Congress is considering new legislation that will dramatically and adversely impact domestic energy production offshore Texas, Louisiana, Mississippi and Alabama, says Tim Murray, managing director of Guggenheim Partners LLC.

“The Macondo well blowout (by BP Plc in the Gulf of Mexico) is a disaster that has cost 11 lives and environmental damage that is yet to be accurately quantified. Despite the impact of this disaster, Congress must not act irrationally and emotionally to this incident,” he warned.

“Unfortunately, some in Congress are quickly moving forward with legislation that will have profound, negative consequences for independent producers.”

The proposed changes would increase offshore liability limits to what he termed unrealistic levels under OPA 90 (the Oil Pollution Act of 1990)—as much as $10- to $20 billion, with no liability limits.

Currently, OPA 90 imposes liability on offshore producers for removal costs and $75 million in damages. Independents rely on insurance to assure they can meet the OPA 90 requirements.

But no insurance is available at the $10-billion level, says Murray. In fact, the insurance industry is currently near its worldwide capacity for the E&P industry. Without insurance, independents would have to leave the Gulf and other U.S. offshore areas. Independent production could be shut down, and new drilling would come to a virtual halt. Some 30% of GOM oil and 60% of GOM natural gas production could be lost, he estimates.

Once all the facts are known, a prudent and well-reasoned cost-benefit analysis should be undertaken to balance safety, environmental and domestic energy priorities, he says. “Prior to the Macondo well blowout, the only significant drilling or production environmental incident, more than 40 years ago, was Unocal’s Santa Barbara channel incident in 1969. Yet, from 1953 to 2000, federal offshore lands produced 13.1 billion barrels of oil and 140.5 trillion cubic feet of gas.

“In 2009, federal offshore lands produced 30.2% of all U.S. crude oil and 11.4% of all U.S. natural gas production. Of that, independents produce 30% of all offshore crude oil and 60% of all offshore natural gas. Today, federal offshore lands are estimated to contain 21% of all U.S. crude oil reserves and 6% of all U.S. natural gas reserves.”

Also, federal offshore lands are a major source of revenue for the U.S. Treasury. Federal offshore lands generated more than $5.8 billion in cash bonuses and royalties for the U.S. Treasury in 2009. In 2008, the total was $23 billion, he says.

Although independent oil and gas companies hold 90% of the leases offshore in the Gulf, major oil companies and national oil companies (NOCs) hold the balance and are principally focused on deepwater due to reserve potential and extremely high capital intensity.

The majors and NOCs typically self-insure their offshore operations, while independents rely on the global insurance market. Onerous, unlimited and uninsurable penalties by Congress would drive independents from the Gulf en mass.

“The economies of Gulf Coast states employ thousands directly involved in the offshore oil and gas industry, including technical personnel, boat and helicopter companies, oilfield and remedial operating services, pipeline and gathering companies, shipyards, builders of rigs and platforms and more,” he says.

Prior to the recent incident, worldwide third-party pollution-liability capacity for offshore operations was in excess of $1.5 billion, and the insurance market has already indicated at least a 15% reduction in that capacity as a result of this incident, according to Murray’s research. Tens of billions of dollars in coverage is out of range for insurance providers.

“The impact of dramatically raising the liability cap for offshore operators will force all independents to cease activity offshore, putting at risk a significant amount of domestic crude oil and natural gas production and a loss of significant reserves that will necessitate dramatic increases in imported crude oil and natural gas,” says Murray.

“The economic impact of shutting down offshore oil and gas operations in the Gulf will be much more devastating, by orders of magnitude, than the temporary impact on the fishing industry. While that is an important industry to the Gulf states, the fishing industry is relatively minor compared to the direct impact of shutting down offshore oil and gas operations.”

Also, arbitrarily increasing liability limits and regulatory burdens on the offshore industry would “undoubtedly cause a significant number of bankruptcies of oil and gas operators, service companies, and shore-based businesses” that would cause “massive unemployment and a huge ripple effect on Gulf Coast economic security,” setting back the fledgling economic recovery.

“While televised pictures of oil-soaked birds cause emotional reactions among some citizens, it is important to keep in perspective the loss of American military personnel in the Mideast, which supplies the majority of America’s imported crude oil (excepting Canada),” Murray observes.

“With 30% of America’s oil produced offshore, loss or curtailment of that production will significantly increase foreign crude oil imports, significantly impairing America’s energy security.”

Murray predicts that shutting down 30% of America’s crude oil production from the offshore would increase the price of gasoline, diesel, jet fuel and feedstocks to the petrochemical industry, causing further economic damage.

“The Macondo well blowout is a significant environmental incident. However, it is premature to overreact to the ultimate damage. With the warm Gulf waters, degradation of the oil will occur quickly as warm-water bacteria digest the oil and currents dissipate it.”

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