‘Town Lotters’ Gird for Oil Royalties Fight

Until recently, Betty and Floyd Kalessa never thought much about the oil that lies in the sandy soil far beneath their modest, two-bedroom home.

The Kalessas were content to receive a monthly royalty check of about $180 from the oil company that leases the mineral rights to their Belmont Shore property. The money helped the Kalessas make ends meet for two decades, especially after Floyd suffered a stroke in 1973.

A few months ago, however, the couple realized that the payments were beginning to dwindle. Their royalty had fallen to $9 by May.

The Kalessas and more than 8,000 other Long Beach leaseholders are getting less money because a complex reevaluation by state geologists has found that the oil beneath their land is poorer, both in quantity and quality, than previously believed.

At the same time, the state found that oil under its own land nearby was more plentiful and of richer quality. That increased profits for the state, which reaps about $300 million a year from crude pumped from under a state-controlled stretch of ocean adjacent to Long Beach.

“We feel like we’re being robbed,” said Betty Kalessa, 58. “We were depending on those checks for income. If it keeps going this way, I don’t know what we’ll do.”

Leaseholders Fight Back

The oil leaseholders in Long Beach are fighting back. About 300 residents have united to form the Long Beach Oil Royalty Owners Inc., a nonprofit corporation to battle state officials over the decisions that have eroded their monthly royalties.

Leaders of the group plan to lobby for legislation to restore the larger payments. In addition, a lawsuit has been discussed.

For the leaseholders, the stakes are great. They stand to lose a substantial portion of the more than $5 million they have received in royalties each year.

The royalty cuts have affected nearly all the leaseholders, a group of east Long Beach property owners that includes retirees living on Social Security and major landlords such as the city and the Long Beach Unified School District.

What the leaseholders have in common is owning property over a deposit of oil dubbed the Town Lot. They have already made some headway in their fight.

Assemblyman Dave Elder (D-Long Beach) told a recent gathering of the group that he would push for legislation restoring higher royalty payments to the leaseholders, who are known as the Town Lotters.

As many of the leaseholders see it, the state has manipulated intricate geological data that goes into the formula used to determine how profits should be divided.

“The state is playing with the numbers to make it appear that the best oil, and more of it, is under their land,” said Mel Wright, former chief geologist for the city who is aiding the leaseholders. “They’re picking out the numbers that help them and hurt the Town Lotters.”

State Denies Accusation

State officials say they have judged the geological factors correctly and maintain that the reductions in royalties are just part of the process.

“There’s been no concerted effort on the part of the state to hurt anyone,” said Rick Ludlow, staff counsel to the state Lands Commission, which controls the offshore oil sites. “We think we’re dealing fairly with the Town Lotters.”

That view obviously is not shared by the Town Lotters.

“I feel like someone has come into my house and picked up a purse full of money,” said Rose Buchholz, a silver-haired widow who is founder and president of the leaseholder group. “It’s a fine line, but the state has stayed within the law. Still, there’s been nothing fair about what they’ve done.”

The roots of the dispute date back to 1936, when oil was discovered in nearby Wilmington. During the months that followed, additional drilling revealed that the Wilmington Oil Field stretched more than 11 miles, from Redondo Beach in the north to the ocean off Seal Beach on the south.

While oil operations were launched in the harbor area, the crude beneath the eastern part of Long Beach was left untapped because of concern that derricks would spoil the residential ambiance. City officials also worried that removal of oil would cause land in the neighborhoods to sink, a phenomenon called subsidence that had already occurred in the harbor area.

During the 1950s, however, the subsidence problem was solved. Oil operators found that water could be injected into the ground to replace the oil and keep the land from sinking. The procedure opened the door for development of the southern flank of the Wilmington Oil Field.

3-Power Control

After three years of negotiations, the Long Beach Unit oil operation was formed in 1965 by the state, the city and oil companies that had bought up mineral rights from the owners of Town Lot property.

The group built four offshore oil islands, from which all drilling operations are handled on a collective basis. By using a process called “slant drilling,” oil operators on the islands are able to drill at an angle for miles in any direction to reach rich deposits of crude far inland or out at sea. So far, more than 600 million barrels of crude have been pumped from the field, which is expected eventually to yield more than 1 billion barrels.

Meanwhile, the task of deciding who owns the oil has proven far more difficult.

Several complicated geological factors go into measuring the quality and quantity of crude beneath a parcel of land. Among them are the depth of the deposit and the composition of the soil. About 70 equations and more than 1,500 separate factors go into the so-called “equity formula.” The formula determines what percentage of profits each Town Lotter gets from the oil field.

To oversee use of the formula, the Long Beach Unit established a three-member equity committee representing the state, the city and owners of leases in the Town Lot.

As drilling has continued over 20 years, additional geological data on the quantity and quality of oil under each parcel has been produced. Periodically, the equity committee decides what data will be plugged into the formula. Over the past 20 years, the committee has reevaluated the oil field six times, most recently in 1984.

But what was supposed to be a democratic process has become a dictatorship, the Town Lotters say.

State Got City Vote

Although the city owns much of the sea bottom off its shores, the state has the rights to all offshore oil. Because of that, the three parties in the equity committee agreed that the state would have both its vote and control of how the city votes. Thus, the state--with the two votes it controls--can dictate the outcome on all matters.

Leonard Brock, a former oil properties director in Long Beach, said the state began using its votes to its own advantage in 1980. Until then, the reassessment votes generally favored the Town Lotters.

“Everything was working well for years,” said Brock, who is assisting the royalty owners. “The problem is that now the state has some overzealous individuals working on this. All they’re trying to do is get everything possible for the state.”

Ludlow of the Lands Commission insisted that all decisions are made ethically.

“To sit back and ignore the information our geologists find would be negligent,” Ludlow said.

He said the Town Lotters could take any dispute before an arbitrator--something the group has done twice. In one case, an arbitrator ruled against the Town Lotters; that setback in 1984 led to the current royalty cutbacks. A second arbitration session is in progress.

Ludlow said the leaseholders have been hit hard because re-adjustments in the profits are retroactive to 1965, when drilling began. Because of that, a minor reduction can cause the royalty checks to decrease by as much as 50% until the reduction is paid off.

Retroactive Reductions

“All the changes in royalties go back about 20 years,” Ludlow said. “That’s what hurts.”

Buchholz said that for many leaseholders, the monthly royalty checks are simply “pennies from heaven” and the cuts will not dent their budgets. But others, such as the many elderly people living in the area, feel the sting more, she said.

“Nobody has been spared,” Buchholz said. “Some of these poor little women sit at home and cry because they need this money.”

Alleyne Clark, 83, said she has not received a royalty check since January. Clark said she used to get about $40 a month, which she used to supplement the Social Security benefit she lives on.

“I had really depended on it after all those years of getting checks in the mail,” she said. “I don’t know if I have enough Social Security to see me through.”

To Clark and many other Town Lotters, the reasons behind the reduced royalty checks remain a mystery.

“Certainly the oil hasn’t decreased, has it?” she said. “I don’t see any rhyme or reason to it. I don’t see why the state is so rabid about it.”

Leonard Putnam, a former city attorney who helped Buchholz organize the leaseholders group, said many Town Lotters have been kept in the dark.

“They’re in no position to query or protest,” Putnam said. “As it is, there’s no real representative for the Town Lotters, and the state is in no position to talk to them one at a time.”

Large landowners also have been affected. The school district, which owns property in the Town Lot, expects to lose about $400,000 during the coming year because of royalty cuts. Several churches, businesses and other organizations also reported declines in their monthly payments.

Church’s Income Slashed

To Grace Methodist Church, for instance, the reassessment meant a cut from $2,700 a month to about $160, according to Virginia Remick, administrative assistant at the church.

“That was a source of income we really depended on,” Remick said, adding that several church programs had to be cut. The church is now making do mainly with the weekly offerings of its members, she said.

“We’re just hoping things are worked out so we can get the money back,” Remick said.

Buchholz said the nonprofit corporation should help give the leaseholders a voice. She said she decided to organize the group in January, when she got sick of seeing her royalties diminish.

Starting from scratch, Buchholz spent hours telephoning leaseholders and urging them to get together. No master list of owners’ names was available, so Buchholz got them from tax rolls.

Efforts to form a coalition of Town Lot leaseholders have failed on three previous occasions.

“Always before, people just weren’t riled up enough,” Buchholz said. “But when these severe reductions hit, I knew it was time.”

Buchholz hopes to build a membership of more than 5,000 leaseholders within a year through word of mouth.

“I don’t know all the answers and I don’t know that there’s a quick fix for this,” she said.

“Maybe I’m a fool, but you know what fools and angels do: Fools rush in where angels fear to tread.”