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HomeMy WebLinkAboutI - 4 - West Newport Oil FieldTO: CITY COUNCIL FROM: Utilities Director SUBJECT: WEST NEWPORT OIL FIELD RECOMMENDATIONS: 1. Approve one of the following: January 11, 1982 CITY COUNCIL AGENDA ITEM NO. I - 4 �U�D Ttvtt�4.j— Ceffi 2 v COUNCIL :- of ff BEACH Option A - Direct the staff to negotiate an agreement with a private firm to operate the oil field on a short term (2 year)basis. Option B - Direct the staff to call for open and competitive bids to operate the oil field on a short term (2 year) basis. 2. Approve the Technical Oil Advisory Committee recommendation to build a crude oil shipping line. 3. Refer a proposed budget amendment for $76,000 to Council Budget Committee. DISCUSSION OF RECOMMENDATIONS: In their review of the oil field operation, the Technical Oil Advisory Committee (TOAC) felt that because of the low level of maintenance by the previous operator and because of the lack of detailed information on well production, condition of the wells, effect of windfall profit tax, State severance tax, and overall op- erating costs it would not be in the City's best interest at this time to call for a long term competitive bid. As a result the Committee recommended Option A. Under Option A the City would negotiate a short term (2 year) agreement with a qualified private firm to operate the oil field. During this period the desired detailed information on the operations of the wells could be obtained and the required remedial work could be completed. Because of the Council's stated preference for an open and competitive bid, the Council may prefer Option B. Option B. would provide for the selection of an operator for a 2 year term by calling for open and competitive bids. It is believed that this approach would meet most of the objectives to the TOAC and still be in keeping with the Council's previous position. In reviewing the sale of crude oil, the TOAC felt that the City should continue the past practice of selling the oil under a separate City Contract. It was further felt by the TOAC that the sale of oil to Chevron appears to have a number of long term benefits to the City, therefore the City should continue to work with Chevron on a possible contract and a connection to the Chevron pipeline. January 11, 1982 14EST NEWPORT OIL FIELD Page 2 The TOAC further recommended that the City complete the construction of a 3000 ft. crude oil shipping line between the City Tank Farm and the Chevron pipeline as soon as possible. The present method of shipping the crude oil by truck is expensive and has all the risk associated with a tanker truck operation. It is estimated that the annual cost to ship by truck; is $50,000. The estimated cost to construct the pipeline is $45,000. All costs should be re- coverable within one year. Because of the poor condition of the 2" production lines and the 2" casing gas line between Wells 1 through 12 and the City Tank Farm the staff recommends that they be replaced as soon as possible. Estimated cost of additional work: 1. Construct 4" crude oil shipping line (3000') $45,000 2. Replace 2" production lines (2500') $18,000 3. Replace 2" casing gas line (600') $ 5,000 4. Remedial work at well heads (12 wells) $ 8,000 76,000 Unless otherwise directed all of the remaining recommendations of the TOAC listed in the December 17, 1981 minutes (copy attached) will be pursued by the staff. STATUS REPORT: Both the completion of the City Tank Farm and the start up of the oil wells are proceeding on schedule. On November 4, 1981 the construction of the tank farm advanced to the stage where the City started to put the oil wells back into operation. By December 3, 1981 all 31 of the front wells were in production. It is anticipated that the remaining 3 wells (located behind Newport Shores) will be in production sometime in January. At present all of the crude oil is being sold to the Powerine Oil Co. under a 60 day purchase contract. After 60 days either party may cancel by giving a written notice 30 days in advance. Until a shipping pipe line can be constructed, the crude oil is being transported in trucks from the tank farm to the Powerine Refinery in Santa Fe Springs. The City receives the "posted price" of $26.30 per barrel less $0.87 per barrel for shipping. Oil Production is now averaging about 150 barrels per day. Revenue from the sale of oil is $ 3,800/day. [ ($26.30 - $0.87) 150 = $3,800 ]. Of this amount approximately 1/8th is paid out in the form of royalties to other parties. The remainder is placed in the City's Tideland Fund. January 11, 1982 WEST NEWPORT OIL FIELD Page 3 Both the wells and the tank farm are currently being operated by the Sampson Oil Company of Long Beach, A full time pumper has been hired by the Sampson Oil Company. For its services the Sampson Oil Company recieves a monthly retainer and is reimbursed for the cost of the pumper. According to the City's legal consul, Rutan & Tucker, the condemnation trial is scheduled for the first week in February and the declaratory relief trial is scheduled for the second week in April. Both the Utilities Department and Rutan & Tucker are continuing to work closely with the State Lands Commission under the Joint Powers Agreement. All contracts and agreements approved by the City Council will be reviewed with the State Lands Commission. n Joseph T Devlin Uti1iti- Director JTD:bc Attachment TECHNICAL OIL ADVISORY COMMITTEE MINUTES DATE: December 17, 1981 TIME: 9:00 AM LOCATION: Utilities Yard ATTENDANCE: Hans Lorenz, Member and Chairman George Guthrie, Member Don Simpson, Consultant Joseph Devlin, Utilities Director Bob Dixon, Utilities Administrative Assistant 1. MINUTES: The minutes of the meeting of August 19, 1981 were approved. 2. MEMBERSHIP: It was pointed out that George Guthrie had been reappointed to the Committee, and that the appointment of George Zebal would expire in 1982. 3. OPERATING AGREEMENT: The Committee reviewed a copy of a draft along with suggested changes of a proposed agreement that would be followed in putting the oil operation out for public bid. The Committee noted the City was only in the initial phases of returning the oil field to full production. It was also noted that due to a low level of maintenance by the previous operator a large amount of remedial work would be required. The Committee felt that the City was under a Tidelands obligation to maximize the revenue from the field, and the City should select the option that would keep the operational costs to a minimum. Before entering into a long term commitment the City should determine the following: A. Capacity and condition of each well. B. Cost of returning each well to full production. C. The extent of remedial work needed. D. Ongoing operating costs. E. Effects of "windfall profit" tax. TECHNICAL OIL ADVISORY COMMITTEE MINUTES - continued Because of the lack of information it was the opinion of the Committee that it would be difficult at this time to conclude on the specifics of a long term agreement and it would be in the City's interest to (1) negotiate a short term contract with a private oil company to provide all field supervision and labor required to operate the wells and (2) hire a qualified Petroleum Engineer to recommend on production improvements and remedial work. The Committee further recommended that the City should maximize the use of private oil field companies in doing any oil field work and that the City should only provide the normal services given to work done by private contractors. Using this approach there would be no need for any increase in City personnel to produce the wells or operate the tank farm. 4. SALE OF OIL: The Committee reviewed the current 60 day contract with Powerine Petroleum sales. The Committee felt that the City should continue the past practice of selling the oil under a separate City contract. They also felt that the staff should continue working with Chevron on a long term agreement to purchase the oil and to obtain a connection to the Chevron pipeline. 5. SUMMARY OF RECOMMENDATIONS: A. That on an interim basis the City hire a qualified oil field contractor to operate the wells for a minimum of two years. B. That the City retain a Consulting Petroeul Engineer to provide recommendations on production and remedial work. C. That no City personnel be involved except for supervisio n and services normal to City contract work. D. The City obtain and quantify the basic information on production and operating cost that would be needed to prepare a long term operating agreement. E. That the City investigate the sale of oil to Chevron. F. That the underground shipping line be installed as soo n as possible to avoid risks associated with trucking of oil. G. That in the future the City closely follow the day to day operation of the oil field. H. That the City make routine field checks on the gaging and production operation. Joseph T. Devlin Secretary