BP Shutting Down Some Production at Alaska's Prudhoe Bay Oil Field

BP Exploration Alaska, Inc. has begun the process of shutting down production from the Prudhoe Bay oil field Sunday after unexpectedly discovering severe corrosion and a small spill from a transit pipeline there. According to the U.S. Energy Information Agency (EIA), the Prudhoe Bay field represents about 8% of U.S. crude oil production and half of Alaska’s daily output. The sudden announcement means that there will be about 400,000 barrels per day fewer for domestic refiners in the near term. Oil prices spiked immediately on Monday in response to the news.

A complete shutdown of Prudhoe Bay may not be necessary, but the interruption in Prudhoe Bay crude oil production will have a marked effect on U.S. crude supplies - and pricing - at a time when the country can least afford it. Anomalies in data received from internal sensing devices last Friday alerted officials that corrosion-related thinning of pipeline walls which exceeded BP tolerances, later confirmed by follow-up inspections, had occurred. Inspectors also found a small spill, which BP officials said was contained and clean up efforts commenced. Additionally, BP said that they would expedite the inspection of their other North American pipelines.

The latest incident comes on the heels of other high-profile lapses for the oil giant, including an oil spill from another pipeline in Alaska, the recent accidental death of a contractor at their Texas city facility, a March 2005 explosion at the same refinery that killed 15 and prompted OSHA to levy heavy fines against the oil major, and a near-miss incident on an offshore oil platform in the Gulf of Mexico.

In the face of recent events, BP could ill afford another environmental disaster and had little choice but to prudently shut down operations. The string of incidents has placed enormous pressure on BP to improve its safety practices and processes and the U.S. Department of Justice and the Environmental Protection Agency have been investigating BP for possible criminal wrongdoing in connection with the March 2005 accident. The series of safety and environmental setbacks at BP's US operations are straining the credibility of BP’s “safety first” philosophy. Partly in response to outside criticism, BP has created the senior position of US health and safety adviser and an ongoing advertising campaign is trying project the firm as green energy company.

In a prepared statement posted on BP’s WEB site, Bob Malone, President of BP America, said, “We deeply regret that it has been necessary to take this drastic action of an orderly and planned shutdown of the Prudhoe Bay oil field. On behalf of the BP Group I apologize for the impact it is having on the nation and the State of Alaska.” Malone added, “We have now taken the decision to replace the main oil transit lines at Prudhoe Bay. This will be accomplished as part of our overall plan for ensuring the integrity of the field. Our priorities moving forward are to assure the safety and integrity of our operating infrastructure, minimize impact on the environment, continue the cooperative working relationship with the relevant agencies and restore production as soon as it is safely - and I reinforce safely - possible.” BP officials said they did not know how long the field would remain closed.

On Wednesday, in Alaska, Governor Frank Murkowski put a hiring freeze on State employees in response to the pipeline crisis. The state stands to lose more than $6 million in taxes and royalty revenues for every day the pipeline is shut down. Murkowski also vowed to hold BP responsible for losses to state. The vast majority of Alaska’s state budget is dependent on oil revenues.

In response to the potential supply crisis, the U.S. Energy Department indicated its willingness to provide oil from the government's emergency supplies (the Strategic Petroleum Reserve) if refiners asked for it. The significant reduction in U.S. domestic crude oil production comes at a particularly bad time. Rising gasoline prices …quot; near all time highs …quot; coupled with saber rattling from both Iran and Venezuela and violence in the Middle East, have all combined to provide for a volatile and uncertain energy outlook for the U.S. and the world. Meanwhile, legislation to allow domestic drilling in ANWR remains stalled and the Senate and House versions of energy legislation intended to open up offshore areas have a long way to go before being reconciled. Negotiations for the latter bills, expected to be difficult, will commence in September.