A Hammond federal judge will not stop BP from expanding its Whiting refinery to process Canadian crude oil, as requested in a lawsuit filed by a local environmental group.

That does not mean BP lawyers are done battling environmentalists over the $3.8 billion expansion and the related state air quality permit. Indeed, Hammond federal Judge Philip Simon dismissed the National Resources Defense Council's request for an injunction Friday, because the federal lawsuit mirrors a still-pending appeal filed with the state's Office of Environmental Adjudication by environmental groups.

Simon wrote that federal courts should let state agencies rule on the expansion before the matter goes federal. He called the NRDC federal case a "collateral attack," a "terribly inefficient" attempt to get "multiple bites of the apple."

Weighing concerns over federalism and the role of the states in environmental regulation, Simon ruled for state oversight instead of federal litigation.

"To allow it would be to gut the carefully crafted system that Indiana has put in place," Simon wrote.

Simon's ruling is a victory for BP in its fight over the expansion project, which is set to wrap in 2011. The project will increase the refinery's gasoline production by 1.7 million gallons a day, company officials said. Construction has started, even as the company defends challenges from environmental groups over air and water pollution.

The National Resources Defense Council sued BP in July 2008, claiming the Indiana Department of Environmental Management granted BP its air permit based on BP's "demonstrably incorrect representations" about the project's increase in air emissions. The suit asked Simon to block the project and force BP to go back to the state for another air permit.

While he won't halt the project, Simon did not dismiss all of the lawsuit's claims against BP. He ruled that federal courts can consider the suit's third claim: that construction crews started work on the refinery before BP sought any permits. Simon ruled that his court could still consider levying a financial penalty against BP for that claim.

The appeal to the state Office of Environmental Adjudication is scheduled for a hearing in October.

BP spokesman Brad Etlin said the expansion is proceeding as planned. Lawyers for the environmentalist group did not return calls for comment.