Legal drilling battle looms as Gulf spill spreads

SAN FRANCISCO/CHANDELEUR ISLANDS, Louisiana (Reuters) - The White House is set to step up its legal battle to keep deepwater drilling on hold in the Gulf of Mexico after oil companies persuaded a U.S. judge to overturn a six-month ban.

Interior Secretary Ken Salazar said late on Tuesday he would order a new moratorium "in the coming days" to reinstate a temporary ban aimed at ensuring offshore safety after the worst oil spill in U.S. history struck at a BP operation on April 20.

"We see clear evidence every day, as oil spills from BP's well, of the need for a pause on deepwater drilling," Salazar said in a statement.

Salazar will testify to a Senate subcommittee at 11 a.m. EDT on Wednesday, along with Michael Bromwich, the new head of the Bureau of Ocean Energy.

The bureau is the new name of the Minerals and Management Service, the troubled regulator blamed for failing to police the energy industry adequately. Bromwich, a former Justice Department inspector general, is assigned to overhaul it.

But President Barack Obama, also dealing with his top general in Afghanistan over insulting comments in a magazine article, postponed Wednesday's energy policy meeting with senators which would have covered process for passing energy and climate laws this year.

The two-month old disaster -- which threatens fishing and tourist industries in the Gulf as well as fragile ecosystems -- has shattered investor confidence in BP Plc, the British-based energy giant blamed squarely for the spill.

The price of BP's stock, a stalwart of investment portfolios in Britain and the United States, has been slashed in half since the start of the crisis.

On June 17 the company halted dividend payments, pledged $20 billion to a special fund to pay for the clean-up, and said it would step up asset sales to $10 billion worth over the next 12 months.

BP shares fell to 13-year lows in London on Tuesday amid uncertainty about the company's value as it grapples with the containment, clean-up, lawsuits and mounting costs. On Wednesday at 0945 GMT the company's shares were up 1.14 percent at 337.8 pence.

The entire sector is also under scrutiny "given the new politicization of the oil industry," said Michael Cuggino, chief executive of Pacific Heights Asset Management in San Francisco, which holds BP shares.

"I think we're all trying to find out what the company's worth right now," he said. "It could go lower certainly. It could also bounce back and the fog clears and you begin to have some clarity with respect to what the problem is."

TOP OF OBAMA'S AGENDA

Seeking to restore confidence and rehabilitate BP's image, Managing Director Bob Dudley will take over the day-to-day response to the spill from Chief Executive Tony Hayward, who was criticized for a series of gaffes.

The crisis has thrust its way to the top of Obama's crowded domestic agenda and he has evoked it to rally support for his efforts to craft a clean energy and climate change policy.

The high-stakes legal battle over deepwater drilling began after the BP well ruptured, spewing millions of gallons (liters) of crude into the Gulf of Mexico and killing 11 workers.

Obama imposed the ban while officials checked that other wells were operating safely. But in granting a request by more than a dozen oil services companies for the moratorium to be overturned, the judge challenged its "immense scope."

Figures from the International Energy Agency on Wednesday confirmed its view that by 2015, up to 800,000 barrels of crude or about 0.8 percent of projected global output could be affected by widespread delays, although it said the figure could also be as low as 100,000 barrels.

A new Reuters/Ipsos poll found most Americans still support offshore drilling despite the spill.

SANDBAR BUILDERS

Other skirmishes are taking place over the spill, pitting local against federal officials.

Forty miles off the Louisiana coast, on the north end of the Chandeleur Islands, a sand dredge sat idled late on Tuesday after the U.S. Fish and Wildlife Service ordered operators to stop building new sand barrier islands.

The agency wants local officials to put the dredge farther out but face complaints that will waste time -- a common complaint about the federal response to the effort.

"Adaptive management and common sense are critical to the success of this project if we are going to prevail in protecting our precious marsh," Billy Nungesser, president of Plaquemines Parish, said in a letter to Obama complaining about the delay.

(Writing by Ed Stoddard and Andrew Callus; Editing by Hans Peters)

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