BP inks deals for new pipeline to repair Prudhoe Bay oil field

Friday, August 11, 2006

ANCHORAGE, Alaska -- BP said Thursday it had signed two major deals to supply new pipe for approximately 10 of the 16 miles of an Alaskan oil pipeline it was forced to begin shutting down early this week.

The discovery of leaks and severe corrosion in the pipeline prompted the company to say it planned a gradual shutdown of the entire Prudhoe Bay oil field, the nation's largest.

But late Thursday, the company said it may keep the western side of the pipeline open, although a final decision was not expected until early next week.

About 140,000 barrels of oil per day were still flowing out of Prudhoe Bay as of late Thursday, said Craig Wiggs, a performance unit leader for BP.

If the western side kept flowing, that would mean the company would be able to maintain the 140,000-barrel capacity -- and possibly ramp up to 185,000 barrels -- while work continues on the eastern side.

BP PLC spokesman Scott Dean said that the company had signed contracts with United States Steel Corp. and Nippon Steel Corp. to supply the 10 miles of pipeline, and is working to win contracts for the remaining materials.

Dean said it was too early to say exactly how much the total project will cost, but insisted BP is not looking to pinch pennies.

"We are committed to sparing no expense to make this pipeline safe and reliable," he said.

Separately, ConocoPhillips spokesman Bill Tanner said Thursday that his company had invoked a "force majeure" clause in the contracts it has with customers who receive oil from Prudhoe Bay. Such an action alerts those customers that it may not be able to supply all the crude oil it has promised because of an unforeseen emergency, and allows them to seek out alternative sources.

BP said it had no similar plans because the oil it gets from Prudhoe Bay is processed by the company itself. Exxon Mobil said it was monitoring the situation.

BP, which operates the oil field, has not yet said exactly how it might divide costs with ConocoPhillips Co. and Exxon Mobil Corp., which also share ownership of the Prudhoe Bay site.

"We're still working it out with the partners," Dean said. "We're the operator but everyone's got a share in the field."

Chuck Bradford, an analyst with Soleil Securities, which covers pipe companies, said the BP orders, while not huge, will nevertheless be a boon U.S. Steel and Nippon Steel.

Bradford said he also expects the pipeline shutdown to have a longer term effect, because it may prompt others in the industry to rush to replace their decades-old pipeline, in the hopes of averting similar troubles.

"There's just an awful lot of old pipe out there that needs to be replaced," he said. "The problem's going to be that nobody has the capacity to make the pipes. Everybody's full."

A burst of new orders could extend an already strong period for the steel pipe industry, he added.

For oil refineries that normally get supplies from Prudhoe Bay, analysts say the shutdown is unlikely to cause short-term problems because most have a stockpile that stretches 30 to 45 days. But if the shutdown stretches for several months, analyst John Thieroff with Standard & Poor's said it could create further difficulties as those refineries struggle to get crude oil from other parts of the world.

Refiners Tesoro Corp. and Valero Energy Corp. have both said they don't anticipate any immediate problems. ConocoPhillips said it was working to arrange for alternative supplies for its Ferndale, Wash. refinery if there are any potential shortfalls.

Petroleos Mexicanos, Mexico's state-owned oil monopoly, offered on Thursday to speed up oil deliveries to the U.S. to help offset supply shortages caused by the pipeline shutdown, though the level of exports wouldn't be increased.

A longer-term shutdown at Prudhoe Bay also could cause a spike in gas prices on the West Coast, Thieroff said, where many of the refineries that process the oil from Prudhoe Bay are located. That's because it can be difficult to get crude oil into that part of the country, which is served by fewer pipelines than other parts of the country.

"Anything that takes gasoline off the market is likely to result in really, really sharp spikes in prices in parts of the country that already pay the highest prices," Thieroff said, referring to the West Coast.

But Mark Gilman, analyst with The Benchmark Co., said the shutdown may have little impact on overall U.S. gas prices, because there are plenty of other sources of crude oil that could compensate for any potential shortfall.

The average U.S. retail gasoline price rose a couple of cents soon after BP's announcement on Sunday that a leak would require it to shut down the oil field, but has hovered around $3.036 a gallon for regular unleaded since then. Unleaded gasoline prices on the West Coast, where refiners get about 30 percent of their oil from Alaska, have risen more than in the rest of the country, but the bigger jumps have been in diesel fuel. In Washington and Oregon, diesel fuel prices were at the states' record highs, at $3.347 a gallon and $3.245 a gallon, respectively.

Retail fuel prices could drop in the coming days, though. Gasoline futures on the New York Mercantile Exchange fell 9 percent Thursday to a four-month low.

For BP, whose earnings topped $22 billion last year, the shutdown could prove both a blessing and a curse. While the company could certainly be hurt by the expense and image problems raised by the leak and repairs, it also stands to benefit if oil prices surge because of uncertainty over the shutdown.

In the second quarter that ended June 30, BP's profits grew by 30 percent from a year earlier to $7.3 billion, boosted by soaring oil and gasoline prices. Revenues topped $73 billion.

"This is, at worst, a very small fraction of their worldwide output, so that (means) any price benefit, which would relate to their entire production stream, would more than offset the relatively small volume loss," Gilman said.

Still, Gilman said it's not yet clear how much BP's reputation has been hurt by the fiasco, which critics argue may be a result of lax government oversight and a corporate unwillingness to perform high-level maintenance. The shutdown may be especially troubling because it comes on the heels of a major incident in March, when corrosion in another BP transit line in Prudhoe Bay caused a spill of up to 267,000 gallons.

"The risk is more, I think, associated with the public image of the company," Gilman said.

Associated Press Writers Jeannette J. Lee in Prudhoe Bay, Steve Quinn in Dallas, Kristen Hays in Houston and Madlen Read in New York contributed to this report.

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