U.S. Court Overturns GOM Drilling Moratorium; Government Set to Appeal

New Orleans federal judge Martin L.C. Feldman has issued a preliminary injunction against the enforcement of the U.S. administration's six-month drilling ban in the offshore Gulf of Mexico (GOM), which followed a one-month suspension in activity in May, in the immediate aftermath of the Macondo oil spill. However, the status of the ban will remain unclear until an appeal from the U.S. administration is heard, meaning "no change" on new deepwater drilling activity for the time being.

Feldman cited the damage to businesses, workers, and the local economies of the Gulf from the ban and said that the administration had failed to justify the need for "a blanket, generic, indeed punitive, moratorium" on deepwater oil and gas drilling, which affects all exploratory and development drilling in water depths of over 500 feet. "Are all airplanes a danger because one was? All oil tankers like Exxon Valdez? All trains? All mines?" asked Feldman, in comments carried by the Associated Press. "That sort of thinking seems heavy-handed, and rather overbearing". The case was brought on behalf of service companies by Hornbeck Offshore, with another case pending in Houston, Texas, brought by rig specialist, Diamond Offshore (which may be pre-empted by the Feldman ruling). Diamond is amongst those facing claims of force majeure from leaseholders affected by the ban, in one of a number of signs of the ripple effects of the moratorium within the oil industry (see table below). Their position has received verbal backing from many of the GOM leaseholders, including Chevron, which has been one of the most vocal in its criticism of the ban, although that has not translated into any legal action from leaseholders directly, as yet.

Secretary of the Interior Ken Salazar has already stated that he plans to issue a new order in the days ahead that will elaborate on the reasoning behind the six-month ban, which affected 33 drilling projects in the GOM region (see table) but has had no impact on current production. The Department of the Interior (DOI) will also ask for a stay of execution on the ban and lodge an appeal against Judge Feldman's ruling at the U.S. Court of Appeals for the 5th Circuit in New Orleans.

In a sign of some of the partisan affiliations guiding thinking on the drilling ban, Democrat Representative and a front-row player in recent hearings on deepwater drilling, Edward J. Markey, called the judge's ruling "another bad decision in a disaster riddled with bad decisions by the oil industry". To date, congressional hearings on the spill have thrown up questions about the role of the regulator, the Minerals Management Service (MMS), the decisions taken by companies under time and cost pressure at the Macondo site, and emergency response plans in place in the event of a spill. In this regard, BP's plan was found to closely resemble those of other major operators, with four (BP, Chevron, ConocoPhillips, and ExxonMobil) citing measures to protect walruses, which do not live in the region, and three listing the number of an expert who died some years ago, although many of the executives cited key differences with the approach followed by BP.

Ripple Effects

The pressure to lift the ban reflects the mounting ripple effects from the oil spill and the resulting moratorium, which have taken in a number of developers and explorers in the GOM region and the rig and service contractors supporting them. This includes the 33 rigs identified by the MMS who were told to halt activity on 27 May, in addition to a number of other exploration and development efforts in play, although Brazil's Petrobras has said this week that it still expects its Chinook/Cascade commissioning to begin on schedule in the second half of the year.

The table below shows information gathered so far on the main leaseholders and rig operators involved, with day rates for rigs alone averaging around US$500,000/day—in cases, as high as US$603,000, for the U.S. Noble Clyde Boudreaux operating for Noble Group—showing the scale of potential losses from the ban, and the incentives to move rigs and activities elsewhere if it runs its full course. There are some differences between MMS data and those reported by news agencies and fleet updates from rig operators in the region (as well as movement on rigs in the interim), but a picture of those immediately affected is becoming more apparent, with implications less evident for those responsible for supplying smaller bespoke services and parts to the industry. While Anadarko, Statoil, and Cobalt have all invoked force majeure on some or all of their GOM rigs, affecting rigs leased by Transocean, Noble, Diamond and Maersk, Transocean and Noble have already stated that they reject Anadarko's claim, with Diamond seeking an overturning of the whole GOM moratorium in the courts (as mentioned above).

Outlook and Implications

With a litigious culture, legal challenges not immediately related to the Macondo incident were always likely, although perhaps the speed with which the moratorium has been overturned has come as a surprise to the administration, which is now scrambling to put together evidence to support its continuation, with some reports that it may even seek to ramp up some measures based on evidence gathered on the Macondo spill. That is likely to see new evidence heard in the coming days, all of which makes any resumption in GOM activities unlikely until operators and contractors are clearer on the legality of a return to "business as usual". President Barack Obama's administration, meanwhile, is very clear that a return to "business as usual" is the last thing it is seeking from this incident, with upstream regulation, equipment requirements, and the opening-up of new areas to exploration all likely to be changed in the wake of the Macondo spill and growing signs that the administration wants to use the incident as a wake-up call to persuade the United States into cleaner energy use, where hydrocarbons are an element in the mix, rather than the dominant ingredient.

Sustaining the moratorium—or a more focused ban—will be an important element in this effort, keeping the public pressure on the industry at large as well as BP and getting to the bottom of the "cozy relationship" that is thought to have contributed to lax safety regulations in the region. With the oil still flowing into the Gulf, the administration has some clear and persuasive evidence on the dangers of a return to work for the rest of the industry without serious new procedures in place. The economic and ecological damage of the spill is likely to far outweigh that of the moratorium in the longer term, though this is of little comfort to the coastal communities who are bearing the brunt of both.