YUMA - Royalty owners are feeling shortchanged by Colorado's multibillion-dollar energy industry.

Years ago, landowners with mineral rights were grateful for any royalty fee they received from oil and gas drilling on their land.

But as the energy giants cash in on the latest oil and gas boom and take bigger paychecks to the banks, royalty owners say they want a fairer portion of the windfall.

"It's always been a kind of gray area," said Hazel Gardner, a royalty owner of nine natural gas wells on her 3,500-acre property 10 miles east of Yuma.

"You just take what the oil and gas companies give you. You can't figure out all the charges they take out from the checks, and you begin to wonder."

Colorado's $13 billion energy industry pays hundreds of millions of dollars in royalties each year. Industry representatives say the complaints of royalty owners are unfounded, given that companies follow strict guidelines when it comes to paying the fees.

"It has never been explained to me how royalty owners can say they don't understand (the checks)," said Ken Wonstolen, counsel to the Colorado Oil & Gas Association. "The price, volume and deductions are clearly marked in the check stubs."

But Gardner and other landowners, many of whom depend on royalty checks for their primary income, are dissatisfied.

They allege that companies make unlawful deductions from the royalty checks. For example, they say companies often deduct costs to gather or squeeze excess water from gas at wellheads when those expenses ought to be paid by the companies.

The royalty owners also complain that companies charge higher interstate pipeline costs than in past years. Rising costs not only eat into royalty checks but also push up the price of gas paid by consumers.

"Our No. 1 issue is that the price of natural gas at the wellhead and burner tip keep getting farther away from each other," said Jerry Simmons, executive director of the National Association of Royalty Owners. "Pipeline companies are adding fees that royalty owners don't see because of confidential contracts between oil and gas producers and those companies.

"We question those charges and deductions from royalty checks."

Also, producers don't disclose ad-valorem or property tax they pay counties on oil and gas production, although the tax is deducted from royalty checks. In fact, producers don't even reveal the information to tax collectors at the Colorado Department of Revenue, royalty owners say.

Wonstolen counters that property tax information is confidential.

"Wouldn't you have a problem with anybody seeing your income tax returns?" Wonstolen said.

The oil and gas association supports a bill in the state legislature that would allow the state revenue department to access tax information from county offices. The bill allows royalty owners to see a notice of valuation on the produced oil and gas and estimate their tax burden from that.

Companies generally deduct interstate pipeline costs and local taxes from royalty checks. Other deductions such as gas gathering or dehydrating costs are specific to contracts that companies have with royalty owners. The legality of those deductions, if in question, should be sorted out in the courts, Wonstolen suggests.

"In Colorado, there is no law that says any postproduction costs are nondeductible from royalty checks," Wonstolen said. "Marketing costs are determined on a case-by-case basis, depending on specific contracts."

The growing animosity between royalty owners and the energy industry is not lost on regulators.

"Oil and gas production has become a lot more valuable commodity in past years because of stronger prices and higher production volumes," said Brian Macke, director of the Colorado Oil and Gas Conservation Commission, which regulates energy development in the state. "It is a more important income stream to royalty owners, and that's caused them to look a lot more carefully at how they are being paid on their royalties.

"And that's bringing about this recently elevated level of interest in royalty payments."

The commission approves permits for drilling. But it has limited powers to resolve disputes over private contracts between companies and royalty owners. That's forcing the owners to seek relief in the courts, opening the floodgates to lawsuits.

Colorado royalty owners have won more than $5 million in four cases in recent years. More cases, including a class-action lawsuit filed by a Parachute rancher in October, are in the pipeline.

Nationwide, royalty owners are seeking hundreds of millions of dollars in royalties and penalties from oil and gas producers.

A circuit court in Roane County, --W.Va., grabbed recent headlines when it awarded $405 million to about 8,000 royalty owners, mostly farmers, in a class-action lawsuit against gas producer Chesapeake Energy Corp. of Oklahoma.

"We, as royalty owners, would love those lawsuits to go away," Simmons said. "We'd love to have no excuse ever to question the payments that royalty owners receive or to question the amazing veil of confidentiality over the pipeline issues."

Advocate for landowners

Mary Ellen Denomy grabs the mic, her black magician's cloak billowing behind her as she darts across the dimly lit Yuma High School auditorium floor.

The audience stops chattering and strains to see her. Many of the 80 royalty owners drove for miles on a cold, windy Saturday morning to hear Denomy.

Denomy knows their problems. And she promises to help.

"Companies are sucking out oil and gas off your fields," Denomy says, steadying her black felt hat with pink feathers. She wears various costumes, including the magician's cloak and hat, to entertain her mostly older audience.

"You have to determine what your share is," she says. "You have to ask questions to the companies."

Denomy should know.

She has posed enough questions to oil and gas producers in past years to become a familiar name in industry circles. Western Slope royalty owners call her Erin Brockovich, a reference to the woman - made famous in an eponymously named movie starring Julia Roberts - who fought and won pollution charges against West Coast utility giant PG&E.

"Mary Ellen is very bright. She probably knows more about the accounting of oil and gas industry than anybody else in the state," said Joan Savage, a royalty owner who lives south of Rifle. Denomy helped her win $750,000 against Williams Cos.

Originally from Michigan, Denomy moved to Colorado in 1993 to pursue a career in accounting. She heads the Colorado chapter of the National Association of Royalty Owners, based in Oklahoma. Denomy spends most of her time on the road or in seminars, educating royalty owners and local government officials about royalty regulations.

"My son thought I needed to come," said Lorena Kiser, 77, sitting beside her son Wes for Denomy's talk at Yuma High School.

Kiser owns royalties on five gas wells on 1,200 acres near Yuma.

"I thought I could learn something about royalty, what I am being charged for," she said.

Jerry Simmons, executive director of the royalty owners group, says the organization is focused on the escalating pipeline costs that gas companies not only deduct from royalty checks but also pass on to retail customers.

Using data from the U.S. Department of Energy, NARO found that the average price of gas at the wellhead for 2006 was $6.39 per thousand cubic feet. In contrast, the consumer price of gas last year was $14.31 per thousand cubic feet.

That shows the midstream industry, such as pipeline companies, added on average $7.92 per thousand cubic feet to the price to get the gas from the wellhead to the consumer, Simmons said.

"When I first started looking at this, I got mad as a consumer," Simmons said. "Then I got mad as a taxpayer and as a member of the royalty owners association."

Now NARO and consumer groups are pressing for more supervision of midstream companies, many of which are subsidiaries owned by oil and gas producers.

Wonstolen dismissed NARO's allegation, saying pipeline costs are fair deductions given that companies pay those costs to sell gas in the marketplace. Companies' royalty checks clearly state those deductions as well as the volume of oil and gas produced at a particular well and the price at which the commodity was sold, he said.

"If they have issues with pipeline transportation, they are free to contend that and go to court," Wonstolen said.

Fighting in court

Genevieve Clough got the news on a wintry morning last month. She had won $4 million against Williams Cos.

Her first thought was, "Bill would have been so pleased today."

Bill Clough died last year. He was 89.

Age and ill health hadn't stopped him from pursuing Barrett Resources for years, complaining that the Oklahoma oil and gas producer unfairly made deductions from his royalty checks. He earned about $3 million a year in royalties on his 12,000 acres near Rifle.

The Garfield County District Court jury agreed with the Cloughs in August 2004. But the ruling was unacceptable to Williams, which now owns Barrett Resources. The case reached the Colorado Court of Appeals, which also sided with the Cloughs.

"I am so relieved," Genevieve Clough, 82, said. "It has been going on for so many years."

But the Cloughs' saga may be far from over.

Williams spokesman Kelly Swan said the company plans to pursue the case in the Colorado Supreme Court.

"We feel Barrett Resources may have had the authority to make those deductions," Swan said.

Neighbors remember Bill Clough as a simple man who didn't flash his millions, made mostly in royalty checks from oil and gas producers. He'd started off years ago as a sheep rancher and bought land near the Book Cliff Mountains - land that later was found to hold tons of natural gas.

"You'd see him driving around in his old jeep," said Steve Thompson, who lives in Silt and knew Bill Clough for many years.

"I don't think he ever tried to cheat anybody. If somebody owed him something, they probably owed him 10 times more than what he asked for - that's what I feel about him."

Denomy testified in the Cloughs' case.

Just as she did in the Savages' case.

Denomy's association with the Savage family dates to the 1990s when she began working at the family's ranch business near Rifle. The family owns 6,000 acres south of Rifle, land that has been dotted with more than 100 gas wells for the past 20 years.

Joan Savage, 82, remembers hiring Denomy as her personal secretary about 10 years ago, a few years after the death of her husband in 1982. The duo noticed unexplained deductions in the royalty checks.

"The math didn't work out, so I'd write letters to the company," Savage said. "Sometimes they wrote back to me, but not meaningful answers. At other times, there were no responses at all.

"There was enough money involved that I decided to go to court."

Savage and Denomy traveled to Oklahoma to pursue a lawsuit against Williams.

They stayed for two weeks and came back to Rifle with 300 boxes of paper, including more than 40,000 pages of documents to build their case.

The case dragged on for nearly five years.

Finally, the Colorado Court of Appeals ruled in 2005, handing Savage a $750,000 win.

"It was a very thankless deal," Savage said. "But we did prove (the company) was making improper deductions from my royalty."

Deduction halted

Williams says it has discontinued making deductions for gathering costs unless those costs are specified in contracts.

The Clough or Savage lawsuits don't paint the whole picture, Swan said.

The company operates 2,000 gas wells in Colorado and deals with 1,600 landowners. It paid $131 million in royalties to those landowners last year, in addition to $98 million in royalties to the federal government, even as the company earned a profit of $308.5 million.

"Royalty fees are substantial expenses that we take very seriously," Swan said. "Those expenses are a part of doing business, and we treat royalty owners fairly."

Royalties and deductions

• Royalty: A percentage of oil and gas sales from a well paid to an individual who owns mineral rights to that property. The contract between the individual and the oil and gas producer specifies the royalty percentage and, in some cases, the cost deduction from the royalty check.

• Royalty owner: A person who owns mineral rights to a property that produces oil and gas, and receives a royalty check on that production.

• Royalty deduction: Companies deduct taxes and costs incurred to sell oil and gas in the retail market, including pipeline and transportation charges. In Colorado, companies are not allowed to deduct the cost of bringing gas pumped at wellheads to marketable condition.

chakrabartyg@RockyMountainNews.com or 303-954-2976

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