Published: August 7, 2006
Last Modified: August 8, 2006 at 02:01 AM
BP began a complete shutdown of the giant Prudhoe Bay oil field Sunday after a leak onto the tundra raised new and troubling questions about dangerous corrosion of North Slope pipelines.
The extraordinary shutdown will reduce the flow of all North Slope oil by 400,000 barrels a day -- nearly half the Slope's normal output -- and could rattle oil and gasoline markets. The shutdown also will crimp state tax and royalty revenue by millions of dollars a day.
Shutting down the field and its roughly 1,000 wells will take days to complete, and BP executives said the field will stay down until the company can prove the pipes are safe to operate or until other pipes can be used or built to bypass bad ones.
BP executives rallied early Sunday to deal with the crisis, which began after crews checking major Prudhoe Bay oil pipelines for corrosion discovered a leak that sent up to 210 gallons of crude onto the tundra.
Company managers decided to shut down the entire field as a precaution and start an intense new round of inspections to see whether the pipes are safe to operate.
BP already had been under intense pressure to deal with corrosion and maintenance problems that in recent months have drawn the scrutiny of state and federal pipeline and pollution regulators, members of Congress and federal criminal investigators.
The scrutiny came in the wake of a corrosion-related spill from another Prudhoe pipeline that sent an estimated 201,000 gallons of crude over about 2 acres of tundra. That spill, discovered March 2, was the largest on the Slope since oil production began there in 1977.
Steve Marshall, president of BP Exploration (Alaska) Inc., said Sunday this weekend's spill, coupled with an inspector's report received Friday showing that a pipeline, 30 inches in diameter, might be pocked with weak spots caused by corrosion, prompted the shutdown decision.
"It's a very serious situation," he said. "We clearly, deeply regret having to take this action."
The shutdown came two days after John Browne, BP's London-based chief executive, went to Prudhoe Bay to look at the spring spill site. During his Alaska visit, Browne apologized for recent company lapses, including the spill.
Marshall said Alaska managers consulted Browne, who flew out of Alaska late Friday, about the shutdown, and Marshall said he personally called Gov. Frank Murkowski on Sunday to let him know it was coming.
"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," said Bob Malone, who is Marshall's boss as president of BP America.
Prudhoe Bay is the country's largest single oil field, and one of the largest in the world. BP owns about 26 percent of the field and runs it on behalf of other owners including Exxon Mobil and Conoco Phillips, which each own about 36 percent.
Wealth from Prudhoe transformed and modernized the Alaska economy and, although it is in steep decline, Prudhoe continues to be Alaska's most important source of revenue to run state government.
State lawmakers, meeting in special session in Juneau in part to consider raising oil taxes, debated suspending a key vote Sunday pending more information on the shutdown, but the House went ahead and passed the tax bill. The bill now goes to the Senate.
Prudhoe's output represents about 2.6 percent of total U.S. supply, including imported oil, and up to 8 percent of U.S. domestic oil production. Loss of that much oil could rattle crude markets, pushing up prices, industry analysts said Sunday.
Already, prices are very high. At Friday's closing price of $74.16 a barrel for North Slope oil delivered to West Coast markets, 400,000 barrels are worth nearly $30 million a day -- a big financial hit for the oil companies as well as for the state.
Robynn Wilson, state tax director, estimated the Prudhoe Bay shutdown will cost the state roughly $6.4 million a day.
She said, however, the state won't really be losing any money.
"This is not lost income. It would only be deferred," she said. "When the field is brought back online, there will be a surge in production."
This weekend's leak occurred in what's known as a transit line, a major pipeline that feeds crude oil into the trans-Alaska pipeline, which carries all North Slope oil south for 800 miles to the tanker terminal at Valdez.
BP, under orders from federal pipeline regulators, is in the midst of a campaign to systematically clean and scrape sludge from the inside of the pipes, then send an electronic device called a "smart pig" through them to look for corrosion, which can eat holes through the steel walls of the pipes. A total of 22 miles of these transit lines are to be cleaned and pigged, BP executives said.
On Friday, BP received a report that a smart pig run done in late July turned up unexpected problems -- 16 "anomalies," or thin spots, in 12 locations on a transit line on the east side of the sprawling Prudhoe Bay field.
In response to the report, BP crews went to examine the line and found oil-soaked insulation at one spot. As they tended to that, the crew noticed the oil leak nearby, Marshall said.
On Sunday morning, BP executives huddled and made the decision to shut down Prudhoe Bay.
BP says it spends millions of dollars annually to fight corrosion, an insidious problem that is a constant worry in the oil fields. Most corrosion is caused by water contacting steel.
Last month, BP executives announced a $50 million initiative to inspect, clean and replace Prudhoe pipelines.
Although the entire North Slope oil patch, which has many oil fields large and small, has been shut down many times to accommodate, for example, maintenance on the trans-Alaska pipeline, the discrete shutdown of Prudhoe Bay is believed to be unprecedented, BP spokesmen said.
Michael Williams, the state Revenue Department's chief economist, noted that oil prices have spiked sharply in recent weeks primarily because of the violence between Israel and Hezbollah guerrillas in Lebanon as well as ongoing militant attacks in Nigeria.
At the same time, crude oil inventories remain at relatively high levels, Williams said.
"The market is very much on edge, and it doesn't take much to push it one way or the other," he said. "If you think in terms of psychology as opposed to any basic market fundamentals, there's a chance we could go up a couple of dollars."
The price is likely to settle down after traders realize that U.S. crude supplies are quite high and major foreign suppliers such as Saudi Arabia are having trouble moving all the oil they have for sale these days, Williams said.
James Wiggins, spokesman for the U.S. Pipeline and Hazardous Materials Safety Administration, said Sunday that BP had informed federal officials Friday that it had found several sections of pipe about which it was concerned.
The field shutdown, he said, was "something BP elected to do on its own," Wiggins said.
The agency this year issued stern orders to BP to clean out sludge from the transit lines and run more pigs to swab the pipes and look for corrosion.
A grand jury also has asked BP to cut out the section of pipe that leaked last spring and submit it as evidence in the government's investigation of that spill.
Discovered in 1968, Prudhoe Bay is the largest oil field in North America. It is among the world's 20 largest fields.
Miles from Anchorage: 650
Area (acres): 213,543
Production started: 1977
Number of wells: 1,114
Average daily output (barrels): 400,000
Percentage of Alaska output: 48
Percentage of U.S. output: 8
Photo by AL GRILLO / The Associated Press
Click on photo to enlarge
John Kurz, operations manager for the Prudhoe Bay oil field, right, Friday explains to John Browne, CEO of BP, left, and BP America chairman and president Bob Malone the steps taken to remediate the area affected by a 201,000-gallon oil leak found March 2.