).6 Generally, under the Unclaimed Property Act, payments attributable to unknown or unlocatable individuals are only subject to the custody of the State of West Virginia if the last known address of the apparent owner is within the State or there is no last known address for the apparent owner and the operator is domiciled in the State. As a result, when an unknown or unlocatable interest owner’s last known address is not in the State of West Virginia and the oil and gas operator is not domiciled in the State of West Fright Gone Continued on page 14

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