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Seal Beach seeks millions in lawsuit over an offshore oil project that reaches from Long Beach

Orange County Register logo Orange County Register 5/27/2021 Martin Wisckol
a person standing on top of a sandy beach: Oil producer California Resources Corp. is being sued by the city of Seal Beach, which claims it’s owed taxes for company’s pipelines that extract oil from offshore of Seal Beach and into its wells on Long Beach’s Island Chaffee, shown here.  (Photo by Brittany Murray/Press Telegram) © Provided by Orange County Register Oil producer California Resources Corp. is being sued by the city of Seal Beach, which claims it’s owed taxes for company’s pipelines that extract oil from offshore of Seal Beach and into its wells on Long Beach’s Island Chaffee, shown here. (Photo by Brittany Murray/Press Telegram)

Long Beach’s Island Chaffee, an islet built to host oil wells, has pipelines that reach into waters offshore of Seal Beach, from which they’ve been extracting oil since 2005.

Now, the city of Seal Beach wants a piece of the action.

Seal Beach’s lawsuit against the oil company, California Resources Corp., seeks retroactive fees, per-barrel taxes, and penalties that could exceed $9 million. The city says it only became aware of the operation in 2018 after the company refused to pay.

“They went around our back, thinking the city wouldn’t do anything,” said Seal Beach Councilman Thomas Moore.

But while the city says its municipal code requires that California Resources pay up, the company points to the same code as evidence that Seal Beach law exempts its operations from city business licenses, fees and taxes.

“We are not subject to the business tax in Seal Beach because we’re not doing business in Seal Beach,” said Michael Mills, attorney for California Resources.

Seal Beach code is layered in determining what oil operations constitute “business” in the city. If the well bottom — where oil is extracted from the ground — and the well head — where the oil is removed from the well — are both located in the city, there’s a variable “in-city” tax which was $73 cents a barrel in 2018. If the well head is located outside the city but its pipelines run within municipal boundaries, there’s a non-changing tax of 1-cent-per-barrel.

However, operations are exempt from city code if they’re on state-owned land, which in Seal Beach includes the ocean bottom offshore. The code says city regulations don’t apply to “drilling and production of oil where wells are located and bottomed on state-owned tide and submerged lands.”

California Resources argues that because its well bottom is on state-owned land, which it leases from the state, it’s exempt from city taxes and other business charges.

In response, Seal Beach City Attorney Craig Steele said that city code requires the wells to be both “located and bottomed” on state land to qualify for the exemption, emphasizing that both conditions must be met. Because California Resources’ well head is on land owned by the city of Long Beach, it is not exempt and must pay appropriate fees and taxes, Steele said.

‘Absurd’ tax rate

Should the courts decide California Resources must pay, a second dispute — over the amount owed — is likely.  Prior to the lawsuit, the city told California Resources that it owed $9.3 million for operations through 2018. That works out to a tax of 68 cents per barrel plus other fees and penalties. That tax is 68 times the 1-cent-per-barrel out-of-city tax outlined in city code.

Legal arguments are still making their way into the court filings, but prior to the suit Steele wrote Mills that “the city’s tax collector may determine the amount of tax to be paid.” There was no further explanation of how the 68-cent-per-barrel figure was arrived at.

The Seal Beach tax collector who calculated the amount is no longer with the city and Steele said he didn’t know how it was determined, although it appears to have been calculated at the in-city rate.

“There has to be more (work) formalized in terms of what’s owed,” Steele told the Southern California News Group. “We’re going to have to ask a judge what the right amount is.”

Mills called the calculation “absurd.”

“One of the things that is most disturbing is that the city feels it has the right to set the rate and penalty at whatever it thinks is appropriate,” Mills said. “I think that’s unconstitutional.”

City needed cash

Seal Beach first learned about California Resources’ operations from Greg Kirste, a Laguna Niguel-based consultant.

Kirste had been hired by the city in 2013 and 2014, with two separate contracts of $24,000 each, to investigate and collect unpaid oil taxes and fees. He found one such delinquent account at the time, which generated $216,000 for the city.

By October 2017, when Kirste offered additional services to the city, unsolicited, Seal Beach needed money. Voter approval of a 1-cent sales tax, which has steadied city finances, was still a year away.

“We were having very tight budgets and watching every penny,” said Moore, the city councilman. “He brought to light that there may be missing revenue from oil drilling.”

Kirste was particularly attractive to the city because he offered to work on contingency, standing to earn 15% of any revenue he brought in.

“At the time, the city didn’t have to pay anything,” Moore said.

Within a year, Kirste had identified the California Resources operation, how much oil it had extracted and calculated that it owed the city $4 million in per-barrel taxes, $4 million in penalties, $39,000 in base taxes and permit fees, and $1.2 million for his contingency fee. In a Sept. 26, 2018 letter to California Resources, Kirste enumerated those charges and told the company to pay up.

Mills responded with a letter to the city, saying, “Because this demand is bogus, (California Resources) hereby rejects it in its totality.”

There were months of subsequent correspondence, including a letter from Kirste to the State Lands Commission, which oversees leasing of state-owned real estate. While Kirste sought confirmation that taxes were owed to Seal Beach from operations on the state-leased land, commission attorney Joseph Fabel responded that the agency lacked the authority to make a determination.

Lawsuit expenses

On May 26, 2020, the city filed suit. California Resources then succeeded in winning a change of venue from Orange County to San Diego County, arguing that anti-oil drilling sentiment in Orange County could prejudice a jury against an out-of-town oil company. A trial has been set for July 18, 2022, although Mills said there would likely be numerous motions in the meantime that could alter the course of the suit.

He declined to discuss what those motions might include, but expressed confidence that California Resources would prevail.

“I think it’s a lot of unnecessary litigation and expense for the city,” Mills said. While Kirste’s work was on a contingency basis, city legal expenses are not.

However, City Councilmembers Moore and Joe Kalmick both said they liked the odds of the city bringing in more money than the lawsuit cost.

“Obviously, when you go into litigation, you believe the lawsuit is going to more than cover the cost,” Kalmick said. “I feel fairly confident in the opinion of our city attorney on this.”

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Meanwhile, city finances have stabilized, thanks in good measure to the 1-cent sales tax . Because that tax applies to online purchases by city residents, the pandemic didn’t have a negative impact on city revenue, Moore said.

“It actually helped make it a regular budget year for Seal Beach,” he said.

So, does the city even need $9 million more?

“We have a lot of projects on the table,” Moore said. “We have flooding issues; we need pump stations and drainage projects. Our lifeguard tower was built in 1965 and needs attention. There are a lot of projects like that, that cost a lot.”

This story was updated June 4, 2021, to include a more recent in-city per barrel tax rate.

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