Prudhoe Bay closure jacks up oil prices

Talk about your great moments in bad timing. Will we hit the much-feared $100 per barrel before the year is out? From Bloomberg, Aug. 8 (links and emphasis added):

Oil traded near a three-week high in New York on concern BP Plc’s pipeline closure in Alaska will cut off supplies from the largest oil field in the U.S. for months.

BP, the operator of the Prudhoe Bay field, said yesterday it will halt 400,000 barrels a day of production while it repairs corroded pipelines. U.S. Energy Secretary Samuel Bodman offered to release oil from the nation’s emergency stockpile as gasoline use increases.

“This is not the right time for a supply-related problem, especially given the high demand season for gasoline,” said Naohiro Niimura, head of commodity sales and research at Mizuho Corporate Bank Ltd. in Tokyo. “Clearly, the strong fundamentals are here to stay.”

Crude oil for September delivery was at $76.75 a barrel, down 23 cents, in after-hours electronic trading on the New York Mercantile Exchange at 2:01 p.m. in Singapore. Prices today are 20 percent higher than a year ago.

Prudhoe Bay may take as long as five days to shut. It may take “weeks or months” to complete fixes, BP Alaska President Steve Marshall said yesterday.

Oil gained as much as 3.4 percent to $77.30 a barrel yesterday, the highest intraday price since July 17. It closed at $76.98, the second-highest since trading began in 1984.

Brent crude oil for September settlement was at $77.97 at 2:02 p.m. Singapore time, after rising 2.8 percent yesterday to close at a record $78.30 a barrel on the London-based ICE Futures exchange. Futures touched $78.64 a barrel, the highest intraday price since the Brent started trading in 1988.

BP Repairs

BP, the world’s second-largest publicly traded oil company by production, is shutting the field because of pipeline corrosion and a leak. The company said it will work with public agencies to determine if it’s safe to operate parts of the field, which accounts for 8 percent of U.S. oil production.

Brent oil, the price marker for two-thirds of the world’s crude, may rise to a record $79.80 a barrel this week as BP’s Alaskan shutdown compounds global supply problems, Societe Generale said in a report.

“Oil’s bull run is back,” Deborah White, Paris-based Societe Generale’s energy analyst said in a note to clients. “Refining capacity constraints have been aggravated by unexpectedly tight supply.”

The U.S. holds 688 million barrels of oil in its Strategic Petroleum Reserve along the Gulf Coast. That oil could be provided if needed to replace supplies from Prudhoe Bay, Secretary Bodman said yesterday.

Oil Shipments

Refineries along the West Coast, particularly those in the Pacific Northwest, depend on Prudhoe Bay for crude supplies. There is no pipeline network linking the coast to the reserves in the Gulf Coast.

“That’s going to really support prices going into the fall heating season,” said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “The reserves are located in Texas and Louisiana so it’s difficult for them to move that crude from those reserves to the refiners in California.”

Tesoro Corp., the second-biggest oil refiner in the U.S. West, has enough crude oil for the next 30 to 45 days, for its Golden Eagle refinery in Martinez, California, and its Anacortes refinery in Anacortes, Washington, both of which use crude from Prudhoe Bay, the company said in a statement yesterday.

Valero Energy Corp., the biggest U.S. refiner, said its West coast refineries can meet near-term needs. The longer-term effects are unknown.

Crude Inventories

U.S. commercial oil inventories held 333.7 million barrels on July 28, almost 10 percent higher than the five-year average for the period. An Energy Department report tomorrow will probably show inventories fell by 1 million barrels last week, based on the median forecast from a Bloomberg News survey of 11 analysts.

Oil reached a record $78.40 a barrel on July 14 on concern that fighting in Lebanon between Israel and Iranian-backed Hezbollah might spread in the Middle East, source of almost a third of world supply. Prices rose above $75 last week on signs Tropical Storm Chris might have strengthened to a hurricane in the Gulf of Mexico.

“With increasing geopolitical risks, oil prices spiking to $80 to $100 a barrel is a real possibility,” Gordon Kwan, the head of China oil and gas research at CLSA Ltd., said in a report today. Global spare production capacity of 1.4 million barrels a day “is a tiny help compared to the magnitude of the potential problems the world faces.”

Lebanon, Gasoline

Lebanon’s government, which includes Hezbollah Cabinet ministers, yesterday approved deploying 15,000 of its troops to southern Lebanon once Israel withdraws, as the United Nations debates a cease-fire resolution.

Gasoline for September delivery was at $2.256 a gallon in after-hours trading. It rose 0.9 percent to $2.2516 yesterday.

Stockpiles of the motor-fuel probably fell 1 million barrels last week, the third straight decline, according to the analyst survey. Inventories held 210.9 million barrels on July 28, 0.8 percent higher than the five-year average.

Demand the past four weeks averaged 9.6 million barrels a day, 1.6 percent higher than a year ago, the Energy Department said Aug. 2.

It certainly is nice to see BP’s painstakingly cultivated “green” image get tarnished. Note it has officially changed its name from British Petroleum to BP, its propaganda plays up alternative energy programs, and its corporate logo is now a green flower. Reuters, Aug. 8:

In an industry known for butting heads with environmentalists, British oil company BP has long managed to convince Americans that it is a responsible “green” corporation.

But that carefully-crafted “Beyond Petroleum” image led by its green-friendly chief executive John Browne may be in jeopardy as BP deals with the latest blow to its U.S. operations — the shutdown of its massive Prudhoe Bay, Alaska oil field after a spill from a corroded pipeline.

Closing the pipeline follows a rash of environmental and safety issues with which BP’s U.S. arm has dealt over the past two years, including a 2005 explosion at its Texas City, Texas refinery that killed 15 workers.

Analysts say the latest shutdown may have limited impact on BP’s finances and stock price. But it could still be costly for the company in the United States.

“The wider implications for BP are more sentiment driven,” Credit Suisse analyst Ed Westlake wrote in a research note on Monday.

“The company, consistently seen by the public as the ‘greenest’ energy company, will be hurt hard by these reports, particularly following hot on the heels of the blowout at the Texas refinery, as well as explosions at Prudhoe Bay,” Westlake wrote.

Credit Suisse said that future project approvals in the United States could be difficult given that BP attracted regulators’ attention after the Texas City blast.

Seems like this problem has been brewing for a while. From AP, Aug. 8:

The aging pipeline system on the North Slope has been fraught with problems lately. BP, which posted a net profit of $7.3-billion for the three months ending June 30, operates the Prudhoe Bay field.

In March, BP was blamed for the rupture of a pipeline at the same Prudhoe Bay field, leading to an extension of a criminal investigation into the company’s management of its Alaskan operations.

Steve Marshall, president of BP Exploration Alaska Inc., said tests Friday indicated that there were 16 anomalies in 12 areas in an oil transit line on the eastern side of Prudhoe Bay. Tests found losses in wall thickness of between 70 and 81 per cent. Repair or replacement is required if there is more than an 80 per cent loss.

BP also said Sunday that workers found a small spill of about four to five barrels, which has been contained and is being cleaned up.

Friday’s smaller spill was discovered when workers went to the transit line to get a closer look at the pipe. Workers were stripping off pipe insulation when they noticed what looked to be an oil stain. About three hours later, they found the small leak.

And there could be even bigger problems in store. The Prudhoe Bay shut-down comes right on the heels of this. Reuters, July 21:

The Trans-Alaska oil pipeline will shut down for about 36 hours this weekend for some scheduled maintenance work, the line’s operator said on Friday.

The shutdown, set to start on Saturday morning, occurs annually to allow several maintenance projects to be completed at once, said Mike Heatwole, a spokesman for Alyeska Pipeline Service Co., the consortium that operates the 800-mile (1,287 kilometre) line and its Valdez marine terminal.

Alyeska plans several maintenance tasks including the replacement of a check valve. The targeted check valve, near the southern end of the line, is one of the devices designed to stop flow and isolate oil in case of a breach or leak, Heatwole said.

No interruptions in oil shipments are expected as a result of the shutdown, he said.

This weekend will be Alyeska’s only scheduled maintenance shutdown this year, while there were two such shutdowns in each of the past two summers to reconfigure the system management of a long-term project, Heatwole said.

The Trans Alaska Pipeline System normally ships about 820,000 barrels of oil daily.

Alyeska is owned by five oil companies. BP, ConocoPhillips and Exxon Mobil together own about 95 percent of the consortium; Unocal and Koch Alaska Pipeline Co. own the remainder.

Note that contrary to oversimplified media accounts, BP is but the leader of a consortium that exploits Prudhoe Bay. From the Anchorage Daily News, Aug. 7:

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.

The relentlessly opinionated Greg Palast, of course, argues that the timing was intentionally bad, designed by BP’s consortium to drive up oil prices. From, Aug. 8:

Is the Alaska Pipeline corroded? You bet it is. Has been for more than a decade. Did British Petroleum shut the pipe yesterday to turn a quick buck on its negligence, to profit off the disaster it created? Just ask the “smart pig.” […]

Why shut the pipe now? The timing of a sudden inspection and fix of a decade-long problem has a suspicious smell. A precipitous shutdown in mid-summer, in the middle of Middle East war(s), is guaranteed to raise prices and reap monster profits for BP. The price of crude jumped $2.22 a barrel on the shutdown news to over $76. How lucky for BP which sells four million barrels of oil a day. Had BP completed its inspection and repairs a couple years back — say, after Dan Lawn’s tenth warning — the oil market would have hardly noticed.

But $2 a barrel is just the beginning of BP’s shut-down bonus. The Alaskan oil was destined for the California market which now faces a supply crisis at the very height of the summer travel season. The big winner is ARCO petroleum, the largest retailer in the Golden State. ARCO is a 100%-owned subsidiary of … British Petroleum.

BP could have fixed the pipeline problem this past winter, after their latest corrosion-caused oil spill. But then ARCO would have lost the summertime supply-squeeze windfall.

Meanwhile, look what’s going on in British Columbia. From the Canadian Press, Aug. 7:

SQUAMISH, B.C — Officials monitoring an oil spill off the B.C. coast say up to 100 birds in the Squamish estuary have been affected.

It will take a number of days to see whether the bunker fuel that seeped into the estuary will make the birds sick, Dave Smith of the Canadian Wildlife Service said Monday.

Cleanup crews have attempted to capture birds soiled by the oil but have so far been unsuccessful.

“All the birds flew into the air,” he said. “You can’t really do anything with birds unless you capture them. There’s no way to do that until they’re weakened to the point where they can be captured and that generally takes several days.”

Smith said trying to capture the birds is only putting more stress on them.

More than 29,000 litres of heavy bunker oil spewed into the water after a cargo ship punctured a fuel tank while leaving port Friday.

The wind pushed it about 500 metres into Howe Sound, a stretch of water along the highway between Vancouver, Squamish and Whistler, and some seeped into the sensitive Squamish estuary.

Brian Clark with the B.C. Environment Ministry acknowledges that authorities are being criticized for downplaying the situation.

“The public perceptions is that we’re doing nothing but we’ve been out there every day, we know where the birds are, we know where they’re moving, so when they do get weak we’ll be able to get there faster,” Clark said.

He added that otters in the area that may have been exposed to the oil appear to be healthy and free of contamination.

An estimated two-thirds of the oil has been recovered. About 90 cubic metres of oil debris has been collected and stored for shipment to a disposal location.

Parts of the shoreline and several recreational areas remain closed.

See our last post on the global oil shock and the struggle for Alaska.