Spill panel calls for offshore drilling reform

WASHINGTON (Reuters) - A White House panel probing BP's massive oil spill called for an overhaul of the regulatory system that was entirely unprepared for the disaster, but the plan was sure to face opposition from Republicans reluctant to expand government oversight.

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.

Many of the recommendations would require Congressional approval 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.

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.

But commission co-chair Bill 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.

"In effect, our nation was entirely unprepared for an inevitable disaster," said Reilly.

As a first step, he demanded that Congress provide the funding to hire additional government inspectors of drilling rigs.

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.

"Like it or not, oil and gas companies are in this together, and they must adopt rigorous standards through an industry-wide safety institute, or risk losing access to these leases and resulting profits," Reilly said.

Commission co-chair Reilly told Reuters last year that the panel was seriously considering calling for an independent self-regulating oil industry group.

On the issue of how much companies should be held responsible for economic damages caused by spills, the commission said the current liability cap of $75 million is far too low.

BP waived that cap for its Gulf spill, pledging to pay all reasonable claims related to the accident.

The commission did not offer a recommendation on how high the liability cap should be raised, but panel co-chair Bob Graham said Congress should consider developing variable caps based on the risks of the well being drilled.

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 legislative efforts.

With Republicans, who are traditionally supportive of the oil industry, in control of the House of Representatives, it could be difficult to enact comprehensive drilling reform.

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 greenlit plans to invest nearly $12 billion in two major deepwater Gulf projects late last year.

The API 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 jumped 2.3 percent on Tuesday, outperforming the tepid gains of 0.5 percent in the broader S&P 500 index. The sector, which has largely been on a climb since early September, is nearing the highest point since September 2008.

Cameron International Corp, 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)