Drilling down into the Hermosa Beach oil deal

City officials took the town by surprise with the Friday announcement that they had settled an epic $750 million lawsuit by a spurned oil company, ending a threat of municipal bankruptcy that had cast its cold shadow over the little town for 14 years.

But the settlement promises to revive an issue that once over-arched all others in the 19,000-person city, calling for Hermosans to vote yea or nay on an oil drilling project just like one they rejected 17 years ago in an often bitter civic battle.

Déjà vu, Hermosa style.

The settlement, hammered out on the city’s part by Councilmen Michael DiVirgilio and Kit Bobko, does away with a breach-of-contract claim by Macpherson Oil Company of Santa Monica, which had planned to slant-drill oil from under the Pacific Ocean, using a rig on city-owned land several blocks inland.

Under terms of the settlement, city officials will put forth a ballot measure to repeal at least part of a citywide ban on oil drilling, which was imposed by a previous ballot measure that was hotly contested in 1995.

If the ban is lifted, a separate oil company would be allowed to conduct the drilling project, having bought out Macpherson’s project rights for $30 million.

If the ban is not lifted, the city will pay $17.5 million to the new player in the game, Bakersfield-based E&B Natural Resources Management Corp. (Hermosa’s annual city budget is about $26 million.)

If the ban is lifted, the city would receive roughly 15 percent of the oil revenue under a complex royalty formula, unless it turns out there is little or no oil to drill, in which case the city would pay E&B as much as $3.5 million. The city school district would receive some level of royalties as well, on top of 20 cents per barrel of oil, under terms of the old Macpherson contract.

Money matter

City officials said the amount of money that could be earned depends upon how much oil would be recovered, and E&B was busy reviewing estimates of the oil reserve, to provide Hermosans with an estimated range of royalty earnings.

The question of how royalty money could be used remained to be answered as well.

Under state law, public revenue from undersea drilling may only be used for projects that benefit the tidelands, west of the mean high-tide line. But city officials said they did not yet know how the complicated tidelands restriction would apply to oil royalties.

Hermosa has used tidelands revenue from a large offshore communications cable to help rebuild its beach bathrooms.

E&B President Steve Layton said some of the oil drilled would be under the land, perhaps far enough inland to avoid the tideland restriction. He also said the city and schools would receive some money, such as property taxes based on oil production, from the use of city land not under the restriction.

E&B was looking at “third-party estimates” of the amount of oil that could be recovered, and will use that to estimate royalties, and then place the information before Hermosans, he said.

“We have that work product and we are comfortable with it, but before we make any public comments we want to thoroughly review it,”Layton said.

To the voters

By returning the whole oily issue to the voters, the settlement brings full circle 17 years of sweat, environmental studies, jam-packed City Council meetings, courtroom arguments, campaign battles and intense civic debate.

Dency Nelson, one of the most prominent environmentalists in a city that takes pains to brand itself green, expects the drilling issue to become the over-arching one all over again.

“My hope is that it will be the overriding issue in Hermosa Beach, and I think it will be,” said Nelson, a 29-year Hermosan.

He said it is “way too early” to take a position on the proposed oil project, which will undergo an environmental review by the city, and must pass muster with the California Coastal Commission. But, he added, “I have never, ever voted for oil drilling anywhere, anytime, anyplace.”

Nelson praised the settlement, however, and said it was hailed with relief at an informational meeting with Councilman Jeff Duclos and a number of other active Hermosa environmentalists.

“It’s a great relief for the city. The lawsuit was an albatross hanging around our neck. It was impeding any forward progress for the city. This albatross, this crippling burden, has been lifted,” he said.

“It’s not in the hands of the courts, it’s in the hands of the citizens ofHermosa Beach,” Nelson said.

He said the voters “have a fixed dollar figure” capping the city’s liability.

Despite “overwhelming support for the settlement” at the informal meeting, “a great deal of concern” was expressed over the possibility of oil drilling in Hermosa, Nelson said.

“My concern is that a company can say anything and promise much, but if something should happen, they can afford better lawyers than we can,” he said.

“And all this branding and forward progress we’ve tried to make, in a city that calls itself a ‘green idea city,’ it might be difficult for oil drilling to cohabit with that idea,” he said. “But I want to be pragmatic. Maybe there is the potential for lemonade to be made out of lemons, so I’m going to keep an open mind on this,” Nelson said.

Hermosa was the first municipality in the area to sign an international pledge to strive for carbon neutrality. It has imposed one of the region’s strictest outdoor smoking bans, and has won environmental awards for innovative storm drain projects to keep pollution from the ocean.

To the drill

Layton, whose fast-growing company produces oil and gas from more than 20 fields in California, Louisiana, Kansas, Wyoming and Texas, said E&B’s potential oil project is “essentially the same” as the one planned by Macpherson. But, he said, the technology is much more sophisticated, and computerized, for what is now called directional drilling, rather than slant drilling, in the industry.

He said directional drilling is common in urban areas, and E&B conducts directional drilling at oilfields including one underneathBeverly Hills.

“I absolutely believe this will be a safe project. I understand a lot of questions will be asked, and we are looking forward to the opportunity to provide answers, to explain what we want to do, how to do it safely, and provide the city with a strong source of revenue,” he said.

He said the city’s environmental review, a next step in the process, “will be a very, very good source of information for the voters.”

Under the terms of the Macpherson project, a pipeline would be built to carry oil from Hermosa, Layton said.

“Where that route would go is uncertain at this point, the answer would depend on the city’s environmental review, and where the market for oil would be,” he said.

His company could lose $12.5 million if Hermosa voters reject the drilling project, butLaytonseemed eager to cast his lot with them.

“The great thing about this is that the voters will get to decide, and that’s the way it should be,” he said.

Agreement reached

An April 4 trial had been set to decide the Macpherson lawsuit, which had wound its way up and down the court system for a decade and-a-half, as Macpherson tried to prove that a Hermosa City Council acted illegally when it unilaterally barred the drilling project as unsafe in 1998.

Then on Friday afternoon, Mayor Howard Fishman met with company presidents Don Macpherson Jr. of Macpherson Oil and Layton of E&B, at theRosecrans Avenuelaw office of City Attorney Michael Jenkins, where the trio signed the legal settlement.

About two minutes later Fishman made a conference call to reporters, announcing that “the crippling litigation” had been ended.

Fishman, crediting DiVirgilio and Bobko with negotiating the settlement, said, “During the past 14 years, the city has attempted several times to reach a resolution of this case. Today, we have finally succeeded. Recently, Hermosa Beach Councilmember Kit Bobko, Councilmember Michael DiVirgilio and Macpherson Oil Co began a dialogue about an innovative new settlement [with E & B Natural Resources as a third partner].

“After extensive negotiations, the city successfully reached an agreement that limits the city’s liability to $17.5 million and provides for an alternative that would reduce the amount to $3.5 million.”

Fishman further noted, “The voters of the City of Hermosa Beach will decide…whether the oil drilling project will go forward. Whichever course the voters choose, they can know that through this settlement, we have removed the cloud of crippling litigation that has been hanging over the city for the past 14 years.”

Officials said a ballot measure could be placed before voters within about a year.

‘Nearly impossible’

As recently as October 2009 Fishman, then a candidate for City Council, said an out-of-court settlement of the Macpherson lawsuit was “nearly impossible.”

At the time, attorneys for Macpherson were eyeing each other over a seemingly unbridgeable chasm.

The first settlement talks in more than a decade, brokered by then-Assemblyman Ted Lieu, had been followed by a $4.5 million settlement offer from the city, which Macpherson dismissed as a “nuisance value” amount.

Macpherson and the city had even taken the step of undergoing a two-day nonbinding mediation session led by Judge John E. Ryan, who presided over the landmark bankruptcy ofOrangeCounty.

The two sides sat apart while the judge shuttled back and forth, but no settlement resulted.

Doing the deal

Negotiations that led to Friday’s settlement began in early February, with a call from the oil company seeking DiVirgilio and Bobko.

“The first phone call was from Don Macpherson to us, suggesting we speak to E&B,” Bobko said.

“We met with E&B a few days later, and within days we were briefing the rest of the council,” he said.

Bobko and DiVirgilio said Macpherson sought them out because he felt he knew them better than other council members. The two had been prominently involved in earlier talks with the oil company, either as members of council subcommittees or as holders of the city’s rotating mayoralty.

“We consulted with our colleagues on the council at every turn, and advised them of the status of the negotiations,” Bobko said. “It was always a 5-0 vote.”

“Today is a momentous day for us. It’s a red letter day, it’s a fabulous day forHermosa Beach,” DiVirgilio said.

“This news is possible because of Don Macpherson’s willingness to settle,” with the help of an imaginative approach of E&B Resources, he said.

DiVirgilio said the costs to Hermosa are “reduced and capped.”

“It’s never going to be over $17.5 million,” he said, comparing that to the potential of a $100 million to $700 million court judgment against the city.

The most recent significant ruling in the lawsuit had come in early 2010, when a state appeals court told the city it could argue one more time that Macpherson’s oil project was so unsafe that canceling the drilling contract was legal. But, the court said, if the city failed to convince a jury on that point, the trial set for April would determine how much of that $750 million claim the city would have to pay Macpherson.

The city had spent more than $3 million preparing for the trial.

“We were burning about $200,000 to $300,000 a month on trial preparation, and it was going to spike. The burn rate was pretty substantial for both sides,” Bobko said.

“Everybody was spending a tremendous amount of money to get ready for trial, in what was a potentially apocalyptic lawsuit,” Bobko said.

“The city is not taking any money out of its hide to fund the settlement,” Bobko said. “E&B was generous enough to put $30 million on the table.”

A similar settlement could not be reached with Macpherson because “the city does not have enough money to pay Macpherson what he wanted,” DiVirgilio said.

E&B enters

Laytonsaid E&B volunteered to take part in the settlement process after noting the progress of the Macpherson lawsuit and studying the potential for oil drilling off the Hermosa shore.

“Oil resources in the Hermosa Beach area have been talked about for a long time in the industry,” he said. “The status of the [Macpherson] litigation…is something we looked at last fall, and with the upcoming trial, it seemed that circumstances were there for a third party to come in, in some fashion, and possibly facilitate a solution that might benefit everyone.”

Layton met with Don Macpherson early this year, and then both oilmen began meeting with DiVirgilio and Bobko.

“A line of discussion was always open [between the city and Macpherson], which is a good thing,”Layton said.

Neighborly talk

Former Councilman Gary Brutsch said he had a chance meeting with Macpherson, a former neighbor, on a pre-Christmas flight to Hawaii, and urged him to talk again to DiVirgilio and Bobko about the lawsuit.

Although the Brutsch and Macpherson families have been close, Brutsch had not seen the oilman in about 15 years, and knew he was unhappy about the battle with Hermosa.

“He is a businessman and a family man. He’s a straight up guy, and he did not want the city to go bankrupt,” Brutsch said. “I really didn’t know how to handle it, but then he came up to me.”

The two caught up, and then talked about the lawsuit.

Macpherson “said Michael had reached out to him recently,” Brutsch said, and after some conversation, Brutsch urged the oilman to keep the lines of communication open.

“I suggested he call Michael and Bobko,” Brutsch said.

Brutsch said he mentioned Bobko because he is familiar with him, and knew Bobko “wanted to solve this thing.”

DiVirgilio said he had been keeping in touch with Macpherson over a long period of time “hoping that a relationship might lead to something.”

The city posted the full settlement agreement on its website Friday.

Oily past

The history of oil battles in Hermosa goes back 80 years.

Near the beginning of the 1900s, seesaw style oil derricks were pumping up and down on locations along Sixth and First streets. Then in 1932 Hermosa voters banned oil drilling within the city limits.

In 1958 Shell Oil wanted to drill in Hermosa, and paid $500,000 for the chance to hold city elections to strike down the drilling ban. Shell failed to rescind the ban, but still paid the city the half million, which was used to help build a city pier that later was replaced with the current one.

In 1984 Hermosa voters approved Measure P and Measure Q, allowing limited oil drilling, in part to fund a city purchase of the greenbelt parkway that runs the length of the town.

In 1986 the City Council awarded a lease to Macpherson Oil Company for the slant-drilling project on a city maintenance yard atSixth StreetandValley Drive. In 1992 the lease contract was renewed.

In 1993 the group Hermosa Beach Stop Oil filed a lawsuit alleging that Macpherson’s project would violate state law as well as Measures P and Q. (The oil money was no longer needed for the greenbelt, which the city bought with voter-approved bonds.)

In 1995 Hermosa voters approved Measure E, which was backed by Stop Oil and once again banned all drilling in the city.

The City Council questioned whether the measure applied to drilling already under contract, and in 1997 Stop Oil filed another lawsuit aimed at forcing the city to halt Macpherson’s project, contending that it was indeed banned under Measure E.

In September 1998 the City Council halted the project by unilaterally canceling Macpherson’s lease contract, declaring the project too hazardous to the safety of Hermosans.

In December 1998 Macpherson filed its own lawsuit, alleging breach of contract by the city.