Markets & Finance

BP's Pipeline Trouble


BP (BP) said Aug. 7 that it is moving to shut down Alaska's Prudhoe Bay oil field in the coming days, after the discovery of severe corrosion in pipes and a leak of four or five barrels of oil. How long will it take to resolve the problem? It could take weeks or months to repair the pipeline, though the company will not give a precise estimate. "We will not resume operation of the field until we and government regulators are satisfied that they can be operated safely and pose no threat to the environment," says BP America Chairman and President Bob Malone. The company operates 22 miles of oil transit pipeline at Prudhoe Bay.

After the announcement, investors bid up the price of light sweet crude oil scheduled for September delivery, as they watched fighting continue in the Middle East. Prices soared by $2.22, or 3%, on Aug. 7, to $76.98, on the New York Mercantile Exchange.

RELATIVE CALM. Industry watchers aren't panicking about the Prudhoe Bay shutdown's impact on supply. Prudhoe Bay is important, but it "is not going to cause a crisis," said Dr. Manoucher Takin, a senior petroleum analyst at the London-based Center for Global Energy Studies.

The move will cut Alaska North Slope oil production by an estimated 400,000 barrels per day, compared to the U.S. total daily production of around 5 million barrels per day. Analysts' estimates for the length of the shutdown ran from a few weeks to "some months." BP may be able to arrange the repairs to bring back some production before the job is complete.

TAKING SAFETY SERIOUSLY. "The shutdown of the oil field shows that BP is taking safety very seriously," says Peter Hitchens, an oil and gas analyst at Teather & Greenwood, an Edinburgh institutional and corporate stockbroker. Hitchens thinks BP will restore the oil field's production "in a maximum of weeks."

The Prudhoe Bay shutdown isn't the first snafu in recent years for BP. The company announced plans to replace a three-mile segment of pipeline after a 240,000-gallon spill was discovered in the area on Mar. 2. After that accident, the U.S. Transportation Dept.'s Pipeline &Hazardous Materials Safety Administration ordered BP on July 20 to take preventive steps such as inspecting the pipelines in Prudhoe Bay.

Alaska isn't the only trouble spot. Where Hurricane Katrina had blasted in late 2005, BP found two leaks this May in subsea equipment at Thunder Horse, an offshore drilling site southeast of New Orleans. The company expects to replace the damaged pipes and start production in 2007. In another mishap for BP in the U.S., the Commodity Futures Trading Commission alleged that BP traders manipulated the propane market in early 2004.

"PUNISHING" BP. In March, 2005, an explosion at a Texas City (Tex.) refinery killed 15 people. The same year, BP got fined for air pollution at its Carson refinery in California. During 2005, it forked over about $56 million in fines for numerous such violations, compared with only $4.8 million in 2004. (For more detail, see BP Global's statement on fines and penalties.)

BP isn't the only one with exposure to the recently damaged area. The Irving (Tex.) oil major ExxonMobil (XOM) and Houston's ConocoPhillips (COP) each have 36% stakes in the Prudhoe Bay project, which BP operates while holding only a 26% stake. In terms of worldwide equivalent oil and gas production, ConocoPhillips generates around 5% of its production from Prudhoe Bay, while Exxon only gets 3%, and BP 2%.

Yet investors punished BP more than its rivals. BP's stock price sank $2.19,or 2.9%, to $70.45 per share on Aug. 7. Exxon's edged up 54 cents, to $69.23 per share, while ConocoPhillips fell 91 cents, to $67.61. Wes Ralston, an analyst at the energy investment boutique Howard Weil, explained that investors see the Prudhoe Bay leak as a sign of larger problems that BP hasn't addressed yet. "People are asking 'is there another shoe to fall?" he says. (He disclosed that he has a long position in ConocoPhillips shares.)

IMAGE IMPROVEMENT. The Prudhoe Bay accident takes place as BP moves to shore up its record on safety and make improvements to its operations in the U.S. On a conference call on July 25, Chief Executive John Browne promised to add another $1 billion to the $6 billion earmarked over the next four years for improving safety at its U.S. refineries and upgrading Alaskan pipelines.

He noted a new advisory board with external members for BP America, which is owned by BP PLC. Malone was recently appointed chairman of that board and made responsible for monitoring the operations of BP's U.S. businesses—with particular focus on compliance, safety, and regulatory affairs.

"A bad image is the last thing the company wants," says Fadel Gheit, an oil and gas analyst at Oppenheimer. If BP doesn't pay attention, they'll end up in the penalty box in the long run, he says. He thinks BP will make progress addressing the leak in Prudhoe Bay. "They already admitted that they will take all the blame." Gheit adds that Malone has been with BP for many years and has "an incredible track record."

Given the scope of BP's current problems, its U.S. chief may face a difficult time keeping that record intact.


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