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EXXON ORDERED TO PAY $3.5 BILLION TO ALABAMA IN ROYALTIES DISPUTE

Jan 2, 2001

The National Law Journal

In a verdict that defendant ExxonMobil Corp. called "manifestly unfair," a Montgomery, AL jury has awarded the state more than $3.5 billion over disputed royalty payments on natural gas taken from 13 wells in Alabama waters.

The jury ordered Exxon to pay the state $87.7 million in compensatory damages and $3.42 billion in punitives, finding that the oil company had committed fraud by underpaying about $40 million over a six-year period. Exxon denied any fraud and vowed to appeal.

MESSING WITH 'BUBBA'

The lawsuit involved gas wells in Mobile Bay, in the Gulf of Mexico. In 1981 and 1984, Alabama leased the rights to natural gas from part of the Mobile Bay field to the then-Exxon Corp., said plaintiff's attorney Robert T. Cunningham Jr. of Mobile, AL 's Cunningham, Bounds, Yance, Crowder and Brown. He said the state "drew up a state-friendly oil and gas lease," which required Exxon to pay royalties on a gross proceeds basis. The common oil and gas lease, Cunningham said, sets royalties on wellhead value, "when the gas is worth less."

Under the lease, Exxon also had to pay royalties on gas used to run the operation.

Exxon signed the lease, said Cunningham, and began processing and selling natural gas from the Mobile Bay wells in 1993. At that time, he alleged, "Exxon made a corporate decision that it would treat this as if the lease was a wellhead lease. Exxon would take deductions for costs and ay on wellhead value, and they would take free use of the fuel."

A letter by an Exxon attorney, which was unearthed during the discovery process, Cunningham added, indicated that the company should pay the standard royalty because even if Alabama realized it was being paid less and sued, the company would only have to pay the extra royalty, plus interest attorney fees. The letter also described the Alabama Department of Conservation and Natural Resources staff as "inexperienced," Cunningham said. "The implication was that Bubba ain't going to find out what's happening."

The state hired Cunningham's firm, appointing partner John T. Crowder as assistant attorney general, to sue Exxon. But Exxon got to the courthouse first and filed a declaratory judgement action.

"They know we were getting ready to file suit in Mobile, so they filed in Montgomery, " said Cunningham. "It's a conservative venue where there have been few large verdicts."

The state then countersued, charging breach of the lease agreement and fraud. Exxon Corp. v. Department of Conservation and Natural Resources, No. CV-99-2368 (Cir. Ct., Montgomery Co.

Exxon spokesman Thomas Cirigilano said the company contended that the lease was "ambiguous" and that the company and the state had a simple "legitimate dispute over the interpretation of how to calculate royalties." The company filed a declaratory judgment action to get a court to determine how royalties should be paid, he said.

The claim by the state that Exxon had determined it could cheat the people of Alabama because they wouldn't catch on was "absolutely untrue," Cirigilano said. The statement calling the people of Alabama "too inexperienced" referred only to the staffers at the Alabama conservation department, which drafted the lease, he said, adding, "in context, the statement is an attempt to explain why the Alabama lease form is so unclear."

Exxon also contended that it never attempted to conceal its actions.

Exxon will file motions to set aside the verdict. if these fall, it will appeal.

The state of Alabama has similar claims pending against four other oil companies.

Under the terms of its contingency agreement with the state, the Cunningham Bounds law firm will receive 14 percent.

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