Salazar May Give Congress More Details on Drill Ban

U.S. Interior Secretary Kenneth Salazar, who has promised a new ban on deep-water oil drilling after an initial one was ruled illegal, has hinted what a revised moratorium might look like and may provide more details when questioned by members of Congress today.

In any new ban, Salazar must reconfigure the original moratorium to address legal flaws cited by U.S. District Judge Martin Feldman in a June 22 ruling. Alternatively, he might impose regulations that effectively stop deep-water drilling without a formal prohibition, legal experts said.

“Feldman’s going to have a problem” with any broadly based, retooled government moratorium, said Anthony Sabino, a professor at St. John’s University in New York who specializes in complex litigation and oil-and-gas law. “They have to cut it back big time,” he said.

Salazar is scheduled to appear before the House Natural Resources Committee on the reorganization of the former Minerals Management Service, which regulates drilling safety. The agency was renamed the Bureau of Ocean Energy Management, Regulation and Enforcement this month. Salazar may be asked about his plans for a new ban as he was on June 23, the last time he testified on the same topic.

President Barack Obama temporarily halted all drilling in waters deeper than 500 feet (152.4 meters) on May 27 to give a presidential commission time to study improvements in the safety of offshore operations. The six-month moratorium was imposed in response to the worst oil spill in U.S. history, caused by the sinking of the Deepwater Horizon rig in the Gulf of Mexico off the Louisiana coast in April.

Irreparable Harm

Hornbeck Offshore Services Inc. and other offshore service and supply companies on June 7 sued U.S. regulators, including Salazar, seeking to lift the ban. The companies argued that they would suffer irreparable economic harm from the suspension of drilling.

Feldman, who is based in New Orleans, found the original ban was illegal because it was “arbitrary” and “capricious.” He said the government failed to explain why 500 feet of water was the threshold for banned drilling, didn’t consider alternatives, didn’t give reasons to support the scope of the moratorium, and failed to justify the ban’s six-month time limit.

Feldman ruled that there wasn’t a strong enough connection between the moratorium and the drilling-safety recommendations it was based on. Salazar could base a second ban on different criteria, according to energy law professor Jack Williams, of Georgia State University in Atlanta.

‘Completely Tapped’

Government lawyers repeatedly cited the industry’s inadequate ability to respond to the current oil spill, much less a second one, in court filings and at hearings. Still, the U.S. didn’t bring up that point in documents supporting the original moratorium.

“If they can prove the U.S. and the industry are completely tapped beyond their capacity to respond, that might be something” Salazar could use to justify a new suspension, Williams said.

Salazar must proceed cautiously in revising drilling restrictions because even a “mild, toned-down version” may trigger more litigation from affected drilling companies, as well as censure from Feldman, Sabino said.

A new ban, Salazar said in congressional testimony on June 23, might take into consideration the differences between developmental drilling in reservoirs where pressures are known and exploratory drilling into formations “where you don’t know as a company what it is you are drilling in.”

Deep-Water Defined

Only five of the 33 wells affected by the original ban are exploratory wells, Feldman said. The judge also noted that the agency’s own safety report preceding the moratorium defined “deep-water” as 1,000 feet or more, double the 500-foot trigger favored by Salazar.

“It was our decision to move forward with allowing shallow water drilling to continue because at the 500-foot level, they can still be anchored to the bottom,” Salazar testified June 23, in defense of the restriction to shallower depths. “It’s still a place where the wellhead can be reached by divers.”

Salazar may delay resumption of deep-water drilling by requiring companies to get new permits for existing wells or to do new environmental impact statements, Williams said. Many current deep-water wells were approved without such impact statements being filed, he said.

This would “slow the industry down without necessarily killing it,” Williams said.

The U.S. also may be able to accomplish its goals by beefing up inspections, Sabino said.

More Inspectors

“The government could tell the companies, ‘You folks can drill, but we’re sending out more inspectors,” he said. “How many safety inspectors and how long it takes to make an inspection is under the discretion of the federal agencies.”

If Salazar orders a new round of heightened safety inspections, which keeps drilling rigs idle without imposing a blanket ban, companies will have a difficult time opposing the plan in court, said Carl Tobias, professor of law at the University of Richmond in Virginia.

“The companies might challenge it, but the government could argue that was in line with what the judge was saying,” Tobias said.

Feldman has denied a U.S. request to leave the drilling ban in place while regulators appeal. The U.S. Court of Appeals in New Orleans yesterday granted an expedited hearing on Salazar’s request to stay Feldman’s order overthrowing the ban. The court will hear the matter on July 8.

Windfall Tax

If Salazar wants to sidestep the legal pitfalls of a new ban altogether, he could discourage deep-water drilling by encouraging Congress “to tax the hell out of all that activity to make it economically unfeasible,” Williams said.

“Something like a windfall profits tax on that part of the Gulf would have the same effect as a moratorium and would be a more traditional government solution,” Williams said.

Hornbeck and the other offshore oil-service companies already have filed a motion accusing Salazar of a “de facto” extension of the ban through his public statements following Feldman’s June 22 ruling. Drillers are afraid to incur the expense of starting back up, for fear they will have to stop again, Williams said.

Until Salazar spells out the new drilling rules, the U.S. is getting a virtual ban that can’t be legally challenged, Williams said. “That is absolutely what the government is doing,” he said.

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

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