RPT-Obama administration set for drill ban legal fight

* U.S. appeals court set to hear arguments Thursday

* Ruling expected quickly over reinstating moratorium

By Jeremy Pelofsky

WASHINGTON, July 8 (BestGrowthStock) – 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 (BP.L: )(BP.N: ) oil spill but blocked by a
federal judge.

The high-stakes showdown starts at 3 p.m. local time (2000
GMT) 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 (152.5 meters) 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. (HOS.N: )
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. (BHI.N: ), 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 (RIGN.S: ) 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. (DO.N: ) 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 (CIAOX.O: ).

More broadly, oil service stocks have taken a heavy beating
since the spill and the Philadelphia oil services sector index
(.OSX: ) 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.
(Additional reporting by Rodrigo Campos in New York and Anna
Driver in Houston; editing by Paul Simao)

RPT-Obama administration set for drill ban legal fight