Exxon Mobil Corp. said it will take “all legal steps” tochallenge a record $3.5 billion verdict announced last week by anAlabama jury, which found the oil company had defrauded the stateand underpaid royalties on natural gas well leases in state waters.The case centered on charges that the energy giant had underpaid upto $87.7 million in royalties on the Mobile Bay natural gas projectin the Gulf of Mexico.

Last Tuesday, the Alabama jury ruled for the state, with anaward in punitive damages six times the state’s previous record of$581 million for a civil lawsuit. The jury took two hours to returna judgment in the case, and said it set the damages by triplingExxon Mobil’s annual production from 13 natural gas wells locatedon the Alabama coast in the disputed time.

Exxon Mobil (formerly Exxon Corp.) and Alabama have argued aboutthe lease royalty amounts since 1995. State consultants estimatedthat 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 itmerged with Exxon were not part of the dispute.

According to internal Exxon Mobil documents placed into evidenceduring the trial, Alabama State Attorney Bob Cunningham said thatthe company called Alabama officials “inexperienced,” in thenatural gas business and thus would underpay the state. Juryforeman Shae Fillingim said the internal documents were thedeciding factor and that the jury had found that Exxon Mobil knewit was doing something wrong.

However, Exxon Mobil disputed facts in the state’s case,contending that it had attempted to follow Alabama’s leases fornatural gas wells in coastal waters. It argued that the “simple”contract dispute did not warrant a large punitive judgment. ExxonMobil lawyers contended that the lease contracts allowed thecompany to deduct processing costs before royalties were paid, andsaid that lease contracts did not require royalty payments fornatural gas used in the state’s production process.

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

Another Alabama official, John McMillan, who was the state’sConservation Department commissioner in 1981 when the leases wereapproved, said he expects the verdict to be reduced or settled fora smaller amount. However, he said Alabama would not see any of thesettlement, if any, for years.

Alabama has lawsuits pending against four other energy companiesoperating natural gas wells along the state’s coast.

Carolyn Davis, Houston

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