BILL ANALYSIS �
AB 2711
Page 1
Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON NATURAL RESOURCES
Wesley Chesbro, Chair
AB 2711 (Muratsuchi) - As Amended: April 21, 2014
SUBJECT : Oil and gas: loan to City of Hermosa Beach
SUMMARY : Loans the City of Hermosa Beach (City) $17.5 million
to pay the liability it will incur if City voters reject a
November 2014 local ballot initiative to approve an offshore oil
lease on City tidelands. Requires the City's loan payments to
be deposited into the State Coastal Conservancy Trust Fund to be
used, upon appropriation, by the State Coastal Conservancy
(Conservancy) for expenses related to its Climate Ready Program.
EXISTING LAW :
1)Creates the California Coastal Sanctuary Act of 1994, which
does all of the following:
a) Makes findings and declarations that offshore oil and
gas production in certain areas of state waters poses an
unacceptably high risk of damage and disruption to the
marine environment of the state.
b) Establishes the California Coastal Sanctuary, which
includes all state waters subject to tidal influence west
of the Carquinez Bridge, except as to oil or gas leases in
effect on January 1, 1995, unless the lease is deeded or
otherwise reverts to the state after that date.
c) Generally prohibits a state agency or state officer from
entering into any new lease for the extraction of oil or
gas from the California Coastal Sanctuary.
2)Authorizes the Conservancy to address the impacts and
potential impacts of climate change on resources within its
jurisdiction. Authorizes the Conservancy to undertake
projects within its jurisdiction, including, but not limited
to, those that reduce greenhouse gas emissions, address
extreme weather events, sea level rise, storm surge, beach and
bluff erosion, salt water intrusion, flooding, and other
coastal hazards that threaten coastal communities,
infrastructure, and natural resources.
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THIS BILL :
1)Authorizes a $17.5 million loan from the state's oil and dry
gas revenues, which shall be paid to the City if the City is
obligated to make payment pursuant to Section IV.4.6.c of "The
Settlement Agreement and Release" entered into on March 2,
2012, between Macpherson Oil Company (Macpherson), Windward
Associates, E&B Natural Resources Management Corporation
(E&B), and the City. (Section IV.4.6.c of the settlement
agreement is explained in more detail below.)
2)Requires the City to annually pay the state at least $500,000
until the loan is paid in full.
3)If the City fails to make a payment, requires the Controller
to deduct the payment from the City's sales and use taxes.
4)Requires the City's loan payments to be deposited into the
State Coastal Conservancy Trust Fund to be used, upon
appropriation, by the Conservancy for expenses related to the
Conservancy's Climate Ready Program.
FISCAL EFFECT : Unknown
COMMENTS :
1)Background . In 1919, the Legislature granted the City, in
trust, administrative control of the state's tide and
submerged lands located off of the City's coast. The City
must manage these lands for the benefit of the people of
California and consistent with the public's right to use
California's waterways for commerce, navigation, fishing,
boating, natural habitat protection, and other water oriented
activities.
In 1932, the voters of the City enacted a ban on all oil and
gas operations within the City, declaring such activity to be
both unlawful and a public nuisance. In 1984, to generate the
funds needed to acquire open space and parklands within the
City, the voters adopted Propositions P and Q, city
council-sponsored ballot measures that would allow slant
drilling from two onshore sites into oil and gas deposits
located within the City's granted tide and submerged lands.
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In June 1986, the City published a request for proposals for
oil exploration and production at the two sites. Macpherson,
which had in 1976 proposed developing oil resources in the
City's tide and submerged lands and had been a leading force
in placing the 1984 ballot measures before the voters, was the
only company to respond to the City's request.
The City and Macpherson entered into an oil and gas lease in
1992. After signing the lease, Macpherson began efforts to
obtain permits and governmental approvals necessary for
production of oil and gas on City-owned property. On August
10, 1993, after an extended review process, the City approved
a conditional use permit for the Macpherson project. The
permit contained 140 conditions, requiring submission to and
approval by the City of a number of additional reports, plans,
and analyses prior to the issuance of any permit for
commencing work.
Beginning in April 1994, the Hermosa Beach Stop Oil Coalition
(Stop Oil) began a campaign to qualify a ballot initiative to
end the Macpherson project and to reinstate the comprehensive
prohibition on oil drilling in the City. The measure,
Proposition E, appeared on the November 1995 ballot and was
approved with 56 percent of the vote.
Notwithstanding Proposition E's adoption by the voters, the
City continued to perform under its lease with Macpherson
based on its concern that it would face legal exposure if it
terminated the lease agreement. When notified of the City's
decision to continue to respect the lease agreement, Stop Oil
commenced a lawsuit on June 9, 1997 for declaratory and
injunctive relief to require the City to apply Proposition E
to the Macpherson project. Stop Oil named the City as a
defendant and identified Machperson as the real party in
interest.
In its complaint, Stop Oil asserted that application of
Proposition E was not an unconstitutional impairment of the
City's contractual lease obligations with Macpherson, and that
the lease gave the City the right, as a matter of contract, to
apply Proposition E to terminate the project and to terminate
the City's contractual obligations to Macpherson without any
liability to the City.
In February 1998, the City retained a company to perform a
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risk analysis on the project. On September 17, 1998, the City
Council held a meeting regarding the risk analysis report. A
contributor to the report testified that the production of
methane from the project posed a "substantial" risk to the
health and safety of nearby residents.
On December 8, 1998, the City Council adopted Resolution No.
98-5950. Relying on the risk analysis report, the resolution
stated that the Macpherson project "presents an unreasonable
risk of harm to persons who live, work and recreate in close
proximity to the project site." The resolution further stated
that "Those who live and work in proximity to the project site
should not be forced to live in perpetual fear of occurrence
of a catastrophic and potentially fatal event."
Macpherson filed a cross-complaint on December 10, 1998
against the City for breach of contract, alleging that the
risk analysis report did not demonstrate any previously
unknown or undisclosed risk that had not already been
appropriately mitigated or dismissed as not significant. The
City answered, asserting that it was entitled to exercise its
discretion to deny further permits and thus to terminate the
project based on public safety concerns identified in the
report.
On November 17, 1999, the trial court entered final judgment
denying Stop Oil's complaint for injunctive and declaratory
relief. The trial court found that application of Proposition
E to the oil project would "constitute a total and
unconstitutional impairment" of the lease between Macpherson
and the City. Stop Oil appealed the judgment.
On December 8, 2000, while the appeal was pending, the trial
court entered judgment on Macpherson's cross-complaint. The
trial court found that Macpherson's sole remedy was specific
performance and ordered the City to honor the lease.
On January 24, 2001, the appellate court issued a judgment on
Stop Oil's appeal. The essential issue was "whether
reinstatement of a total ban on oil drilling within the City,
adopted through the initiative process in November 1995
(Proposition E), constitutes an unconstitutional impairment of
the 1992 lease agreement between Macpherson and the City for
oil and gas exploration and production on City-owned
property." The court held that Proposition E did not
AB 2711
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unconstitutionally impair the lease and thus reversed the
trial court's judgment on Stop Oil's complaint. However, the
court did not reach the issue of whether Macpherson has a
viable claim against the City for breach of the lease based
upon the voter's 1995 passage of Proposition E.
The parties subsequently engaged in protracted litigation over
whether Macpherson had a claim for damages for breach of the
lease. Macpherson was seeking more than $700 million in
damages. The City asserted that it did not breach the lease
because the passage of Resolution No. 98-5950 "precluded City
officials from issuing McPherson a drilling permit, the
procurement of which was a condition precedent to McPherson's
contractual right to drill for oil."
During the litigation over damages, E&B, an unrelated
third-party oil company interested in obtaining the rights to
Macpherson's lease, approached the City and Macpherson with a
plan to settle the case. A settlement agreement was executed
by all of the parties on March 2, 2012, which consists of the
following terms:
E&B will provide Macpherson with a settlement
payment and a small percentage of the oil revenues in
exchange for assignment of the oil lease to E&B.
The City will place a measure on the ballot for the
electorate to decide whether E&B should be allowed to
drill. (The measure will likely be placed on the
November 2014 ballot.)
If the ballot measure passes, the City will pay E&B
$3.5 million through deductions from royalties otherwise
due to the City through the lease.
If the ballot measure fails, or if the measure
passes but the lease is denied for any reason other than
an action or inaction undertaken solely by and under the
control of E&B, the City will pay E&B $17.5 million.
(This specific provision is contained in Section IV.4.6.c
of the settlement agreement and is referenced in the
bill.)
The City and Macpherson will dismiss their pending
lawsuit.
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The ballot measure is currently planned for the November 2014
election.
1)E&B's Proposed Operations . According to the draft
environmental impact report for the E&B project, the project
will include "an onshore drilling and production facility site
that would utilize directional drilling of 34 wells (30 oil,
four water injection) to access the oil and gas reserves in
the tidelands (pursuant to a lease granted by the State of
California to the City) and in an onshore area known as the
uplands." In addition, the project "would result in the
installation of offsite underground pipelines for the
transportation of the processed crude oil and gas from the
Project Site to purchasers, extending through the Cities of
Redondo Beach and Torrance." The lease provides for a 35-year
drilling period.
2)If the ballot measure fails, how will the city pay the $17.5
million due to E&B ? According to the City's website:
The city has earmarked $6 million already to pay for a
portion of the debt, and it may need to issue
municipal debt in order to raise some of the funds to
pay E&B the remainder of the $17.5 million, payable
over 20 or 30 years. It may not be necessary to adopt
new or increased taxes to pay the principal and
interest payments on the debt, but it is presently
uncertain whether some services would be reduced or
eliminated in the absence of some type of increase in
revenues. The city's Cost/Benefit Study will include
an examination of ways to pay the debt and the
potential financial impacts on the city.
3)The Conservancy's Climate Ready Program . The
Conservancy's Climate Ready program focuses on projects
protecting important coastal resources and habitats from
the current and future impacts of climate change. The
Conservancy is collaborating with local partners and
other agencies to reduce greenhouse gas emissions and
prepare communities along the coast and within the San
Francisco Bay for climate change. SB 1066 (Lieu, Chapter
611, Statutes of 2012) gives the Conservancy explicit
authority to work with its partners on projects to
address the effects of climate change on coastal
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resources along the coast and within the San Francisco
Bay Area, including those that accomplish the following:
Prepare our communities for extreme weather
events, sea level rise, storm surge, beach and bluff
erosion, salt water intrusion, and flooding;
Address threats to coastal communities, natural
resources and infrastructure; and,
Reduce greenhouse gas emissions.
This bill will provide the Conservancy's Climate Ready
Program with a steady flow of revenue for approximately
35 years, as the City's annual loan payments will be
deposited into this program.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Mario DeBernardo / NAT. RES. / (916)
319-2092