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STATE WINS EXXON LAWSUIT

Dec 20, 2000

Montgomery Advertiser

A Montgomery County jury on Tuesday ordered Exxon Mobil Corporation to pay Alabama $3.5 billion for an alleged scheme to cheat the state out of natural gas royalties.

Exxon Mobil will appeal the verdict and won't have to pay the award while appeals are pending. Company attorneys maintain Exxon Mobil has paid its fair share.

The jury of eight women and four men deliberated about 2* hours Tuesday morning before reaching a verdict. The jury heard two weeks of testimony and saw Exxon Mobil documents that state attorneys said proved fraud.

"There are four other oil companies that need to get the message that Alabama is minding the store," said John Crowder, a Mobile attorney who represented the state. "If you steal, you're going to get punished."

The state has four similar lawsuits against other oil companies, and Crowder said Exxon Mobil turned down the state's offer of a $600 million settlement before the trial.

The jury agreed with the state's argument that Exxon Mobil failed to pay $87.7 million it owed between 1993 and 1999 for 13 natural gas wells in state waters near Dauphin Island and Fort Morgan. Exxon Mobil signed leases in 1981 and 1984, agreeing to pay royalties of 25 percent to 28 percent on the gas produced and sold. The wells began producing in 1993.

The state argued the leases required payments on gross revenue, while Exxon Mobil contended it could deduct some expenses.

In addition to $87.7 million in compensatory damages for the alleged underpayment, the state's lawyers asked the jury for $3 billion in punitive damages. The jury upped the punitive award to $3.42 billion.

State attorneys said that was fair, alleging that Exxon Mobil stood to defraud the state out of at least $1 billion over the life of the gas wells, which are projected to produce for 20 to 30 more years.

"They stood to gain another one to two billion," Crowder said. "The ratio of (punitive damages to compensatory damages) is only 3-to-1. That's a very reasonable ratio."

Joe Espy, a Montgomery attorney representing Exxon Mobil, could not be reached for comment.

Espy's office referred questions to Exxon Mobil spokesman Tom Cirigliano, who said the company "strongly disagrees" with the verdict.

"The punitive award is meritless," Cirigliano said, reading a prepared statement. "No evidence of fraud was offered by the department at the trial and none was considered by the jury."

The jury award could be changed by Montgomery County Circuit Judge Tracy McCooey, who heard the case. It could also be changed on appeal.

Ted Hosp, legal advisor for Gov. Don Siegelman, said it was unclear where all the money would go if the state prevails on appeals.

Under a constitutional amendment approved by voters in 1985, royalties go into the Alabama Trust Fund, a savings account with more than $1 billion. Earnings from the fund help pay for state government.

On Nov. 7, voters approved another amendment, pushed by Siegelman, to allow 35 percent of the annual royalties to be used for roads, bridges, labs and other infrastructure.

The law firm of Mobile attorneys Crowder, Richard Dorman and Robert Cunningham would receive 14 percent of the award if it stands, or about $490 million. Hosp said that percentage was negotiated. Dorman said the firm usually gets 33 percent of awards.

The other cases pending are against Amoco, Shell, Hunt and Mobil. Crowder said he did not know how much the state would claim in underpayment or punitive damages in those cases. He said Exxon Mobil's alleged underpayment was the largest of the five.

State attorneys showed the jury documents they said proved Exxon Mobil's intent to deduct costs and take other steps to reduce payments to the state, even though it knew those weren't allowed under the leases.

"We have nine Exxon documents that clearly show they recognized the state's position was correct," Crowder said. "But they did a business risk analysis and concluded that if they decided to underpay the royalties and if they do get caught, all they would have to do is give the money back, plus interest and the cost of the litigation."

Cirigliano said Mobil Exxon made its interpretation of the lease clear before investing more than $1 billion to develop the 13 wells and refining facilities.

Natural gas was discovered in state waters off Mobile Bay in 1979. In the 1980s, oil companies placed bids for the right to pump and sell the gas. Exxon paid $585 million for rights to the gas.

Crowder said the state discovered the underpayments during a 1995 audit.

One Exxon Mobil document mentioned Alabama's "inexperienced regulatory staff and processes."

"They decided, because of an inexperienced staff, they were going to sneak something by the state of Alabama," Dorman said.

Siegelman issued a prepared statement.

"The verdict is appropriate, because it is against a company that has attempted to cheat the people of Alabama out of more than $1 billion," Siegelman said.

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