More than 27,000 Texas royalty owners were granted class actionstatus in a suit against Ft. Worth-based Union Pacific ResourcesGroup Inc. Other defendants include UPR affiliates Union PacificResources Co., Union Pacific Fuels Inc., Union Pacific Oil and GasCo., and Union Pacific Austin Chalk Co.

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, on 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.”

The lawsuit alleges that Union Pacific Resources engaged in adeliberate scheme aimed at lowering royalty payments. “What theydid was quite clever,” said Will Bowen, the class action suitrepresentative. “They shifted the value of the natural gasproduction away from the point where the royalties were calculatedto a position downstream in a wholly-owned subsidiary. They soldthe natural gas through a process of inter-affiliate sales from onewholly-owned subsidiary to another at an arbitrary price. Thesecontrolled transfer prices were then used as the basis to calculateour 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.

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