Wall Street Journal

NEW YORK -- An Alabama jury Tuesday ordered ExxonMobil Corp. (XOM) to pay $3.5 billion in damages in a dispute over royalties from natural gas wells in the state's waters.

The award against ExxonMobil, the world's largest publicly traded oil company, includes $87.7 million in compensatory damages and $3.42 billion in punitive damages.

ExxonMobil, Irving, Texas, said it "strongly disagrees with the jury's verdict." The company plans to take all legal steps to challenge the verdict.

According to the Associated Press, the jury arrived at the punitive damage award by tripling Exxon's annual production from 13 natural gas wells along the Alabama coast.

The dispute between ExxonMobil and the Alabama Department of Conservation and Natural Resources centers on the interpretation of lease agreements in Alabama state waters.

ExxonMobil said it has complied with the lease requirements and has paid royalties to the state agency in accordance with the leases.

"The Department was advised of ExxonMobil's interpretation of the lease before ExxonMobil invested in excess of $1 billion building and maintaining the Mobile Bay project," Exxon said in a written statement, "and we advised the Department again of our interpretation in early 1994, shortly after royalty payments began."

Over the years, Exxon has paid the state agency $456 million in royalties and $500 million in lease bonuses, said Exxon spokesman Tom Cirigliano.

Mobil began production in the area in 1988, and Exxon began production in the area in 1993, Cirigliano said. The two companies merged last year.

Cirigliano said it was "premature" to speculate on the potential for the jury's damage award to affect the company's future earnings.

The size of the punitive portion of the settlement was "remarkable" for a case that does not involve personal injury, said Tom Harrison, publisher of Lawyers Weekly USA, a Boston-based trade publication that tracks the size of jury verdicts across the country.

According to Harrison, the size of punitive damages awarded in Alabama have been climbing.