Exxon Paid Fair Oil Royalties, Jury Decides

In a victory for the oil industry, a Los Angeles jury Monday rejected claims that Exxon Corp. owed California taxpayers as much as $750 million because it allegedly undervalued petroleum pumped from public lands.

After deliberating for 16 days, jurors decided that California received fair royalty payments during the 1980s for oil extracted from the Wilmington field off Long Beach. Exxon, jurors added, did not act in bad faith or manipulate oil prices.

The decision, experts say, could forestall similar claims against the oil industry because the jury rejected a long-standing contention that oil companies rob federal and state governments of billions of dollars in royalties by manipulating the prices of crude oil.

Only last month, federal legislators, led by Sen. Barbara Boxer (D-Calif.), referred to the Exxon case when they tentatively approved new regulations to collect higher royalties for oil pumped from U.S. lands and waters.

Four major oil companies had already paid the state $345 million to settle identical claims arising from their operations in the 8,000-acre Wilmington oil field. California was seeking a similar windfall against Exxon--until Monday’s decision in Los Angeles County Superior Court.

The verdict was significant because California’s 13-year-old suit against the oil giant has been closely followed and held up as a case in which a large petroleum company manipulated oil prices to cheat taxpayers.

“This verdict would tend to put a damper on future suits like this,” said Martin Brian McMahon, an attorney for the state, who said he was “obviously disappointed” with the outcome.

Ken Leonard, a senior manager with the American Petroleum Institute in Washington, the oil industry’s trade group, said the decision could “certainly have a far-ranging impact on the debate [involving royalty payments] at the federal level.”

“We’ve indicated all along that there needs to be a more equitable and more certain system for paying royalties,” said Leonard. “This decision merely highlights the fact that there certainly needs to be a better way.”

For three decades, oil companies and federal and state governments have battled over how the oil industry calculates royalty payments for oil pumped from the lands or waters owned by the American public.

California is one of a few states where the stakes have been high, because the state gets 50% of the money collected by the federal government for production on land and 27.5% of the proceeds from offshore oil.

Royalties are a percentage of the selling price. If that price is artificially low, the federal and state governments receive less than their fair share of the money. Federal and state agencies have long argued that oil companies use complex pricing formulas and prices determined by themselves--not market prices--to calculate the royalties for crude oil.

Such underpricing, according to the House Government Reform and Oversight Committee in 1996, was responsible for the federal government failing to collect as much as $2 billion in royalties on a nationwide basis from 1978 to 1993.

But new pricing rules approved by the U.S. Senate leadership last month would peg payments to market prices. Senators from other major oil-producing states may attempt to restore the current system, but Boxer has pledged a filibuster to block any such effort to continue the present system, which she calls “an out and out thievery” to benefit the oil industry at the expense of taxpayers.

In their civil suit against Exxon, California officials contended that the oil giant had shortchanged the state about $350 million for oil pumped from 1981 to 1989. With prejudgment interest, that sum would have ballooned to $750 million, said Larry R. Feldman, a Santa Monica attorney who represented the company.

Lawyers for the state cited studies suggesting that during the 1980s, Wilmington crude oil was being sold at up to $4 per barrel less than Alaska’s North Slope crude oil--which was purchased by the same refineries that bought the Wilmington crude. In a competitive market, the state contended, the prices should have been the same after adjustments for quality differences, but they were not. Exxon said other factors can affect the price, such as the cost of shipping crude.

In 1991, the state’s lawyers secured $345 million from four firms--Texaco, Union Oil, Mobil Oil and Shell Oil--to settle claims that they paid insufficient royalties for their operations in the Wilmington field.

But jurors who listened to two months of testimony from economists and oil experts said the state simply showed no hard evidence that Exxon was guilty of wrongdoing.

Jurors interviewed Monday said they believed that Exxon acted fairly.

Floyd Johnson, a 36-year-old claims adjuster from Inglewood, said he was convinced that Exxon did nothing wrong.

“The company followed the rules spelled out in the contract” with the state, Johnson said. “The [state] didn’t produce any information to make me feel otherwise.”

Feldman, Exxon’s attorney, said the firm felt vindicated.

“A jury looked at this for three long weeks and concluded that there was no basis for this suit,” Feldman said. “I hope this sends a message that the government’s argument is plain wrong.”

McMahon, the state’s attorney, said he has not yet decided whether he will appeal the decision.