Unclaimed
Property Overlooked Aspects of Unclaimed Property in the Midstream Oil & Gas Sector
Introduction Historically, most vertically integrated oil and gas companies managed unclaimed property through their Division Order or Land units which contributed to a focus on mineral royalties. Personnel operating in the Division Order or Land units spend a considerable amount of time researching and maintaining owner records applicable to mineral or royalty ownership, which obviously supports the reason why this has been the practice. Oil and gas companies are now recognizing the need to evaluate exposure in the midstream component of their operations. Since many companies did not account for exposure applicable to midstream operations in their unclaimed property compliance procedures there could be a risk of considerable past due unclaimed property exposure due the states. As a refresher, the midstream component of the oil and gas industry falls between upstream and downstream and involves the transportation, storage and marketing of mineral products. Similar to other industries, the midstream component has its own unique unclaimed property exposure areas including storage payments, lease agreements and easements. As these liabilities are often generated in high volume, it is likely that companies may lose contact with the owners to whom payments are due. When this occurs, and the liability remains stale for a period meeting State unclaimed property dormancy criterion, the property becomes reportable to the State in the same way as other property types. We find that midstream companies that generate liabilities applicable to pipelines and storage units often have the highest exposure in this sector. This is due to the fact that both pipelines and storage tanks often “pass through” or are housed on leased properties, respectively. The use of another party’s land is authorized through lease What is Midstream & what are the UP exposure areas?
agreements that define occupancy and payment terms. Payments due from the midstream company to the landowners often remain outstanding due to a number of reasons including, but not limited to: • Bad or Unknown Address of the owner which prevents successful delivery of the check • Checks for small dollar values which go uncashed • The owner is deceased and heirship has not been established preventing the disbursement of the check • Title or Legal Disputes which can also prevent the issuance of the checks Depending on company practice, the balances due to the owner may remain in outstanding checks, be voided and reissued multiple times, or reflected as an open liability due to another party on the general ledger. Either of the aforementioned practices could result in unclaimed property liability that can be easily overlooked. Compliance focus on Midstream The evaluation of unclaimed property compliance within an oil and gas company’s midstream component is often an issue raised under audit. Unlike royalty payments issued through revenue payable disbursement accounts, midstream liability payments are often disbursed through the accounts payable disbursements. As many companies in the oil and gas sector believe accounts payable and receivables to be immaterial areas of potential exposure, testing of these cycles can result in a significant number of transactions selected for research due to the high volume of un-remediated checks. So…What do we do? In order to mitigate the risk of noncompliance with State unclaimed property laws, it is imperative that oil and gas companies evaluate compliance holistically – meaning all property types generated by the company
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N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
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