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July 13, 2010

Gulf Drilling Ban May Wreak Havoc on States, Landrieu Says

A Gulf of Mexico moratorium on deep- water drilling put in place after BP Plc’s oil spill may cause “almost unfathomable” damage to state and local government finances, U.S. Senator Mary Landrieu said in a court filing.

The six-month ban imposed by President Barack Obama would cut traffic on Louisiana Highway 1, a roadway to drilling launch points, forcing the state to make up $39 million of toll revenue for bond debt, according to the friend-of-the-court brief filed July 2 by Landrieu, a Louisiana Democrat, and business groups in Gulf Coast states.

Loss of wages will put a “severe burden” on the resources of state governments, which are already struggling with cleanup costs resulting from the spill, the brief said. In Louisiana 320,000 direct and indirect jobs depend on drilling, as do engineers in Houston, the filing said.

“If one magnifies the impact across the remaining Gulf Coast states, including Texas, the havoc it could wreak in these communities is almost unfathomable,” the parties said in the brief. “The moratorium essentially cuts the legs from under Gulf Coast communities, which are struggling to survive.”

Louisiana and its parishes, which are similar to counties in other states, might lose $8 million to $15 million of tax revenue a month, the filing said.

Suspension of deep-water drilling may idle 33 floating drilling rigs for as long as six months, putting as many as 46,000 direct jobs on the rigs at risk and threatening to reduce income and sales taxes, according to the Baton Rouge-based Louisiana Mid-Continent Oil and Gas Association.

Reduced Payrolls

The moratorium may reduce local payrolls by nearly $2 billion, according to the filing. In Louisiana oil and gas drilling generates $70 billion of economic activity, including $12.7 billion of household earnings, or 15.4 percent of the state’s total, the filing said.

Louisiana Treasurer John Neely Kennedy has warned that at some point state and local governments will begin feeling diminished revenue because of the moratorium, said his spokeswoman, Sarah Mulhearn, in an e-mail.

The brief was filed in response to the federal government seeking to postpone a ruling delaying a court order by U.S. District Judge Martin Feldman that scrapped the six-month drilling ban imposed May 27 after the explosion and sinking of the Deepwater Horizon oil rig in April.

Court Hearing

A three-judge appeals panel is expected to hear arguments from the U.S. government today on whether the six-month moratorium on deep-water drilling in the Gulf should be reinstated after a lower court threw out the ban.

Obama said the moratorium, covering waters deeper than 500 feet (152 meters), was needed to give a presidential commission time to study offshore operations safety as the oil spill became the largest in U.S. history. Hornbeck Offshore Services Inc. and other oil service companies had sued U.S. regulators, including Interior Secretary Kenneth Salazar, arguing the drilling suspension would cause them irreparable economic harm.

Hiring in tourism-related areas is down in the Gulf Coast region as vacation cancellations have risen and the number of bookings fell from prior years, said Michael Chriszt, assistant vice president of the Federal Reserve Bank of Atlanta, who based his findings so far on anecdotal reports.

“It’s going to have a pretty significant impact on sales taxes and tourism in those areas,” said Chriszt, in a phone interview. “That could have a spillover into state revenue numbers.”

For now, some municipal bond investors say they are reviewing risk to holdings on a case-by-case basis.

“We’re trying to understand the scope of the disaster,” said Ronald Schwartz, who helps oversee $3 billion of municipal bonds as a managing director in the Orlando office of Atlanta- based StableRiver Capital Management. “We’re concerned and we’re watching.”

www.businessweek.com

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