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Oil prices climb more than $2

Tuesday, August 8, 2006

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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 2.6 percent of the nation's daily supply including imports, or about 400,000 barrels a day.

BP, the world's second-largest oil company, discovered the extent of 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 approximately 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. Thus, we would not be surprised to see volume losses in the area of 5 percent to 10 percent."

Steve Marshall, president of BP Alaska Exploration Inc., said tests Friday indicated 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.

Company officials said they did not believe a routine maintenance "pigging" of those lines was necessary because they carry clean crude from which water has been removed.

Marshall said the company believed ultrasonic testing of pipeline wall thickness was sufficient. But he said the company has since learned otherwise.

"Clearly, we are already in the process of adjusting considerably our corrosion program," Marshall said.

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 further.

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.

"If there is a request for oil we'll certainly take a serious look at that," spokesman Craig Stevens said.

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 some of the oil to refineries when there were disruptions because of pipeline problems or other troubles.

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."

The company said it is spending $72 million this year to fight corrosion, up from $60 million last year. BP puts millions of gallons of corrosion inhibitor into the pipelines each year. It also examines pipes via 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 say what the effect might be 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.


AP Writers Matt Volz in Juneau, Alaska, and Jane Wardell in London contributed to this report.


On the Net:

http://alaska.bp.com


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