On-again, off-again oil deal sends a small city to court

The deal seemed straightforward enough. Hermosa Beach voters had overturned a 52-year-old ban on oil drilling, and a small Santa Monica company had signed the lease for the job, one that was supposed to earn the small city as much as $2 million a year.

But after more than a decade in court, not a drop of oil has been pumped from the ground. Instead, the deal that was supposed to solve the city’s financial problems and help fund schools threatens to send it into bankruptcy.

The state Supreme Court last month refused to review a lower court ruling that Hermosa Beach had breached its contract with Macpherson Oil Co. and ruled that a trial must be held to decide how much the city owes.

Macpherson’s lawsuit asks for damages of more than $100 million. The city’s latest settlement offer: $4.5 million.

“They never put a shovel in the ground,” Mayor J.R. Reviczky said. “For doing nothing, other than pursuing approvals, that’s pretty generous.”

The mayor said paying more than about $10 million would bankrupt the city.

James Bright, a former geologist who is Macpherson’s attorney, called that figure “absolutely untruthful or naive.” He said it would take $125 million to $180 million to send the city into bankruptcy. “They just don’t want to pay anything that’s inconvenient,” Bright said.

The only people who have made money so far are the lawyers. The city’s legal feels have hit $1.4 million. Donald Macpherson Jr., president and chief executive of Macpherson Oil, says his firm spent $6 million on the deal through 1998 but won’t provide more recent figures.

“I wish the project would have gone through,” he said. “It’s a really sad story.”

This is a fight that goes beyond the legalism of the courtroom and into the realm of human emotion. It begins with the aspirations of Macpherson’s father, Donald R. Macpherson Sr.

A former UCLA football player and Navy veteran whose ship the Japanese sank at Guadalcanal during World War II, Macpherson founded the company in 1960.

The Hermosa Beach project marked an important expansion, and it could have doubled the company’s production, his son said.

But the fortunes of drillers in Hermosa Beach, a city of about 20,000 residents, have teetered for years on the changing attitudes of voters.

The city banned oil drilling in 1932. A ballot measure to overturn the ban failed in 1958, but in 1984 voters passed an initiative that allowed drilling in a city maintenance yard and on a site the school district owned.

“This was good for the city,” said City Atty. Michael Jenkins. “This city had serious budget problems for a long time. In the post-Prop. 13 era, this could be seen as a panacea.”

Two years after the ban was lifted, Macpherson Oil was the only bidder for the leases. It estimated there were 20 million barrels of oil.

By then the younger Macpherson had moved through the company ranks, working on drilling rigs and then managing operations in Bakersfield.

He moved to Hermosa Beach to help the project get started, even becoming president of the local Chamber of Commerce.

Don Macpherson is now 56, with thinning hair and glasses. In a conference room at his Santa Monica office is a poster-size photo of the Venice canals taken in 1930, a forest of oil wells on the shore. It was a vision, he said, that became hard to dispel in Hermosa Beach.

The group Hermosa Beach Stop Oil went to court a couple of times to challenge the project in its early stages but lost. In 1995, the group gathered enough signatures to place yet another initiative on the ballot, this one to block drilling. Measure E passed with 56.3% of the vote.

What changed voters’ minds? Rosamond Fogg, the leader of Stop Oil, had argued that if the project went through, oil derricks would sprout along the California coast. In a recent interview, Fogg, who now lives in San Pedro, called the project “bigger, dirtier, more intrusive and more dangerous than what had been represented before.”

Macpherson said Stop Oil used scare tactics, with posters of oil wells aflame.

Measure E left city officials in a quandary. “The question we faced, obviously, was what do we do?” Jenkins said. “Does it apply to the lease or doesn’t it?”

The council decided that the initiative couldn’t be applied retroactively and that the drilling deal was still a deal. Hermosa Beach and Macpherson pushed forward.

In 1997, Stop Oil sued the city to shut down the project.

The company, meanwhile, had received its state permits. All it needed was the council sign-off. “It was the final leg of what truly had been a marathon,” Jenkins said.

The council met in September 1998 to listen to one final risk analysis report. Its chambers were filled with more than 200 No Oil supporters. People sat on the floor and spilled into the foyer and the parking lot, holding placards and fake skeletons.

Sitting on the right side of the room were Bright and the Macphersons, Sr. and Jr.

The report found the project “safe as any comparable modern operation.” It said that over 35 years, there was one chance in 7,000 of at least one death and one chance in 700 of one or more serious injuries.

Councilman Sam Edgerton questioned the report’s author, Frank Bercha, and Bercha called the risks “substantial.”

When Macpherson Jr. spoke, he didn’t seem worried, telling the council he was happy with the report. “Macpherson Oil Company would not be involved in a project that was not safe, nor would our insurance companies be involved in a project that is not safe.”

But the son recalled that as he watched the drilling plan collapse, Macpherson Sr. turned to him, anger flashing in his eyes. “Can’t you do something?” he asked.

There was nothing to do. The council voted to end the project. The son said it was one of the most helpless feelings he’d ever had.

Francis Barker, a close friend of Macpherson Sr. and a company director, went home from the meeting and had a heart attack.

The senior Macpherson died nine months later at age 79. “He was deeply depressed,” his son said. “Did that lead to his early demise? It may have. It sure didn’t help.”

Not long after the council meeting, Macpherson said, he told City Manager Steve Burrell that if the city paid him the $6 million he had spent on the project, the company would walk away.

“Burrell calls the council and calls me back and says, ‘We’d rather take our chances in court,’ ” Macpherson recalled. Burrell said he didn’t remember the conversation “but that would be exactly the way I operate.”

Macpherson sued.

Since then, the two sides have spent more time in court than Judge Judy, with one side winning and then the other. In 2001 a court ruled Measure E could indeed block the project. But this year a court ruled that, because the project was scuttled, the city had breached the contract and owed Macpherson damages.

“No one in their wildest dreams could imagine this is where we’d end up,” Reviczky said. “It’s incredible.”

Settlement offers have come and gone, most of them coming from Macpherson, with the company’s numbers growing as its legal standing strengthened.

Interviews and letters provided by Macpherson detail the settlement offers.

The city, early on, offered to settle for $2 million. Macpherson offered to go away for $4.5 million in 2001. In 2002 Macpherson said he wanted $17.5 million after “my position in the litigation significantly improved.”

By 2007, Macpherson’s price had grown to $24 million.

Macpherson’s latest settlement offer was about $34 million, according to Reviczky. In July, the city offered $4.5 million.

Why $4.5 million? “That’s close to our cash reserves,” the mayor said. “It’s the only way I can pay him tomorrow.” The city’s insurance will not cover Hermosa Beach’s liability in this case, he said.

Reviczky added that Macpherson “feels insulted by the offer. I understand that.”

The major sticking point is that the two sides can’t agree on what makes up damages. City officials say they’re willing to pay Macpherson’s costs, but they want the firm to open its books.

Macpherson says he wants to be paid not only for his expenses but also for lost profits.

Current and former city officials say Macpherson is motivated by his father’s memory and that he already had lost interest by the time the project was killed.

“I don’t know how he can carry such anger so long,” Councilman Michael Keegan said. “A smarter man, in my opinion, would have gotten some money a long time ago and had it in bank and working for him.”

Macpherson says none of that is true. “Am I trying to do something to honor the passing of my father? No. But I think people ought to live up to their agreements, and governments ought to as well.”

The fight promises to hit the Legislature. Assemblyman Ted Lieu (D-Torrance) says he intends to reintroduce a bill this month to limit Macpherson’s damages to its costs.

An earlier version of the bill stalled.

But if this one passes, Macpherson said, he’ll challenge its constitutionality.

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jeff.gottlieb@latimes.com