Government loses bid to keep oil drilling ban

WASHINGTON/VENICE, Louisiana Thu Jun 24, 2010 7:26pm EDT

1 of 33. A worker ties a boom used to mop oil from the Deepwater Horizon spill from a beach in Gulf Shores, Alabama June 24, 2010.

Credit: Reuters/Lee Celano

WASHINGTON/VENICE, Louisiana (Reuters) - The Obama administration lost a legal skirmish on Thursday when a judge refused to put on hold his decision lifting a ban on deepwater oil drilling imposed after the worst spill in U.S. history.

After striking down the moratorium on Tuesday, a federal judge in New Orleans rejected a request to allow the six-month ban to stand while the government appeals his decision.

Judge Martin Feldman issued a brief order denying the stay request, pointing to his previous ruling that criticized the ban as arbitrary, far-reaching and unjustified given the impact on thousands of oil industry workers and communities.

The government has appealed to the U.S. Court of Appeals for the Fifth Circuit and can ask it to stay Feldman's decision. It is also revising the ban to make it more flexible and possibly open some areas to drilling, but has not said when it will issue a new moratorium.

Feldman's latest ruling was more unwelcome news for the administration, which has been on the defensive over what critics call a slow and ineffective response to the 66-day-old spill in the Gulf of Mexico.

The government imposed the moratorium after a well owned by BP Plc ruptured on April 20, unleashing millions of gallons of crude into the sea, one of the biggest environmental catastrophes to hit the United States.

SALAZAR DEFENDS BAN

But the ban, set by President Barack Obama while a commission investigates the causes of the disaster, has been condemned by some on the Gulf Coast, where the economy is closely tied to the energy industry.

"I think he's lost his mind. If they shut down the oil fields, I might as well shut down," said Joan Strohmeyer, who owns a hotel in Venice, Louisiana.

The spill has shut down rich fishing grounds, threatened the Gulf Coast's tourism industry, tarred beaches and killed hundreds of turtles and birds and dozens of dolphins.

Interior Secretary Ken Salazar told lawmakers in Washington the government was aware of the moratorium's impact on the Gulf Coast economy, but he said the ban was necessary "until we get to a level where we can provide a sense of safety to the American people that drilling can in fact continue."

Oil companies say the government has not proven the need for a blanket ban on deep sea drilling and warn it will lead to major layoffs. Judge Feldman agreed and in his ruling on Tuesday sharply rebuked the U.S. government.

BP SHARES HIT NEW LOW

The spill has undermined investor confidence in BP, a staple of British pension funds, as estimated clean-up costs soar. The British energy giant has seen its shares lose almost half their value since the spill.

BP's U.S.-listed shares closed down 3.13 percent at $28.74 in New York trading on Thursday, hitting a new year-low. The company's stock lost 2.47 percent in London.

Analysts said investors were reacting to news that the U.S. government was reviewing the environmental impact of BP plans to drill in Alaska.

"Think about it. How many holes can you have in a bucket? There are just too many problems," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Shareholders are also worried about how much BP will ultimately have to pay for cleaning up the mess in the Gulf of Mexico. Under U.S. political pressure, it agreed last week to set up a $20 billion fund to pay damages to oil spill victims.

BP also faces more than 240 spill-related lawsuits, most filed on behalf of businesses, including commercial fishermen, shippers and resort operators, according to the Westlaw database. Westlaw is a unit of Thomson Reuters.

But at its current levels BP's share price is attracting some interest -- fund managers who focus on undervalued and unloved stocks have started buying BP shares.

The purchases seem small so far and some portfolio managers are still analyzing whether the company will come out of the disaster intact, managers speaking at the Morningstar annual investing conference in Chicago said on Thursday.

BP said its oil-capture systems at the leak collected or burned off 16,830 barrels of oil on Wednesday, a 38 percent drop from Tuesday's record rate of 27,100, after an underwater accident forced a 10-hour shutdown.

With the hurricane season having officially started on June 1, BP is keeping an eye on stormy weather, which could hamper its clean-up and containment efforts.

The U.S. National Hurricane Center said a tropical wave over the western Caribbean Sea could develop into a tropical depression over the next couple of days as it moves toward the Gulf of Mexico.

Most weather models forecast it would move toward the southern Texas and Mexico coasts. Earlier, some models had projected the wave would move toward the BP clean-up operation in the central U.S. Gulf Coast.

(Additional reporting by Tom Doggett and Ayesha Rascoe in Washington, Kristen Hays in Houston, Ross Kerber and Aaron Pressman in Chicago and Jonathan Stempel and Caroline Valetkevich in New York; writing by Ross Colvin; editing by Ed Stoddard and Mohammad Zargham)