As officials at BP scrambled to reopen a major Alaskan pipeline, gasoline prices continued to drift higher on financial markets Tuesday — a sign that worries over tight crude oil supplies could bring consumers even more pain at the pump.
A lot depends on just how much crude oil is lost to the market. And that depends on how long it takes to repair the line, which was shut down Sunday after multiple areas of heavy corrosion were discovered. Analysts and oil industry experts say the company has its work cut out for it.
On Tuesday, Energy Secretary Samuel Bodman said that repairs are expected to take until January but that part of the pipeline may be operable before then. That would allow some oil from the Prudhoe Bay field, which supplies about 8 percent of the nation's oil production, to continue to flow.
“A complete shutdown of the Prudhoe Bay system may not be necessary,” Bodman told reporters.
Based on current information, the Energy Department estimated the shutdown will keep some 50 million barrels of oil from getting to market before full service can be restored. That's roughly 10 days' worth of all U.S. production and about 5 days' worth of oil imports.
In the short term, the hardest hit will be refiners — and drivers — on the West coast, where much of much of the Alaskan oil is processed. While any potential squeeze wouldn’t be felt for a few weeks, the loss of North Slope crude will be cushioned by plentiful crude stockpiles, which are currently running well above their five-year averages for this time of year. Bodman said the government was also prepared to draw oil from the U.S. Strategic Petroleum Reserve, if needed.
The upward pressure on gasoline prices also could ease in the next few weeks as the summer driving season winds down and demand for gasoline begins to fall.
Beyond the potential for pain at the pump, the state of Alaska stands to lose millions of dollars in lost tax revenues. At current prices, the complete loss of Prudhoe production is costing the state $6.4 million a day, according to Revenue Commissioner Bill Corbus.
So a lot is riding on how long it takes to fix the pipeline. And the current four-month estimate is just a guess.
"We have taken all nonessential persons off the slope,” Steve Marshall, president of BP Alaska Exploration Inc. said Tuesday morning. More than 100 workers will begin removing insulation to get a better look at the corroded pipes, he said.
Only after those inspections are completed can the repair work begin.
“I think it is a much larger problem than people are led to believe,” said Chris Edmonds, vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. “This is 22 miles of transit pipe that BP runs in its Prudhoe Bay facility in Alaska in territory that is not that easy to get to or work in.”
For starters, the repair job could be hampered by shortages of skilled labor. Since the days in the 1970s when an army of laborers, lured northward from the lower 48 states by high wages, built the 800-mile Alaska pipeline, the oilfield services industry has been hit by a major decline in skilled workers. So it may be difficult to find enough people to effect a speedy repair of the crippled line to Prudhoe Bay.
“The welding is not something you just learn at Welding 101,” said Raymond Paul, a spokesman for the Association of Oil Pipelines. “That’s especially one of the big challenges — to find really qualified welders."
Supplies may also be hard to come by, starting with the tens of thousands of feet of three-foot-diameter, 3/8-inch-thick steel pipe needed to replace the corroded pipeline.
“There’s no inventory out there — it’s a very, very tight market,” said Bill O’Grady, an energy analyst at A.G. Edwards in St. Louis. “If they can get the pipe, three to four months is probably pretty reasonably. But that’s the trick.”
Additional damage?
The discovery of multiple areas of corrosion in the initial inspection also raises the prospect that additional problems could be found. BP discovered the corrosion that forced the pipeline shutdown only after the U.S. Department of Transportation, which regulates the nation's 200,000 miles of oil pipelines, ordered a full inspection after the BP line spilled 270,000 gallons of oil in March. BP faces a criminal investigation into the causes of that spill.
Since 2001, the Transportation Department has required pipeline operators to use a so-called “smart pig” — a device sent through a pipeline that uses ultrasound to spot weak points caused by corrosion or other damage. But based on an exemption to those regulations granted to BP for the Prudhoe Bay pipeline, other inspection techniques were used, according to Paul. After that March spill, the Transportation Department ordered the “smart pig” inspection, which is still under way.
“We need to touch more of the pipe to see where these things are,” said Bill Hedges, BP’s corrosion expert. “We clearly know we weren’t finding the worst spots.”
Some have questioned whether the corrosion that forced the recent shutdown was the result of inadequate maintenance of the 30-year-old pipeline. The Financial Times reported Tuesday that a union representative complained to the company for seven years that increased workloads were hampering proper monitoring of the pipeline.
"They were playing Russian roulette with the facility and the flow lines, jeopardizing the safety of the workers and threatening the environment,'' Chuck Hamel, a spokesman for BP employees critical of the company, told the FT.
Regardless of the ultimate cause of the pipeline outage, the incident will raise questions about whether the oil industry is spending enough of its record profits on maintaining existing oil facilities, said O’Grady.
"People respond to incentives, and the incentive the financial markets have given to the industry is to basically scrimp on this kind of spending — you get no reward for it,” he said. “That’s the potential rub out there that really concerns me. Is this the tip of the iceberg? Are we gong to see all kinds of other problems all over the world?"