AP: BP shuts Alaska oil site, cutting U.S. fuel supply

BP shuts Alaska oil site, cutting U.S. fuel supply
Reuters, The Associated Press

August 7, 2006

ANCHORAGE, Alaska Oil company BP has indefinitely shut down the biggest American oilfield after finding a damaged pipeline, removing about 8 percent of U.S. oil production and stoking fears that already high gas prices will shoot up further.

Steve Marshall, president of BP Exploration Alaska, said Sunday night that the eastern side of Prudhoe Bay would be shut down first, an operation anticipated to take 24 to 36 hours. The company will then move to shut down the west side, a move that could close more than 1,000 Prudhoe Bay wells.

Once the field is shut down, BP said oil production would be reduced by 400,000 barrels a day. That is close to 8 percent of U.S. oil production, or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.

Shares in BP - already part of a criminal probe into a much bigger Alaskan pipeline rupture in March when about 267,000 gallons, or 1 million liters, of oil spilled - dropped as much as 2 percent to 623 pence, or $11.89, on the London Stock Exchange in morning trading Monday.

The closure is the latest incident to hit the BP Alaskan operations, a cornerstone of its global upstream portfolio, and deals another blow to its U.S. image following a deadly refinery explosion last year and a trading scandal.

"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," the newly appointed BP America chairman and president, Bob Malone, said in a statement.

Prudhoe Bay is operated by a BP-led group that includes ConocoPhillips and Exxon Mobil, which itself was involved in the biggest Alaskan oil spill when the 11 million-gallon Exxon Valdez tanker had a mishap in 1989.

BP officials said they did not know how long the Prudhoe Bay field would be off line. "It will depend on the rate at which we can complete the inspection of these lines and satisfy ourselves and state and federal regulators that they pose no risk to the environment," said a BP spokesman, Ronnie Chappell, said.

The shutdown comes at an already worrisome time for the oil industry, with supply concerns stemming both from the hurricane season and instability in the Middle East. Oil surged above $77 a barrel in Europe.

London Brent crude climbed Monday morning as much as two percent to $77.73 a barrel, within reach of its all- time high of $78.18, on expectations that the United States would scour European markets for replacement oil.

A 400,000-barrel per day reduction in output would have a major impact on oil prices, said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo. A barrel contains 42 gallons, or about 160 liters, of crude oil.

"Oil prices could increase by as much as $10 per barrel given the current environment," Emori said. "But we can't really say for sure how big an effect this is going to have until we have more exact figures about how much production is going to be reduced."

But Victor Shum, an energy analyst with Purvin & Gertz in Singapore, said he expected the impact to be minimal since crude inventories are high.

"So while this won't have any immediate impact on U.S. supplies, the market is in very high anxiety," Shum said. "So any significant disruption, traders will take that into account, even though there is no threat of a supply shortage."

Marshall 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 percent. Repair or replacement is required if there is more than an 80 percent loss.

"The results were absolutely unexpected," Marshall said.

The Alaska shutdown brings further U.S. scrutiny to BP, which is being investigated for an explosion in March 2005 at its Texas City refinery, in which 15 people died and 170 were injured. BP accepted full responsibility for the blast.

In June, the U.S. futures market regulator said BP tried to manipulate U.S. propane prices by cornering the market in February 2004. BP rejects the allegations.