California's Expanded Drilling Plan Delayed But Not Dead

SAN FRANCISCO (Dow Jones Newswires), Jul. 28, 2009

A proposal by Plains Exploration & Production Co. (PXP) to expand drilling off California's coast, then shut down the rigs after several years, appears down, but not out, after a recent setback.

The plan, approved by several environmental groups that aim to shut down all drilling off the coast of Santa Barbara, was strongly supported by Gov. Arnold Schwarzenegger as a source of new revenue for the cash-strapped state. The drilling plan was part of an agreement that state legislative leaders reached last week to fill California's $26 billion budget gap. The state Senate passed the drilling measure, but the Assembly defeated it 28-43 late Friday.

Plains said that although it was disappointed by the Assembly vote, it would continue pursuing the project.

"PXP's principle focus will be to continue pushing for the project based on its merits to the state of California and address any misconceptions that groups may have regarding the project," Plains spokesman Scott Winters wrote in an email. "The more people are given a chance to evaluate the project on the basis of facts we've found that we are able to win support for the project and innovative approach we've taken."

Plains shares closed 8.6% lower Monday, at $29.39 a piece.

The Environmental Defense Center, one of several local environmental groups that reached the drilling agreement with Plains, is working to move the project forward, said Linda Krop, an attorney for the group.

"There were a lot of misrepresentations in Sacramento last week," Krop said, referring to statements from some lawmakers and other environmental groups that were not party to the PXP agreement. In particular, she said the agreement with Plains is enforceable by the state and also through the company's agreement with the Trust for Public Lands.

Under the agreement with the environmental groups, Plains would promptly expand oil drilling off the coast of Santa Barbara, then shut down four oil platforms and two onshore processing facilities by 2024. The company also would donate $1.5 million to Santa Barbara County for new low-carbon bus technology and 4,000 acres of land for public use. The company would slant-drill into the state's seafloor from a platform it operates in federal waters.

The project initially ran into trouble in January when the state Lands Commission rejected it, saying it was unclear whether the agreement was enforceable and whether the federal government, which has authority over Plains' offshore rigs in federal waters, would sign off on it. The proposal that was part of the budget agreement would have bypassed the Lands Commission in the approval process for the project, a political end-run that left a bad taste in the mouths of officials, including U.S. Rep. Lois Capps, D-Calif., who supported the project. Capps also didn't think it was appropriate to speed the proposal through merely as a budget stopgap measure.

"Despite her support for the original agreement, Congresswoman Capps does not agree with this proposal to allow drilling off the coast of Santa Barbara in order to fill the State's budget gap and has expressed her concerns about this proposal to the Governor," Capps spokeswoman Emily Kryder said.

Assembly Speaker Karen Bass, who tentatively agreed to the proposal as part of the overall budget agreement, said in a statement that there would be another opportunity for the Assembly to vote on the proposal later in August, after a three-week recess. Bass, herself, didn't vote on the measure Friday. Her office didn't immediately reply to a request for comment.

Oil produced off the coast of Santa Barbara is generally considered "heavy" crude, or crude with higher sulfur content. The crude that Plains currently produces off California's central coast is processed at a refinery owned by ConocoPhillips (COP) in Santa Maria, Calif., then shipped north to the San Francisco Bay Area, where it is refined into fuels.  

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