New Labour were branded environmental hypocrites by Greenpeace yesterday after it emerged that the Government was fighting a legal challenge aimed at stopping oil exploration on an Atlantic reef.

Among the 21 companies that will benefit if the environmentalists' challenge fails is BP, the company of which Lord Simon - an unpaid and unelected minister - used to be chairman. A row erupted last week when it was revealed that Lord Simon, minister for trade and competitiveness in Europe, still had pounds 2m worth of shares in the company.

Greenpeace's legal challenge centres on exploration licences to search for oil far off the north-west coast of Scotland which were granted by the outgoing Conservatives to companies including Shell, Texaco, Mobil and Elf.

The environmentalists are seeking a High Court judicial review of that decision on the grounds that it breaches European Union directives on assessing the impact of drilling on habitats. The cold-water coral (or lophelia pertusa) that experts argue constitutes a reef is teeming with life but Greenpeace says that the Government and the oil companies have not made adequate assessments of the damage drilling and seismic explosions would cause. They argue that the habitats are so important that they should be protected anyway.

During the election campaign, Labour put forward its environmental credentials in a document called "In Trust for Tomorrow", in which it said it would make green challenges easier with the establishment of an environment division of the High Court. "Citizens' action is needed to strengthen the enforcement of environmental policy. Public enforcement is weak and becoming weaker," the document said.

However, the Government lined up with the oil companies last week to fight the challenge, so Greenpeace now faces a two-day hearing in September which could seriously drain its resources.

"We were staggered when the Government lined up with the oil companies," Gerry Doyle, spokeswoman for Greenpeace, said. "We expected them to agree with us that a full environmental impact assessment needed to be done first to try to protect the species out there.

"Now we have the expense of taking on 21 oil companies and the Government, each with their own legal team. If we lose, the costs will be enormous."

A spokesman for the Department of Trade and Industry, which granted the licences, said the Government was defending the previous administration's decision because it believed it had followed the EU directive - the Environmental Impact Assessment Directive - to the letter.

"Where there is likely to be environmental impact, we require the companies in question to commission environmental research which is then considered by the relevant bodies, like the Joint Nature Conservation Committee," he said. "After those consultations, recommendations are carried out to establish what the company should do to limit any impact on the environment."

He said the department accepted that there was cold-water coral at some of the proposed drilling sites, but there is likely to be argument in court over whether it constitutes a reef.