Hermosa Beach OKs Lease for Oil Firm to Drill in City Yard : Resources: City hopes for millions of dollars in revenue, but the 7-year-old proposal still faces regulatory obstacles.

After years of debate, the Hermosa Beach City Council on Tuesday night approved a lease with MacPherson Oil Co. for oil drilling at a city maintenance yard. But officials cautioned that the plan must still negotiate a maze of governmental agencies and might never become reality.

Dozens of permits are required before the first of 30 proposed wells is drilled. The biggest obstacle is the state Lands Commission, whose staff says it cannot approve the project because there is insufficient underground drainage in the city.

“We don’t believe we can approve the lease,” Jim Trout, the commission’s assistant executive officer, said Wednesday in Sacramento. “That is not a political decision. That is a professional petroleum engineering decision.”

The commission staff had previously found that there is adequate underground drainage for oil drilling but reversed its decision in July. Councilman Charles Sheldon, a supporter of the project, said that the Exxon Valdez spill and a general opposition to offshore oil drilling affected the commission’s decision. Commission staffers, however, say their finding is purely technical. And Trout said the staff will review its finding if the city presents evidence to the contrary.

In the meantime, officials from both the city and Santa Monica-based MacPherson Oil hailed this week’s agreement as a critical step in the city’s seven-year quest to support its declining tax base with oil and gas revenues.

“It has been a long process,” said Don MacPherson Jr., the company’s president. “The agreement that we reached was the result of a long negotiation. There was a lot of giving and taking on both sides. . . . We’re happy that that phase is now behind us.”

The agreement permits MacPherson Oil, with the help of GLG Energy Inc., to drill 30 wells at the city yard at 6th Street and Valley Drive. The wells would be drilled at a slant to recover oil from reservoirs underneath the city and the offshore tidelands. A 160-foot-high tower would store the oil rig.

While no one knows when, or if, the project will clear all the governmental hurdles, a minimum of $500,000 a year is guaranteed to the city under the agreement once the wells begin producing. The city estimates that it would receive between $24 million and $92 million in oil and gas revenue during the 35-year lease. The Hermosa Beach School District would receive an undisclosed amount based on 20 cents a barrel of oil pumped from the site.

Revenues from the drilling had been agreed upon earlier, leaving two main issues for discussion: liability and the cleanup of any contaminants found on the site.

MacPherson Oil is required to provide $3 million in insurance to protect the city from liability. In addition, the company would be required to pay $4 million--and the city $2 million--toward an environmental disaster fund. The money would come from oil revenues.

The city is required, under the agreement, to pay the first $50,000 for the cleanup of any contaminants on the site. The company would pay the next $50,000. Any costs above $100,000 would be borne by the city through a loan from the company that would be paid back in oil revenues. If the company refuses the loan, the agreement would be voided.

Although a 1984 ballot proposition gave the city the go-ahead to drill oil, the 3-2 vote on the lease agreement Tuesday demonstrates the controversy that has lingered over some of the contract’s details.

Mayor Kathleen Midstokke and Councilman Roger Creighton, who both voted against the lease, said they favored the idea of oil drilling but had problems with the contract reached with MacPherson Oil.

Midstokke said the agreement should have made MacPherson Oil bear full liability for any problems. Creighton said he could not publicly discuss his objections to the contract because they were based on closed-door council discussions.

Hermosa had several wells in the late 1920s, but noise and fumes prompted the city to ban oil drilling in 1932. In 1984, voters revived the drilling idea, passing two pro-oil initiatives as a way to raise money to repair the city’s crumbling streets and sewers.

Since then, the proposal has crawled ahead amid arguments over how much revenue the city would get from drilling and how much noise and pollution would be generated. An environmental impact report was certified by the city last year after months of study and delay.

Councilman Sheldon said he is confident that the plan will go forward. He predicted that oil drilling could begin in as little as two years. MacPherson was even more optimistic. He said the company could clear the remaining hurdles by next fall.

Both Sheldon and Creighton are retiring from office next month, and 11 candidates are vying for their seats. And while the future council’s direction on the matter is unclear, oil drilling already has become a topic of debate in the campaigning for the Nov. 5 election.

Apart from action by the state Lands Commission, the project faces several other obstacles:

* The city must find another location for its maintenance yard. The two sites under consideration are a portion of the city-owned South School grounds, which also would be used for processing and storing the recovered oil, and an area next to the city’s Community Center off Pier Avenue. MacPherson Oil agreed to pay $21,000 under the lease to fund an engineering study on the issue.

* The lease agreement is the business relationship between the company and the city, but MacPherson Oil still needs a conditional-use permit from the city to meet local planning laws. The conditions put on the permit would be important in ensuring that MacPherson reduces the effects of noise, air pollution, vibration and traffic cited in the environmental impact report.

* A defunct oil well on the maintenance yard must be cleared away by the city before drilling can begin. The city is pursuing legal action against the operator of that well, Roy Stinnett, but officials refused to comment further.