More than 27,000 Texas royalty owners were granted class actionstatus in a suit charging Ft. Worth-based Union Pacific ResourcesGroup and affiliates manipulated gas transactions resulting inunderpayment of royalties for the last six years.

While the suit itself does not specify damages, one plaintifflaw firm estimated damages could amount to $100 million.UPR saysthe suit is bogus and an example of “lawsuit lottery.”

A class action certification order, signed Dec. 7 in state courtin Brenham, allows royalty owners under leases in Texas to seekrecovery for underpayment of royalties from UPR for gas productionduring the first quarter of 1994 through the present. UPR said itwill “vigorously appeal” the Brenham judge’s certification of classaction status.

“Under Texas law, Union Pacific Resources has a duty to theseroyalty owners to market their gas diligently,” said Robert R.Herring Jr. of Fleming & Associates, one of the plaintiffs’ lawfirms. “Union Pacific Resources failed to market the gas diligentlyin this case because they simply sold the gas to an affiliate andpaid royalty on the proceeds from this sham transaction instead ofon the proceeds that UPR actually received on the open market.”Herring estimated the damages at $100 million. “While discovery hasnot been completed, we believe the damages will be substantial.”Affiliates named in the class action include Union PacificResources , Union Pacific Fuels, Union Pacific Oil and Gas, andUnion Pacific Austin Chalk.

The lawsuit alleges UPR engaged in a deliberate scheme aimed atlowering royalty payments. “What they did was quite clever,” saidWill Bowen, the class action suit representative. “They shifted thevalue of the natural gas production away from the point where theroyalties were calculated to a position downstream in awholly-owned subsidiary. They sold the natural gas through aprocess of inter-affiliate sales from one wholly-owned subsidiaryto another at an arbitrary price. These controlled transfer priceswere then used as the basis to calculate our royalty payments.”

UPR said the merits of the case have not been reviewed by thetrial court and that damage estimates released by plaintiffs’lawyers are “grossly exaggerated.

“We believe this action is without merit,” said UPR GeneralCounsel Joseph A. LaSala Jr. “In fact, while UPR values its royaltyowners, the plaintiffs have not alleged any amount of damages intheir court papers and have presented no evidence to support theamount mentioned in their press release. The plaintiffs’ theoriesignore market realities. The prices, based on market indices, uponwhich royalties are currently paid are widely accepted and usedthroughout the industry — dispelling any ‘sham’ nature to thosetransactions. To us, this has strong flavor of some trial lawyersplaying lawsuit lottery. Union Pacific Resources has done nothingimproper and stands solidly behind its practices in marketingnatural gas.”

UP Fuels was sold by Union Pacific Resources for $1.35 billionto Duke Energy in early 1999. “We believe that after this saleUnion Pacific Resources has continued to market the gas to DukeEnergy based on arbitrary and artificial index prices rather thanmarketing the gas with due diligence in order to obtain the bestdeal reasonably possible,” Herring said. “Essentially we believethat the practice of short-changing the royalty owners continuestoday.” A Duke spokeswoman said the company does not comment onongoing litigation.

In a separate case in federal court, Union Pacific ResourcesCorp. and five other oil and gas companies reportedly agreed to paya $71 million settlement for underpaid royalties on oil productionwhich when combined with other individually negotiated settlementsis estimated to total more than $276.3 million.

“Contrary to the trial lawyers’ suggestion in their pressrelease, UPR was one of the smaller contributors to the amount ofthe settlement,” UPR said in a press release.

The lawsuit was filed in Brenham, TX, by Houston-based law firmsFleming & Associates and Looper, Reed, Mark & McGraw Inc.,and Brenham-based Moorman, Tate, Moorman, Urquhart & Haley.

Joe Fisher, Houston

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