The Obama administration heads to court on Thursday with a single goal -- to reinstate a six-month moratorium on deepwater oil drilling imposed in response to the BP Plc oil spill but blocked by a federal judge. The high-stakes showdown starts at 3 p.m. local time (4 p.m. ET) at the U.S. Court of Appeals for the Fifth Circuit in New Orleans, where government lawyers will square off for one hour against drilling companies before a three-judge panel. The Obama administration said it imposed the suspension of drilling below 500 feet to avoid another oil well blowout -- BP's leaking undersea well in the Gulf of Mexico has soiled the shores of every U.S. Gulf Coast state. But drillers like Hornbeck Offshore Services Inc. won a reprieve when U.S. District Court Judge Martin Feldman said the moratorium was too broad and arbitrary.
Feldman ruled last month that the Interior Department failed to adequately take into account the economic impact the drilling suspension would have on the industry as well as local communities. The Justice Department, which appealed, will argue that Feldman wrongly substituted his judgment in place of Interior Department expertise and that the moratorium was narrow by only affecting drilling at 33 sites. It will ask that his ruling be put on hold. The appeals court is expected to rule quickly after the rare oral argument on the stay request. Drilling companies want to get back to work, while the government wants to protect against another spill. Additionally, the State of Louisiana has intervened in the case, telling the court that the drilling industry is worth $3 billion to its economy, which was just getting back on its feet after Hurricane Katrina in 2005.
While the drilling companies and the Obama administration squabble over the blanket moratorium, another complication emerging is a plan by Interior Secretary Ken Salazar to issue a revised drilling suspension that might be more flexible. As a result of the moratorium, some companies have said they will focus on work elsewhere, including the oilfield services company Baker Hughes Inc., which is moving workers out of the Gulf of Mexico to other countries. "Short-term, we're relocating some of our people on the offshore rigs," Baker Hughes CEO Chad Deaton said on Wednesday after a town hall meeting on the moratorium in Houston. "Fortunately, activity around the world is fairly strong." The deepwater suspension followed an April 20 explosion that rocked the Transocean Ltd oil rig that was drilling the BP well, killing 11 workers and unleashing the oil spill. As a result, the government quickly inspected 29 of the 33 deepwater wells.
Those spot checks found 27 rigs compliant with regulations and permit terms, while two had minor violations, according to Hornbeck. Diamond Offshore Drilling Inc. filed its own lawsuit against the moratorium but then joined the others. Since the BP well exploded in April drilling stocks have been hammered, with Transocean shares down 44 percent, Hornbeck shares down 24 percent and Diamond shares off 28 percent, based on the close of regular trading on Wednesday. The moratorium challenge in court "could give some of these (drillers') stocks a lift in the near term," said Channing Smith co-portfolio manager of Tulsa, Oklahoma-based Capital Advisors Growth Fund.
More broadly, oil service stocks have taken a heavy beating since the spill and the Philadelphia oil services sector index has dropped 27 percent from its 2010 high hit in late April. The index bounced back in June but started July near the year's lows and is now down 25 percent from the April highs.