California oil refiners take note: Attorney General Jerry Brown is taking a tough line when it comes to greenhouse-gas emissions.

A recent agreement ConocoPhillips (COP) reached with Brown to offset the greenhouse-gas emissions from an expansion at its Rodeo oil refinery near San Francisco has set a precedent that other facilities will likely have to follow.

ConocoPhillips agreed to stop operating a production unit at the refinery and to contribute more than $10 million to local greenhouse-gas offset programs. The company will offset an expected 500,000 metric tons of carbon dioxide a year from a new hydrogen plant by auditing its three California refineries to identify sources of greenhouse gases and opportunities to cut them. The Rodeo plant will also conduct an energy-efficiency audit to identify feasible efficiency measures.

The Sept. 11 agreement was a watershed moment for California refiners who face both a growing market for fuels and increasingly stringent environmental requirements. Brown's deal makes clear that the work of reducing greenhouse gases from refineries begins now, ahead of state regulations, and refiners are scrambling to respond in a way they can justify to investors. Some have begun working on their plans in consultation with the attorney general's office, while an industry trade group is lobbying for changes in the law that made Brown's actions possible.

As part of the agreement, Conoco will provide $7 million to the Bay Area Air Quality Management District for offset projects in the San Francisco Bay area, and $2.8 million on reforestation to sequester an estimated 1.5 million metric tons of greenhouse gases. The company surrendered the operating permit for a calciner at its Santa Maria oil refinery that produces graphite petroleum coke for the steel industry and emits about 70,000 metric tons of greenhouse gases annually. The refinery will continue to produce fuels such as gasoline and diesel.

Meanwhile, the bar for future refinery projects is likely to rise, Brown said.

"ConocoPhillips got a lot of consideration because they were the first," Brown said. "We have to get more demanding."

Conoco's agreement ended an appeal Brown had filed against an environmental report Contra Costa County had certified for the expansion project. Brown had argued the report didn't adequately address the project's climate impacts.

Refiners' Sentiments Mixed

Some refiners embrace Brown's approach, while others don't, but all are stepping carefully.

Dallas-based Alon USA (ALJ) is on board with Brown's approach.

"I, personally, believe Attorney General Brown is on the right path," said Chief Executive Jeff Morris, who met with Brown within days of his agreement with Conoco to assure him the company was taking its carbon footprint seriously.

Morris anticipates greenhouse-gas mitigation will add to the already high cost of refinery enhancements, but views it as part of doing business in California.

"The regulations aren't developed and no one knows what will be done to create reductions, but I view this as being what our California customers want," said Morris.

Tesoro Corp. (TSO), which owns a refinery in Los Angeles and another one near San Francisco, hasn't signed on to the Brown's approach.

"Tesoro hasn't factored greenhouse gas reductions into investment plans yet, as no rules have been written," said Lynn Westfall, the company's vice president of external affairs and chief economist.

Tesoro has calculated emissions for all of its refineries and expects that more energy-efficient processing equipment at its northern California plant and other conservation will reduce its greenhouse-gas emissions, Westfall said.

The regulations that Tesoro and others are watching for aren't likely to surface before 2009, according to the California Air Resources Board, which is charged with drawing up the rules. Enforcement of California's climate change law, and its rules, is set to begin in 2012. The law calls for the state to cut greenhouse gas emissions by 25% to reach 1990 levels by 2020.

An inventory of California's current greenhouse-gas emissions and an estimate of its 1990 emissions are due in December, said CARB spokeswoman Jennet Paauwe.

Chevron Corp. (CVX), California's biggest refiner, has also come under Brown's scrutiny.

In May, Brown filed comments with the city of Richmond regarding the company's plans for its refinery there, citing concerns that the changes would result in a significant increase in greenhouse-gas emissions.

Chevron has been open about its greenhouse-gas emissions from its refineries, although it avoided commenting directly on Brown's involvement in the Richmond project.

Early Action As Status Quo

"Chevron shares the concerns of the public regarding climate change and we believe it is important that our stakeholders understand how we are managing the issue," said Chevron spokesman Alex Yelland.

Chevron's Richmond refinery project involves replacing existing equipment with newer technologies that are more energy efficient and will improve operational reliability, Yelland said. The improvements will reduce greenhouse-gas emissions and is in line with the American Petroleum Institute's Climate Action Challenge to reduce greenhouse gas emissions through a 10% energy-efficiency improvement at refineries by 2012, he said.

A forthcoming environmental impact report on the Richmond refinery project is likely to address both greenhouse-gas emissions and Brown's comments, said Yelland. The report is being prepared by a third party for the city, with information provided by the company.

Chevron has measured and reported greenhouse-gas emissions from its global operations for a number of years, he said.

Chevron and ConocoPhillips are members of the California Climate Action Registry, a nonprofit organization that requires members to report their carbon emissions in California, and encourages them to increase their energy efficiency and cut their greenhouse-gas emissions.

The companies' early action could pay off, as oil refining and other industries can expect continued close monitoring and pro-active measures from Brown regarding their greenhouse-gas emissions.

"I have the legal authority and I will fully exercise it," Brown said.

Under California's Environmental Quality Act, expansion projects must adopt all feasible methods of greenhouse-gas mitigation, he said.

The Western States Petroleum Association has complained that Brown's pressuring of refiners to cut their emissions prior to the establishment of state rules will cause capital projects to slow down.

The California Environmental Quality Act has to be modified to incorporate and integrate climate change so that projects don't get stopped in their tracks," said Catherine Reheis-Boyd, the group's chief operating officer.

Brown disagrees.

"Nothing justifies doing as little as they can for as long as they can," he said. "The people and Gov. Schwarzenegger are with me on this issue."

(Beth Heinsohn covers ethanol and biofuels in addition to traditional crude-oil refining for Dow Jones Newswires.)

Copyright (c) 2007 Dow Jones & Company, Inc.