By Kristen Hays and Jeff Mason
HOUSTON/NEW ORLEANS (Reuters) - The Obama administration scrambled on Friday to respond to a court's refusal to reinstate a ban on deepwater drilling imposed after BP Plc's massive oil spill, while insisting the ruling was not a major setback for the policy.
The Interior Department said it will issue a new order on deepwater drilling below 500 feet (152.5 metres) to address the concerns raised by federal courts.
It did not say when the new moratorium would be issued, but officials said it was not likely to come on Friday.
A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled 2-1 on Thursday against the administration's request to stay a lower court decision lifting the six-month drilling ban, saying the government failed to show how it would be irreparably harmed if it were not granted.
The court, in New Orleans, added that the administration also "made no showing that there is any likelihood that drilling activities will be resumed pending appeal."
The ruling was issued unusually quickly after the late-afternoon hearing ended, surprising many trial participants because one of the judges had said he hoped for a decision by early next week.
The ruling pushed shares of Transocean Ltd, the world's largest offshore drilling contractor, up more than 5 percent on the Zurich exchange on Friday. They had lost almost half their value since April.
Transocean owns the BP-leased rig that exploded in the Gulf of Mexico in April, triggering the biggest oil spill in U.S. history.
The flow of oil from BP's blown-out Macondo well is killing birds, sea turtles and dolphins, imperiling multibillion-dollar fishing and tourist industries at a time of high unemployment, and soiling the shores of all five U.S. Gulf Coast states.
TOO RISKY?
The administration said the appeals court ruling was not an outright rejection of its policy, because it lets the Interior Department apply to stop a project if an operator attempts to start deepwater drilling in the Gulf.
"Based on what we have learned since the BP oil spill it has become increasingly clear that companies may not have adequate containment and response capabilities to respond to a spill and therefore as the Secretary has said previously, he will be issuing a new moratorium," Interior spokeswoman Kendra Barkoff said.
The administration said it imposed the moratorium to allow enough time for an investigation of the disaster. The energy industry fears the ban could put costly projects on hold.
Interior Secretary Ken Salazar was to speak in California later on Friday.
Analysts said they did not expect more deepwater drilling projects any time soon.
"Effectively the government's getting what they want by default. It's too risky for companies to start up the deepwater drilling process when you know the rug could be pulled out from underneath you," said Dan Pickering, head of research at Tudor, Pickering, Holt & Co., based in Houston.
HIGH POLITICAL STAKES
The political stakes in the drilling battle are high for U.S. President Barack Obama as he tries in the face of harsh criticism to show he is responding forcefully to the crisis.
The White House said on Thursday it had sent BP a list of questions about the company's efforts to cap the ruptured well that has been leaking crude oil into the Gulf since late April and ordered it to respond within 24 hours.
Retired Coast Guard Admiral Thad Allen, who is overseeing the U.S. response to the spill, said he expected BP's response by Friday afternoon and that he had spoken to Bob Dudley, the head of BP's Gulf Coast restoration unit, about it Thursday night.
Shares of the British energy giant, which had seen its share price plummet by about half at one point during the 81-day crisis, were off about 1 percent, after rallying to gain about 25 percent over the past two weeks.
Investors had been cheered by reports that BP was seeking new investors and optimism that the worst of the spill might be over, amid talk of progress on a relief well considered the best chance to finally stop the environmental disaster.
But the shares were hit on Friday by concern about the expected new moratorium and talk that the relief well was not as advanced as some observers had hoped.
"Some of the weakness you're seeing, in addition to the thought of the new moratorium, is the fact that the relief well is further out than people had anticipated," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.
The relief well is expected to be completed in mid-August.
Shares in drilling companies Hornbeck Offshore Services Inc and Diamond Offshore Drilling were also down.
Hoping to capitalise on an expected 7-10 day stretch of good weather, the U.S. government is pressing BP to begin a switch to a bigger, more storm-proof containment cap at the sea floor, Allen said.
The new cap would capture up to 80,000 barrels (3,360,000 gallons/12,700,00 litres) of oil a day, versus 25,000 barrels currently.
However, BP must remove the existing cap, which will lead to an unchecked gusher of oil into the Gulf until a new cap is in place, Allen said. The switch could take 3-4 days, and about 15,000 barrels per day could gush into the sea over that period.
Allen said the cap could be installed by late Sunday or early Monday.
(Additional reporting by Silke Koltrowitz in Zurich, Leah Schnurr in New York, Ayesha Rascoe and Steve Holland in Washington; Writing by Patricia Zengerle; Editing by Kristin Roberts and Eric Beech)
