A Move To End Oil Drilling in LA Could Unearth Development Opportunities. Extracting Them Is a Challenge. Thousands of Drilling Sites May Open to Development, but Problems Persist Long After the Work Stops.
This story was reported and written by Jack Witthaus,
with design by Jelena Schulz.
Developer John Stanek thought the roughly 20-acre site in coastal Long Beach, California, would be like striking real estate oil: In three years, he'd build more than 220 homes near the 710 and 405 freeways in L.A. County’s second-largest city in a region where undeveloped land is rare. But eight years later, construction still hasn't started.
It turns out that for more than six decades the property had been used as a disposal site for oil drilling liquids, with contaminants absorbed into the ground, forcing his firm, Integral Communities, to spend millions of dollars to simply categorize the property's pollutants and develop a cleanup protocol to meet local, state and federal standards.
"It's not something for the faint of heart," Stanek said.
The Los Angeles region is awash in sites that have been used for generations to extract, store and refine oil and natural gas. Home to the nation's largest urban oil field, it's a region where pumpjacks still churn away on lots next to multimillion-dollar homes, from the 1,000-acre Inglewood Oil Field near Los Angeles International Airport and, until recently, to the campus of Beverly Hills High.
A movement is now underway to shut down many of those facilities. In greater Los Angeles, multiple governments, including the city of Los Angeles, are moving to end oil and gas drilling in an area that extends over hundreds of square miles.
California Gov. Gavin Newsom called in April 2021 for the end of in-state oil drilling by 2045. On Sept. 16, he signed into law a bill that would make it more difficult for not only oil but natural gas to be produced within 3,200 feet of homes, hospitals and schools.
As pressure mounts to close the facilities, real estate developers are taking note of the opportunity that may come with repurposing many of these prime properties. But the delays faced by developer Integral Communities show the potential development challenges.
Black Gold Rush
California at one time was the nation’s leading oil producer, and it still is among the largest. It may have a reputation for sunshine and moviemaking, but the L.A. region is also home to thousands of oil wells which pumped out an estimated 10 million barrels in 2020, roughly 7% of California’s total field production of crude oil, according to the U.S. Energy Information Administration.
Now, with moves afoot to halt production in the state, attention is turning to what's involved in developing the land occupied by oil and gas drilling and their related service providers.
Alex Massachi, CEO of Los Angeles-based developer Massachi Industries, said development on these sites comes down to figuring out how much time and cost is involved with remediating properties. Oil and natural gas often are drilled together, and the extraction can contaminate the water, soil and air around the drilling sites in similar ways. "It'll take the more savvy developers and investors to go after these because it's a lot more risk," Massachi said.
While these sites seem promising for redevelopment, particularly in a region that is short on land for commercial and residential construction, it remains uncertain whether the bans will move forward. And at the same time, cities enacting drilling bans have spent little time envisioning a future for former oil field sites.
All the while, these legacy oil and gas properties present cleanup and monitoring challenges, meaning the specter of oil drilling could haunt the region for decades to come. It is a legacy that extends to all properties tied to the oil and gas industries, including extraction, storage and service stations.
"It'll take the more savvy developers and investors to go after these because it's a lot more risk." —Alex Massachi, CEO of Los Angeles-based developer Massachi Industries
"We've essentially made Swiss cheese out of our landscape," said Seth Shonkoff, executive director of PSE Healthy Energy, an energy and policy research institute funded by private foundations and government agencies. "We've created a situation where we're going to have to heavily invest in the plugging of these Swiss cheese holes, and we're going to have to have robust monitoring systems to ensure that these holes aren't leaking hazardous amounts of gas."
In addition to the sheer volume, the cost to clean up contaminated sites and who will pay for the remediation remains unclear. A 2020 estimate from the London-based nonprofit think tank Carbon Tracker pegs the cost at $7 billion to simply close the orphaned oil and gas wells in California and perhaps $280 billion to do so across the United States. The estimate does not include how much it will cost to clean up the sites to make them safe for redevelopment.
Nearing the End
Culver City is perhaps the municipality closest to stopping oil drilling among the Los Angeles governments making the attempt. In October of 2021, the city southwest of downtown L.A. known for its film and tech jobs adopted an ordinance that would phase out oil and gas extraction no later than Nov. 24, 2026.
Still, the bans don't necessarily mean the drilling stops. Culver City and Englewood, Colorado-based oil and gas developer Sentinel Peak Resources are in discussions "to explore options with respect to the oil termination ordinance that are mutually agreeable in an effort to avoid litigation," according to a joint statement. The discussions were expected to wrap up in October.
At the heart of the issue is an old real estate tool: amortization. Simply put, governments and drillers must agree on an amortization period, an amount of time to allow for drilling to continue in order for energy companies to recoup losses from ending previously permitted and approved drilling.
Failure to reach an agreement may mean ordinances head to court, where they may get thrown out, as has happened to other bans in past decades in the state of California.
"There have been mixed results in the past," said Thomas Manakides, an environmental attorney and partner at Los Angeles-based Gibson Dunn & Crutcher who has studied these cases.
Complicated Relationships
Some governments are moving cautiously with their bans. A Los Angeles County ordinance would stop drilling in an area that covers roughly one-third of all oil drilling in the county, excluding the Inglewood Oil Field that falls on county land. A Los Angeles County representative did not respond to multiple requests to comment from CoStar News on the ban’s status.
The Inglewood Oil Field spreads over 1,000 acres and has been a source of oil and natural gas since 1924, according to owner Sentinel Peak Resources’ website. More than 1,600 wells have been drilled in the field southwest of downtown L.A., which is now surrounded by homes, schools, parks and commercial space.
The cost of losing the Inglewood Oil Field may be steep: It has produced more than 400 million barrels of oil in the past century. It’s estimated that as much as half of the field’s remaining oil resources can be “readily accessed” through drilling and production activities, according to the field’s website. With a barrel of American crude selling for about $85, it's going to be a challenging proposition to sell.
It's unclear if a ban will occur in Long Beach, which sits on top of what's called the Wilmington Oil Field. Long Beach partially banned drilling in the 1950s after it discovered areas of the city had sunk by as much as 25 feet due to fossil fuel extraction, according to the Duke University Energy Initiative, a research institute within the North Carolina university. A 1964 voter referendum allowed drilling to resume, and reclaimed water is now pumped into the oil reservoirs in the oceanside city to stop the sinking and push new oil out of the ground.
The city’s relationship with drilling is complicated. It has long benefited from revenue generated by oil fields through barrel taxes and other fees, which have helped build bike trails, public pools and playgrounds. Long Beach even honors its oil drilling around the Signal Hill neighborhood with a statue of roughnecks. In the 2020 fiscal year, the oil fields generated $18.9 million in revenue for city services, though the revenues experience high fluctuation due to the changing cost for barrels of oil, according to an October 2021 memo issued by the city of Long Beach.
The city has a goal to wean itself off those oil revenues by 2035, when it is projected the oil field "may generally cease production for economic reasons," according to the memo.
Redevelopment Challenges
For Mark Tarczynski, the dream of redeveloping a former oil field site is more than five years in the making.
Tarczynski, an executive vice president with Colliers in Los Angeles, worked on a roughly 23,000-square-foot property near Dodger Stadium where drilling had been abandoned and capped two decades earlier. But when a new owner went to redevelop the property into housing in 2016, the capping wasn't up to current code. So, the wells were recapped before the property owner discovered that three feet of soil needed to be removed because lead and other toxic materials were leaking into the dirt. "Here we are today, six years later, and it's still not being built," Tarczynski, said.
The first step to cleaning up a drilling site, plugging and abandoning an oil well, is easier than the subsequent steps. A representative with the California Geologic Energy Management Division, known as CalGEM, the state division overseeing oil, gas and geothermal industries, told CoStar News that plugging and abandoning an oil well can take from a few days to a few weeks depending on the well, its condition and age.
"Here we are today, six years later, and it's still not being built," —Mark Tarczynski, executive vice president with Colliers
Costs can range, too, but between 2011 and 2019, it usually cost around $112,000 to plug and abandon a well. Most of these costs are funded by the operators, private property owners or developers. But occasionally the state and local governments assist in funding the remediation if there are public benefits associated with the development.
The more challenging requirements involve remediating the soil, getting a property rezoned and redeveloping the land into something new, all while monitoring the site for toxins. In general, a contaminated site can add years to a development project, said Larry Kosmont, CEO of El Segundo-based real estate and land-use consultant Kosmont Cos. He's seen redevelopment projects on contaminated sites drag on for decades as developers and local governments work to secure funding from private parties and government agencies to clean up sites as they seek permits and approvals to build.
That doesn't mean redeveloping these properties isn't profitable. Often, contaminated sites in Southern California are in places where mixed-use projects, housing and other services are needed, Kosmont said. Special tax-exempt financing, various government grants and special loans can defray the cost of mitigating the soil.
"Generally, it's worthwhile if you do it right," Kosmont said. "It's high risk and high return."
What’s Next
Ultimately, the drillers may be motivated to sell their properties to developers as crude production wanes and energy demand in California shifts to renewables. A representative with CalGEM said it is seeing an uptick in permit requests to plug and abandon oil sites. For example, New York-based Warren Resources recently applied for more than 100 plug and abandonment permits to cap wells in the Wilmington neighborhood of Los Angeles, the CalGEM representative said.
Sentinel Peak Resources is one of those that sees a redevelopment future for its oil fields. In December 2020, the driller sold 120 acres in Montebello, east of downtown Los Angeles, for $190 million to homebuilders Lennar of Miami and Toll Brothers of Fort Washington, Pennsylvania, according to CoStar data. The development site, which has abandoned oil wells on it, is called Metro Heights and may have as many as 1,200 single-family homes.
The luxury homebuilding development is expected to have parks, multiple pools and spas, outdoor barbecue areas and a fitness center. Construction is underway, and marketing has already begun. Representatives with the homebuilders did not respond to multiple requests to comment from CoStar News.
Even factoring in the costs and complexities of monitoring redeveloping former oil drilling sites, experts say it’s best that the drilling stops for both the health of the planet and for the people around active oil and gas development.
"It's far better to have to deal with the management of legacy infrastructure and move on into the future and create prosperity in these spaces than to shy away from that activity and continue to have active development,” Shonkoff said.
And so Long Beach developers are moving ahead on redeveloping legacy oil and gas sites.
On Sept. 1, Long Beach’s planning commission OK’d Integral Communities’ proposed River Walk development, meaning the project can proceed to Long Beach’s city council for approval.
Stanek hopes that home construction can start in 2025 after more than a decade of work. Looking ahead, the development executive said he believes developers may be interested in redeveloping other legacy oil and gas sites around greater Los Angeles if drilling ends.
“But it takes time,” Stanek said. “And a lot of money."