Video: Crude delay

msnbc.com staff and news service reports
updated 8/7/2006 8:11:04 PM ET 2006-08-08T00:11:04

In what could be another blow to consumers already hard hit by high energy costs, petroleum giant BP PLC said Monday its Prudhoe Bay facilities in Alaska will be shut down for weeks or months due to damage that will require it to replace 73 percent of a pipeline from the field.

The shutdown, which drove oil and gasoline prices sharply higher on energy markets, removes about 8 percent of daily U.S. crude production.

Light, sweet crude oil rose $1.59 to $76.35 a barrel in electronic trading on the New York Mercantile Exchange, while gasoline prices rose more than 4 cents to $2.2725 a gallon.

BP, the world’s second-largest oil company, began shutting down the pipelines on Monday and said it would replace 16 miles of the 22 miles of transit pipeline in the Prudhoe Bay field following a leak discovered Sunday.

Company officials told a news conference they did not immediately know how much it would cost to replace the lines. They will continue to keep the oil field closed and bring parts back into service once it’s safe to do so.

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.

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

Steve Marshall, president of BP Exploration Alaska Inc., said Sunday night that the eastern side of the Prudhoe Bay oil field would be shut down first, an operation anticipated to take 24 to 36 hours. The company will then move to shut down the west side, a move that could close more than 1,000 Prudhoe Bay wells.

Possible major impact on oil prices
Once the field is shut down, BP said oil production will be reduced by 400,000 barrels a day. That’s close to 8 percent of U.S. oil production or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.

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

The shutdown comes at an already worrisome time for the oil industry, with supply concerns stemming both from the hurricane season and instability in the Middle East.

A 400,000-barrel per day reduction in output would have a major impact on oil prices, said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo. A barrel contains 42 gallons of crude oil.

“Oil prices could increase by as much as $10 per barrel given the current environment,” Emori said. “But we can’t really say for sure how big an effect this is going to have until we have more exact figures about how much production is going to be reduced.”

But Victor Shum, an energy analyst with Purvin & Gertz in Singapore, said he expected the impact to be minimal since crude inventories are high.

“So while this won’t have any immediate impact on U.S. supplies, the market is in very high anxiety. So any significant disruption, traders will take that into account, even though there is no threat of a supply shortage.”

No gasoline shortages seen
U.S. consumers will not face shortages of gasoline and other petroleum products because of the BP shutdown, the government’s top energy forecasting agency said on Monday.

“It certainly isn’t going to create any shortages in gasoline, diesel fuel and other petroleum products,” Tancred Lidderdale, an analyst with the federal Energy Information Administration, told Reuters.

Lidderdale said West Coast refiners, where most of Alaska’s crude oil is shipped, have plenty of oil supplies as crude inventories in the region are “above average.”

BP's Marshall 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.

“The results were absolutely unexpected,” Marshall said.

BP America Chairman and President Bob Malone said Prudhoe Bay will not resume operating until the company and government regulators are satisfied it can run safely without threatening the environment.

“We regret that it is necessary to take this action and we apologize to the nation and the State of Alaska for the adverse impacts it will cause,” Malone said in a statement.

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. Some 267,000 gallons of oil spilled. 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.

Even a short shutdown of Prudhoe Bay could be crippling to Alaska’s economy.

Alaska House Speaker John Harris said it was admirable that BP took immediate action, although it’s sure to hurt state coffers. “This state cannot afford to have another Exxon Valdez,” said Harris, R-Valdez.

The Exxon Valdez tanker emptied 11 million gallons of crude oil into Prince William Sound in 1989, killing hundreds of thousands of birds and marine animals and soiling more than 1,200 miles of rocky beach in nation’s largest oil spill.

The Associated Press and Reuters contributed to this report.

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