ExxonMobil lays out $200 million case seeking tax refunds for Qatar natural gas deal

DALLAS (CN) — ExxonMobil laid out its argument before a Texas judge Monday, the first day of trial in its tax lawsuit against the federal government, seeking approximately $200 million in federal tax refunds.

During opening arguments, Exxon attorneys said the oil and gas firm invested over $1 billion in onshore and offshore infrastructure at Qatar's massive North Field reserve, but the U.S. government unfairly assessed penalties against the natural gas project.

The Internal Revenue Service incorrectly denied it deductions for 2010 and 2011 related to Exxon’s Al Khaleej Gas entity with the Qatari government — a deal under which natural gas produced from the massive offshore North Field is reserved for domestic use via pipelines — Exxon said in its March 2022 lawsuit in Dallas federal court.

The North Field contains over half of Qatar’s total natural gas reserves; Qatar as a whole has the world’s third-largest natural gas reserves.

Exxon originally asked for over $1.8 billion in tax refunds, but filed an amended complaint in July 2023, dropping claims regarding a separate deal in Malaysia. Exxon is now seeking over $180 million in penalties paid for 2010 and 2011 and a tax refund for production payments from Al Khaleej Gas to Qatar.

Exxon attorney Jim Rouhandeh, with Davis Polk in New York, told U.S. District Judge David Godbey during opening statements the deductions were valid because Al Khaleej Gas was a partnership under the tax code between Exxon and Qatar and each entity made substantial hands-on contributions.

“Exxon paid over $1 billion for onshore and offshore infrastructure,” Rouhandeh said. “AKG was run by a management committee appointed by Exxon and Qatar and decisions had to be unanimously agreed upon.”

The company points out that Exxon and Qatar repeatedly referred to themselves as partners in the marketing materials and billboards touting the arrangement, and says payments that Al Khaleej Gas made to Qatar qualified as production payments.

“Rather than taking solely a profit share, Qatar took a reduced profit share and a production payment carved out of all of AKG’s gas interest,” the 24-page amended complaint states. “A production payment is a well-established form of financing that has been used in the oil and gas industry for decades and that constitutes debt under federal tax law and regulations.”

Ryan Galisewski, with the Department of Justice Tax Division, pushed back during Monday's hearing. He told the judge Exxon’s tax department was “dreaming up different techniques” to hunt for foreign tax credits, internally nicknaming the effort “tax optimization.”

To get the deductions, Galisewski said, Exxon engaged in “simple relabeling” of the names of payments. He showed the court slides of internal Exxon documents that containing alleged relabeling of Qatari royalties. He said Exxon wanted to turn the royalty into “something else.”

Exxon attorney Rouhandeh expressed reluctance when he objected during the government’s opening statement, as such objections are uncommon.

He cited the “high confidentiality” of the Exxon documents Galisewski was presenting in court. “These are subject to confidentiality agreements,” Rouhandeh said.

The bench trial is expected to last one week. About a dozen witnesses are expected to take the stand, mostly former Exxon employees involved in the North Field reserve.

Before opening statements, Judge Godbey tentatively granted Exxon’s motion to close the courtroom for a portion of one witness’ testimony. Exxon citied the highly confidential information the testimony would produce.

Follow @davejourno

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