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LEASE KEY TO $3.5 BILLION

Dec 24, 2000

The Birmingham News

The main reason Alabama won a jaw-dropping $3.5 billion verdict against Exxon Mobil might boil down to this: Bob Macrory did his homework.

Macrory was a low-profile lawyer in the state Conservation Department two decades ago when he was asked to draw up leases for energy companies wanting to tap natural gas in the Gulf of Mexico just off Alabama's coast.

Macrory wanted to make sure the state got a fair shake in the deals. "I felt this was a chance-in-a-lifetime opportunity for the state," Macrory recalled. "It's not like we're Texas. This was pretty much our only shot."

The leases drawn up by Macrory became central to the state's claims that Exxon had deliberately underpaid millions of dollars in royalties. Exxon's lawyers branded the leases "unclear and ambiguous," insisting the company had done nothing wrong.

Yet a Montgomery County Circuit Court jury days ago sided with the state -and Macrory's leases- by returning what has been called the fourth largest verdict against a corporation in U.S. history. Exxon said it would appeal.

Jim Martin, former director of the Alabama Conservation Department said Macrory's careful work on the leases enabled the state to press its case against Exxon. The state is suing four other energy companies on similar claims.

"That Macrory they ought to put up a statue to that young man," Martin said.

Macrory began his homework on the leases shortly after Mobil had a big strike in the Gulf in 1979. Then head of the Conservation Department's lands division, he soon learned states usually didn't fare well in disputes with energy companies.

He didn't want that to happen to Alabama. So he began reading treatises on oil and gas leases. He asked the industry for suggestions. He got his hands on leases written by other states, including Alaska and Texas.

"I was trying to figure out how to level the playing field for the state," Macrory said.

Among the ideas he picked up. Energy companies should pay royalties based on the "gross proceeds" of their natural gas production. Aimed at blocking them form subtracting expenses before they paid the state, this clause would become critical in the trial.

Macrory said he also inserted a clause saying ambiguities in the contract should be interpreted inn favor of the state, not the oil company.

Exxon signed on the dotted line in 1981.

Initial Doubts-

The company began producing a decade later, eventually drilling for gas at 13 wells on state-owned lands, promising to pay the state 25 percent of the value of the gas it extracted. Since 1993, Exxon has paid Alabama royalties topping $240 million, according to the state's lawsuit.

But almost as soon as the first check came in, Alabama officials had doubts about whether the state was getting its fair share.

The way Martin remembers it, Macrory came to his Conservation Department office to talk about the situation. For two hours, with the door closed and the phone unplugged, they studied the Exxon leases and the payments.

They decided an in-depth audit was needed, and Martin went to then-Gov. Fob James. Before long, Houston's George Caess & Associates was hired. Martin said the examination convinced him that Exxon was unfairly deducting expenses before paying royalties.

At the trial, Exxon's lawyers said, the company believed it was allowed to subtract those expenses under the leases drafted by Macrory.

After getting audits, Alabama officials came t believe Exxon owed $132 million in additional royalty payments for October 1993 to December 1997. That year the state asked Exxon for $50.5 million in underpayments. In 1999, it requested an additional $81.6 million.

Exxon contends it owes much less, if any.

Martin said the company told him state officials where merely "inexperienced" in the ways of the industry. I'll be the first to admit that, but we're not stupid," he said.

Eventually, Exxon would sue the state in Montgomery County Circuit Court, seeking a shield against claims is owed more in royalties.

A courtroom clash was inevitable, but first the state had to play beat-the-clock.

Alabama Gov. Don Siegelman had managed to pass laws that would place strict caps on punitive damage awards against companies, starting in August 1999, just days before the deadline the suit was filed against Exxon", Macrory said.

Testimony in the trial began Dec. 4, and the jury's decision said it will "take all legal steps to challenge the verdict," and legal experts say the case will likely drag on for years.

Just minutes after the verdict was delivered Dec. 19, the phone at Martin's Gadsden home rang. Macrory was on the other end with a question: "Can you believe that when we put our heads together that it would end up with a $3.5 billion verdict?"

Martin dad to admit he was pleased. "that's a great, great verdict that was the result of years of hard work," he said.

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