The Tuscaloosa News

The state of Alabama is suing a major energy producer, seeking more than $132 million in back royalty payments from oil and gas pumped out of state owned lands in the Gulf Mexico.

Jury selection is scheduled to begin Monday in Montgomery in the case against Exxon Corp. over the oil and gas royalties that are supposed to go into the Alabama Trust Fund, which state voters recently altered with a constitutional amendment.

The lawsuit alleges that Exxon has not paid the state all the royalty and interest payments it owes on the oil and gas it has been getting from offshore state land since 1993.

Exxon sued the state last year, asking Montgomery County Circuit Judge Tracy McCooey to declare that the company did not owe more royalties and interest. The state countersued, prompting next week's court action.

Attorneys for Exxon could not be reached for comment.

John T. Crowder, a lawyer for the Department of Conservation and Natural Resources, which filed the lawsuit, said he had no comment on the pending litigation. A spokesperson for Exxon lawyer Joe Espy said he was preparing for trial and was not available.

If the state wins and can collect money, the amount sought represents 7 percent of the $1.9 billion Alabama Trust Fund that will be created next year with the merger of the Alabama Trust Fund and the Alabama Heritage Trust Fund.

The two funds were created as savings accounts to deposit royalty payments from energy companies paying for the right to remove oil and gas from state-owned tracts.

Ninety-nine percent of the oil and gas royalties go to the Alabama Trust Fund and 1 percent goes to the state conservation department's lands division. The state expects to collect royalties for another 20 years to 25 years.

The trust fund earns interest that is deposited into the state's $1.2 billion General Fund, buys land under a state land trust program and funds cities and counties.

Voters on Nov. 7 authorized a constitutional amendment that would change the trust fund's operation and allow the state to spend some of the royalty payments and earnings from the trust fund.

The money, plus Exxon's increased payments, would boost the fund and increase funding to the state's operating budget.

In 1997 the state asked Exxon for $50.5 million in alleged underpayments and an additional $81.6 million in 1999.

According to the lawsuit, Exxon has paid $240 million in oil and gas royalties since it began producing energy in Alabama's Gulf waters in 1993. Exxon secured lease rights in 1981.

Oil companies are required to pay royalties of 25 percent on the value of gas and oil taken from the Gulf lands, said former Conservation Department Director James Martin. He was conservation director for Govs. Guy Hunt and Fob James.

Martin said that his assistant, Bob Macrory, drew up leases for oil companies using other state leases as models with one important exception-Alabama's lease did not allow companies to deduct certain expenses from royalty payments.

The lawsuit states that Exxon deducted expenses for tracts that had no wells and did not pay royalties on gas produced from Alabama tracts. The company is also accused of not selling gas at the best price as required by the lease, instead using gas to generate electric power for Exxon's own consumption and not paying royalties on the electricity.

Macrory, who is in the department's land division has been called as a witness and is unable to comment.

Martin said that Macrory became suspicious of Exxon's payments when the company allegedly failed to include details of how it arrived at energy prices used to calculate royalty payments, as other energy companies were doing.

"We said (to Exxon), 'Look, you're going to have to show how you arrived at that and go back and show it' and they never did," Martin said. "That sent up a red flag."

Martin said James authorized hiring an auditor who reported that Exxon allegedly owed more money based on the contractual formula followed by other energy companies. "When two big corporations sign the same lease and the two react differently, we saw something was wrong," Martin said.

Martin commended James' successor, Gov. Don Siegelman, for filing the countersuit.

Alabama has lost major lawsuits costing millions of dollars, but Siegelman's legal adviser, Ted Hosp, said this one could be different.

"We think they have been underpaying pursuant to the oil and gas leases owed to the state," Hosp said. "We're glad to be on this side of this lawsuit."