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Resort offers options for gas plant!
Shutdown: Bacara scenarios ....

May 26, 2000

Venoco could recover the $32 million cost of buying and improving its controversial Ellwood oil-and-gas facility by the end of 2001 -- and enjoy a 10 percent-plus annual profit from the operation -- according to Bacara Resort & Spa, which doesn't want a gas processing facility next door.

The soon-to-be completed $222 million, 360-room resort has prepared a detailed economic analysis outlining three scenarios for the plant, which is adjacent to the resort on the Ellwood coast. Bacara, like numerous other businesses and residents, has been asking Santa Barbara County to impose an amortization ordinance on the facility, basically creating a deadline for ending the operation after Venoco has made an appropriate profit.

Last year, the company's controversial Ellwood plant and Platform Holly, about 2 miles offshore, endured numerous releases of gas -- including potentially deadly hydrogen sulfide. The county responded by shutting down the plant temporarily and imposing much stricter operating requirements. Venoco then installed a gas-burning flare on the platform, eliminating hydrogen sulfide incidents for the past several months, county energy officials say.

Earlier this year, Bacara offered to pay $195,000 for a county economic analysis of the facility. But the county declined the offer because of a possible conflict of interest.

Now Bacara, admittedly concerned about the financial impact that future leaks might have on the resort, has prepared its own economic analysis of its next-door neighbor.

"As the incidents (gas releases) increased ... the situation came to a head," said Bacara attorney Michael Arruda, with Baker & McKenzie in San Francisco. "It's become an increasing concern to Bacara."

Bacara's analysis details three options for the plant and platform -- which Venoco apparently purchased for $15 million before spending another $17 million for improvements. Bacara claims any of the alternatives would allow a 10.5 percent annual profit for Venoco:

Without any changes to the facility or Platform Holly, the oil operator would recoup its $32 million investment at the end of 2001, said Bacara analyst Scott Jones, principal and senior vice president of Lexecon Inc. in Cambridge, Mass. However, if the company must abandon the facility, an estimated $21 million effort, the date extends until late 2004.

Closing the onshore gas-processing plant and moving the operation to the platform, about a $15 million proposal, would create a much safer option for nearby residents and offer a profit to the oil operator by the end of 2003. Then the company could continue to operate the platform while processing oil at a much smaller onshore plant.

If the company would build two pipelines to carry both oil and gas to Exxon's Las Flores Canyon plant, eliminating all its onshore oil and gas processing, the shutdown date moves to 2008. This highest-priced proposal would cost about $24 million.

Venoco would not comment about Bacara's financial estimates or the period required to recover its investment, said Mike Edwards, the oil company's vice president of land.

Earlier this week, Venoco announced its own far-reaching $40 million-plus proposal for the plant and platform. The company offered to dramatically downsize its Ellwood facility and move the gas-processing operations offshore to Platform Holly. In addition, the company would close its Ellwood marine terminal, used by barges to ship oil to the Los Angeles area, and establish a much-safer pipeline system as part of the still-evolving proposal.

Venoco's announcement is also an alternative to an amortization ordinance, but demands drilling further into an oil-rich reserve in order to raise revenue for the project, which it estimates at $40 million to $70 million, said Rod Eson, Venoco's executive vice president and co-founder. The California Coastal Commission and state Lands Commission would have to approve any extended-reach drilling from the platform to reach the reserves.

The Santa Barbara-based firm opposes the amortization process, warning that it could create a legal showdown that would cost the company and the county millions of dollars and several years.

"Any amortization ordinance would constitute a taking" of property illegally, said Edwards, the Venoco vice president. "It's a condemnation if you can't develop the (offshore oil) leases."

But amortization is allowed by the county because the Ellwood facility is a non-conforming use of the property in west Goleta, said Santa Barbara attorney Fred Clough, who also represents Bacara.

And amortization creates a "reasonable return" for Venoco, said Jones, who acknowledges that fluctuations in the price of crude oil could affect the payback schedule. Bacara's economic analysis is based on crude prices of about $13.72, $7 or $8 less than the market price today but consistent with historical averages. Higher prices would create a faster payback for Venoco and make a fair amortization date arrive sooner.

The county -- already considering an amortization analysis of the facility -- will review the Bacara study, said Dianne Meester, director of the county Energy Division.

"We got a quick briefing (of the Bacara report), and we'll look at it, but it doesn't alleviate us from doing our own analysis," said Meester, who will ask the Board of Supervisors next month for a state grant to fund a $300,000 study about the future of the plant.

Bacara would admittedly benefit with the elimination of onshore gas processing. The five-star resort -- charging at least $400 per room per night -- must notify guests of the health threats from hydrogen sulfide and methane, which has been found on the property. In the event of a gas release, a public address system would warn guests and outline safety procedures, said Andy Rosenberger, county assistant fire marshal.

But other businesses and homeowners would also like a greatly reduced, much-safer operation, Arruda said.

"It's not just Bacara, it's a whole neighborhood that has grown up around it," Arruda said, pointing to greater safety for the nearby homes, a school, Sandpiper Golf Course and UCSB. "Things have changed; the neighborhood has changed."

Bacara and Venoco officials have discussed compromises the past few months, he added, but negotiations have since stalled.

"There's a certain amount of space that we're not sure we'll be able to bridge" with Venoco, Arruda said. "We've been engaged in this dance for a while."