Oil, Gas Prices Jump as Pipeline Shut Down

Link to article here.

It doesn’t take much to disrupt our oil supplies these days. A perfect storm seems to be brewing and this is all before hurricane season…

Oil, Gas Prices Jump as Pipeline Shut Down
Pipeline repairs may take months, BP says
Associated Press
Aug. 7, 2006

ANCHORAGE, Alaska — BP said Monday it will replace 16 miles of pipeline from its huge Prudhoe Bay oil field and production could be closed for weeks or months, crimping the nation’s oil supplies.

The news drove oil prices up by more than $2 a barrel and boosted gasoline prices. The West Coast was expected to be squeezed particularly hard and the government was considering releasing oil from emergency stockpiles to ease an expected crunch.

BP PLC, the world’s second-largest oil company, began shutting down pipelines Sunday after a leak was discovered. The company said today it would replace about 73 percent of the 22 miles of transit pipeline it operates in the Prudhoe Bay field 650 miles north of Anchorage.

Company officials told a news conference they did not immediately know how much it would cost to replace the lines. They said that the oil field would remain closed while they inspect the lines for corrosion and that they would bring parts back into service once it’s safe to do so.

Once complete, the shutdown will cut production by 400,000 barrels a day, about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.

“BP deeply regrets it has been necessary for us to take this drastic action,” said Bob Malone, chairman of BP America.

BP discovered corrosion in the transit lines only after the Department of Transportation ordered their inspection following a 270,000 gallon spill in March at another section of the field.

Transit lines move processed oil to flow stations for transport down the trans-Alaska pipeline for shipment 800 miles south to Valdez, where it’s shipped to the Lower 48 aboard tankers.

BP officials said the line where the leak was found was last checked in 1992, using a “pig,” a device sent down the tubes to clean and assess pipeline integrity.

BP had not done a routine maintenance “pigging” on its transit lines. They didn’t think it was necessary because those lines carry clean crude from which water was removed.

Steve Marshall, president of BP Alaska, said the company believed ultrasonic testing of pipeline wall thickness was an acceptable substitute on those lines.

In hindsight, he said, that has proven not to be sufficient.

“Clearly, we are already in the process of adjusting considerably our corrosion program,” Marshall said, adding that the company will significantly increase its maintenance and surveillance of the transit lines both now and when they are replaced. The company is spending $72 million this year to inhibit corrosion, up from $60 million last year.

The aging pipeline system on the North Slope has been fraught with problems lately. BP, which posted a net profit of $7.3 billion for the three months ending June 30, operates the Prudhoe Bay field.

In March, BP was blamed for the rupture of a pipeline at the same field, leading to an extension of a criminal investigation into the company’s management of its Alaskan operations.

Steve Marshall, president of BP Exploration Alaska Inc., said tests Friday indicated that there were 16 anomalies in 12 areas in an oil transit line on the eastern side of Prudhoe Bay. Tests found losses in wall thickness of between 70 and 81 percent. Repair or replacement is required if there is more than an 80 percent loss.

BP also said Sunday that workers found a small spill of about 4 to 5 barrels, which has been contained and is being cleaned up.

The news sent the price of light, sweet crude oil up $2.22, or 3 percent, to settle at $76.98 a barrel today on the New York Mercantile Exchange, after peaking at $77.30 earlier in the day

The average U.S. retail price of a gallon of unleaded, regular gasoline was $3.036 on Monday — near its all-time high of $3.057, reached Sept. 5 after Hurricane Katrina hit the Gulf Coast.

Gasoline futures also rose, indicating that the market expects prices at the pump to increase more.

Because of the disruption of supplies, the Energy Department is prepared to provide oil from the government’s emergency supplies if a refinery requests it. Spokesman Craig Stevens said the department will be in contact with BP and West Coast refiners later Monday to assess the situation.

California gets about 20 percent of its oil from Alaska, with the remainder coming from in state and foreign sources.

The reserve has about 700 million barrels in storage on the Gulf Coast to be used in case of a serious supply disruption. The Energy Department in the past has lent SPR oil to refineries when there were disruptions because of pipeline or other problems.

“If there is a request for oil we’ll certainly take a serious look at that,” he said.

Bill Hedges, BP’s technical expert on corrosion, said the Prudhoe Bay pipelines were initially designed to last 25 years, but have now lasted 29 years, with many of the lines in “excellent condition.”

BP’s anticorrosion program is intended prolong the life of the oil field another 50 years so that the infrastructure can be used to bring natural gas to U.S. markets. The company’s reliance on ultrasonic technology will have to be re-evaluated, he said.

“My assumption is that we didn’t do it in the right spots,” he said.

BP, along with oil giants ConocoPhillips and Exxon Mobil Corp., are in negotiations with the state to build a $25 billion natural gas pipeline to Canada to ship the 35 trillion cubic feet of known natural gas reserves on the North Slope.

The troubles at the Alaskan oil field add to other problems for BP in the United States, where the company is the largest oil producer, following an explosion at its Texas City refinery that killed 15 workers in March 2005 and a trading scandal.

The shutdown comes six months after the North Slope’s biggest ever oil spill was discovered on a Prudhoe Bay transit line. BP installed a bypass on that line in April with plans to replace the pipe. Only one of BP’s three transit lines is now operating.

BP puts millions of gallons of corrosion inhibitor into the Prudhoe Bay lines each year. It also examines pipes by taking X-rays and ultrasound images.

BP has a 26 percent stake in the Prudhoe Bay field, meaning its own production would be cut by 100,000 barrels a day, or around 2.5 percent of the company’s worldwide production, said spokesman David Nicholas. He declined to provide any forecast on the impact of the shutdown on earnings.

U.S. shares of BP PLC fell $1.19, or 1.6 percent, to $71.35 in morning trading on the New York Stock Exchange. Shares of BP Prudhoe Bay Royalty Trust, which derives revenue from royalties of BP’s Prudhoe Bay oil, fell $9.12, or 10.4 percent, to $78.77 on the NYSE.