Summary

MACPHERSON OIL COMPANY v. CITY OF HERMOSA BEACH
LAWSUIT AND SETTLEMENT

The long-running lawsuit between Macpherson Oil Company and the City of Hermosa Beach over the City’s breach of the 1992 oil and gas lease between the parties has finally been resolved through an innovative three-party settlement involving E & B Natural Resources Management Corporation.  Macpherson, the City, and E & B Natural Resources entered into the settlement agreement on March 2, 2012, approximately one month before trial was scheduled to commence, thereby ending the 13 year saga of this lawsuit (details of which are provided below).  However, the story of the oil project has not quite come to an end.  As part of the three party settlement, E & B Natural Resources Management Corporation has assumed Macpherson’s position as lessee under the 1992 oil and gas lease, and Hermosa Beach voters will decide whether the oil project will go forward to the next level in a measure that is expected to be placed on a ballot in 2014.  A decision by the voters to proceed with the oil project for for further regulatory approval would result in the City and the City’s school district collectively receiving very substantial oil royalties; conversely, the voters may decide not to allow the project to go forward and instead elect to pay $17.5 Million in damages for cancellation of the project.

Because of considerable interest over the years and the wide-reaching implications associated with the Macpherson/Hermosa Beach lawsuit, below is an informational overview of the Macpherson Hermosa Beach project, the resulting lawsuit, and the innovative three-party settlement whereby E & B Natural Resources has assumed Macpherson’s position with respect to the project.  

EXECUTIVE SUMMARY

Background – The City’s Oil Riches

The City of Hermosa Beach could be one of the richest small cities in America.  The giant Torrance oil field extends beneath Hermosa Beach, both onshore and offshore.  This Hermosa Beach oil could all be produced from a single onshore urban drill site.  Urban drill sites have operated throughout the Los Angeles Basin for decades with no report of offsite casualties or catastrophes of any kind, providing millions of dollars to local governments and schools.  In 1984, Hermosa Beach voters approved an initiative to allow drilling from City owned property used as the City’s maintenance yard.  In 1986 Macpherson Oil Company was granted a lease through a sealed bid process to drill for oil from the maintenance yard, and, through royalties, share the revenue with the City and the Hermosa Beach school district.  The lease was renegotiated and amended in 1992 to include the City’s offshore Tidelands as part of the leased lands.  But following a 1995 ballot measure that banned oil drilling anywhere in the City, no oil has been recovered.  The Macpherson/Hermosa Beach lawsuit over the planned drilling, filed in 1998, was settled in 2012 under an agreement that could once again authorize drilling for oil from the City’s maintenance yard.  Documents filed during the lawsuit estimated the value of the lost oil production Macpherson would have received if allowed to proceed with the project under the 1992 lease with the City at more than $850 million.

The Macpherson/Hermosa Beach Lawsuit

In November 1995, City voters adopted Proposition E reinstating a total ban on oil operations within the City, including operations at the City’s maintenance yard.  Project opponents demanded that the City enforce Proposition E to stop the project.  On September 17, 1998, the city council voted to terminate the oil project Macpherson was to conduct under the 1992 lease.  Macpherson asked to recover the money it had expended upfront on the project during previous the 12 years as required by its leases.  The City denied Macpherson’s request.  Macpherson then filed its lawsuit against the City in December 1998, seeking the damages caused by the City’s termination of the oil project.

The Macpherson/Hermosa Beach litigation had a long and complicated history, bouncing back and forth between the trial court and the Court of Appeal.  A jury trial was scheduled to commence on April 4, 2012.

The Lawsuit Settlement

On March 2, 2012, Macpherson and the City of Hermosa Beach reached a settlement agreement.  The agreement called for a separate company, E & B Natural Resources Management Corp., to acquire Macpherson’s position in the project, and for a new election by Hermosa Beach residents to authorize oil drilling by E & B Natural Resources.  The settlement details:

• Macpherson was paid $30 Million in return for dismissing its lawsuit against the City and assigning its project leases and permits for oil drilling from the City’s maintenance yard to E & B Natural Resources Management Corp. E&B Natural Resources provided the $30 million cash settlement.  Of that $30 Million payment, E & B Natural Resources paid $12.5 Million from its own account and $17.5 Million as a loan on behalf of the City.
• At E & B Natural Resources’ expense, the City will place a measure on the ballot that will ask the City’s voters if they wish to repeal the existing ban on oil drilling and enter into a development agreement for E & B Natural Resources to complete the drilling project at the City maintenance yard.
• If the voters reject the ballot measure, the City will have to repay the $17.5 million of the loan from E & B Natural Resources. E&B Natural Resources will forgive the additional $12.5 million of the settlement payment.  Therefore, while the settlement with Macpherson was for $30 million, the city’s total potential financial exposure is capped at $17.5 million.  While that is significantly less than the $850 million in damages being sought by Macpherson, it is still nonetheless a significant amount of money for a city the size of Hermosa Beach whose total annual budget is around $27 million annually.
• If the voters approve the ballot measure and E & B Natural Resources secures all the necessary permits to drill, the City will only owe E & B Natural Resources $3.5 million, which would be paid from oil revenues from the project. Under this scenario, the city will have successfully settled the lawsuit with no out of pocket expense for the citizens of Hermosa Beach.
• Should the project go forward, the City will receive 15.33% of the project’s gross revenue as royalties, without any obligation to pay for any of the costs incurred to carry out the project.  Of that, only the royalties attributable to production from the City’s offshore Tidelands will be restricted in use.  All of the royalties from the City’s onshore Uplands and all of the separate drill site royalties that the City will receive on every barrel of oil produced through the City maintenance yard drill site (including oil from the City Tidelands) will be unrestricted and can be used for any purpose.  Macpherson will receive royalties of 4.83% of which 3.33% will come from the City and will not reduce the City’s 15.33% share, and 1.5% will come from E & B Natural Resources.  The Hermosa Beach School District will also receive revenue from the project.

Project Approvals by The City and Other Government Agencies

During 12 years of planning after receiving its initial lease from the City in 1986, Macpherson secured permits from the City and from other governmental agencies for the project.  Primary among these permits and approvals were:

• Environmental Impact Report.  The City prepared a comprehensive Environmental Impact Report or EIR studying safety and environmental issues.  The City certified its final EIR in 1990 and the city council adopted a Resolution approving the EIR.
• Conditional Use Permit.  After further extensive public hearings, the City issued its Conditional Use Permit or CUP for the project in 1993, with the city council adopting a Resolution approving the project.
• California State Lands Commission.  The City itself presented evidence at public hearings before the California State Lands Commission seeking approval of the 1992 lease.  The Commission granted its approval of the 1992 lease in 1992, and again in 1994.
• California Coastal Commission.  The City’s maintenance yard is located within the jurisdiction of the California Coastal Commission.  After years of study and public hearings, the Coastal Commission approved the Coastal Development Permit for the project in February 1998.

CUP Comparison

» CUP Comparison

Existing Lease

» Existing Lease »

» City Conditional Use Permit »