As California teeters on the verge of insolvency, the governor has proposed expanding offshore oil drilling under a plan approved by environmental groups as a way to tap new revenue while protecting the environment.

In a rare agreement between environmental groups and an oil producer, Plains Exploration & Production Co. (PXP) has agreed to permanently shut down four oil platforms off the southern California coast and two onshore processing facilities in Santa Barbara by 2022, and donate 4,000 acres of land for public use, in exchange for the right to immediately expand drilling in the state's seafloor from a platform it operates in federal waters.

Environmental and community groups in Santa Barbara have hailed the project, called Tranquillon Ridge, as a major milestone in their efforts to shut down the oil rigs off Santa Barbara's coast. Current law allows offshore drilling operations that were in place prior to a 1981 moratorium on new offshore drilling to continue indefinitely.

Gov. Arnold Schwarzenegger has championed the Plains project as a new source of desperately needed revenue to help fill California's $24.3 billion budget shortfall. The state would collect $100 million from Plains on July 1 and as much as $2.3 billion in royalties over the 13 years of the project.

Schwarzenegger and other California officials have expressed strong, united opposition to new offshore drilling over concerns about the environment, most recently in response to a Bush administration-era proposal to reopen waters in the nation's Outer Continental Shelf to new drilling.

 
   Old Rigs, New Revenue

Schwarzenegger has focused on the oil-rig shutdowns and near-term revenue from the Tranquillon Ridge project, but he also argues that it would redirect money to California that would otherwise go to Washington.

"We believe this project would be good for the state, not simply from a fiscal perspective but from an environmental perspective," said H.D. Palmer, a spokesman at the administration's Finance Department.

If oil is going to be produced from California's seabed, the state should get a piece of the royalties, otherwise "we might as well be writing Washington a check," he said.

A small fraction of the 240 million barrels of oil California produced last year came from the state's offshore oil fields, while production from federal waters off the state's coast produced double the amount.

Despite support from environmental groups, including a group called Get Oil Out, the proposal hit a snag in January when the state Lands Commission rejected the plan on a 2-1 vote, in part because it doesn't yet have approval from the federal government, which has authority over the oil platforms. The plan's chief opponent is Lt. Gov. John Garamendi, a Democrat who is running for a seat in the U.S. House.

Schwarzenegger, a Republican, and environmental groups say they're confident they can get the federal approval needed to move the Tranquillon Ridge plan forward.

The Lands Commission "definitely raised some issues, but we feel confident we can address them," said Linda Krop, an attorney for the Environmental Defense Center in Santa Barbara, one of the groups that brokered the deal.

Even with legislative approval, the proposal requires approval from the state Coastal Commission and the U.S. Interior Department. The Legislature is expected to pass a budget bill, with or without the Tranquillon Ridge plan, by June 15.

-By Cassandra Sweet, Dow Jones Newswires; 415-439-6468; cassandra.sweet@dowjones.com