ExxonMobil's Date With the Supremes

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It's beginning to look like ExxonMobil (NYSE: XOM), the world's largest public company, will be listening to the Supremes by June. The nation's highest court has agreed to decide whether a $2.5 billion punitive damages award levied against the company is excessive.

This, as many Fools recall, goes back to 1989, when the Exxon Valdez, a tanker operated by the company, went aground in Alaska. At the time, the ship was under the command of Capt. Joseph Hazelwood, who was accused of being tipsy at the time of the accident but was later cleared of the charge in court.

The Valdez slid along Bligh Reef, which obviously was named for another notorious skipper, spilling about 11 million gallons of crude oil on 1,500 miles of Alaskan coast. Exxon ended up paying numerous fines, along with about $3.4 billion in cleanup costs.

But a group consisting of fishermen, landowners, local governments, and Native Americans sued the company, claiming that they had suffered economic damages. They were originally awarded a $5 billion judgment. The award was later halved by a federal court, although the remaining amount is still the highest punitive damage award in the history of American jurisprudence.

Exxon maintains that the award bears no relationship to actual damages, that the company has already paid plenty in the cleanup effort, and that past precedent limits the amount of punitive awards. It also invokes a long-standing maritime law protecting ship owners from the acts of ship masters who disregard the owner's own rules and policies.

All this comes at a time when Alaska's governor is pushing Exxon, along with BP (NYSE: BP) and ConocoPhillips (NYSE: COP), to submit to a competitive bidding process relative to the construction of a pipeline. The line would provide an outlet for as much as 235 trillion cubic feet of natural gas from the North Slope to other lines that then could get it to consumers in Canada and the U.S. The producers had expected the line to be constructed by companies whose business is pipeline operations, such as MidAmerica, a unit of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), but they have been reluctant to offer bids.

So if Merrill Lynch thinks it has problems, my suggestion is that it spend one day in the skin of a major oil company. Whether dodging barbs from Hugo Chavez or Vladimir Putin, or various constituencies in Alaska, these guys can't buy a break. And with global demand for crude oil beginning to outstrip supply, their challenges aren't likely to abate soon.

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