The Alabama Supreme Court has struck down a lower court ruling that ExxonMobil Corp. owed the state $3.6 billion for fraud and for underpaying the state in a contract dispute over natural gas pumped from Alabama-owned waters in Mobile Bay.

In the 8-1 ruling, a $3.5 billion punitive damages award also was thrown out because Alabama did not prove Exxon defrauded the state of royalties owned on the company's gas production at its offshore Mobile Bay facilities, the court ruled. Punitive damages generally may not be awarded in a contract dispute under state law without a finding of fraud.

However, the state's high court unanimously affirmed a 2003 jury verdict, which would require Exxon to pay the Alabama compensatory damages of $51.9 million for underpayment of gas royalties (see NGI, Feb. 12; July 11, 2005).

"The state bore the burden of proof on its fraud claim, and it did not present substantial evidence that Exxon made any misrepresentations, that the state reasonably relied on any of Exxon's alleged misrepresentations, or that the state suffered damage as a result of that reliance," the majority opinion stated (Exxon Corp. v. Department of Conservation and Natural Resources, 1031167, Alabama Supreme Court).

Eight Republican associate justices agreed that the evidence did not support a finding of fraud; Chief Justice Sue Bell Cobb, a Democrat, was the lone dissenter.

"The state failed to offer substantial evidence that it suffered any actual damage as the result of any alleged misrepresentation or suppression" of facts, stated the court's majority opinion, which was written by Associate Justice Tom Parker. "No fraud was proven under Alabama law."

The high court's decision "validates the company's assertion that the state had improperly turned a contract dispute into a fraud action,'' said Exxon General Counsel Charles Matthews. "It's a dangerous precedent for a state to be able to charge someone with fraud if you don't agree with its interpretation of a contract."

Alabama filed the original lawsuit in 1999 against predecessor company Exxon Corp., alleging under-payment of royalties due from gas wells drilled in state waters around Mobile Bay, but the Alabama Supreme Court reversed the $3.5 billion punitive judgment and sent it back for a retrial (see NGI, Dec. 23, 2002). A second jury trial in 2003 awarded the state $11.8 billion. However, the trial judge in that case reduced the award because of rules governing the ratio of actual and compensatory damages to punitive awards.

Exxon appealed, calling the reduced amount unconstitutional. It argued that Alabama had earlier lost an identical claim against Hunt Petroleum Corp. And Exxon said its drilling contracts with the state were identical to Hunt's. In the Hunt case, the Alabama Supreme Court found that because Hunt supplied the state with monthly royalty reports with payment calculations, the state could not have been misled. Exxon said that it followed the same practice.

The state brought similar lawsuits against five oil companies that were producing natural gas from state leases in Mobile Bay, but settlements in those cases were considerably under the Exxon award. In late March 2002, Shell Oil reached a settlement to pay the state of Alabama $27 million plus another $6.4 million in legal fees to settle accusations of underpaid royalties (see NGI, March 25, 2002).

Barring reconsideration by the Alabama Supreme Court, Alabama's only chance for a reversal on the ruling would be an appeal to the U.S. Supreme Court.

In related news, Exxon reported net income in 3Q2007 was $9.41 billion ($1.70/share), compared with $10.49 billion ($1.77) in 3Q2006. The results fell 5 cents short of energy analysts' consensus expectations. Revenue rose 2.8% to $102.34 billion, topping the prior record of $100.72 billion, which was set two years ago. Capital spending rose 7.5% to $5.44 billion. Exxon also reported that it spent $7.8 billion to buy another 90 million of its common shares in the quarter.

Worldwide, gas volumes rose to 8.3 Bcf/d from 8.14 Bcf/d in 3Q2006. However, North American natural gas production declined. In the United States, gas output moved to 1.435 Bcf/d from 1.567 Bcf/d in 3Q2006. Canadian gas production declined to 735 MMcf/d from 864 MMcf/d a year ago. In the United States, gas prices fell to $5.79/Mcf from $6.71/Mcf in 3Q2006 and from $7.12/Mcf in 2Q2007.

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