Although NES Financial has been providing 1031 exchange services to the oil and gas industry for years, we recently received a new, unexpected request from several oil and gas production companies struggling to manage their book of royalty payments. Today, 1031 exchange are limited to real estate only. Their process, particularly in the case of lost royalty owners, was quite burdensome and expensive. That process typically required opening, managing and maintaining multiple bank accounts to act as suspense accounts — accounts in which funds are held temporarily. Although a solution to this problem has been available for quite some time, it has not been utilized effectively until now.
There are several different types of ownership rights in each piece of land — surface rights, mineral rights, etc. These rights may all belong to one person, but in many cases they do not. Consequently, as income is generated from the land or the minerals held within it, the producer will owe multiple owners varying shares of the proceeds. When drilling and exploration companies lease property and begin to drill, they’re expected to make rental payments to the surface owners and royalty payments to the mineral owners, as soon as production begins.
However, this process is much more difficult than it sounds. Over time, the chain of title on a single piece of property can become quite complex as the ownership rights get divided, sold, and handed down. Energy companies often struggle to identify and locate the rightful owners of the royalties. In cases where the current mineral owners cannot be located or cannot be paid immediately due to ongoing litigation, deceased owners who left no wills, owners whose wills have yet to be probated, or simply due to bad addresses or inadequate title documents, the funds must be set aside or placed into suspense accounts until the correct payee can be located. Without streamlining the process, energy companies could potentially spend hundreds to thousands of dollars every month opening and managing the bank accounts necessary to hold the funds during the search for each royalty owner. In many instances, state and local laws require those royalty payments be tracked and reported until either a payment is made to the rightful owner or, if the owner is still missing, the statutory period for holding the funds lapses and the funds escheat to the state.
The process of opening and maintaining separate bank accounts for each suspended royalty interest is not only costly and burdensome to the royalty payer, but it also places a drain on the bank that must also utilize costly resources to open and maintain these accounts. Luckily, there is a solution available to minimize the costs of administrating and maintaining suspense accounts.
The NES Financial Solution
NES Financial’s Capital Administration Solution provides a cost-effective and streamlined solution for both banks and energy companies. Our technology’s unlimited sub-account feature connects any number of suspense accounts under one master account, leaving your company and your company’s bank with far less administration, document retention and reporting.
Our technology-based solution provides full account visibility to allow 24/7 monitoring of the accounts. This enables royalty payers to manage their suspense account responsibilities through one master account which allows viewing of all sub-account transaction activity as well as all related documentation from one centrally located, password protected website. In addition, by only working with the master accounts while NES Financial takes care of all of the sub-accounting, document storage, and report production, banks can save money and pass these cost savings on to their energy customers.
Manage your complex financial transactions more efficiently with the right financial administrator. See how our Capital Administration Solution is specifically designed to benefit your company.
NES Financial welcomes your questions and opinions. Allow us to address your business needs by contacting us. We look forward to hearing from you!