Well Hasn’t Run Dry in Builders’ Search for Home Development Sites

Builders have started construction on 188 single-family homes on an operating oil field in Signal Hill, demonstrating how Southern California’s real estate boom is rendering some land more valuable for real estate development than for oil production.

Landowners and oil field operators historically have clashed frequently over whether certain oil fields should be shut down and converted to real estate uses--especially on land where oil production is declining, said attorney Tony Ciasulli, who represents Alamitos Land Co., and President Geoffrey Le Plastrier of project developer Le Plastrier Development Co.

But they say the Bixby Ridge housing development, to be built by the Irvine-based South Coast Division of Centex Homes, proves that the two industries can coexist peacefully, especially when property prices are rising in Southern California.

They also say the project offers hope for some relief, however limited, from the scarcity of land for new housing in the region.

“In some parts of Los Angeles, some of the only undeveloped land that’s left is in oil fields. As [oil] production diminishes and real estate values rise, these sites will be the logical places for in-fill developments,” Le Plastrier said.

Ciasulli, a partner in the Los Angeles office of Morgan, Lewis & Bockius, said Alamitos Land and the oil field operator, Barto-Signal Petroleum, worked out an agreement that makes room for the housing development by closing some--but not all--of the oil wells.

Although that may sound like a simple arrangement, Ciasulli said, landowners and oil field operators traditionally have clashed because of the “inherent conflict” in their respective interests.

In many oil field leases, Ciasulli said, the landowner grants the oil field operator rights to produce oil indefinitely, “as long as the oil wells produce in paying quantities.” In return, the landowner receives a portion of the oil production royalties.

The phrase “paying quantities” has been the subject of much dispute between landowners and oil producers over the years, according to Chris Hall, president of Torrance-based Drilling & Production Co., a consultant to Alamitos Land in the Bixby Ridge project.

The leases leave it primarily to the discretion of the oil field operator to determine whether the wells are economically viable, said Hall, whose company operates oil fields in the Bakersfield area and serves as a consultant on oil and natural gas matters.

Landowners and oil producers had fewer disputes about “paying quantities” in the early days of oil production in Southern California, when the wells produced prodigiously and landowners received hefty royalties. But whenever oil production dwindles, royalties plunge and property prices rise, a landowner’s thoughts turn to development.

“The situation is entirely different now. Land that was worth little or nothing for homes 50 years ago is now in the middle of a city and is in a prime location for new homes,” Ciasulli said.

Land-use decisions are complicated by the cost of closing down wells. Abandoning a well costs about $35,000 in the Los Angeles Basin, according to Hall. That’s because the well’s piping, pumps and equipment must be removed, the well must be filled with cement, and other measures must be taken in accordance with California Department of Oil and Gas regulations.

Oil producers are understandably reluctant to take on the expense of abandoning a well if they think it might be rendered more productive in the future by improved technology or rising crude prices, Hall said.

The solution at the Bixby Ridge project has been for Alamitos Land to pay the cost of abandoning some wells and rerouting most of the underground pipelines and electrical lines for wells that will continue to operate at the site, according to Ciasulli.

All told, the land company will have several million dollars invested in these costs by the time the project is completed, he said.

Le Plastrier, whose firm is based in Newport Beach, said the pressure to convert oil fields to real estate uses has grown tremendously in just the last few years because of rising property prices in Southern California.

“As I drive around Los Angeles, I see properties that wouldn’t have made any economic sense to develop five or six years ago that would make perfect sense now,” he said.

One of those, in fact, is the land underlying the Bixby Ridge project at Hill Street and Hathaway Avenue in Signal Hill.

Le Plastrier said the project wouldn’t have been profitable six years ago when he and Alamitos Land began planning the new homes there. The six years required for approval is about twice as long as the typical approval time for a residential project, Le Plastrier said.

Compared with standard residential developments, the Bixby Ridge project was “as different as flying a 747 is from flying a biplane,” Le Plastrier said.

He explained that the project was complicated by the presence of oil wells and the hilly terrain of Signal Hill, along with the time-consuming process of obtaining permits from the city of Signal Hill and the state oil and gas regulators.

There was also the need to design a site plan, including streets and infrastructure, in keeping with the current real estate market in order to attract a home builder.

The project would have been simpler if this were a flat piece of land without oil fields, or if the oil operator were simply abandoning the entire field, according to Le Plastrier.

“Building homes on abandoned oil fields is fairly common. Most of Huntington Beach and many other communities in Southern California are built on abandoned oil fields,” Le Plastrier said.

“There is a very well-established procedure for building housing projects over abandoned oil fields,” Le Plastrier said. “If you can get through the myriad problems, these sites are pretty well accepted by the market.”

Homes are rarely built directly atop an old oil well, Le Plastrier said, and in the case of Bixby Ridge, the wells that will continue to operate will be landscaped to make them unobtrusive.

Le Plastrier noted that Bixby Ridge, named for the pioneering Long Beach family that still owns Alamitos Land, isn’t even the first housing development to be built on or near an existing oil field. Los Angeles-based Kaufman & Broad built houses on a site close to the Bixby Ridge project in the early 1990s.

But the recession put the damper on such projects as housing values dropped. Home prices have only recently hit levels that make the oil field projects feasible, according to Le Plastrier. Both he and Hall said they expect many more such projects if real estate values continue to rise.

Centex hasn’t set prices for the Bixby Ridge homes yet, but they will probably be priced at “about $270,000 to $300,000,” said Nick Leonard, a Centex vice president.

After Bixby Ridge, Le Plastrier said Alamitos Land plans a 108-home development, now in its initial stages, across the street. These in-fill sites are in demand because they’re near facilities, services, jobs and freeways, he said.

Ciasulli said the approach offers an alternative to urban sprawl.

“Considering our shortage of land, if we can take property closer to the urban center that might be somewhat less than pristine and do something with it rather than abandoning it, we’re tremendously better off,” the lawyer said.