Oil Royalties Could Prove Mixed Blessing : Resources: Officials could seek to make property owners who have received the funds help pay for cleanup.

Most people don’t have the good fortune to collect regular checks from their neighbors.

There are property owners in the San Fernando Valley and Ventura County, however, who get regular royalty checks for oil and gas wells drilled by neighbors.

In Pacoima, for example, about 3,900 property owners are mailed checks by Medallion California Properties Co. From a small plot of land on Paxton Street, Medallion pumps oil and gas found under nearby homes and businesses. Although none of the nearby residents has leased the ground 500 feet below their homes, the Pacoima oil field has generated additional income for the locals for 20 years.

But the Pacoima pumping operation doesn’t really affect property values, said Ed Koenig, office manager of Park Regency Inc., a real estate brokerage in San Fernando. As the oil wells have dried up, the royalty checks have become smaller and less frequent, he said. And because the pumping operation is camouflaged, it hasn’t depreciated nearby property values.

Checks received by the Pacoima property owners, and others who lease their oil and gas rights, vary depending on the size of their property, the amount of oil and gas being pumped, the terms of the lease, and the current price of oil. Royalties from a typical homeowner can range from a few dollars a month to $100 or more. In Pacoima, current oil production is at 30 barrels a day--way down from the 1,000 barrel-a-day production in 1986--as the wells are beginning to run dry.

While there are no new oil or gas wells being drilled in north Los Angeles County or Ventura County, there are 1,750 currently pumping wells in Ventura County and another 400 in the San Fernando Valley, reported Pat Kinnear, district deputy of the California Department of Conservation, Division of Oil, Gas and Geothermal Resources in Ventura. Drilling units, Kinnear explained, are the tall, metal-framed towers used by oil companies to drill thousands of feet under ground. Once the drilling is complete, the towers are generally dismantled and replaced with more simple and compact pumping machinery.

When an oil company drills on its own property, there is no need to reimburse neighbors for any oil extracted from neighboring land. This so-called right of capture assumes, however, that none of the drilling actually invades the land underneath adjoining parcels. Because most oil drills don’t just go straight down, a company that drills for oil has to get permission from the owners of any adjacent properties that might be invaded underground by drilling.

Oil companies get this type of permission by signing leases with properties as far away as one mile from a drilling site. In Pacoima, for example, the original drilling extended 7,200 feet vertically, and more than 3,000 feet horizontally--under acres of nearby parcels.

Oil and gas companies often strike long-term leases with owners of undeveloped properties, explained Robert L. Compton, an oil and gas attorney with law firm Nordman, Cormany, Hair & Compton in Oxnard. In some cases the leases were signed by large ranch owners before subdivision. Once an area is filled with homes and businesses, an oil company generally goes door-to-door to offer property owners royalties in exchange for the rights to so-called directional, or slant drill deep underground, Compton said. Some leases are renewable every 10 years, other leases are perpetual and last as long as there is oil being pumped out of the ground.

It is almost impossible for oil companies to get consent from all the property owners adjacent to an urban drilling site, Compton noted. He says that according to state law, when 75% of nearby property owners agree to sign oil and gas leases, the other 25% can be forced to go along with the majority. None of these leases allows an oil company surface rights on any of the property--only the deep subsurface rights.

Most property owners are more than happy to collect a royalty in exchange for doing basically nothing, but there are some people who aren’t keen on oil production in their neighborhood. They are concerned about unsightliness or worry about safety.

However, James R. Weddle, an agent for Medallion California Properties Co. which operates the Pacoima field, said, “Unless you were up close, you wouldn’t even know it’s an oil field.” The field is actually 10 wells surrounded by a Spanish-style structure and topped with a bell-style tower that was built to camouflage the original oil derrick. The oil pumped from the ground leaves the site through an underground pipeline.

Weddle also said the oil field is no threat to nearby residents. “There are a lot of safety features: fire sensors, subsurface safety valves that shut off automatically when there is an earthquake, and security to prevent anyone getting in and tampering with the wells.” Also, there is nothing toxic at the site, he said. When the oil pumping ceases in about five years, the holes will be plugged and the property can be redeveloped.

Not all oil fields are free of toxic chemicals, however. Many abandoned oil fields are now the subject of extensive litigation as federal, state and local officials try to figure out how to get someone to pay the cleanup bill.

One troubling possibility is that officials could turn to nearby property owners, said Donald Nanney, partner at Gilchrist & Rutter, a law firm in Santa Monica. Nanney researched this issue for a banking client that owned properties in which oil and gas royalties were being paid. He concluded that it may be possible to hold the recipients of royalties responsible for cleaning up the mess left behind by pumping operations.

“It depends on whether the owner of the royalty interest has an ownership interest in the contaminated real property,” said Nanney. An old California Supreme Court case says that if the right to receive a royalty from a certain property is perpetual, “there is a risk that the owner of the perpetual interest would be deemed as owner of the property.” If that happens, an owner could have an obligation to abate a nuisance such as a polluted site. While there hasn’t ever been a case on this particular issue, Nanney said, the liability of royalty holders remains a possibility.

Property owners who agree to lease their oil and gas rights might want to consider executing a lease for a certain period of years that can be renewed--instead of a perpetual lease, Nanney said.

Property owners can do other things to protect their rights with oil and gas leases, said attorney Compton. Property owners should know their share of any oil and gas produced by a nearby field. Owners should also review the oil and gas lease to see what rights are outlined in the lease.

Finally, if you think you are not getting paid your fair share of royalties, you can check productions on file with the state Division of Oil, Gas and Geothermal Resources (805) 654-4761, or demand an accounting of operations from the oil company.