California may consider new offshore oil project to ease budget crisis

California’s legislature might vote later this week to authorize the first new oil activity off Santa Barbara in 40 years as a way to help resolve the state’s budget crisis.

The proposal reportedly was part of an agreement Gov. Arnold Schwarzenegger reached on July 20 with majority and minority leaders of the state’s senate and assembly to eliminate California’s $26.3 billion budget deficit. It includes some $15.5 billion in cuts, defers other costs, and takes funds from cities and counties, several news reports said.

But it also could clear the way for Plains Exploration & Production Co. to directionally drill into state waters from an existing platform in federal waters, generating $1.8 billion of revenue for the state by 2022. “We await final legislative action on the bill, and remain committed to work with the state leaders to ensure the legislation allows the benefits of the historic agreement PXP reached with the environmental community to come to fruition,” a spokesman said on July 22.

The Houston independent producer won support from Get Oil Out and other local environmental groups for the Tranquillon Ridge project earlier this year, but the state land commission denied the application in January. The legislature essentially would be voting on whether to overturn that decision.

A spokeswoman for Schwarzenegger would not confirm whether the proposal was part of the budget agreement with the legislature’s leaders. “The governor and legislative leaders have come to an agreement to solve California’s budget deficit. Details will be made available as the legislature drafts language to be voted on later this week,” she told OGJ Washington Pulse by telephone on July 21.

Schwarzenegger has said, however, that while he continues to oppose new oil and gas activity off California’s coast in general, he favors the Tranquillon Ridge project because it would be from an existing structure, Platform Irene, and extend into state waters without disturbing them.

‘Revenue and jobs’

“It would be new revenue. It would not require new taxes. It would generate state and local revenue and jobs, all of which would help in a state suffering a severe economic downturn and a very severe deficit,” observed Joe Sparano, president of the Western States Petroleum Association in Sacramento.

In Washington, US Rep. Doc Hastings (R-Wash.), the House Natural Resources Committee’s ranking minority, called the apparent agreement a responsible bipartisan response to California’s 11.6% unemployment rate and $26.2 billion budget shortfall. “By responsibly developing energy resources in their own backyard, Californians will have access to new, high-paying jobs and over $1.8 billion in revenue to reduce their state’s deficit,” he said on July 21.

“The good news is that the rest of America can also reap economic benefits by opening additional areas to offshore drilling and energy production. The bad news is that the Obama Administration continues to stand in the way of all-of-the-above energy development. With 9.5% of Americans out of work and an unprecedented $1 trillion national deficit, what are Democrats waiting on?” Hastings continued.

While the proposal could be part of the budget agreement reached by the so-called “Big Five” of California’s government, others are criticizing it as the legislature prepares to work on it because it would bypass the state land commission’s oil leasing approval authority which it has held since 1938.

“The governor just put California’s coastline up for sale when he had other options that don’t put our natural resources at risk,” said Lt. Gov John Garamendi, who chairs the commission. “He refused to approve a plan to tax oil companies that now extract oil in California to fund health care services, children’s programs and education. California is the only oil producing state without an oil severance tax, and it would generate $1.2 billion annually for our state.

‘Incredibly reckless’

“Instead, we are taking dirty money. Big Oil has offered to California $100 million to seduce the state into granting the first new oil drilling lease in California since the Santa Barbara oil spill 41 years ago. The loan must be repaid by forgiving future royalty payments to California. This is an incredibly reckless fiscal policy,” he continued.

Garamendi referred to an initial $100 million payment by Plains, which would be followed by annual royalty payments up to $2.3 billion over the project’s 13-year lifespan. The company previously won environmental organizations’ support for its proposal by agreeing to shut down production at Platform Irene in 2022 and three other rigs off Point Arguelo by 2017, close two onshore facilities in Lompoc and along the Gaviota Coast, and donate about 4,000 acres of land to the public.

US Rep. Lois Capps (D-Calif.), whose district includes Santa Barbara and who usually opposes offshore oil and gas development, backed the Tranquillon Ridge proposal when it went before the state lands commission but questioned Schwarzenegger’s using it to help resolve the current budget crisis. “She believes these decisions on important energy and environmental policy should remain with the appropriate policy makers, the State Lands Commission and the Coastal Commission, rather than allow legislators and the Governor to try and use offshore drilling as a silver bullet for their budgetary challenges,” a spokeswoman for the federal lawmaker said on July 22.

Sparano said that the project could show Californians how safely oil could be produced off their coast. “It would use new, slant drilling technology from an existing structure with no new pipes. It would help bring oil which is sitting there to market. It also would help California’s energy supply rely less on imports. With production in the state declining, any new production, onshore and offshore, is a big deal,” he told OGJ Washington Pulse on July 21.

It also could bring new attention to the US Minerals Management Service’s new five-year Outer Continental Shelf plan, which is currently being developed, WSPA’s president continued. The US Department of the Interior agency is having to rely on data that is 20 years old, but which nevertheless suggests that 10.5 billion bbl of oil and 3 trillion cubic feet of gas off the Pacific Coast, most of it off California, he said.

“I think we’ll get a chance, if it goes through, to show what a careful environmental steward the domestic oil and gas industry is,” Sparano said.

Contact Nick Snow at nicks@pennwell.com

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