Obama administration set for drill ban legal fight

The Obama administration heads to court on Thursday aiming to reinstate a six-month moratorium on deepwater oil drilling imposed after the devastating BP Plc Gulf of Mexico oil spill, but blocked by a federal judge.

The showdown starts at 3 p.m. local time (2000 GMT) at the U.S. Court of Appeals for the Fifth Circuit in New Orleans, where government lawyers will square off for one hour against drilling companies before a three-judge panel.

The Obama administration will "immediately" issue a revised drilling ban if the appeals court backs a lower court decision to block the six-month moratorium on drilling in deep waters, an Interior Department official told Reuters on Thursday.

However, if the appeals court supports the administration's moratorium, the department will not impose a revised drilling ban, the official said.

Regardless of the ruling, the industry is not expected to resume drilling in deep waters any time soon because of the legal uncertainties.

If the judges rule against the moratorium, companies will await the government's next move: the issuance of a revised drilling ban and an another likely appeal.

The Obama administration said it suspended drilling in waters deeper than 500 feet to avoid another oil well blowout and give a special presidential commission time to investigate the disaster.

BP's leaking undersea well in the Gulf of Mexico has soiled the shores of all five U.S. Gulf Coast states.

But drillers like Hornbeck Offshore Services Inc won a reprieve when U.S. District Court Judge Martin Feldman said the moratorium was too broad and arbitrary.

Feldman ruled last month that the Interior Department failed to adequately take into account the economic impact the drilling suspension would have on the industry as well as local communities.

The Justice Department, which appealed, will argue that Feldman wrongly substituted his judgment in place of Interior Department expertise and that the moratorium was narrow by only affecting drilling at 33 sites.

It will ask that his ruling be put on hold.

Back to Work

The appeals court is expected to rule quickly after the rare oral argument on the stay request. Drilling companies want to get back to work, while the government wants to protect against another spill.

Additionally, the state of Louisiana has intervened in the case, telling the court that the drilling industry is worth $3 billion to its economy, which was just getting back on its feet after Hurricane Katrina in 2005.

While the drilling companies and the Obama administration squabble over the blanket moratorium, another complication emerging is a plan by Interior Secretary Ken Salazar to issue, if necessary, a revised drilling suspension that would be more flexible in a bid to mollify critics.

Economic damage from the uncertainty is already being felt. Baker Hughes Inc said it is moving workers out of the Gulf of Mexico to other countries.

"Short-term, we're relocating some of our people on the offshore rigs," Baker Hughes CEO Chad Deaton said on Wednesday after a town hall meeting on the moratorium in Houston. "Fortunately, activity around the world is fairly b."

The legal uncertainties are also taking a bite out of future U.S. production. In its latest forecast, the Energy Department predicted U.S. oil output would be slashed by 82,000 barrels per day --about a week's worth of production -- next year due to delayed or canceled drilling caused by the moratorium.

The deepwater suspension came just over a month after an April 20 explosion that rocked the Transocean Ltd oil rig that was drilling the BP well, killing 11 workers and unleashing the oil spill.

Since the BP well exploded, drilling stocks have been hammered, with Transocean shares down 44 percent and Hornbeck shares down 24 percent, based on the close of regular trading on Wednesday.

The moratorium challenge in court "could give some of these (drillers') stocks a lift in the near term," said Channing Smith, co-portfolio manager of Tulsa, Oklahoma-based Capital Advisors Growth Fund.

More broadly, oil service stocks have taken a heavy beating since the spill and the Philadelphia oil services sector index has dropped 27 percent from its 2010 high hit in late April. The index bounced back in June but started July near the year's lows and is now down 25 percent from the April highs.

[Source: By Jeremy Pelofsky, Reuters, New Orleans, 08Jul10]

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