Exxon Mobil to Appeal $3.5B Royalty Judgment

Exxon Mobil Corp. said it will take "all legal steps" to challenge a record $3.5 billion verdict announced last week by an Alabama jury, which found the oil company had defrauded the state and underpaid royalties on natural gas well leases in state waters. The case centered on charges that the energy giant had underpaid up to $87.7 million in royalties on the Mobile Bay natural gas project in the Gulf of Mexico.

Last Tuesday, the Alabama jury ruled for the state, with an award in punitive damages six times the state's previous record of $581 million for a civil lawsuit. The jury took two hours to return a judgment in the case, and said it set the damages by tripling Exxon Mobil's annual production from 13 natural gas wells located on the Alabama coast in the disputed time.

Exxon Mobil (formerly Exxon Corp.) and Alabama have argued about the lease royalty amounts since 1995. State consultants estimated that the underpayments and unpaid interest totaled $87.7 million. However, Exxon Mobil said the amount was less, if anything at all. Wells that Mobil Corp. developed along the Alabama coast before it merged with Exxon were not part of the dispute.

According to internal Exxon Mobil documents placed into evidence during the trial, Alabama State Attorney Bob Cunningham said that the company called Alabama officials "inexperienced," in the natural gas business and thus would underpay the state. Jury foreman Shae Fillingim said the internal documents were the deciding factor and that the jury had found that Exxon Mobil knew it was doing something wrong.

However, Exxon Mobil disputed facts in the state's case, contending that it had attempted to follow Alabama's leases for natural gas wells in coastal waters. It argued that the "simple" contract dispute did not warrant a large punitive judgment. Exxon Mobil lawyers contended that the lease contracts allowed the company to deduct processing costs before royalties were paid, and said that lease contracts did not require royalty payments for natural gas used in the state's production process.

Tom Cirigliano, an Exxon Mobil spokesman, said last week that the company would challenge the verdict as long as necessary, and Bob Macrory, an attorney with Alabama's Conservation Department, who authored the leases for the state with Exxon, said he is sure the case would be appealed all the way to the U.S. Supreme Court.

Another Alabama official, John McMillan, who was the state's Conservation Department commissioner in 1981 when the leases were approved, said he expects the verdict to be reduced or settled for a smaller amount. However, he said Alabama would not see any of the settlement, if any, for years.

Alabama has lawsuits pending against four other energy companies operating natural gas wells along the state's coast.

Carolyn Davis, Houston

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