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Sunday, Oct 1, 2023

Local Oil Companies Look to Fight Drilling Bans

With crude oil prices at a seven-year high and nearing $100 per barrel, it would seem like boom times for local oil-producing companies. In the past when oil prices hit these levels, they reactivated shuttered wells, expanded drilling operations and watched the dollars roll in.

But now, things are different as oil drilling bans are proliferating throughout the region. Culver City, the city of Los Angeles and the county of Los Angeles have all approved in concept new drilling bans and the phasing out of all existing wells, with the city of Los Angeles, acting just last month.

What’s more, the state is considering imposing a huge buffer zone between oil drilling operations and sensitive land uses that could terminate the operations of most wells.

So, instead of enjoying the oil price boom, local oil companies are gearing up for legal battles in a desperate bid to gain enough compensation for the termination of their local drilling operations in order to keep from being put out of business entirely.


“We’re not going out without a fight,” said Ralph Combs, manager of regulatory and government affairs from Long Beach-based oil producer The Termo Co. “This is the mother of all lawsuits if (jurisdictions) try to take our property without compensation.”

Termo Co. has 22 wells in unincorporated Los Angeles County, 14 more in Long Beach/Signal Hill and a total of 75 wells throughout California. Last year, the company produced about 450,000 barrels of crude oil and 1.46 million cubic feet of natural gas. Gross revenue was in the $30 million to $40 million range.

Amortization versus seizureAll the restrictions now under consideration would ban new oil drilling. Culver City and the city and county of Los Angeles have also passed directives to consider phasing out existing oil wells.


These municipalities are considering a new concept for these phaseouts: amortization. Under this concept — which is designed to circumvent a constitutional ban on the taking of private property without fair market compensation — a local government can move to declare an economic activity noncompliant with zoning codes and then require a company to stop that economic activity once it has recouped its investment. The government is not obligated to make any additional payment to the company.

Culver City was the first to consider this concept in its five-year phaseout of existing oil wells as part of its 2019 ordinance; the concept is still under consideration. Los Angeles County followed suit with its oil drilling ordinance last September, and now the city of Los Angeles is exploring this option as part of its directive enacted last month.

“These actions — drafting an ordinance to declare oil drilling a nonconforming land use throughout the entire city, initiating an amortization study, proper clean-up of all abandoned wells, and city participation in a task force to protect and assist workers — are critical to our ambitious ‘LA100’ efforts, which will achieve 100% carbon-free energy in Los Angeles by 2035,” Los Angeles City Councilman Mitch O’Farrell said in a press release last month. “We have a moral imperative to ensure that all Angelenos, especially those in underserved communities, have the right to a safe neighborhood and a healthy life.”

But this amortization option has roused intense opposition from Termo and other local oil producers; they say it is in essence a taking of private property rights without fair market compensation.

“They are taking our business away,” said Jeff Cooper, vice president and co-owner of Wilmington-based Cooper & Brain Inc., a family-owned business founded in 1933.

Cooper & Brain has 20 wells in the Wilmington Oil Field underneath the city of Los Angeles, an additional well in Signal Hill, and another 30 wells or so in northeastern Orange County.

Cooper said that from a practical standpoint, if Los Angeles were to enact an amortization policy for the shutdown of existing wells, the company would have little or no capital to clean up the wells after they cease operation or to set up operations in other, more drill-friendly regions.

“The concern is that we could go into debt to pay for the shutdown and cleanup of existing wells,” he said. “And that’s before one can look at money to expand elsewhere.”

Cooper and Termo said they would definitely join in any legal action to stop this amortization concept from being implemented. That legal action is likely to be led by the California Independent Petroleum Association, a Sacramento-based trade group.

Rock Zierman, the association’s chief executive, said the amortization policy is likely to be proven illegal.

“We think this whole scheme is illegal and exposes the city to liability,” Zierman said. “They are depending on a legal theory that’s not well-founded. It’s essentially just telling the operators and property owners of the mineral rights that they are out of business.”

Industry ‘setbacks’Local oil producers are also concerned by a statewide proposal unveiled by Gov. Gavin Newsom last October. That proposal would prohibit new wells and facilities within a 3,200-foot exclusion area — or setback — from homes, schools, hospitals, nursing homes and other sensitive locations. It would also require pollution controls — including a leak detection and response plan — for existing wells and facilities within the same 3,200-foot setback.

The regulation is now undergoing review; a final rule could be issued later this year.

Local oil producers say a key factor in gauging the impact of the state regulation is when a new well or facility designation is triggered. They are concerned that maintenance of existing wells that ends up boosting the flow of oil could trigger that designation.

“We will have to look at what ‘new drilling’ is considered to be,” Cooper said. “If you alter the casings in a particular well, does that well suddenly get reclassified as a new well and therefore subject to shutdown? It all depends on the wording of the regulation.”

The state proposal is also of concern to Signal Hill-based Signal Hill Petroleum Inc., which has roughly 180 wells in the small city of Signal Hill and another 20 in Long Beach.

“The 3,200-foot setback would impact all our wells, both in Long Beach and Signal Hill,” said Debra Montalvo Layton, vice president of government affairs and corporate strategy for Signal Hill Petroleum.

But Layton noted that Signal Hill Petroleum also has an arm that develops properties around abandoned oil wells into retail and single-family home projects, which puts the company in a different situation than Termo or Cooper & Brain.

She said that’s no reason to let the state proposal become law without a legal fight, however.

“We’re not prepared to just give up oil production and become a real estate company,” she said.

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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