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    City Att'y Scores Big Appeals Court Win In Big Bucks Oil Abandonment Fund Dispute Between City Hall & Sac'to; Case May Head to CA Supreme Court

    (January 8, 2005) -- In an Appeals Court case that he argued personally, LB City Attorney Bob Shannon scored a big win in a big bucks battle between LB City Hall and the State of CA over a multi-million dollar oil abandonment reserve fund.

    In a decision released January 7 (full opinion on link below), the 2d district Court of Appeals held that the City of LB is legally entitled to create and maintain an oil abandonment reserve fund to cover costs that will inevitably occur when an oil is no longer pumped from a field on state tidelands.

    "It's a great decision. It's everything I could possibly have hoped for," City Attorney Shannon told The ruling by a three-judge appellate panel reverses a lower court ruling which found for the State. The CA Attorney General's office now has the option of filing a petition asking the CA Supreme Court to hear the case.

    The dispute arose over oil revenue derived from the LB tidelands. LB holds the tidelands in trust for the people of the State of CA for purposes of navigation, commerce and fishing. The State Lands Commission oversees use of the tidelands.

    Oil and gas beneath the LB tidelands is produced under contracts (approved by the State) between LB City Hall and oil company contractors. The Court of Appeal said these contracts differ from typical oil and gas leases in which the lessee is usually obligated at the end of the lease to plug and abandon all wells and remove all production facilities from the leased land at the lessee’s expense. In contrast, the contracts between LB City Hall and the oil company contractors can be terminated by the contractors on notice to the City that the oil and gas production operations under the contracts are no longer profitable...and with one exception, the contractors have no obligation to plug and abandon wells and remove production facilities that remain after termination of the contracts.

    LB and Sacramento "believe a substantial number of wells and production facilities will remain after the contracts are terminated, and the costs of plugging and abandoning these wells and removing the facilities may amount to at least $200 million, and up to $500 million if the four artificial islands are removed," the Court of Appeal noted.

    In 1996 the City, faced with the certainty of large well plugging and abandonment and facility removal costs, proposed withholding money from tidelands oil revenue that would otherwise be paid to the State and placing it in an interest-earning account which would be used to cover these costs.

    City Hall secured opinions from its legal counsel that withholding tidelands oil revenues for a reserve to cover future well abandonment and facilities removal expenses was permissible under a state statute. The State took the position that statute did not allow the City to withhold revenue that would otherwise be payable to the State, except to cover moneys that the City has expended, and that putting money aside in an abandonment fund is not "expending" money within the terms of the statute.

    In January 2000, City Hall notified the State that the City would fund an abandonment reserve, created the previous year, from tidelands oil revenue. The City deposited the retained revenues in an abandonment reserve fund which as of April 2003 contained over $62 million.

    In February 2001, a bill supported by both City Hall and the State was introduced in the Legislature (AB 1519) which provided that LB could retain, out of monthly tidelands oil revenue, moneys to be deposited in an abandonment fund and used solely for the costs of plugging and abandoning wells and removing production facilities that are not the contractual responsibility of the oil contractors or other parties. The amount was limited to $190 million, and the bill contained other provisions and limitations. The Legislature did not act on the bill.

    In April 2002, Sacramento demanded abolition of the abandonment fund and payment of the money in the fund to the State, contending LB had no statutory authority to withhold tidelands oil revenues for future abandonment costs. The City refused; LB and State reps met in fall 2002 to discuss the demand...and again the City refused. In April 2003, the State sued.

    A trial court found for the State, concluding that LB had unlawfully withheld the money deposited in the abandonment reserve fund, ordered City Hall to stop the practice and directed LB to pay Sacramento all the money in the reserve.

    The Court of Appeal reversed, concluding that state law does authorize LB City Hall to "create and maintain an abandonment reserve fund to cover oil production costs that are certain to occur and can be reasonably estimated."

    City Attorney Shannon said that the Appeals Court ruling was particularly gratifying for him because Sacramento wouldn't acknowledge (after prevailing in a lower court) that it might lose on appeal...and refused to negotiate. "Now the worm has turned," he said.

    Click on the following hyperlink to view the Court of Appeal opinion in State of CA ex rel. CA State Lands Commission v. City of Long Beach.

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