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Corroded Alaskan oil pipes shut off

Severe damage to a pipeline means work that will cut off 400,000 barrels a day - about 8 percent of U.S. production - sending prices up yet again.

By ASSOCIATED PRESS
Published August 8, 2006

ANCHORAGE, Alaska - BP said Monday it discovered corrosion so severe that it will have to replace 16 miles of pipeline at the huge Prudhoe Bay oil field - work that could shut down the nation's single biggest source of domestic crude for months and drive gasoline prices even higher.

Oil prices climbed more than $2 a barrel on the news, and gasoline futures rose, too. The West Coast is expected to be squeezed particularly hard, and the government is considering releasing oil from its emergency stockpile to ease the crunch.

BP PLC said it will have to replace most of the 22 miles of so-called transit pipeline at Prudhoe Bay, which produces about 8 percent of the nation's daily supply, or about 400,000 barrels a day.

BP, the world's second-largest oil company, discovered the corrosion with tests that were ordered by the federal government after a big oil spill last March at Prudhoe Bay, situated above the Arctic Circle, 650 miles north of Anchorage.

The oil company said it was surprised to find such severe corrosion, and had gone 14 years without using a device called a "pig" to clean out its lines because it did not believe it was necessary.

Bob Malone, chairman of BP America, said that in a worst-case scenario, it could take weeks or months to replace the pipelines. But the company said it will try to put portions of the network back into operation as they are repaired.

"BP deeply regrets it has been necessary for us to take this drastic action," Malone said.

BP operates the Prudhoe Bay oil field for itself and for other oil companies, namely ConocoPhillips and ExxonMobil. Prudhoe Bay and other oilfields on Alaska's North Slope feed oil into the 800-mile trans-Alaska pipeline. The North Slope produces about 800,000 barrels a day; Prudhoe Bay accounts for half of that.

BP officials said they did not immediately know how much it would cost to replace the lines. The company made $7.3-billion in profit during the most recent quarter.

"We estimate it could take between 2-3 months to get it back on line," Bruce Lanni, an industry analyst with A.G. Edwards, wrote in a research note. "However, there are no assurances that it will return to current capacity, given the complexities and age of the reservoirs."

Steve Marshall, president of BP Alaska Exploration Inc., said tests Friday showed that there were 16 anomalies in 12 areas in a transit line on the eastern side of Prudhoe Bay. Tests found losses in wall thickness of between 70 percent 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 four to five barrels.

The aging pipeline system on the North Slope has been fraught with problems lately.

BP discovered corrosion in the transit lines only after the U.S. Transportation Department ordered their inspection following a spill of up to 270,000 gallons in March. It was the biggest spill in North Slope history and has become part of a criminal investigation into the company's Alaskan operations.

The news sent the price of light, sweet crude oil up 2.22, or 3 percent, to settle at $76.98 a barrel Monday 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, which often takes seven to 10 days.

Crude oil prices already have been driven to record high levels because of concerns over oil supply reliability stemming from fighting in Middle East, threatened U.N. sanctions on Iran for Tehran's suspected nuclear weapons program, political machinations by Venezuelan President Hugo Chavez and militant attacks on Nigerian oil fields.

Alaskan crude oil usually goes to refineries on the West Coast, where there is enough surplus to last about two weeks, analysts said. After that, refiners will have to scramble to line up new supplies.

Because of the disruption of supplies, the Energy Department said it is prepared to provide oil from the government's emergency supplies if a refinery requests it.

The government's reserve has about 700-million barrels in storage on the Gulf Coast. Oil has been drawn at least three times from the emergency petroleum reserve - during the 1991 Persian Gulf War, during the 2000 presidential campaign to help stem heating oil price hikes in New England and following Hurricane Katrina's damage to Gulf Coast offshore oil platforms and refinery capacity.

On Monday, 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.

Information from Hearst Newspapers and the Washington Post was used in this report.

WHAT GOVERNORS SAID

Energy independence and alternative fuel had already been part of the weekend's meeting of the National Governors Association. News of the shutdown put an edge on the topic:

Republican Gov. Haley Barbour of Mississippi: "We need supply to grow. That means more drilling like (proposals to open the Arctic National Wildlife Refuge), more nuclear energy, more coal to liquid."

Democratic Gov. Janet Napolitano of Arizona: "It's just further confirmation of the fact that we need a national energy policy. It's further confirmation that our continued dependence on foreign oil is a problem."

PRICES UP

OIL: Increased more than $2 a barrel, to $76.98.

GAS: The average U.S. retail price of a gallon of unleaded regular hit $3.036.

[Last modified August 8, 2006, 05:33:23]