Corrosion will force lengthy shutdown in Alaska; more pain at the pump seen as early as this week

The San Diego Union-Tribune

Oil and gasoline prices spiked yesterday, after BP said it would shut down the nation’s largest oil field because of corrosion problems in the Alaskan Prudhoe Bay pipeline.

The closure will cost the United States about 400,000 barrels of oil each day, or 2.6 percent the nation’s consumption. For California, the shutdown will cause the loss of 8 percent of its oil supply, at a time when gas prices are already running near record highs.

The giant oil company said it would take up to five days to shut down the field. It declined to specify how long it would take to replace the 16 miles of corroded pipeline running from the Prudhoe Bay field. BP said it could take weeks or months to do the work.

“BP deeply regrets it has been necessary for us to take this drastic action,” said Bob Malone, chairman of BP America. He added that the company would try to put sections of the pipeline back into service as they are repaired.

The loss of crude from the giant field will cause logistical problems across the nation, including a scramble to redirect oil tankers to the West Coast. The Energy Department said it is prepared to provide oil from the government’s Strategic Petroleum Reserve if a refinery requests it.

“They’ll be able to find oil and get it here, but it will take time,” said Tim Hamilton, an energy consultant to the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Most of the roughly 900,000 barrels of crude that are normally produced each day from Alaska’s North Slope go to refineries in Washington, California and Hawaii, said Joe Sparano, president of the Western States Petroleum Association, a trade group in Sacramento.

The BP shutdown affects less than half of that production, or about 400,000 barrels daily. But news of the lost Alaskan production stunned jittery energy markets yesterday and drove crude oil prices up $2.22 a barrel to $76.98 per barrel.

Spot wholesale prices of gasoline in Southern California rose about five cents on the news. The increases in oil and wholesale gasoline prices are expected to be felt at gas pumps as early as this week.

Retail gasoline prices yesterday nonetheless continued their recent decline, falling about 1 cent to an average of $3.27 per gallon in San Diego County. Despite the price reduction yesterday, the loss of crude from Alaska almost certainly spells the end of the recent cycle that saw local gasoline prices fall about 14 cents per gallon over the past two weeks.

Michael Shames, executive director of the Utility Consumers’ Action Network, noted that the looming reduction in crude supplies will hit directly at Arco, a BP subsidiary and a retailer that plays a key role in the San Diego gasoline market.

“Arco had been the low price leader or the sole discounter among the major retailers,” he said. “For them to have major problem with supply means the other major companies will be free to raise their prices.”

California is not as reliant on Alaskan crude as it once was, with the state now deriving about 16 percent of its oil from Alaska, down from a high of about 45 percent in the early 1990s.

Most of the crude oil California uses comes from foreign sources, including Saudi Arabia, Iraq, Ecuador, Venezuela, Brazil and Argentina. About 42 percent of the state’s crude oil came from overseas in 2005, according to the state.

California produced 37.2 percent of the oil it consumed in 2005, the energy commission said.

Of the state’s 21 refineries, 14 make gasoline or diesel fuel, and only five of those receive Alaskan North Shore crude, according to the California Energy Commission.

Claudia Chandler, a spokeswoman for the commission, said refineries have seven to 10 days of oil supply on hand.

“The important thing will be for BP to give a time frame,” Chandler said. With a repair-time estimate in hand, she said, it should be easier for refiners to line up alternative supplies.

Chevron Corp., which operates two of the state’s largest refineries in El Segundo and Richmond, said it does not anticipate disruptions because of the oil pipeline problems.

“At this time, we continue to meet the supply needs of our refineries and do not anticipate reduced crude runs as a result of the Prudhoe Bay production shortfall,” the company said in a statement.

Tesoro, the state’s fourth-largest refinery, said the BP shutdown would not have an immediate effect on its operations because only 10 percent of its crude supply comes from Prudhoe Bay.

Shell Oil Co. also said it had enough supply on hand or en route to give it the time to arrange for alternative supplies to its refinery in Washington state. Its California refineries don’t usually use Alaskan crude oil.

BP discovered the pipeline corrosion only after it was ordered to do an internal inspection by the Department of Transportation, which acted after a 270,000-gallon spill along the line in March. It was the biggest spill in Alaskan North Slope history and has triggered a criminal investigation of the company.

The pipeline inspection involved use of a “smart pig” — a device that travels within the pipeline — which found that the steel had corroded in 12 places on the eastern side of Prudhoe Bay to thicknesses less than BP considers safe.

The company said the pipes where the corrosion was detected had not been inspected with this internal device since 1992. BP officials said they didn’t believe routine maintenance “pigging” of those lines was necessary because they carry clean crude from which water has been removed.

The company’s regular practice in Prudhoe Bay had been to use exterior monitors to spot-check sections of pipeline that were prone to corrosion.

The Foundation for Taxpayer and Consumer Rights said BP‘s maintenance practices underscore the industry’s failure to put money back into its businesses, despite record profits.

“Drivers will pay through the nose for this very preventable emergency,” said Judy Dugan, research director for the Santa Monica group.

State authorities urged residents not to rush to gas stations to stock up on gas for California’s 25 million registered vehicles — an action that could drive up prices in the short term.
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Oil production chart

7 to 10 — Days of oil supply currently held by refineries in the state