BP Shuts Production at Prudhoe Bay

From Bad to Worse

BP's seemingly unending string of problems in the United States got even worse yesterday when the company announced that it was shutting in all production at the BP-operated Prudhoe Bay oilfield in Alaska after an inspection on Friday (4 August) revealed unexpectedly severe corrosion in a pipeline at the facility. The inspection, prompted by U.S. regulators, came after an oil spill in March raised questions about operations at the Prudhoe Bay field and the condition of the infrastructure (see United States: 3 March 2006: Pipeline Failure Forces BP to Shut in U.S. Prudhoe Bay Operation). BP has already been ordered to replace a three-mile section of pipeline following the incident, and federal U.S. inspectors called on the company to test its pipelines more thoroughly following a spate of minor spills (see United States: 21 July 2006: BP Ordered to Drain Alaskan Pipeline Ahead of Corrosion Tests). According to BP, these tests, carried out over the weekend, revealed 16 anomalies in 12 separate sections at an oil transit line on the east side of the field. After analysing the results BP elected to shut-in all production indefinitely so that repairs can be made. The company said that the tests revealed "unexpectedly severe corrosion" and has apologised for the need to shut in production. Prudhoe Bay is the largest oilfield in the United States and produces some 400,000 b/d of crude, roughly half of the total output from Alaska's North Slope fields. BP was unable to say how long the field would be shut in. The phased shutdown began yesterday and will take several days to complete.

News of the unplanned shut-in helped send crude prices rising once again in electronic trading yesterday and early today. As of 0500 GMT NYMEX crude was trading up US$1.67/b at US$76.43/b, while ICE Brent crude was approaching a new all-time high of US$77.53/b, a rise of US$1.25/b. BP's share price was also hit in early trading with BP shares opening at 618 pence, approximately 3% off the Friday (4 August) closing price of 636 pence.

The problems at Prudhoe Bay follow on from a long list of safety and operational problems at BP facilities throughout the United States in 2006. The company is facing two grand jury investigations into the Prudhoe Bay leak and an explosion at the company's Texas City refinery, and has already been heavily fined for another incident at a BP-operated refinery in Ohio (see United States: 7 April 2006: Regulators Open Criminal Probe in BP's Alaska Oil Pipeline Leak and United States: 19 April 2006: BP Restarts Texas City Refinery; Report Highlights Safety Problems). These incidents have followed an ongoing campaign by Charles Hamel, a long-standing critic of BP's Alaskan operations, who has alleged that BP has compromised worker safety at the facilities in Prudhoe Bay and failed to maintain facilities and equipment to an adequate level (see United States: 3 September 2004:BP Alleged to Have Breached Safety and Environment Rules in Alaska). To top all of this, BP is also under investigation by U.S. regulators for allegedly manipulating the U.S. propane market (see United States: 29 June 2006: U.S. Regulator Accuses BP of Manipulating Propane Prices). The series of accidents and problems led to the replacement of BP's head of North American operations in June, though the company did state that the replacement of Ross Pillari was unrelated to the incidents earlier in the year (see United States: 20 June 2006:BP Replaces Head of U.S. Business).

Outlook and Implications

The loss of 400,000 b/d of crude production at the current time is, to put it mildly, unhelpful. Markets have reacted and will react to this shut-in, which is by itself only just short of the 500,000-b/d shut-in currently being seen in Nigeria as a result of continued civil strife. Coming unexpectedly, the immediate price impact is likely to be exaggerated. While it is true that BP has been unable to indicate a time-frame, production will resume once repair work is completed and the situation is not as uncertain as that in Iraq and Nigeria. It seems that the repairs may take longer than just a few days given the scale of the corrosion, but weeks rather than months would likely be the worst-case shut-in scenario. This will put pressure on the U.S. West Coast crude and product market as there is little available crude to make up for lost Alaskan cargoes. Gasoline (petrol) prices on the U.S. West Coast may rise relative to other regions as a consequence, but markets will also closely be watching for indications of when BP can resume operations. A clearer timeline may be available in coming days when the company has had a better chance to assess the situation.

The loss will also push back any possible fall in crude prices. With new capacity coming onstream in 2006 and into 2007 there was a potential for crude prices to ease off from current highs towards the middle of next year. The temporary loss of Prudhoe Bay will push any inventory build back, offsetting almost one-third of total net new additions expected this year for as long as the outage persists. If the shut-in does extend through to the end of the month this may also give Iran some more economic leverage as it debates its nuclear programme with the international community ahead of a 31 August deadline to end uranium enrichment. Iranian posturing on potential oil embargoes could cause even more severe price jumps with Prudhoe Bay down. A run on US$80/b is now a distinct possibility again.

As far as BP is concerned, undoubtedly this shut-in will have an effect on its third-quarter results, though despite being operator the company only holds a 26% stake in the field, with partners ConocoPhillips and ExxonMobil each holding a larger 36% stake in the field. Those two companies will see more output affected through the shut-in. BP's reputation is what will take the biggest hit, though the year as a whole for the company's U.S. operations has caused the real damage. The decision to shut in operations completely does indicate that the company is now looking to end the speculation and constant criticism once and for all by implementing needed repair work. The replacement of Pillari is also something that will help BP draw a line under the problems this year and move forward. The new head of U.S. operations, Robert Malone, is tackling the issues head-on, though clearly there is much work still to do. With two possible criminal investigations pending and further scrutiny of the company's operations guaranteed, BP still has five months to go in a year it would rather forget.

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