Oil & gas has undergone many transformations in just the last decade alongside numerous legislative changes. Emissions, for example, has always been a liability from an environmental point of view yet largely gone unchecked until new reporting requirements, fees, and investor sentiment around climate action brought ESG and sustainability to the forefront.
Unclaimed property has undergone a similar transformation in the energy back office with oil & gas companies realizing that like ESG, unclaimed property and escheatment liability are now top of mind for regulators - whose state treasuries benefit from these payments - as well as asset buyers who want to avoid acquiring non-compliant assets.
Let's look at why unclaimed property in oil & gas is so complex, what the risks are, and how PakEnergy can automate your escheatment process to simplify compliance.
What's Escheatable in the Energy Back Office?
If you're in oil & gas but not in the accounting department, chances are the term "unclaimed property" is synonymous with ownership royalties held in suspense and the term "escheat" is probably foreign. Indeed, suspense can be a significant part of an oil & gas company’s unclaimed property. In fact, in a recent PakEnergy webinar on the subject 58% of attendees who answered a poll said that suspense is their largest unclaimed property category.
Unclaimed property can be found in unlikely places in the energy back office that is legally required to be escheated. This includes an employee paycheck that wasn't cashed after they left or a credit sitting in accounts receivable. Escheatable funds also include unused or unresolved AP balances as well as other types of payments to owners, including lease bonuses and delay rentals.
Unclaimed property is big business and states are increasingly going after these funds with changes to dormancy and filing laws. The National Association of Unclaimed Property Administrators (or NAUPA) reports that there is more than $70 billion in unclaimed property sitting in state treasuries and while most states have lost and found programs (just google "escheat TX, LA, OK..." etc.) most of the money reverts to the state. But getting the funds into the treasury in the first place is the whole point of escheatment.
The Evolving Regulatory Landscape
While there hasn’t been major reform in deciding which state receives escheat funds since the Texas vs. New Jersey case in the 60's that led to the establishment of priority rules, there is always a need for clarification and interpretation in some cases. And states where many companies choose to incorporate (Delaware, we're looking at you), have a vested interest in actively seeking out unpaid escheat funds. This has led to an uptick in audits in the last 5 years and incentives to get compliant through voluntary disclosure agreements (VDA).
But knowing where to send the check is just the first step in the escheat process. Dormancy is the next layer of complexity where it is critical to track every interaction with unclaimed property owners in order to follow the exact rules for sending due diligence letters and starting the clock ticking on when to remit payment. And, while the NAUPA II electronic reporting standard attempts to simplify filing, each state has its own dormancy periods, dormancy qualifications, and filing deadlines. A NAUPA III standard is only going to add more complexity as states implement it on their own timetables.
Attempts from the Uniform Law Commission to simplify reporting are well-intentioned but also likely to create reporting complexity for oil & gas accounting departments. As a non-profit organization, the ULC can only recommend model statutes for states to consider and enact. The Revised Uniform Unclaimed Property Act (or RUUPA) was drafted and approved by the ULC in 2016, which seeks to bring uniformity and consistency to escheat to simplify compliance and accelerate revenue to the state (and ostensibly make it available to be recovered by owners). This includes setting different dormancy periods for each type of unclaimed property, but the implementation is completely left to each state.
While RUUPA recommends a 3-year dormancy period for oil & gas royalties, states like Idaho are creating more complexity by stipulating a contingent 5-year dormancy period that changes to 2 years in the case of death. This also reflects a growing trend to use date of death as a trigger for dormancy.
Automating the Escheat Process
When it comes to managing the complexity of unclaimed property and remitting funds to state regulators, it doesn’t matter if an oil & gas company is a single basin operator or a diversified major producer. The owners of unclaimed property can live anywhere, which is where the funds must go based on the first priority rule that uses last known address and the corresponding regulator as the beneficiary. Small independents can have hundreds or even thousands of interest owners, vendors who went out of business and never got their invoice payment, and employees who never cashed their last paycheck. This means attempting to contact owners and remitting payment to regulators from Alaska to Texas, Hawaii to the US Virgin Islands and every point in between.
That's where Pak Accounting’s owner-tracking tools come into play. The cloud-based software captures every interaction with owners, change of address, and ownership/heirship change. Then, it identifies which state’s dormancy rule to use and provides an audit trail for dormancy triggers.
Next PakEnergy's unclaimed property module applies the correct current rules and deadlines (e.g., California requires an escheat notice in October and remittance in June of the following year) and even automates the process of mailing letters for due diligence, again, documented in an audit trail. Then automatically builds the correctly formatted NAUPA EDI file based on each state's reporting requirements.
Big box ERPs and commercial accounting software can't meet the rigorous demands of oil & gas unclaimed property where the vast number of mineral and royalty interest owners combines with a massive supply chain to create a never-ending escheat headache.
All too often this involves manually managing the escheat process at scale in Excel spreadsheets, stuffing envelopes, and fussing with the myriad reporting requirements while hoping rules and deadlines haven’t changed.
Pak Accounting and the unclaimed property module cure the escheat headache with the industry’s only end-to-end solution that accelerates escheatable funds to regulators faster than ever, redirects staff time to higher-value work, and keeps you compliant. And, in today's M&A market, showing off your assets as fully compliant for unclaimed property can increase marketability and deal value.
Want to learn more about modernizing unclaimed property management with The Pak? Download our escheat fact sheet: Understanding and Simplifying Unclaimed Property Management.
With nearly 20 years of oil and gas industry experience, Nikki Naylor has extensive expertise in oil & gas accounting processes, regulations, and best practices. She currently serves as Product Manager at PakEnergy, where she works closely with customers to drive new features and enhancements to the Pak Accounting software platform. Before joining PakEnergy, Nikki served as Senior Revenue Distribution Manager for NGL Crude Logistics and Division Order Analyst at Barr Energy. Nikki has been involved in escheatment for the past 12 years and she is also a long-term member of UPPO. Nikki holds a Bachelor of Science in Biology from the University of Central Oklahoma.
