Deepwater Drilling Ban Lifted by New Orleans Federal Judge

A New Orleans federal judge lifted the six-month moratorium on deepwater drilling imposed by President Barack Obama following the largest oil spill in U.S. history. Drilling services shares jumped on the news.

Obama temporarily halted all drilling in waters deeper than 500 feet on May 27 to give a presidential commission time to study improvements in the safety of offshore operations. More than a dozen Louisiana offshore service and supply companies sued U.S. regulators to lift the ban. The U.S. said it will appeal the decision.

U.S. District Judge Martin Feldman yesterday granted a preliminary injunction, halting the moratorium. He also “immediately prohibited” the U.S. from enforcing the ban. Government lawyers told Feldman the ban was based on findings in a U.S. report following the sinking of the Deepwater Horizon rig off the Louisiana coast in April.

“The court is unable to divine or fathom a relationship between the findings and the immense scope of the moratorium,” Feldman said in his 22-page decision. “The blanket moratorium, with no parameters, seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger.”

Separate Order

“The court cannot substitute its judgment for that of the agency, but the agency must ‘cogently explain why it has exercised its discretion in a given manner,’” Feldman said, citing a previous ruling. “It has not done so.”

Feldman in a separate order yesterday “immediately prohibited” the U.S. from enforcing the drilling moratorium, finding the offshore companies would otherwise incur “irreparable harm.”

Interior Secretary Kenneth Salazar said in a statement that he will issue a new order on deepwater offshore oil drilling.

“We see clear evidence every day, as oil spills from BP’s well, of the need for a pause on deepwater drilling,” Salazar said. “Based on this ever-growing evidence, I will issue a new order in the coming days that eliminates any doubt that a moratorium is needed, appropriate, and within our authorities.”

White House press secretary Robert Gibbs told reporters that “continuing to drill at these depths without knowing what happened does not make any sense.”

Appeal Plan

The U.S. will ask Feldman to stay his ruling pending an appeal, Justice Department attorney Michael Thorp said yesterday at a court hearing in a separate lawsuit challenging the ban. The government didn’t indicate how soon it will request a stay.

If Feldman denies the request to halt enforcement of his order, the U.S. could file an emergency application to the U.S. Court of Appeals in New Orleans to stay enforcement, said Anthony Sabino, a law professor at St. John’s University.

The appeals court isn’t likely to reinstate the moratorium, said Sabino, an expert in complex federal litigation.

“The judge’s decision is the proper application of the law,” he said in an interview. “There’s no question the government’s action was extremely broad.”

Transocean Ltd., which leased the Deepwater Horizon to BP Plc, jumped as much as 3.5 percent yesterday in New York Stock Exchange composite trading after the decision was announced. Hornbeck Offshore Services Inc., which brought the suit, surged as much as 11 percent. Both later retreated, with Transocean shares down $1.42, or 2.6 percent, to $52.49 and Hornbeck down 24 cents, or 1.5 percent, to $15.32 at yesterday’s closing.

Public Safety

The U.S. argued that the moratorium was necessary to assure public safety.

“We need to make sure deepwater drilling is as safe as we thought it was the day before this incident,” Brian Collins, a lawyer for the government, told Feldman in a court hearing June 21. “It is crucial to take the time because to fail to do so would be to gamble with the long-term future of this region.”

BP has two pipes collecting oil and gas from the ocean floor. They collected 25,830 barrels of oil on June 21, the biggest quantity diverted from the Gulf of Mexico since the April 20 spill began, London-based BP said in a statement. David Nicholas, a BP spokesman, declined to comment on the ruling, saying the company wasn’t a party to the case.

Lawyers for the drilling companies told Feldman the moratorium illegally sidesteps a required industry comment period. They also said regulators failed to tell Obama that all active deepwater rigs passed an immediate re-inspection after the Deepwater Horizon exploded and sank, with only two rigs reporting minor violations and the rest getting approval to continue operations.

Louisiana’s Argument

Henry Dart, special counsel for the Louisiana attorney general, told Feldman that federal regulators failed to consult with state officials about the impact of the drilling ban, allegedly violating U.S. law.

“Even after the catastrophic events of Sept. 11, the government only shut down the airlines for three days,” Louisiana said in court papers seeking to lift the ban.

Lawyers for the state and oilfield companies told Feldman that the ban could cost as many as 20,000 jobs if the moratorium lasted 18 months.

“The defendants trivialize such losses by characterizing them as merely a small percentage of the drilling rigs affected, but it does not follow that this will somehow reduce the convincing harm suffered,” Feldman said. He said the economic impacts of the ban would “clearly ripple throughout the economy of this region.”

Feldman granted the injunction after finding it likely the oilfield companies will succeed in proving “the agency’s decision was arbitrary and capricious,” which violates federal law governing policy decisions.

‘Immeasurable’ Effect

“An invalid agency decision to suspend drilling of wells in depths over 500 feet simply cannot justify the immeasurable effect on the plaintiffs, the local economy, the Gulf region, and the critical present-day aspect of the availability of domestic energy in the country,” Feldman said.

Feldman’s ruling “is another bad decision in a disaster riddled with bad decisions,” U.S. Representative Edward J. Markey said yesterday in a statement. “There are serious safety risks that must be examined with these 33 deepwater rigs before they start drilling again.”

The ban didn’t shut down the oil industry in the Gulf, the Massachusetts Democrat said. “Ninety-seven percent of the manned rigs in the Gulf of Mexico are up and running,” he said.

Oil Service Jobs

The “ruling by U.S. District Court Judge Martin Feldman is an important step in returning thousands of oil service workers to their jobs,” Royal Dutch Shell Plc spokesman Bill Tanner said in an e-mailed statement.

“Shell remains confident in its expertise and procedures to safely drill and complete deepwater wells.” Shell’s safety standards often exceed regulatory requirements and include rigorous training program for well engineers, Tanner said.

Kjersti Torgersen, a spokeswoman for Statoil ASA in Houston, didn’t immediately return a call seeking comment. Todd M. Hornbeck, CEO of Hornbeck Offshore, didn’t immediately return a call for comment.

Realistically, not a lot has changed, said Jud Bailey, an analyst at Jefferies & Co. in Houston.

“It’s a small victory for the industry, but clearly the administration has dug in its heels and is going to try to keep this moratorium, come hell or high water,” Bailey said yesterday in a phone interview. “Investors, as it relates to the drillers, are for the most part staying away. There’s too much uncertainty, too much headline risk.”

Bailey said he doesn’t think many operators would run out and immediately try to resume operations. “You run the risk of this getting overturned by the appellate court,” he said.

The case is Hornbeck Offshore Services LLC v. Salazar, 2:10-cv-01663, U.S. District Court, Eastern District of Louisiana (New Orleans).

To contact the reporters on this story: Laurel Brubaker Calkins in Houston at laurel@calkins.us.com; Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net.

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