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Interior Dept. denies it has extended drilling freeze to shallow gulf waters

By Steven Mufson
Washington Post Staff Writer
Thursday, June 3, 2010; 7:44 PM

The Interior Department denied Thursday that it has extended a drilling freeze to shallow waters of the Gulf of Mexico, contradicting an e-mail written earlier in the day by the Minerals Management Service's supervisor of field operations for the Gulf of Mexico.

The confusion started when MMS rescinded five shallow water permits, including two issued only the day before. Michael J. Saucier, regional supervisor of field operations for the MMS Gulf of Mexico region, sent identical emails to at least two companies whose drilling permits were rescinded, saying that "until further notice we have been informed not to approve or allow any drilling not [sic] matter the water depth." Earlier in the week, he had told one of the companies that drilling in water up to 500 feet deep would not be affected by the Obama moratorium.

Later, as hedge fund and investment bank trading desks scrambled to decipher the administration's intentions, an Interior Department spokesman said "shallow water drilling may continue as long as oil and gas operations satisfy the environmental and safety requirements Secretary [Ken] Salazar outlined in his report to the President and have exploration plans that meet those requirements. There is no moratorium on shallow water drilling."

Drilling rig operators said that new regulations -- which haven't been issued yet but which are now expected to be issued before President Obama arrives in the area Friday -- might still cause substantial delays in drilling plans even without a moratorium. One said that he had been told that some rig operators in the middle of drilling with valid permits might be asked to stop and refile permit applications.

"What we don't know is what additional safety information will be required and how long it will take us and our lessees to compile that information and whether we will have a de facto extension of the moratorium to shallow waters," said Jim Noe, general counsel of Hercules, the largest operator of shallow water jack up rigs in the Gulf of Mexico. "And that's the real concern."

Hercules received an e-mail rescinding a permit issued earlier in the week for a well scheduled to commence in a week or two.

Obama announced last week that he would suspend drilling in deep water in the gulf for six months, effectively delaying plans for at least 30 rigs. Lawmakers from Gulf Coast states had urged him to allow continued drilling in shallow waters to protect jobs in the region and Obama did so.

But Thursday the MMS rescinded permits issued earlier in the week. One was for a well in 130 feet of water about 50 miles south of Louisiana. Randy Stilley, chief executive of Seahawk, said that he had been in the process of getting one of his rigs ready to drill that well on behalf of a company called Bandon. He wasn't sure what to do now.

Stilley said that Interior said they must wait to comply with new regulations, and he expected those to include new tests for blowout preventers and new contingency plans for worst case scenarios. But the regulations haven't been issued yet, and it's unclear how much time it will take to meet them. The rigs generally come up for new contracts every 15 to 30 days and therefore frequently need new permits.

"It is hard for our clients to comply with something they haven't seen," Stilley said. "We're getting a lot of mixed signals. And there seems to be some confusion at MMS. To me that's not helpful to them as regulators and certainly not helpful to us in the industry trying to plan our business." He said it was also unclear whether companies awaiting approvals from the MMS would have to submit new permit applications, which would give MMS an additional 30 days to reply.

There are more than 40 rigs drilling in shallow water in the Gulf of Mexico, Noe said. About 100 people work directly for each rig, Stilley said. There are additional jobs linked to supporting the industry.

Shallow water rig operators have argued that their risks are different from the deepwater drilling that led to the giant oil spill now fouling the Gulf. Jackup rigs stand on the sea floor and blowout preventers are positioned on the rig decks, unlike the malfunctioning one Transocean and BP were using a mile below the water surface. In addition, the rigs are drilling in familiar territory since shallow waters have been explored since the 1950s. Much of the new drilling is tapping into natural gas reservoirs left behind by companies more interested in oil in the past.

"Over 46,000 wells have been drilled in the Gulf of Mexico offshore in less than 1,000 feet of water since 1949," said Noe. "We were hopeful that the policy makers had distinguished between shallow and deepwater activities in a meaningful way."

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