Mobile Register

World's largest oil company to appeal finding that it underpaid offshore natural gas royalties to Alabama

MONTGOMERY - A Circuit Court jury on Tuesday drilled Exxon Mobil Corp. for a record $3.5 billion in damages and penalties, finding that the company had skimmed offshore natural gas royalties that actually belonged to the state of Alabama.

The panel of eight women and four men said the world's largest oil company owes the state $87.7 million in compensatory damages, plus $3.42 billion in punitive damages, $420 million more than a trio of Mobile lawyers hired by Gov. Don Siegelman had asked for.

When a 14 percent fee of $490 million for the lawyers is taken out, that would leave $3.01 billion for the state.

Exxon Mobil immediately said it would appeal the verdict, which came after a two-week trial before Montgomery County Circuit Judge Tracey McCooey. Jurors began deliberations just after 9 a.m. Tuesday morning, taking about two hours to reach a verdict.

Siegelman said the huge verdict, six times the previous Alabama record, was appropriate, because Exxon Mobil had thought it could harm the state and get away with it.

"Today, that company has been proved wrong, and I would suspect they won't make the mistake of trying to take advantage of this state again," Siegelman said in a statement.

The state's hired lawyers, from the firm of Cunningham, Bounds, Yance, Crowder and Brown, contended that Exxon deliberately underpaid, thus committing fraud.

Using the company's own projections of reserves and future natural gas prices, they told the jury that Exxon Mobil would have taken a huge sum from the state over the 30-year life of the wells if allowed to continue.

On that basis, attorney John Crowder asked the jury for $3 billion in punitive damages, three times the total projected damages.

"We proved if they hadn't gotten caught, they would have stolen $1 billion from the state," Crowder said.

Exxon Mobil spokesman Tom Cirigliano said the case was about different understandings of legal language, not about any attempt to defraud the state Conservation Department, which oversees offshore leasing.

"The punitive award is meritless," Cirigliano said in a statement. "No evidence of fraud was offered by the department at trial, and none was considered by the jury.

Montgomery lawyer Joe Espy, who handled the case for Exxon Mobil, referred inquiries to Cirigliano.

In question were royalties from 13 natural gas wells in three fields off of Mobile. The Bon Secour Bay Field consists of five blocks leased by the state in Mobile Bay, just north of the Fort Morgan peninsula. The North Central Gulf Field consists of four blocks south of Fort Morgan. The Northwest Gulf Field consists of three blocks south of Dauphin Island.

Those fields produce about 400 million cubic feet of natural gas every day, according to the company, and are connected by 28 miles of pipeline to Exxon's processing plant, which is located at 6000 Deakle Road, just south of Bellingrath Gardens. The company said it has invested more than $1 billion in the Mobile-area gas fields.

Crowder and the state's other lawyers said they felt their strongest support in the case were internal Exxon documents, where employees warned the company that it was wrongly calculating what it owed to Alabama. Those were convincing to jury foreman Shae Fillingim of Montgomery, who said those warnings made the company look guilty.

"There were nine documents on Exxon paper," he said.

Fillingim said the jury upped the punitive damages to $3.42 billion because it was about three times a year's sales from the gas wells.

"It's not 'Hey, they make a lot of money,'" Fillingim said. "But it's a drop in the water to them."

The stock market seemed to shrug off the verdict on Tuesday. Shares of Exxon Mobil (NYSE: XOM) rose 81 cents to $87.19. Even if collected in its entirety, the verdict might not put a very big dent in company finances. Exxon Mobil had profits of $7.9 billion on sales of more than $185 billion in 1999.

Alabama's leases are unusual in that they require companies to pay 28 percent of what the gas is sold for after it is processed. Most leases call for a company to pay a royalty on what petroleum products are worth at the wellhead, a lower price because it is unrefined.

The state says that means the company can't write off gas it burns to fuel the production process, royalties on sulfur or condensate oil or other production costs. The state also claimed Exxon failed to get the best price for its gas, also depriving Alabama of royalties

Exxon claimed the state's interpretation was wrong, and it was wrong to penalize the company for a legitimate disagreement.

"This dispute is and always has been one between Exxon Mobil and the department over the proper interpretation of a lease form never before used in any U.S. jurisdiction," Cirigliano said. "We continue to believe that our interpretation of the lease is proper and consistent with Alabama law and industry custom and practice."

Pointing to internal documents, Crowder said Exxon thought it would only have to pay back royalties plus interest and court costs if "inexperienced" Alabama officials found them out, encouraging the company to press forward with its attempt to shortchange the state.

"They forgot about punitive damages," Crowder said.

The sense that penalties would be a containable cost of doing business bolstered state officials' approval of the verdict.

"This company stated they believed they could get away with their scheme, because the people of Alabama were too inexperienced to understand they were being cheated," Siegelman said.

Lawyers for the state said they expected Exxon Mobil to seek a new trial from McCooey, and if that failed, to carry its case to the Alabama Court of Civil Appeals.

"They'll tell the judge this was some kind of runaway jury," Crowder said.

Exxon Mobil would have to post an appeal bond of 125 percent or $4.38 billion to go forward, said Ted Hosp, Siegelman's legal adviser.

The case, which began before Exxon and Mobil merged in 1999, may not be the last big verdict. Four other companies that extract natural gas from Alabama face suits in Mobile County Circuit Court. Tuesday's case would have also been tried in Mobile, except that Exxon sued the state first in Montgomery. The state's victory actually came in a counterclaim springing from Exxon's suit.

With snow flurrying as if on cue in Montgomery, the prospect of a $3 billion windfall was just about the best Christmas present state officials could think of on Tuesday. Hosp said the governor's office believes that the $87.7 million in back royalties are "legally required" to be deposited in the Alabama Trust Fund.

That account and the earlier Heritage Trust Fund are worth $1.8 billion combined. Interest goes to the state's general fund, while 35 percent of future royalties are supposed to be used to pay off bond issues for county bridges, the State Docks, research facilities and industrial recruitment.

Carrie Kurlander, Siegelman's spokesman, said the governor wants to use the remaining windfall to create a new trust fund from which income would help pay for education and other "critical needs." Kurlander cited increased prison funding as among those needs.

The disputes started shortly after Exxon began pumping gas from the Gulf of Mexico in 1993. The Conservation Department became concerned enough by 1995 to hire George Kaess, a Houston auditor, to begin looking into Exxon and the four other companies' production.

In 1997, after Kaess finished his audit, then Conservation Commissioner James Martin sent a letter to Exxon claiming the company owed the state tens of millions of dollars. Exxon promptly replied that all the money could be accounted for in allowable write-offs.

Conservation Commissioner Riley Boykin Smith said he felt Tuesday's verdicts showed Exxon had been wrong to dismiss his department.

"Once we did discover the discrepancies, we went out and got the professional talent we needed."

The state and the five companies engaged in settlement talks until August 1999, when they broke down. That was three months after Cunningham, Bounds was hired. Attorney Bob Cunningham said the state offered to settle the case for $600 million about a week before trial, but Exxon Mobil didn't reply to the offer.

Exxon generally had been lauded in the past as a good corporate citizen by residents of the south part of Mobile County, although some residents have complained in general about the noise, lights and smell from gas processing plants.

Exxon lawsuit timeline

1981 - Exxon signs seven oil and natural gas leases for drilling sites just off Alabama's coast.

1984 - Exxon signs 15 more leases.

1993 - Exxon begins production in October in a field, south of Dauphin Island. Two other fields begin production later that year. Alabama begins collecting royalties.

1995 - Alabama hires an outside auditor, George Kaess of Houston, to examine royalty payments from Exxon and other companies.

1997 - Following Kaess' audit, the state sends Exxon a letter in February saying the company hasn't paid full royalty amounts to the state.

1998 - Department of Conservation asks Attorney General's office to interpret leases. Office declines involvement, state and Exxon sue each other.

1998 - Exxon and Mobil announce plans in November to merge. Mobil also has natural gas operations in Alabama, but its royalty disputes with the state have remained separate.

1999 - In May, Legislature's contract review committee approves the hiring of Mobile law firm of Cunningham, Bounds, Yance, Crowder and Brown to pursue three companies for a 14 percent contingency fee.

1999 - The state's settlement discussions with Exxon, Mobil and three other companies break off in August.

1999 - Exxon-Mobil merger completed in November.

2000 - In December, judge orders Exxon to pay $3.5 billion in compensatory and punitive damages to the state of Alabama. Exxon plans to appeal.