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Drillers May Face Months of Waiting Even After Obama Lifts Deep-Water Ban

Oil and natural-gas rigs in the Gulf of Mexico may remain idle for months even if President Barack Obama’s administration agrees to an early end for its moratorium on deep-water drilling.

“In some ways it doesn’t matter when the moratorium comes off, because there are other impediments to drilling now,” Jim Tisch, chief executive officer of Loews Corp., said in an interview today at Bloomberg headquarters in New York. Loews owns 50 percent of Diamond Offshore Drilling Inc., the largest U.S. deep-water oil driller.

Obama is likely to lift the drilling ban in October, ahead of its scheduled Nov. 30 expiration, said Michael McKenna, president of MWR Strategies, an oil-industry consulting firm in Washington. Heightened regulatory scrutiny of drilling’s risks may delay the resumption of operations by companies such as BP Plc and Apache Corp. until mid-2011, McKenna said.

The administration halted drilling in waters deeper than 500 feet after BP’s Macondo well in the Gulf of Mexico blew out April 20. Government officials from Gulf Coast states say the moratorium is ravaging a regional economy already hit hard by the spill, putting the White House under political pressure to end the ban early, McKenna said.

“Lifting the moratorium is almost unimportant,” McKenna said in an interview. “It’s how different the regulatory regime is going to be after. The end game here is to make it a very, very difficult and time-consuming regulatory process.”

Permit Backlog

The BP blowout killed 11 workers and set off the largest U.S. oil spill. The moratorium imposed in response idled 33 rigs and may cost 23,247 jobs, by the administration’s own estimate. Two Gulf rigs, owned by Houston-based Diamond Offshore, have since left the Gulf to drill elsewhere.

“Even after the moratorium is lifted, it’s unclear how long it will take to get permits,” Tisch said.

Where once it took about a month to receive a drilling permit from the government, now “there is a big backlog of applications waiting to be permitted and it’s coming very slowly,” he said. “We have a number of rigs that are idle because we’re waiting for our customers to get permits.”

In addition, proposals to increase or eliminate the $75 million liability cap for oil spills may reduce the number of companies able to drill in the Gulf, he said.

‘Mega’ Oil Companies

“It is unclear today what kind of legislation is going to be passed, but it is possible that in the future the only people that will be able to drill offshore in the U.S. will be mega international oil companies,” Tisch said.

Offshore drillers now have to provide third-party verification that equipment such as blowout preventers, a device that failed at BP’s well, is working. The new standards were proposed in June by the Bureau of Ocean Energy Management, the Interior Department unit that oversees offshore drilling. Operators must also estimate the most oil that could gush in a spill.

Interior Secretary Ken Salazar and Michael Bromwich, head of the bureau, have said the ban can be lifted before Nov. 30 if the industry shows it has improved safety and developed means to contain another spill. Nothing is likely to happen before Bromwich’s public hearings on the oil spill conclude in mid- September, Bromwich has said.

“We are working day in and day out with industry to help them raise the bar on their safety practices, blowout containment, and spill-response capabilities so that deep-water drilling can resume as soon as safely possible,” Kendra Barkoff, an Interior Department spokeswoman, said yesterday in an e-mail.

New Rules

Oil producers are frustrated by some of the administration’s new requirements, said Dan Naatz, vice president of federal resources for the Washington-based Independent Petroleum Producers of America. He cited as an example the lack of an industry standard to calculate the worst- case discharge from a well blowout.

“Some of those things seem like they’re inconsequential, but they can really delay the whole process,” Naatz said. “The efforts are moving in the right direction, but we’ve still got a long way to go.”

New regulations also apply to drillers in shallow water that aren’t under the moratorium Obama imposed in late May. Two permits for new shallow-water wells have been approved since revamped safety requirements were issued June 8, according to the bureau’s website. The fewest permits issued in one month last year was eight, Louisiana Lieutenant Governor Scott Angelle said at an Aug. 4 hearing in New Orleans.

Not ‘Slow Walking’

“That’s not a positive sign,” said Erik Milito, director of upstream and industry operations for the Washington-based American Petroleum Institute, which represents oil and gas producers.

“We have no desire and nobody has secretly instructed me to slow-walk these shallow-water drilling applications,” Bromwich said at the New Orleans hearing. “It’s in everyone’s interests to get these processed and approved and get those people back to work.”

Before the disaster, deep-water wells in the Gulf of Mexico, including BP’s Macondo well, were granted “categorical exclusions” from the full studies required by the National Environmental Protection Act. Such blanket exceptions will no longer be issued while the administration’s review is under way, Salazar said on Aug. 16.

‘Fresh Look’

“In light of the increasing levels of complexity and risk -- and the consequent potential environmental impacts -- associated with deep-water drilling, we are taking a fresh look at the NEPA process,” Salazar said.

That doesn’t mean each new drilling permit will require a full environmental study, which Milito of the American Petroleum Institute estimates could take 12 to 18 months.

Instead, operators of the 31 drilling rigs still idled by the moratorium must submit new exploration plans and reapply for permits to drill, according to the Interior Department. Those plans will be subject to a less rigorous environmental assessment, a compromise opposed by environmental groups.

“Despite all the rhetoric, there’s really no change,” said Bill Snape, senior counsel for the Center for Biological Diversity in Tucson, Arizona. “The categorical exclusions became the symbol of corruption. Now the administration is using that metaphor and, somewhat cynically, saying we’ll ramp it up just slightly and claim we’ve made progress.”

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net.

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