The Associated Press

MONTGOMERY, Ala. (AP) -- Exxon Mobil Chairman Ansel Condray said the oil company didn't believe it would be cheating Alabama when it decided how much to pay in royalties for natural gas wells drilled in state waters.

Condray testified at a hearing Tuesday before Circuit Judge Tracy McCooey, who must decide whether to reduce a record $3.5 billion verdict against the company.

Condray said a company analysis of how much to pay in royalties showed there was a reasonable chance Exxon Mobil's interpretation of its lease agreement with the state would be consistent with Alabama's reading of it.

"We had a view and we thought we had a reasonable and fair and right view," said Condray, who didn't testify during the trial.

But attorneys for Alabama said Exxon documents showed the company knew it was probably underpaying the state but that the company decided to risk it anyway.

"You calculated the chance of success of getting away with it, didn't you?" asked Robert Cunningham, one of the attorney's hired by the state.

"No sir, those are not the words I would use," Condray responded.

McCooey presided over a trial in December where a Montgomery jury decided that Exxon Mobil had fraudulently underpaid the state on royalties for natural gas wells drilled in waters along the Alabama coast. The jury returned the largest verdict in state history: $87.7 million in compensatory damages and $3.42 billion in punitive damages.

Now McCooey is holding a two-day hearing to determine whether the punitive damages are excessive and should be reduced.

In a courtroom crowded with attorneys and their assistants, the judge said the case is going to be appealed to the Alabama Supreme Court, which will ultimately decide the appropriate amount.

"What I do probably doesn't matter anyway," she said, but added that she wanted to make sure the court hearing provided a good record for the Supreme Court to consider.

The judge's frank remarks continued during the hearing.

Exxon Mobil presented Washington economist Jonathan Walker, who contended the punitive damages were grossly excessive. Walker offered a mathematical formula about what would be necessary to deter a company from repeating improper conduct. The formula involved removing the profit from the enterprise, but did not consider the worth of the company when determining the appropriate punishment.

Walker said the $87.7 million in compensatory damages would be sufficient to deter Exxon Mobil because that amount included 12 percent interest on unpaid royalties, and that would erase any gain the oil company had.

After hearing the economist's explanation, the judge said, "No offense, Dr. Walker, but it sounds like a bunch of B.S."

She said courts normally consider the worth of a company, and she noted Exxon Mobil recently finished in first place in the Fortune 500 list of American companies with the greatest annual revenue.

"It would be insane to say that doesn't matter," McCooey said.