Unclaimed Property Compliance in the Oil & Gas Industry: Feedback from the Field

Gary Joseph, Senior Manager Unclaimed Property Consulting and Advisory Services

August 28, 2019


As Energy companies continue to grow and reorganize through mergers, acquisitions, divestitures, and spin-offs, staying in compliance with state unclaimed property laws (“UP Laws”) has become more and more onerous. Newly formed companies, who inherit historic liabilities as a result of reorganizations, are often abruptly introduced to the aggressive unclaimed property landscape when attempting to comply voluntarily via on-cycle reporting and voluntary disclosure agreements (“VDA”), or involuntarily upon receipt of an UP audit notice from a State Administrator’s Office.

Energy companies operating in the upstream sector continue to be a focus of state audits, especially for those states that have shale resources. This is mainly due to the multitude of property types maintained by Energy companies, as well as the highly contested positions on mineral proceeds and revenue suspense that are common in the Oil and Gas (“O&G”) industry. It’s also important to note that the midstream and downstream sectors are no longer able to fly under the radar, as more and more of these companies have also found themselves on the receiving end of audit notices and VDA notifications.

Evaluation of Compliance in Oil & Gas:

The number of third party audit firms conducting multi-state examinations on energy companies continues to grow. Unfortunately, many auditors are not familiar with the nuances of the industry. The absence of industry knowledge among auditors can prove burdensome for target companies, as holders often find themselves educating the auditor on accounting and operational transactions unique to the O&G industry. While these transactions may be commonplace for the everyday energy accounting professional, they can seem like a foreign language to auditors.

An example of a pain-point encountered when auditors are not familiar with the industry is presented in the evaluation of Accounts Receivables – Joint Interest Billings (“AR JIB”). While the evaluation of AR Credit Balance dispositions is standard in unclaimed property examinations, AR JIB transactions are unique to the O&G industry and should not be tested in the same manner as AR Credit Balance dispositions in other industries (i.e. retail). Attempts to test these distinct credits in a similar manner as traditional credit balances could result in the holder undertaking an arduous effort to pull historical records to prove thousands of transactions were applied to accounts of entities among which there is a joint billing arrangement. Considering there are a number of reasons a JIB credit balance may have been created, the resolution effort can be quite daunting.

Another contested area of O&G audits is what should be referred to as the dormancy driver for Mineral Interest properties. More and more companies have expressed concern with auditors flagging the Prior Period Adjustment date as the dormancy driver. As these transactions are often the result of an occurrence or realization outside of the control of the O&G company, the reference to certain dates (i.e. production date) could be misinterpreted as the date the item became due and payable. While many state administrators and auditors have deemed the production date to be the most objective, the realization of the net credit balance may not occur until long after the flagged production date – raising an argument that the accounting date should be considered. Again, this is where industry knowledge, and fairness some would say, is paramount as there would be a need to deviate from audit checklists.

Mineral Interests: CTP and Suspense:

Many state unclaimed property Laws include a current to pay (“CTP”) provision. This provision accelerates the dormancy period for subsequent accruals of mineral interest properties once the original property becomes reportable. The latest version of the Revised Uniform Unclaimed Property Act (“RUUPA”) includes a provision, Section 209 to be specific, that would allow states to shift from the standard dormancy application to an accelerated application once the CTP conditions have been met. Some version of this provision has been enacted in more than half of the states.

The debate on the appropriateness of excluding suspended mineral proceeds from unclaimed property review and reporting is ongoing. Management teams, along with internal legal counsel, have expressed their concerns of escheating properties with certain suspense conditions such as legal, title dispute, division order, or other coding. Unfortunately, state unclaimed property Laws, including RUUPA, do not provide express guidance as to the inclusion or exclusion of any suspended mineral proceed. The intersection of these points will continue to be a point of contest until clear instruction and guidance is provided by the states.

Mergers & Acquisitions

There have been a number of high profile mergers, acquisitions, spin-offs, and divestitures in this year alone, not to mention the past few years. Dependent on the terms of the agreement, holders can either find themselves relieved of certain unclaimed property liabilities, or inheriting the exposure. There are also instances where agreement terms are not as clear, and holders may have retained liabilities existing as of the effective date of the corporate action.

It is important for holders to understand how unclaimed property liabilities will be handled when there is an organizational structure change. State unclaimed property compliance application may require holders to take into consideration legacy transactions and liabilities. Holders may be liable for properties currently on the books, as well as those that may have been voided, canceled or written off prior to the acquisition.

To determine potential inherited unclaimed property exposure, holders should first take into account the type of acquisition, whether it is an acquisition of all ownership interest, or an asset acquisition. In the event of a stock acquisition, holders are often liable for the acquired entities historical compliance as well as current. Asset acquisitions can prove quite complex, as the terms of the agreement will determine whether or not the company is responsible for historical transactions or not.


Unclaimed property compliance in this sector will continue to present its challenges to the holder community due to its inherently volatile nature. It is imperative that holders continue to monitor changes in the unclaimed property landscape, and take PROACTIVE measures in order to mitigate exposure rather than be REACTIVE in response to an audit notice.

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