Oil Drilling in Hermosa Beach is a Bad Deal (click image for full view)
The $500M-$600M that E&B says Hermosa Beach will make from oil drilling is as real as a Unicorn and here’s why…
Royalty payments are based on the amount of crude oil produced multiplied by the price of that oil at the time of sale. According to the Cost Benefit Analysis (CBA), done by an independent 3rd party (Kosmont), the “most likely” amount of oil to be produced is no where close to the amount that E&B is advertising. Also, E&B’s estimate uses a price of oil that is more than double today’s (2/2/15) price of oil and an amount of oil that the CBA refutes. Kosmont has revised their summary estimates for lower prices of oil given declining price of oil and to reflect the Development Agreement.
The CBA lists various oil production scenarios: low, expected, high, and applicant (E&B). According to the CBA, the “low” oil production scenario is actually the “most likely” to occur with a 90% confidence level. “Expected” only has a 50% confidence level. The “high” level is at a 10% confidence level, and the applicant (E&B) estimate is so high, that the CBA doesn’t even have a confidence level for it. Therefore, we voters need to look at numbers that are realistic and not wishful thinking, which is the “low” or “mostly likely” amount.
Price of Oil
Figure 2: Goldman Sachs annotated chart of the history of crude oil prices. Click image for larger view and article.
The CBA has various scenarios based on California Midway-Sunset (CMS) oil prices. E&B uses $105 in their estimates. The price of CMS has been in the low 40’s the past few months; therefore, the above graphic uses the $40 ppb scenario. There is a worldwide oil glut driving the price down. Some are saying that we are in a oil price bubble. Some projections even go as low as $20-$40. The price of oil has fluctuated wildly throughout history. Saudi Oil Minister announces that they will not cut production, and a Saudi prince says that oil will never be $100 again. Also, demand for oil is slowing and continues to slow, according to Bloomberg.
As some point, the price of oil could become so low, that this project would not be viable for E&B. Kern county, home of E&B, is very concerned about dropping oil prices.
Real Losses to Hermosa Beach Residents, Businesses and the City
As soon as the construction starts, Hermosa property owners will lose equity. Those closest to the site could lose a significant amount of money. Collectively, homeowners could lose more money than the city of Hermosa Beach would gain. There are business within 100 feet of the site, who are at risk to losing revenue due to noise, smell and truck traffic. This project could negatively impact tourism and the dollars that tourism brings to all business and the city. The city has also received over $600k in grants for green and sustainability initiatives in the last 2 years. There’s real money to be gained in green and sustainability projects. It’s hard to be green with 30 oil wells and 4 wastewater injection wells a few blocks from city hall.
Direct Costs to the City
The above graphic (Figure 1) is showing the NET revenue to the city AFTER direct costs are paid by the city. These particular direct costs that come out of the unrestricted, general fund amount to more than $2M than what it will cost to just pay off E&B.
The only winner, if oil drilling is allowed in Hermosa Beach, is E&B.
After the direct costs are paid, this is only an increase of about 1% to the general fund based on today’s budget numbers. There will be unknown additional expenses too (e.g. emergency response). The city may not even make any money, and could even lose money.
And if the price of oil stays where it is or declines further, even E&B may not be a winner.
A comment on those restricted tidelands fund… No money for schools, city hall, fire department, undergrounding power lines, police officers, community center or theater improvements, and sewer funding would be restricted to parts that could impact tidelands areas.
For a much more detailed analysis on financial impacts, go to http://www.hboilfacts.com/.