Does this oil company owe Seal Beach $9 million or more? Officials are drilling for answers

If you look a mile or so off the coast of First Street in Seal Beach you might see a sailboat cruising by. What you won’t see are oil wells deep beneath the water’s surface, under the floor of the Pacific Ocean, pumping out crude.

The offshore wells are at the center of a yearlong legal dispute between the city of Seal Beach and one of California’s largest oil companies. Millions of dollars could be at stake.

The city says California Resources Corp. owes Seal Beach more than $9 million. Officials say the company needs a local business license for its slant drilling operation, which started in 2005 and draws oil from roughly 30 offshore wells.

“The city strongly believes that CRC should have obtained a business license from the beginning of its operation, and that it should have paid business license taxes,” Assistant City Manager Patrick Gallegos wrote in a statement earlier this month.

The oil company strongly denies that assertion.

“CRC does not owe any such taxes,” Michael Mills, outside counsel for CRC wrote in a December letter to Seal Beach City Manager Jill Ingram.

In an October letter, Mills wrote that the “demand to CRC is without any basis in state law or the city’s municipal code. Because the demand is bogus, CRC hereby rejects it in its totality.”

Part of why the two parties are at odds is due to key characteristics of the oil operation at the center of the dispute.

The offshore wells in question are bottomed within Seal Beach’s municipal boundary but are not on city-owned land. They are on state-owned land that is leased to CRC. The crude is pumped from the wells to an offshore oil production facility known as Island Chaffee, which is owned by and located in neighboring Long Beach. Slant drills, which are diagonal instead of vertical, can reach wells from far away.

That crossing of boundaries, and how the Seal Beach municipal code addresses slant drilling from an adjacent city into state-owned land within the city’s border, is at the heart of the legal battle and the multimillion-dollar question: Is CRC required to have a Seal Beach business license?

Seal Beach’s search for oil revenue

CRC describes itself as “the largest oil and natural gas exploration and production company in California on a gross-operated basis” and last year recorded more than $3 billion in revenue. It operates numerous facilities in oil fields across California, including in Long Beach and in Huntington Beach.

Seal Beach has been struggling with rising costs for public safety and employee pensions. In November, voters approved a 1% sales tax hike to help alleviate what officials called a “structural deficit.”

A cyclist rides along Belmont Shore, with Island Chaffee in the background. Crude oil is pumped to Chaffee from wells off Seal Beach.

(Allen J. Schaben / Los Angeles Times)

For years, a consultant has been telling city leaders about what he calls millions of dollars in untapped oil revenue without publicly naming the sources. This so-called oil money was hailed as a way for Seal Beach to steady its finances. Hiring a consultant to recover oil revenue was even made into an official objective in the city’s strategic goals document.

At a council meeting in November 2017, elected officials were even considering borrowing money from a reserve fund for the community pool to pay for more police officers.

“It would be like manna from heaven” if the city got the oil money, then-Mayor Sandra Massa-Lavitt said.

The consultant, and the source of information for the city’s claims against CRC, is Laguna Niguel-based Greg Kirste, doing business as Municipal Petroleum Analysts.

After two previous contracts with Seal Beach, Kirste’s first oil industry audits for any city, MPA collected more than $200,000 in delinquent fees from an oil company. That was in 2014.

Kirste was set to sign a third contract with the city in 2015 when it was revealed that his sister and previous MPA business partner, Diane Ripley, had gone on a trip to Alaska with Ingram, the city manager, in 2014. The news raised eyebrows within the community of 24,000 because Ripley had been hired by Ingram, the beach town’s highest-ranking administrator, for city contracts. However, Ingram supplied receipts to show she paid for her trip expenses. Some residents alleged that the trip amounted to a conflict of interest, but an investigation by the Orange County District Atty.’s office did not lead to charges of wrongdoing.

Drilling for revenue continues

Seal Beach did not give up on its quest for oil revenue. In 2017, at the request of residents, the city entertained proposals from other consultants and held public workshops but took no action.

Then, in October 2017, Kirste submitted an unsolicited proposal, saying he had identified new sources of oil revenue.

“MPA is sufficiently certain these new sources will produce millions of dollars in new City revenue,” the proposal read.

He offered to be paid on a 15% contingency fee, promising, “no payments will be made to MPA if revenue is not collected.”

Negotiations between the city and Kirste lasted months, but on June 11, 2018, a new contract went before the City Council. As Kirste was to be compensated on spec, City Finance Director Victoria Beatley called it a “no-cost agreement.”

But there was an issue. Councilman Thomas Moore recused himself from a vote because Crimson Pipeline, a client of Moore’s employer, could be affected by MPA’s work for the city.

That left four council members to consider the contract.

Councilwoman Schelly Sustarsic and then-Mayor Mike Varipapa expressed concern over Kirste having just five years of experience — compared with other consultants who submitted proposals with decades of experience — and the contingency fee, unusual in government.

“If he actually has identified all of this money, we’re still giving away 15%,” Councilwoman Sustarsic said.

Varipapa recommended hiring another consultant, but that idea went nowhere.

Massa-Lavitt and Councilwoman Ellery Deaton supported hiring Kirste.

“We need the money, and we can’t afford to pay somebody to go out and start from ground zero,” Deaton said.

“You don’t need to be in the oil industry for 40 years and drilling wells to understand oil,” Kirste told the council members.

He said his background in research was exactly what the city needed and also noted the $200,000 he had brought into the city and said the contingency fee was proposed because of the city’s finances.

The council deadlocked 2-2 on the contract.

Kirste criticized the council members who voted against him in a letter to the Seal Beach Sun, a community newspaper.

“Each time Seal Beach residents pay a new tax, are missing a pool to swim in, can’t attend a cherished city event, or can’t quickly get the police, they should remember Mayor Varipapa and Councilmember Sustarsic and their vote against collecting OWED taxes,” he wrote.

Proposal returns for consideration

Kirste got a second chance. At the following council meeting, Moore asked for the contract to be rewritten to exclude Crimson Pipeline so he could vote.

On July 23, 2018, amid a budget crisis, the amended contract went before the council.

At that meeting, some local residents urged the city not to hire Kirste, including Ray Zeoli, an engineer who said he had worked for Occidental Petroleum, Shell and CRC and other oil companies over a 35-year career.

Years earlier, Zeoli had worked with the city and the Orange County Health Care Agency after he found out vapors were seeping into his neighborhood from gasoline leaks into soil and groundwater at a nearby Arco station.

A surfer rides a storm-drive big wave in Seal Beach.

(Allen J. Schaben / Los Angeles Times)

Zeoli, who had worked previously for ARCO, teamed up with his neighbors and successfully fought to get the leaks cleaned up.

“It was a nice, a good, example of the community working with staff, and I hope that this will have a ... happy ending,” Zeoli told the council.

Zeoli then outlined his concerns about the Kirste contract, including that he saw the consultant was the most expensive and the least qualified of the consultants who submitted proposals based in part on a brief resume — which did not include dates of employment — that Kirste provided to the public.

“We’ve been trying to get his resume for years. We did. We have a work history,” he said. “There’s not one project on there, not one client listed on there.”

In the end, a divided City Council hired MPA. Moore cast the deciding vote.

In September 2018, Kirste went to work, sending a letter to CRC’s chief financial officer demanding $9.3 million in uncollected taxes.

He now says the company owes Seal Beach $13.4 million. The figure is a calculation of past-due taxes and fees, plus penalties. It also includes Kirste’s 15% contingency fee of roughly $2 million.

“For fifteen years, out of view of residents and city officials, CRC slant drilled under Seal Beach and removed over 250 million gallons of oil without a city license or paying any license tax,” he wrote in a statement. “It’s unclear to MPA why CRC, the city of Long Beach’s oil field contractor, is challenging Seal Beach’s demand to obtain a business license.”

CRC fired back, noting how the consultant is being compensated.

“CRC disagrees with the city of Seal Beach’s recent and unusual contingency fee-based approach to pursue additional revenues by re-imagining its long-standing business license ordinance,” Mills wrote in a statement.

Letters outline legal arguments

Since September 2018, Mills and city officials have exchanged a series of letters outlining their arguments. Both sides point to the city’s municipal code, public records and case law to bolster their claims.

CRC says the operation is exempted by the code.

“Case law and the city’s municipal code clearly carve out extraction from state lands from its business licensing tax requirements, an exemption the city ignores without explanation,” Mills wrote in a prepared statement.

CRC points to a section of the municipal code titled “Scope” that precedes the Business Licenses and Regulations section for the chapter on Oil and Gas Production: “Nothing in this chapter shall be deemed to conflict with state laws concerning drilling for oil on state-owned tide and submerged lands. Nor shall the provisions of this chapter apply to drilling and production of oil where wells are located and bottomed on state-owned tide and submerged lands.”

The city disagrees. In a Nov. 15 letter to Mills, where italics were used for emphasis, Kirste wrote, “CRC’s wells are not located and bottomed on state-owned land and for this reason are subject to the city’s municipal code.”

In an April 19 letter, City Atty. Craig Steele responded, “the wells are not ‘located and (he added the boldface for emphasis of his own) bottomed on state-owned tide and submerged lands’ and the exemption upon which CRC has relied is not applicable.”

In a June 28 letter to Mills, Steele argued, “for the city’s requirements to not apply, both facts must be true.”

Kirste argued the “scope” part of the code applies only to the regulation of oil companies on state-owned land.

“An exemption from a ‘regulation’ is not the same as an exemption from a ‘tax.’ No oil company is exempt from the city’s business license tax,” Kirste wrote in a recent email.

Mills noted the ocean location of the wells in a May 1 letter to Steele. Mills wrote that the city’s code for out-of-city production applies to wells or portions of wells bottomed under any ‘real property in the city and added that “… the wells extracting oil … do not pass through and are not bottomed ‘under any real property in the city.’ ”

In February, Kirste reached out to the California State Lands Commission. Agency attorney Joseph Fabel declined to weigh in on the legal dispute and wrote in a letter “… opining on the application of local municipal law to the facts at hand would provide legal advice that we are unqualified and unauthorized, legally, to give.”

But Fabel did note that “the commission expects its lessees to pay all fees and taxes lawfully assessed on its state leases.”

In a recent email, the commission’s chief external affairs and legislative liaison, Sheri Pemberton, wrote: “The commission, as a general matter, does not collect or monitor a lessee’s business taxes paid to local governments.”

What about that $9 million?

Mills questioned the “math” used to determine that CRC owes Seal Beach millions of dollars.

The city code outlines taxes for three types of oil operations: non-production; in-city producers, where the wellheads are located in the city; and out-of-city oil producers, where parts of the well are in the city but the wellheads are outside municipal boundaries and accessed by slant drilling.

In-city producers pay a $150 base tax per well, a $30 annual oil well permit fee per producing well and a per-barrel fee that fluctuates based on the producer price index for crude oil but would never drop below 12.5 cents a barrel.

The tax for out-of-city producers is only 1 cent per barrel after the first 300 barrels.

The city’s calculation, outlined in a Sept. 26, 2018, letter from Kirste to CRC, charges the oil company as an unlicensed business and taxes them at the rate that in-city oil producers were paying for the past 15 years, plus a 25% penalty on fees and a 100% penalty on taxes. Kirste’s 15% contingency fee is also added to the total.

Steele defended the calculation in the June 28 letter.

“Seal Beach Municipal Code … states that when a business operator has failed to obtain a required business license, the city’s tax collector may determine the amount of tax to be paid,” he wrote.

This led to doubts among some residents who monitor the machinations of municipal government.

“I’m not an attorney, but this seems inherently unfair to me, and I would wonder if it violates the [U.S. Constitution’s 8th] Amendment prohibition against excessive fines,” Dr. Robert Goldberg, a Seal Beach resident, wrote in an email.

Goldberg, a government watchdog who keeps an eye on the budget, has been following Seal Beach’s quest to recover oil revenue for years. A former planning commissioner, frequent public speaker at council meetings and onetime applicant for the job of city manager, he’s also the resident who requested the Orange County District Attorney’s office’s investigation of City Manager Ingram’s trip to Alaska with Ripley.

“Assuming that the city is correct that the ocean bottom meets the legal definition of ‘real property,’ then I would agree that the city should be demanding payment for past due oil production taxes,” Goldberg said.

But Goldberg questioned the amount being demanded, saying it isn’t based on the rates charged to oil producers operating wellheads outside of city limits.

“At 1 cent per barrel and no statute of limitations, CRC would owe the city about $150,000, which includes a 100% penalty, Kirste’s 15% commission and our legal fees to date,” Goldberg wrote.

With a four-year statute of limitations, he estimated the figure to be just $50,000, “in either case — a small fraction of the $9.3 million that the city has demanded.”

And he has one more question: Why wasn’t the CRC situation discovered when MPA signed its first contract with the city in 2013?

“That contract specifically included discovery of any company, like CRC, which had wellheads outside of the city but slanted drill into the city,” Goldberg wrote.

Kirste declined to comment on that issue. But in a letter to Mills, Steele wrote, “Whatever you imagined Mr. Kirste may have learned in prior work, there is no doubt that the city first became aware of CRCs failure to pay business license taxes in 2018, and has diligently pursued the matter since then.”

Reached recently, Zeoli said he wants to stay out of the legal dispute.

“Let the attorneys figure this thing out,” he wrote in an email.

He was shocked to learn that CRC, his former employer, was the alleged tax delinquent and said confidentiality agreements barred him from talking about specific projects.

But he did say his concerns from last year remain relevant, especially when it comes to the potential costs to the city.

Kirste’s contract reads: “In any case where the city waives the right to collect a new revenue source that has ... previously been approved, city shall compensate consultant for time expended on the matter at the hourly rate of $200 per hour.”

“If Kirste’s claim against CRC is not valid or if the city decides not to pursue the claim, the city stands to lose a lot of money in attorney fees and potential hourly fees to Kirste,” Zeoli wrote in an email. “The ‘no cost’ sales pitch that Kirste and Seal Beach officials used to sell this to our City Council members was misleading, at best.”

What’s next?

A communication dated June 28 from Steele, the city attorney, to Mills ends with this: “This letter is the city’s final demand that CRC obtain a city business license for its operations immediately and pay in full all delinquent taxes, penalties, and costs along with currently due taxes.”

But things could be changing. Attorneys from both sides met in late July, notably without Kirste, and have been continuing to communicate.

“CRC will continue to work with the city to determine if there is an amicable way to resolve this disagreement,” Mills wrote in a recent statement. The city also expressed a desire to avoid litigation, calling it a “last resort.”

On Sept. 9, Steele said he was confident in the city’s position but suggested mediation or arbitration could be options.

On Sept. 12, in a response to a reporter’s California Public Records Act request, the city wrote that “the privilege for communications regarding settlement” are exempt from disclosure. When asked if settlement was near, Mills stated he had no comment.

A photographer captures the sunrise at Seal Beach south of the pier.

(Mark Boster / Los Angeles Times)

Assistant City Manager Patrick Gallegos declined to comment on any settlement but said, “The City Council has been kept up to date regarding the oil collection issue and there will be no resolution of this matter without city council authorization.”

In March, the City Council met in closed session to discuss possible legal options but took no action. The council is meeting in closed session to discuss legal issues Monday but it could not be confirmed whether the oil revenue issue would be on the agenda.

“We have established that CRC has been doing business in the city and they must pay the taxes they owe as other oil companies do,” Moore, who is now mayor, wrote in an email message in early September.

Moore said he would recommend getting a “second opinion from an attorney that specializes in oil revenue and recovery.”

For Kirste, the resolution is straightforward.

“MPA sees the outcome of the Seal Beach/CRC dispute as binary,” he wrote in a text message. “The city is right or not. CRC must be licensed or not. CRC owes the city $13.4 million or $0.

“Unless the Seal Beach City Council accepts less than what their municipal code allows, there’s really no in between.”