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Wednesday, April 7, 2010 as of 11:14 AM ET

Natural Disaster

James Rosen



Drilling Moratorium Crippling Gulf, Says Industry

August 11, 2010 - 1:25 PM | by: James Rosen

With the Obama administration returning to federal court to defend its six-month suspension of oil drilling in the Gulf of Mexico, industry executives and analysts claimed the ban was more stringent than originally believed, and exerting a greater impact on the lives and livelihoods of Gulf Coast residents.

Lawyers representing Interior Secretary Ken Salazar were back before U.S. District Judge Martin Feldman in New Orleans Wednesday, seeking to fend off court challenges by an offshore drilling services firm to the newest set of industry rules that Salazar instituted on July 12.  Those rules were meant to preserve Salazar’s original moratorium order, which Feldman ruled unconstitutional on June 22, and to address the concerns articulated by the judge in his ruling.

But some industry analysts say Salazar’s revised rules go further than his first moratorium order, which was set to last until November 30.  The Obama administration said the moratorium was necessary to strengthen the safety of offshore drilling operations in the wake of the April 20 explosion and oil spill aboard the Deepwater Horizon well, operated by British conglomerate BP.  The accident killed eleven rig workers and unleashed an estimated 5 million barrels of crude oil into the Gulf.

“They’re painting the getaway car a different color,” said Dan V. Kish, senior vice president for policy at the Institute for Energy Research in Washington.  Kish said the original moratorium applied only to drilling rigs operating in 500 feet of water or deeper, but that the July 12 order by Salazar applies to all floating rigs in the Gulf.

What’s more, Kish said there are effectively two moratoria in place: the formal one, targeting deepwater drilling, and an informal one targeting shallow-water drilling operations.  “About half of the rigs in the shallow waters of the Gulf are not operating,” said Kish, “because they can’t get permits from the government agency that is supposed to give them permits.  So, in essence, what’s happening is that much of the fleet of deep- and shallow-water rigs in the Gulf of Mexico, which supplies a third of our domestic oil, are being laid up, put in cold storage, awaiting the government to make a decision one way or the other.”

Analysts said that of the thirty-three deepwater rigs in the Gulf, along with another eight under construction and committed to operate in the Gulf, at least four have already left, or are preparing to leave, the U.S. for foreign shores, pursuing contracts in emerging markets like the Egypt, the Congo, Brazil, and Greenland.

Each rig, the analysts said, costs approximately $500-600 million to build, and is constructed under strict debt-financing terms that require the owners to have long-term drilling contracts secured in advance.  “If those contracts, which have been abrogated by the federal government here, are not generating revenue to pay the debt on these rigs,” said Eric Smith, a professor at the Tulane University business school, “the rigs have to leave.  And when they leave…we’ll finish our moratorium and we’ll say, ‘Go back to work,’ and the oil operator is going to say, ‘With what?’ because the equipment will be gone, without any reasonable chance of getting it back anytime soon.”

Smith calculated that current restrictions effectively halting shallow- and deepwater drilling in the Gulf account for the loss of a combined 137,000 jobs, and impose a cost of $3 billion in “payroll effects,” with Louisiana consequently suffering a loss of $300 – $400 million in tax receipts.  Smith’s assessment is in line with some of the projections put forward by Dr. Joseph R. Mason of Louisiana State University, who estimated in a recent analysis that the moratoria will inflict “broad economic losses within the Gulf region and throughout the nation as a whole,” to the tune of $2.7 billion in economic activity.

“The administration is in thrall to the environmental community, unfortunately, and as a result, they’re playing that card, and I think to try and slow up, or increase the cost of, hydrocarbons,” said Smith.  “I don’t blame them for doing that; I just think that’s the reality….After the [1989] Exxon Valdez accident, after the [1969] Santa Barbara accident, we certainly did study the accidents to figure out what went wrong and then take some corrective action.  But we didn’t shut down the industry in the meantime.”

Secretary Salazar’s point man on Gulf drilling operations is Michael Bromwich, director of the new Bureau of Ocean Energy Management, the new incarnation of the agency formerly known as the Minerals Management Service.

Bromwich is presently embarked on a listening tour in the Gulf Coast.  He told an audience in Mobile, Alabama on Tuesday that he doesn’t see the moratorium extending beyond November 30, and held out hope that it could conceivably end sooner than that.  “I’ve asked, and BP has agreed to provide, very detailed descriptions and analyzes and lessons learned on spill containment, on oil spill response, and on drilling safety,” Bromwich said.  “All of that information is extraordinarily relevant to determine whether — when everything is taken into account, including the economic impact — whether the drilling, whether the deepwater drilling moratorium can be shortened, [and] drilling can resume sometime before November 30.”

At the same time, Bromwich made clear that the economic impact of the deepwater drilling moratorium is not his primary concern in his Gulf Coast events this week.  He told the audience in Mobile: “Economic impact is something that we’re paying attention to, that we care deeply about.  We’ve heard about the pain and suffering that people are going through and that certainly is being taken into account.  But that is not the central purpose of these forums, which is to gather information [on drilling safety].”

The co-chairs of the blue-ribbon panel appointed by President Obama to investigate the BP disaster and its after-effects indicated that they will include the economic impact of the moratorium in their final report.

Former Sen. Bob Graham, the Florida Democrat who is one of the co-chairs, told the Washington Post that the final report of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling will address such questions as: “How effective was the moratorium? How well was the moratorium administered and managed? What were the consequences . . . on the side of safety, encouraging enhanced response, as contrasted to the economic aspects?”

Graham’s co-chair, William K. Reilly, a former head of the Environmental Protection Agency, expressed more palpable skepticism about the wisdom of the moratorium, telling the Post: “I don’t understand why it would take six months to vet thirty-three [deepwater] rigs for safety, environmental compliance, regulatory integrity.  It’s never been made clear to me, and the testimony we received in New Orleans [on July 12] was not convincing on that.”

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