[Corp. Watch] Texas says Exxon deliberately sabotaged abandoned oil wells

[Corporation Watch]

Exxon Sabotage May Merit $1 Billion Fine, Agency Says

 By Joe Carroll

(Bloomberg News, July 17, 2009) -- Exxon Mobil Corporation, the largest U.S. oil company, may be fined more than $1 billion for "malicious" sabotage of wells to prevent other producers from tapping fields it no longer wanted, the Texas General Land Office said.

	Jerry Patterson, commissioner of the land office that oversees oil leases that help fund Texas schools, asked the Texas Railroad Commission to conduct hearings into an alleged 1990s program at Exxon Mobil of plugging abandoned wells with trash, sludge, explosives, and cement plugs.

	The barriers made it impossible for other producers to revive the wells, Patterson said in a statement to Bloomberg News.

	Under Railroad Commission rules, Exxon Mobil could face fines of $10,000 a day per well, Patterson said. He said those penalties could add up to more than $1 billion on wells the company abandoned in 1991 after a disagreement over royalties with the owners, the O'Connor family, a Texas oil dynasty.

	"The allegations paint a false and misleading picture of Exxon Mobil's involvement in the O'Connor oil and gas leases," said Margaret Ross, an Exxon Mobil spokeswoman. "The area in which the wells are located has a water table very close to the surface. It was critical that Exxon protect the groundwater by plugging the wells solidly and thoroughly."

	In March, the Texas Supreme Court dismissed lawsuits against Irving, Texas-based Exxon Mobil for damaging the wells, ruling that too much time had passed. O'Connor heirs and Emerald Oil & Gas Company, which took over some of the former Exxon Mobil leases, were plaintiffs in the suits.

'Flagrant Violations' Alleged

	"Exxon committed irrefutable, intentional, and flagrant violations of state rules regulating the oilfield," Patterson said in the statement. "The senseless waste of our natural resources, sabotage of a producing oilfield, and cover-up by Exxon is a malicious act that must be dealt with by the state of Texas."

	The Railroad Commission hasn't decided whether to hold hearings on the well closings, said Ramona Nye, a spokeswoman for the agency. The three commissioners are next scheduled to meet on July 21. Nye confirmed the agency has the authority to fine companies $10,000 a day for improperly plugging a well.

	The 118-year-old commission has been responsible for regulating oil production in the state since the 1930s, when rampant drilling caused a supply glut that collapsed crude prices, according to the Texas State Historical Association.

Relationship Soured

	From the 1950s to the late 1980s, the O'Connors earned more than $40 million in royalties on crude and gas pumped from 121 wells that Exxon and a predecessor, Humble Oil & Refining Co., drilled on the family's land near Corpus Christi, according to court filings.

	The relationship deteriorated in the late 1980s, when Exxon's request for a cut in the 50 percent royalty rate was rejected, court documents showed. Exxon said the field was no longer profitable and began shutting wells, a process that ended in August 1991, according to the documents.

	Two years later, Emerald Oil, an energy company based in Refugio, Texas, agreed to lease one-third of the area formerly operated by Exxon. When Emerald drilled into the plugged wells to revive production, drill bits collided with cement, severed pipes, and explosive charges normally used to perforate rock formations, Patterson said.

	Exxon failed to accurately describe the obstacles it had dumped into the wells in reports known as W-3s that it filed with the Railroad Commission, Patterson said in a letter to the agency. Those reports gave Emerald a false picture of how difficult it was going to be to resume output, he said.

	"You don't foul your own nest," Patterson said. "And that is exactly what Exxon has done."

Impact Potential

	A $1 billion fine would be about one-fifth as costly to Exxon Mobil as the 1989 oil spill by the Exxon Valdez tanker off the coast of Alaska. The company paid $4.84 billion in clean-up costs, fines, punitive damages, and interest for the incident that dumped 11 million gallons of crude into Prince William Sound, damaging wildlife and the fishing industry.

	"The negative PR in their home state is probably more damaging than perhaps any potential costs," said Gianna Bern, president of Brookshire Advisory & Research in Flossmoor, Illinois. "For most oil producers in the world, a $1 billion fine would inflict a lot of pain, but because of Exxon's size and significant cash reserves, they could deal with it."

$25 Billion in Cash

	Exxon Mobil had $25 billion in cash and cash equivalents at the end of the first quarter, more than the Hague-based Royal Dutch Shell and London's British Petroleum.

	The 62-year-old Patterson, a former U.S. Marine Corps fighter pilot, said he's trying to maximize royalty payments to the state's Permanent School Fund by encouraging more petroleum production.

	"This isn't coming from a Birkenstock-wearing environmentalist," Jim Suydman, a Patterson spokesman, said in a telephone interview. "He's a gun-toting Republican who wants to make sure the rules are followed and the state's natural resources are properly developed."

	Exxon Mobil, which pumps more oil than every member of the Organization of Petroleum Exporting Countries except Saudi Arabia and Iran, posted a record $45.2 billion profit in 2008, or more than $6 for every man, woman and child on the planet.

	The company has been shifting its exploration and production focus for more than a decade from traditional oil areas such as Texas and the North Sea to places such as West Africa and Brazil, where prospective discoveries are larger.

	Last month, the company agreed to pay $470 million in interest on a $507.5 million judgment to victims of the Valdez spill. That's in addition to $3.86 billion spent over several years on the clean-up, penalties, and other related costs.