Long Beach says new oil well setback law could have dramatic financial effect on city
As signature-gatherers work to qualify a referendum for state voters to decide if a new oil well setback law should go into effect, Long Beach is bracing for the potential financial fallout from the new law that could include the loss of upward of $20 million in revenue annually.
Senate Bill 1137 was signed into law this year and prohibits the permitting of new oil wells within 3,200 feet of “sensitive receptors,” which include residences, schools, health care facilities and parks and playgrounds.
The bill was authored by state Sen. Lena Gonzalez, who previously served as a member of Long Beach’s City Council, and also requires existing wells within the 3,200-foot buffers to begin to monitor leaks and emissions and install alarm systems.
The bill is slated to go into effect in January, but it’s the focus of a statewide signature referendum effort backed by oil companies to require voters to approve the law. If enough signatures are verified, the law could be postponed from going into effect until it can be placed before voters in 2024.
A memo posted by the city Friday said that the fallout from the law could mean that the city could lose between $6 million and $14 million in Tidelands Funds per year in oil production revenue in addition to lost sales tax, utility tax and property tax revenue. In total, the city’s financial hit could be as high as $122 million over the first five years of the bill, the memo said.
Long Beach officials had previously said the city intends to phase out oil production by 2035, 10 years ahead of the statewide goal of 2045.
However, city officials say the bill could affect the city’s ability to pay to abandon oil wells, and it could also affect the financing of large city projects like the new Belmont Beach and Aquatics Center, replacing the Belmont Veterans Pier and improvements to the Long Beach Convention Center.
“Right now, we’re expecting a fairly significant loss,” City Manager Tom Modica said in an interview Friday.
How much of a loss is hard to say.
Part of the issue is that the projections are based on a historically volatile commodity. The city’s memo shows two projections, one with a barrel of oil budgeted at $55 and another at $65. Both are conservative, considering the city says a barrel has averaged at about $70 for nearly two decades, with this year seeing prices jump up to around $130 per barrel because of the conflict in Ukraine.
Modica said that the pool project, which has grown to an estimated $119 million, would not be able to move forward as currently designed because the Tidelands Funds for capital projects would likely dry up by 2029 instead of 2035, which the city had planned for. The pool’s design would likely have to be reined in to bring the project cost down to between $62 million and $75 million for the city to afford it, he said.
“There really is not a path forward for the current project under 1137,” Modica said.
The pool project was expected to be presented to the City Council this month for a vote on a financing plan, but that has been postponed, Modica said.
Another large looming cost is oil abandonment. The city’s share of an estimated $1.2 billion cost has grown to $154 million. It currently has $70 million set aside, but if oil well production capacity is limited by 1137, which city officials believe it will be, the revenue generated by production that was meant to go toward plugging old wells would also dry up.
Bob Dowell, the city’s director of Energy Resources, said that there is a “fair part” of the city’s operation within the 3,200-foot buffer, including at least two of the city’s oil islands that sit off the city’s shoreline. Dowell said the city would have a better idea of how much of its wells are affected by the bill sometime in early 2023.
Dowell said that the city was planning to put about another $8 million toward abandonment costs this year, but those figures have not been finalized and could actually be slightly larger after end-of-the-year budget adjustments are finalized. It would still leave the city short by about $70 million in covering its share of abandonment costs.
The state has to cover the largest share at almost $940 million.
Gonzalez said Friday that the bill is critical to protecting the communities of color that have suffered from living in close proximity to oil operations, which studies have shown increases the chances of developing certain cancers and other illnesses.
She questioned the timing of the city’s memo, saying that cities across the state have known that an end of oil production was coming and that they needed to plan to switch to alternative revenue sources to pay for city expenses.
“Everyone has been dragging their feet,” Gonzalez said. “What’s next? We need to talk about that. This is going to happen.”
Gonzalez said she’d advocate for more funds for cities like Long Beach to help cover abandonment costs but said that the referendum effort being led by the oil industry was just an attempt to prolong their operations in the state.
“So far they’ve spent $20 million, and that’s money they could’ve spent on abandonment,” Gonzalez said of the industry.
The deadline for signatures to be gathered for the referendum ends next week, and if enough of the over 623,000 signatures needed to qualify the issue for the ballot are verified, SB-1137’s implementation could be delayed by roughly two years—or voters could simply reject it outright in 2024.
A delay in implementation could help cities like Long Beach, which are relying on oil drilling revenue to pay for their share of abandonment costs. But it would likely still require Long Beach to look elsewhere to fund big capital projects like the pool project.
Modica said the city will be participating in a special legislative session going on now in which state lawmakers are discussing capping the profits of big oil companies. Long Beach will ask for the state to backfill the revenue the city expects to lose if its oil production is phased out earlier than it anticipated.
“We’d like that to be considered,” Modica said. “This was a very sudden loss. We believe we’re one of the only cities that’s in this position.”
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