Capital Bureau

MONTGOMERY - ExxonMobil Corp. will return to court today to ask a judge to radically prune the record judgment against it for underpaying natural gas royalties.

But the state, represented by a trio of lawyers from a well-known Mobile firm, will try to frustrate ExxonMobil's game plan. They also will contend that the verdict doesn't really mean much to the world's largest oil company, which had revenues of $233 billion and profits of $16 billion in 2000.

A jury in December ordered ExxonMobil to pay $3.5 billion to the state as a result of skimming a portion of gas royalties from wells in state waters off Mobile for six years. Of that, $3.42 billion was punitive damages, assessed mainly on the theory that the state would have lost about $1 billion if the company had continued to pay at a reduced rate for the life of the wells. Under current law, punitive damages are limited to three times the actual damages.

ExxonMobil, which was still just Exxon when the suit was filed, will tell Montgomery County Circuit Judge Tracy McCooey that there should be no punitive damages, or they should be cut to a much smaller amount, company spokeswoman Judith Glaubig said Monday.

McCooey has already told the parties that she will deny Exxon's request for a new trial, and thus today's hearings will focus on whether the damages were appropriate. Each side could call a number of witnesses, and the hearing could last into Wednesday. Appeals to the state Supreme Court are expected, said Bob Cunningham, one of the lawyers representing the state.

Though appeals could continue for years, the stakes are high.

For the state, $3 billion would be a tremendous windfall. It's also a big case for Exxon, which was stung by negative publicity in December and sent two public relations people to Montgomery, including Glaubig, to talk to reporters Monday. Glaubig acknowledges that Exxon and the state have a legitimate dispute over how much money the company owes. The state, using a lease crafted in 1980, tried to maximize its proceeds from gas wells in Mobile Bay and in parts of the Gulf of Mexico.

Bob Macrory, now an assistant attorney general with the Conservation Department, used examples from other states and legal books in writing the lease. He tried to bar companies from writing off expenses such as gas burned to power processing equipment, and also wrote in a clause forcing them to pay royalties on the best possible price for the gas. Leases let companies write off more expenses in most other states.

"The state admittedly tried to craft a form that was very favorable to them," Glaubig said. But the company continues to contend that the form was unclear and possibly has internal contradictions.

That's what the fight is all about, Glaubig said, not about Exxon intentionally trying to defraud the state, as the state's lawyers argued during the trial. And unless Exxon tried to hide information from the state and the state relied on those false representations, it's not fraud. Glaubig said neither of those conditions were met, because Exxon and the state were engaged in discussions from the start of production in 1993.

"Breaching a contract does not justify, under state law, the imposition of punitive damages," she said "This was an open dispute."

Cunningham disputes that reasoning. He contended at trial that Exxon intentionally decided to write off expenses even though company officials knew they weren't supposed to, thinking they could get away with it.

Cunningham is one of three lawyers for the firm of Cunningham, Bounds, Yance, Crowder and Brown who were picked by Gov. Don Siegelman to handle the case for the state. The lawyers agreed to take 14 percent of the total verdict if they won, and nothing if they lost. If the verdict is not reduced, the trio will see a payday of $490 million. Exxon has attacked their presence as inappropriate, saying the lawyers' push for a big payday has distorted the case.

Cunningham said Monday that he expects Exxon's attorneys to try to re-argue parts of the case that the jury already decided, and that he will try to limit such testimony. Cunningham said he was upset that Ansel Condray, a former president of Exxon USA, will appear at the hearing after not coming to the trial. Condray made the ultimate decision to pay royalties at a reduced rate.

Exxon also will argue that it's unfair for the state to be able to collect punitive damages when it can't be forced to pay them under law. And if punitive damages are merited, Glaubig said Exxon will argue they should be limited to three times the actual damages so far, not the total projected damages over the life of the wells.

Cunningham said the state will focus on how little the verdict will impact Exxon, arguing that it represents only 1.3 percent of the company's 2000 revenue or 5 percent of its net worth.

"It is our position that this verdict impacts Exxon like a flea biting an elephant," Cunningham said.