The oil drilling industry goes head-to-head with the Obama administration in court on Thursday over the White House effort to suspend deepwater oil drilling in the Gulf of Mexico for six months in the wake of the catastrophic BP Plc well blowout.

Given the business and environmental stakes, the U.S. Court of Appeals for the Fifth Circuit in New Orleans is expected to rule quickly, after a rare one-hour oral argument on Thursday, on whether deepwater drilling should be temporarily halted again.

A federal judge, also in New Orleans, lifted the administration's moratorium last month after Hornbeck Offshore Services Inc argued it was arbitrary and unfair because it was a blanket ban on all new drilling in depths below 500 feet.

The Obama administration appealed the decision, defending the suspension as needed to provide time to probe the BP oil spill's cause and ensure other drilling rigs operate safely.

The administration is seeking a stay of the judge's ruling at the hearing, slated for 3 p.m. local time (2000 GMT) on Thursday.

Oral arguments will be heard by a three-judge panel -- two of whom were appointed by Republican President Ronald Reagan and one by Democratic President Bill Clinton.

The vessel that was drilling the BP well, Deepwater Horizon owned by Transocean Ltd, sank after an explosion on April 20 that killed 11 people.

The suspension order affected new exploratory and development drilling and halted work at 33 sites, but did not include wells already producing oil.

'COMPELLING ARGUMENTS'

I think the arguments for a stay are pretty compelling here, said David Uhlmann, a University of Michigan Law School professor and the former section chief of the Justice Department's environmental crimes unit.

He said the argument for a moratorium was fairly convincing given the enormous spill, which could sway the appeals court to grant the stay until they can consider the case's full merits.

I would expect there to be a fair amount of tough questioning for industry lawyers about whether the district court judge was simply substituting his judgment for that of the secretary of the Interior. That of course was not his role, he said.

It would take weeks, if not months, for drillers to get their operations restarted even if they win.

And no matter who is the victor at the appeals court, the losing side could go to the Supreme Court. Some oil companies like Shell have said they will not resume operations until the litigation reaches a final resolution.

Complicating matters is a plan by the Interior Department to revise the moratorium that could make it more flexible for drilling companies. It was not immediately clear what would happen to the court case if and when that happens, potentially leaving the industry in limbo.

If the government loses and proceeds with a new moratorium, it is unlikely to let the big rigs go back to work in the deep waters.

I think it's probably optimistic to assume that deepwater drilling in the Gulf will resume shortly, said Whitney Stanco, an analyst at Concept Capital's Washington Research Group.

I think to the extent that there are any refinements in the moratorium they put in place, they're probably going to be limited and difficult to achieve in the near term.

DRILLERS BACKED BY LOUISIANA

The drilling companies have the backing of key local leaders including Louisiana Republican Governor Bobby Jindal and Democratic Senator Mary Landrieu, who have argued the ban should be lifted in part because the drilling industry is worth $3 billion annually to the state's economy.

The timing could not be much worse for the Gulf coast because the communities were just starting to get back on their feet after the devastating 2005 Hurricanes Katrina and Rita.

But the Obama administration has fired back that the ban was essential given the catastrophe unfolding, as millions of gallons (liters) of oil spew from the well. The administration also said the suspension was narrowly tailored and the Interior Department's expertise should have carried more weight.

Because this deepwater spill has been impossible to fully contain, Interior had to take immediate action to minimize the risk of another spill, the Justice Department told the appeals court. The stakes are even higher now that it is hurricane season.

Hurricane Alex interrupted the cleanup effort last week, and bad weather and high seas from less powerful storms this week have hampered skimming and oil spotting.

U.S. District Judge Martin Feldman said the original blanket moratorium was overly broad and the analysis supporting it inadequate given the enormous economic impact it has on thousands of workers as well as the local communities that support the industry.

The industry has noted that inspections after the BP well blowout found only minor infractions of regulations at two other deepwater drilling rigs.

There is no rational connection between the facts found by Interior and the issuance of a blanket moratorium which has shut down the Gulf of Mexico drilling industry in water over 500 feet deep, the companies told the appeals court.

(Editing by Kristin Roberts and Jerry Norton)

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