View Full Version : Oil Prices Surge As BP Shuts Down Oil Field

08-07-2006, 01:38 PM
Oil Prices Surge as BP Shuts Down Oil Field


By Fred Barbash and Daniela Deane
Washington Post Staff Writers
Monday, August 7, 2006; 11:22 AM

Worldwide crude oil prices surged today after BP oil announced that it was shutting down its Prudhoe Bay oil field in Alaska following discovery of a small leak and corrosion in a pipeline.

The North Slope field produces 400,000 barrels per day, about 8 percent of U.S. crude oil output.

The news sent September crude futures contracts--which represent prices anticipated by traders--up more than a dollar, beyond $76.00 per barrel.

Oil prices were already under severe pressure because of high demand and great uncertainty about supply caused by the wars in Iraq and in Israel and Lebanon.

BP, in a press release, said its engineers discovered a small leak and wall-thinning in a 22-mile long transit pipeline while conducting maintenance on August 4. It said analysis of data revealed 16 anomalies in 12 locations in the pipeline. BP is already facing a criminal investigation over a large spill in March at the same oil field.

BP said the spill, estimated at 4 to 5 barrels, had been contained and that a clean-up effort was underway. The pipeline was shut down at 6:30 a.m. Sunday morning.

BP officials said they didn't know how long the Prudhoe Bay field would be shut down. Company officials said Sunday night that the eastern side of the oil field would be shut down first, an operation anticipated to take 24 to 36 hours. The company would then move to shut down the west side, the officials said.

"We regret that it is necessary to take this action and we apologize to the nation and the State of Alaska for the adverse impacts it will cause," said a statement from Bob Malone, president and chairman of BP America.

"However, the discovery of the leak and the most recent" maintenance runs have "called into question the condition of the oil transit lines at Prudhoe Bay," he said. "We will not resume operation of the field until we and the government regulators are satisfied that they can be operated safely and pose no threat to the environment."

The Energy Department is prepared to release oil from the Strategic Petroleum Reserve, the country's emergency crude oil stockpile, because of the disruption, a department spokesman said Monday, according to the Associated Press.

"If there is a request for oil we'll certainly take a serious look at that," spokesman Craig Stevens was quoted by the AP as saying.

The Strategic Petroleum Reserve was created after the 1973 oil embargo when Arab countries halted petroleum exports to protest U.S. support for Israel. The legislation enacting it was signed by then-President Gerald Ford in December 1975, making it U.S. policy to create an oil reserve capable of holding up to 1 billion barrels as insurance against supply disruptions.

The emergency stockpile has some 700 million barrels in storage on the Gulf Coast. Most of Alaska's oil goes to West Coast refineries. Although it was not immediately clear how those refineries would be supplied with oil on the Gulf Coast, any injection of oil into the market to replace the lost Alaska oil would help ease prices.

The problems at the Prudhoe field come at a bad time for the BP in the United States, where it is the largest oil producer. An explosion at its Texas City refinery killed 15 workers in March 2005.

They also come just six months after the North Slope's biggest ever oil spill -- some 267,000 gallons -- was discovered on a Prudhoe Bay transit line. BP, which has a 26 percent stake in the Prudhoe Bay field, had already announced plans to replace a three-mile segment of the pipeline following the spill.

Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo, told the Associated Press that a 400,000-barrel per day reduction in output would have a major impact on oil prices.

"Oil prices could increase by as much as $10 per barrel given the current environment," Emori said, though he said it was too early to tell what would be the exact effect.

Light, sweet crude for September delivery on the New York Mercantile Exchange climbed $1.74 to $76.50 a barrel in electronic trading by afternoon in Europe. At London's ICE Futures exchange, Brent crude for September jumped $1.22 to $77.39 a barrel.