Editor’s Note: This article was corrected in the Oct. 20, 2014 issue. The text of the correction is at the end of the story.
A battle is bubbling up in the small South Bay town of Hermosa Beach over whether voters should allow oil drilling in the heart of the city or pay millions of dollars to tell an energy company to get lost.
E&B Natural Resources’ plan to drill for oil could deliver millions of dollars to the city, but at the same time would require bringing in a huge, noisy drilling rig and digging dozens of unsightly wells.
Supporters of the Bakersfield oil company’s plan say the project, with its promises of big payments to local coffers over the next 35 years, will mean financial salvation for the city. Otherwise, residents and business owners will be on the hook for millions of dollars in payouts and are likely to face higher taxes.
“We could use a good source of revenue to keep Hermosa Beach at the standard most of us want to see it,” said John Bowler, who owns a food truck management and distribution business and is a former city councilman and mayor. “This revenue is lying at our feet.”
Opponents say it’s too risky and that the attendant noise and pollution will drive down property values. They also contend that the financial benefits for the city are far less than advertised.
“Property values will suffer,” said Jess Lurie, partner in Water’s Edge Group with Keller Williams residential real estate brokerage that is just blocks away from the drilling site. “People move to Hermosa Beach because of the lifestyle. Why would anybody move there if they start drilling for oil?”
Campaign charges
The showdown will come March 3, when Hermosa Beach residents will go to the polls to decide whether to overturn the city’s 82-year-old drilling ban and allow E&B to drill 34 wells on the site of a city maintenance yard.
If voters turn down the proposal, then the city must pay $17.5 million to E&B as part of a two-year-old legal settlement.
But with that election still five months away, the fight has already heated up and become an issue in a November contest for a local state Assembly seat.
The campaign of incumbent Al Muratsuchi, D-Torrance, who opposes the drilling project, alleged late last month that an oil industry trade group – one that counts E&B as a member – is bankrolling the campaign of Republican challenger David Hadley, a Manhattan Beach businessman, to the tune of $750,000. Both E&B and trade group California Independent Petroleum Association denied those claims.
That’s just the latest twist in the decades-long battle over oil drilling in Hermosa Beach. The city sits on a portion of a vast underground oil reservoir beneath most of the South Bay. At the height of the region’s first oil boom in the 1930s, Hermosa Beach residents voted to ban drilling in their city.
In 1984, Macpherson Oil Corp. of Santa Monica waged a successful campaign to get voters to rescind the ban and allow the company to drill at a city maintenance yard at Sixth Street and Valley Drive. The yard is surrounded by homes and is less than a half-mile from the beach.
At the time, the city’s coffers were running low. With no oil revenue and little space for major commercial or industrial development within its 1.3-square-mile boundaries, the city has always relied on residential property taxes and sales taxes from its retail strips on Pier Avenue and Pacific Coast Highway.
Just as E&B is doing today, Macpherson promised that the city would receive millions of dollars in oil revenue that would diversify and stabilize the city’s budget. But before Macpherson could start drilling, voters changed their minds and in 1994 reinstated the drilling ban.
Stung by the loss, Macpherson sued the city in 1998 for $750 million, the amount of revenue it claims it was denied when the city pulled the plug on the project. That amount dwarfs the city’s general fund, which for 2013-14 was only $32 million.
Complex deal
More than a decade of legal wrangling followed. Then, three years ago, E&B Natural Resources President Steve Layton heard about the case.
“As I read more about it, the beginnings of a possible solution came to me,” Layton said. “If we could come in as a third party, without all the animosity that had built up between the city and Macpherson, there was a chance that a settlement could be reached.”
E&B’s inducement was obvious. The company obtained estimates that the oil field contains roughly 35 million barrels of oil. At last week’s price of $90 a barrel, that’s roughly $3.2 billion in potential revenue over the project’s estimated 35-year life span.
The city, meanwhile, needed a way to settle the case with Macpherson so it wouldn’t face the prospect of bankruptcy if it were forced to pay the full $750 million.
In 2012, the city, Macpherson and E&B worked out a deal. Macpherson received a $30 million payout – $12.5 million directly from E&B and $17.5 million from the city. The city, still recovering from the recent recession, didn’t have that sum on hand, so E&B agreed to loan that money to the city.
Under terms of the settlement, the drilling question is to be put to voters. If voters approve the project, then the city would owe E&B only $3.5 million on the loan. If they reject the project, then the city would owe E&B the full $17.5 million.
Revenue flow
If voters OK the project, E&B must still get California Coastal Commission approval, which could take up to a year.
The company would start out by drilling four test wells, then drill 30 more, bringing in an 87-foot drilling rig that would be among the tallest structures in the city. The company would also build an enclosure to house the wells and reduce noise and gas emissions.
E&B will pay roughly 15 percent of the project’s oil revenues to the city, with the city’s general fund getting roughly one-quarter of that.
City officials estimate the general fund would get about $53 million over 35 years. The city’s Tidelands Trust Fund, which can only be used for coastal-related projects such as renovating the city’s pier, would get $148 million over that time.
E&B’s own estimate of the city’s windfall is much higher, based on higher assumptions for the total amount of oil that can be extracted and the price of that oil. The company estimates the general fund would get $140 million and the Tidelands Trust would get $310 million.
An additional $12 million total would go to the Hermosa Beach school district.
For supporters of the project, all that money is the biggest factor. They note that much of Hermosa Beach’s infrastructure is nearly 100 years old and is in need of repair, but that the city lacks capital improvement funds.
“Without raising taxes the city has no way to raise the $100 million or more to meet that infrastructure backlog,” said Jim Sullivan, a commercial real estate broker and longtime city resident. “And if the city has to raise taxes, that will hit both businesses and residents.”
On the other hand, if the project goes forward, Sullivan said Hermosa Beach would be one of the most financially stable cities in the region.
“And that’s great for attracting both new businesses and residents,” he said.
Catastrophic risks?
Opponents are focused on potential risks associated with drilling – from pipeline leaks and explosions to health impacts from prolonged exposure to drilling operations. They’ve taken to referring to the 750 homes closest to the site as being “in the kill zone.”
“If anything goes seriously wrong, many people would lose their lives,” said Stacey Armato, a local attorney and committee chair for opposition group Stop Hermosa Beach Oil.
Their other major argument is that the drilling operations would disrupt the quality of life in the beachside town and cause property values to slide. Real estate agent Lurie said that would directly impact her business.
“People won’t move here and buy homes. They will hear and see and smell the oil drilling operations,” she said. “They also won’t be able to sell their existing homes. Who is going to buy a home 200 yards from the drilling site?”
E&B’s Layton said opponents are overreacting and spreading misleading information about the project. One example: He said opponents have warned of the dangers of trucks loaded with oil from the site crashing in the neighborhood, but all oil from the site will be transported by an underground pipeline.
He also disputed the notion that property values would decline and said E&B will set up a fund that will pay up to $20 million to homeowners if they can prove the project hurts the value of their properties.
“We’re putting our money where our mouth is,” he said. “We wouldn’t be making that commitment if we believed there would be widespread declines in property values.”
This story contained several errors and mischaracterizations regarding an oil drilling proposal in Hermosa Beach.
A drilling rig described as noisy would meet city noise limits; oil wells described as unsightly would be covered and not visible to the public; and a drilling site described as surrounded by homes is close to homes but adjacent to light industrial businesses.
A drilling ban in the city was reinstated in 1995, not 1994. If city voters vote to keep that ban in place, the city will owe E&B Natural Resources $17.5 million plus interest.
E&B estimates the city and a city-run trust fund would receive $287 million and $234 million, respectively, from the oil project. The story quoted lower figures inaccurately attributed to E&B.
Also, Jess Lurie, a real estate agent and co-partner in the Water’s Edge Group with Keller Williams Beach Cities, was misidentified. The story should have used the phrase “her business.”
