US House Set to Vote on Offshore-Drilling Overhaul

WASHINGTON (Dow Jones Newswires), July 30, 2010

The U.S. House of Representatives is set to vote Friday on remaking the entire offshore-drilling system, setting up a fight over how far the government should go in removing support for the industry and instituting new safeguards following the Gulf oil spill.

Democrats from outside of oil-producing states are pushing the legislation, the first chamber-wide response to the BP oil spill. The disaster has damaged Gulf Coast tourism and fishing, and harmed wetlands and wildlife. But oil-state Democrats are breaking with their caucus to join Republicans in warning that response goes too far and will put independent oil and gas producers out of business.

"I'd like to support the bill, but I can't do it," said Rep. Gene Green (D., Texas). "It would stop most of our independents from being able to drill." He said that "about 30" Democrats are opposed.

The House Democratic caucus expects to have enough votes to pass the spill legislation even if 30 members break ranks. But the defections expose a divide within the party that could stall spill-response legislation in the U.S. Senate. Senate Democrats, who may vote next week on removing liability limits, do not have the 60 votes necessary to get around Republican procedural obstacles and must work with Republicans to pass legislation.

Eliminating the cap on damage claims that companies must pay for offshore oil spills is becoming a proxy for a broader fight about the role of government in offshore drilling. Democrats want to discard liability caps, currently set at $75 million, in order to avoid putting taxpayers on the hook for damages that go beyond the costs of cleanup. On Thursday, the White House called liability limits an "implicit subsidy" for the oil and gas industry, and said it "strongly supports" repealing the limit on economic damages claims.

But without a limit to liability, insurers have indicated that they will stop providing offshore-drilling insurance, leaving drilling to the major oil companies that are able to self-insure against disasters.

"Maybe this is a sector where you really need large companies who can bring to bear the expertise and who have the wherewithal to cover the expense if something goes wrong," Carol Browner, special adviser to President Barack Obama on energy and climate change, said in an interview with the Wall Street Journal a month ago.

Some key House Democrats say that the industry may have a point.

"Are the concerns of the small independents legitimate? Yes, I believe they are," House Natural Resources Committee Chairman Nick Rahall (D., W.Va.) said. "And perhaps in the give and take that's going on currently, we'll find some middle ground there that will take into account their concerns."

House Democrats are pushing to change every aspect of the offshore-drilling business, from the time a company bids on a lease to the point when it designs deepwater wells and puts safety equipment on drilling rigs. Companies with poor safety records would be banned from obtaining new leases or drilling permits, a measure that is expected to hit BP especially hard.

In order to obtain a lease or a permit, BP would have to certify that no more than 10 deaths had occurred at its facilities over the previous seven years as a result of violations. Eleven workers died when the rig BP was leasing exploded in the Gulf of Mexico in April. BP has asked House leaders to soften the legislation, saying that its operations "contribute significantly" to domestic oil production.

Government-mandated safeguards, such as requiring blowout preventers to have two sets of shear rams, are also part of the legislation. Blowout preventers are supposed to shut off wells in the event of a catastrophic disaster, with the shear rams the last line of defense on the equipment. Shear rams are supposed to cut pipe and then seal off the well. But a 2004 study commissioned by the agency formerly known as the Minerals Management Service questioned whether shear rams were strong enough to cut through the thick pipes used in drilling. The joints that interconnect pipes create extra barriers.

Some drilling companies say that their rigs aren't designed to accommodate a second set of shear rams. That raises questions about whether existing equipment could be overhauled or would become worthless.

The bill "would penalize every single well with blowout preventer standards that apply without regard to risk factors such as water depth, well depth, reservoir potential, well pressure or proximity to response equipment," said Jim Noe, general counsel of rig company Hercules Offshore. "At some point, even the companies capable of satisfying all of the breathtaking new requirements will ask themselves, "am I willing to take this much exposure to the federal government?"

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