* Interior Dept says drilling can resume under new rules
* Ban was supposed to expire at end of November
* Companies likely to face delays (Recasts, updates with comments from industry group and environmental group)
By Ayesha Rascoe
WASHINGTON, Oct 12 (Reuters) - The Obama administration on Tuesday lifted its ban on deepwater drilling seven weeks ahead of schedule, saying new rules cut the risk of a repeat of the BP (BP.L) oil spill, the worst ever to hit the United States.
The U.S. Interior Department said oil companies must comply with new regulations and demonstrate they can adequately respond to blowouts.
"The oil and gas industry will be operating under tighter rules, stronger oversight, and in a regulatory environment that will remain dynamic as we continue to build on the reforms we have already implemented," Interior Secretary Ken Salazar said in a statement.
Analysts said the new rules could slow the return of deepwater drilling to pre-spill levels. An industry group and Senator Mary Landrieu of Louisiana urged Interior to move quickly on permitting, while the environmental group Greenpeace blasted the early end of the moratorium.
The government imposed the deepwater drilling freeze in late May after BP's ruptured Macondo well began leaking millions of gallons of oil into the Gulf.
The ban was supposed to last through November. The Obama administration is lifting it as Congressional Democrats prepare for mid-term elections in November, with voters worried about the economy and unemployment.
The ban drew protests from Gulf of Mexico lawmakers worried about job losses and a court challenge from energy companies.
While reopening the deep Gulf waters will be welcome news for drillers such as Transocean Ltd (RIG.N) and explorers like Royal Dutch Shell (RDSa.L), analysts say it will take months or years to return activity to the pace prior to the April 20 Macondo disaster.
Michael Bromwich, head of Interior's Bureau of Ocean Energy Management, said it would take time for companies to comply with the rules and for the department to review new permit applications.
Every rig must be inspected before drilling begins and company chief executives must certify each project has met all requirements. (Graphic: link.reuters.com/xur95j )
"My sense is we will have permits approved by the end of the year," Bromwich told reporters on a conference call.
Shares of drilling contractors rose on the end of the ban. Transocean shares climbed 4 percent in U.S. trading to $64.42, and Diamond Offshore (DO.N) gained nearly 3 percent to $68.48 in afternoon trading on the New York Stock Exchange.
COSTS TO RISE
New procedures and more rigorous controls will increase costs and slow development of a region expected to boost U.S. domestic oil production. [ID:nN30288579]
Shallow-water drillers, which were not subject to the drilling ban, also have complained about lengthy delays in permitting since the BP spill.
Jack Gerard, who heads the American Petroleum Institute, a major oil lobbying group, urged the government to move quickly to restart drilling.
"Even though the moratorium is lifted, if the permitting process comes to a grinding halt we really haven't accomplished much," Gerard told Reuters.
The department said there were 18 idled rigs in deep water that must seek drilling permits under the new safety rules.
"Today's decision is a good start, but it must be accompanied by an action plan to get the entire industry in the Gulf of Mexico back to work," Senator Mary Landrieu, a Louisiana Democrat and moratorium critic, said in a statement.
She said she would block confirmation of the Obama administration's nominee to head the Office of Management and Budget until she was certain drilling had resumed at an adequate pace.
Greenpeace USA Executive Director Phil Radford blasted the department's decision to lift the moratorium early.
"The White House wants us to believe that they have solved all the dangers of offshore drilling and we can return to business as usual," Radford said in a statement. "It is a false promise, if not a big lie." (Additional reporting by Tom Doggett, Brady Reddall and Anna Driver; Editing by Russell Blinch, David Gregorio and Dale Hudson)