Well-Drilling Firm Clarifies Its Disputed Letter Over Oil Revenue

A company that wants to sink up to 30 oil wells in Hermosa Beach has clarified a letter that opponents charge gives misleading figures about how much revenue the city of Redondo Beach has received from wells there in the last 33 years.

Macpherson Oil Co., based in Santa Monica, has a prospective contract with the city to sink wells at the city maintenance yard at Valley Drive and 6th Street. Its plan has come under attack before the Planning Commission, which is holding hearings on a draft environmental impact report for the project and a conditional-use permit for it.

Company President Don Macpherson Jr., in the disputed letter that was sent to residents in late August, stated that “in the 33 years of production, Redondo Beach has generated over $70 million in oil revenue.”

Memo to Council

Macpherson clarified the letter in a memo to City Council members last week. He wrote that his letter “did not state, nor was it intended to imply, that the city of Redondo Beach has generated over $70 million in oil revenue.”

Rather, the letter meant to give Macpherson’s estimate of the total value of the oil retrieved from the field under Redondo Beach. Macpherson said his company arrived at the dollar amount by multiplying the average per-barrel price of oil each year since 1956 by the production for that year, then added the annual revenues. Records show that 8.8 million barrels of oil have been recovered from Redondo Beach since 1956.

According to Sheila Schoettger, Redondo Beach’s harbor director, the city has received about $14 million as its share of oil revenues over the 33 years. The city’s contract calls for it to receive 18% of the tidelands and 2% of the upland oil revenue.

Extrapolating from the Redondo Beach experience, Macpherson said that because oil costs more today, Hermosa Beach in the next 35 years stands to make an even greater royalty than Redondo Beach has. Macpherson said based on a city consultant’s figure for the amount of oil underground, he estimates that the city would receive $22.8 million in 1989 dollars. The consultant, Richard Hester of Glendale, estimated that there are 9.4 million barrels of oil under Hermosa Beach.

Macpherson’s own consultants, however, estimate the reserves at three times that.

In 1986, the city awarded Macpherson a 35-year lease to drill for the oil. Under the present contract, the city would receive 18 2/3% of the revenue from the sale of the oil.

Macpherson’s clarification letter was prompted by comments of two drilling opponents who had challenged the figures at a recent hearing before the Planning Commission.

“I would say it’s not just misleading, it’s false,” George Sacks said. “Any clarification like that doesn’t correct it, it just proves it.”

‘Production Has Fallen Off’

Brent Harris, a financial analyst and opponent of the project, said that how much Redondo Beach received is not the issue.

“Whether (the revenues) are $70 million or not, it is clear that (Redondo Beach’s) production has fallen off dramatically” and this has significance for Hermosa Beach because Redondo Beach is draining oil reserves from under Hermosa Beach.

In 1986, the State Lands Commission, in a letter to then-Hermosa Beach City Manager Gregory Meyer, concluded that wells in Redondo Beach were drawing oil and gas from deposits under Hermosa Beach.

Oil production in Redondo Beach has dropped to about 45,000 barrels a year, down from a peak of 705,000 in 1958.

But Macpherson said that Redondo Beach only could have drained oil from the border lands between Hermosa Beach and Redondo Beach and that the bulk of the deposits remain untapped.

The current arguments are the latest in a dispute over whether the city should go ahead with the project.

Harris, in a letter to the City Council, estimated that the city could lose money on it. He said Macpherson’s estimates of oil prices are overly optimistic.

Burdened by Costs

Harris also said the city would be burdened by the costs of buying and cleaning up the South School, as well as relocating the city maintenance yard. Under the current plans, the city would move maintenance work elsewhere to make way for the drilling rig, while a portion of the South School site would be used by Macpherson for an oil separation facility.

Macpherson said Harris’ estimates are “riddled with errors, omissions and false assumptions.”

In a response to Harris’ estimates, he said that if the project is unsuccessful, the city would not suffer a loss because it is not investing the money for the project. He also said that the city’s purchase of the South School site would have no effect on the revenue it would receive from the project and that the project could go forward without the site. He also said the maintenance yard could continue at its present location unless it needs to expand.

Hermosa Beach City Manager Kevin Northcraft said the city is planning to purchase the South School site regardless of the oil project. They are negotiating the purchase with the Hermosa Beach City School District.