* Spill panel calls for expanded drilling regulations
* Gov't needs to set up independent safety agency
* Oil industry needs self-regulating entity
(Adds comments from Republican lawmaker, Interior Dept)
By Ayesha Rascoe
WASHINGTON, Jan 11 (Reuters) - A White House panel probing BP's (BP.L)(BP.N) massive oil spill called for an overhaul of a regulatory system that was "entirely unprepared" for disaster and outlined stringent, new oversight, a plan sure to face opposition from Republicans reluctant to expand government involvement.
The White House oil spill commission said in its final major report that the U.S. government needs to expand its drilling regulations, as well as set up an independent drilling safety agency.
"None of the major aspects of offshore drilling safety -- not the regulatory oversight, not the industry safety standards, not the spill response practices -- kept pace with the push into deepwater," said commission co-chair Bill Reilly.
"In effect, our nation was entirely unprepared for an inevitable disaster," he said.
Many of the recommendations would require Congressional approval, however, and Republicans have been critical of extensive new regulations, saying they would further slow the exploratory pace following last year's drilling moratorium that was imposed in response to the spill.
Republican lawmaker Fred Upton, who heads the House Energy and Commerce Committee, blasted the commission's findings, saying they failed to clearly identify the root cause of the "unprecedented disaster."
"Neither this nor any investigation should be used as political justification for a pre-determined agenda to limit affordable energy options for America," Upton said in a statement.
Oil companies have voiced concerns that onerous new regulations could hamper offshore exploration and drive up oil prices. U.S. Gulf of Mexico oil production fell by 70,000 barrels per day in fourth quarter of 2010, with further drops expected this year and in 2012. [ID:nN11141290]
But Reilly said it was time for Congress "to exercise serious oversight" in a regime that has not kept pace with the industry's push into deeper and deeper waters.
Factbox on panel's main recommendations: [ID:nN11131109]
Analyst view on findings of White House panel
Breakingviews: BP fate better deterrent than reforms
Take a Look on commission's final report: [ID:nN11133978]
As a first step, he demanded that Congress provide the funding to hire additional government inspectors for drilling operations.
Following the BP accident, the Interior Department restructured the agency responsible for overseeing drilling and has instituted a raft of new safety rules.
"We have already implemented several of the key reforms the commission has made clear are necessary, and we will use the commission's report and the findings of other investigations to inform future actions to strengthen safety and oversight," Interior Secretary Ken Salazar said in a statement.
The seven-member commission also pushed for the oil industry to create a self-regulating entity to help enforce standards and called on Congress to raise liability limits on offshore drilling operators.
Modeled on the nuclear industry's Institute of Nuclear Power Operations, a self-regulatory group would allow offshore drillers to hold their counterparts more accountable, the commission said in its final report.
While not calling for a halt to drilling in the Arctic, the commission said there is need for more study of the intense physical conditions and Interior should ensure that companies have adequate plans and resources to handle a spill there.
The commission was created by President Barack Obama after an April 20 explosion ruptured BP's underwater Macondo well, killing 11 workers in the Gulf of Mexico and leading to the worst offshore oil spill in U.S. history.
The commission is the first government-sanctioned group to wrap up its probe of the causes of the BP accident. Its report contains few surprises, as it mirrors many statements and reports released by the panel over the past six months.
Although the commission lacks the authority to establish drilling policies or punish companies, its findings could influence future court proceedings and energy policy.
Paul Sankey, an analyst with Deutsche Bank Oil, said he thinks U.S. offshore activity will be lower in the aftermath of the spill. "The broadness of these recommendations and lack of specifics will delay activity," Sankey said.
Still, despite these concerns from the industry, Chevron Corp (CVX.N) greenlit plans to invest nearly $12 billion in two major deepwater Gulf projects late last year. [ID:nN16258848]
The American Petroleum Institute criticized the panel's report for casting doubt on the entire oil industry based on a single accident.
"This does a great disservice to the thousands of men and women who work in the industry and have the highest personal and professional commitment to safety," said API Upstream Director Erik Milito.
The PHLX oil service index .OSX jumped 2.3 percent on Tuesday, outperforming the tepid gains of 0.5 percent in the broader S&P 500 .SPX index. The sector, which has largely been on a climb since early September, is nearing the highest point since September 2008.
Cameron International Corp CAM.N, which made the blowout preventer on the BP well, drove the equipment sector index higher with gains of more than 4 percent in afternoon trading. BP added nearly 3 percent, while Halliburton gained 3.2 percent and Transocean rose 2.3 percent. (Additional Reporting by Timothy Gardner; Editing by Russell Blinch and Lisa Shumaker)