MANAGERS AND MANAGING: EXXON MOBIL FACES BIG PAYOUT IN ALABAMA OVER GAS ROYALTIES

The Wall Street Journal Europe

Exxon Mobil Corp. was hit by a Montgomery, Alabama, state-court jury with a $3.5 billion (3.92 billion euros) judgment for underpaying natural gas royalties from wells in Gulf Coast waters.

The jury concluded the oil titan should pay the state $87.7 million in actual damages and $3.42 billion in punitive damages to the state of Alabama, which alleged Exxon Mobil tried to cheat it out of $1 billion in royalties from natural gas wells along the coast. Alabama said its leases with Exxon require the company to pay royalties to the state on the gross proceeds form the gas wells.

Tom Cirigliano, an Exxon spokesman, said the company will appeal the verdict and said the punitive award was "meritless." The Irving, Texas, company has 30 days to appeal before the judgment is formally entered.

Exxon said, "We have always endeavored to fully comply with the requirements of our leases and have paid royalties in accordance with those leases." It continued, "We continue to believe our interpretation of the lease is proper and consistent with Alabama law."

Fights over royalty issues have become increasingly common in recent years. Several big oil companies have paid tens of millions of dollars to settle federal and state allegations that entities where cheated out of royalties.

But Exxon commonly has fought such suits rather than settle them. In 1999, a California jury found in Exxon's favor in a 13-year-old royalty lawsuit. Other oil companies had settled with the state years earlier.

In Alabama, Exxon argued, the leases allowed it to deduct certain processing costs before paying the state royalties. The company also said the Alabama leases don't require royalties to be paid on natural gas used as part of the state's production process.

"They believed they could get away with their scheme because the people of Alabama are too inexperienced to understand they are being cheated," said Gov. Don Siegelman.

The size of the damages are unusual given that individuals weren't hurt. But Alabama juries have a reputation of handing down stiff penalties to large companies. The state's previous record for a civil-damage award was set in 1999 by a jury that ordered Whirlpool Financial National Bank, now Transamerica Bank, to pay $581 million to Alabama regarding the purchase of satellite dish.

But Exxon has faced large judgments in the past, most notably the $5 billion in punitive damages assessed against the company for the 1989 Valdez oil spill.