Oilfield Closure to Hit Pumps;

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A shutdown in Alaska will affect refiners in Western states, but it’s not clear how badly. Pessimists say gas could reach $4 a gallon.

The Los Angeles Times

The potentially lengthy closure of a key Alaskan oilfield sent crude oil prices soaring Monday, as experts warned that the disruption could result in higher gasoline prices in California and other Western states dependent on Alaskan oil.

Analysts said it was too early to say how much pump prices would rise, but the most pessimistic predicted $4-a-gallon gas.

Alarmed by the impending cutoff of what amounts to 8% of U.S. oil production, traders on the skittish New York oil market sent crude prices up $2.22 to $76.98 a barrel, just short of the record-high closing price of $77.03 in July.

Officials from the U.S. Energy Department pledged to release oil from the nation’s reserve if necessary to blunt the blow to refiners and consumers.

In California, refiners get about 20% of their oil supplies from the Alaskan North Slope, where about half of the daily production will be stranded once BP shuts down corroded pipelines and its giant Prudhoe Bay oilfield. BP said it could take months to replace more than 70% of the 22 miles of pipeline affected, but the company did not say when the lines would return to service.

On Sunday, BP began shutting down the pipelines after an inspection uncovered extensive corrosion. The inspections were ordered by the U.S. government after a large oil spill in a nearby area in March — pollution that has made BP the subject of a federal grand jury investigation.

“We deeply regret that it has been necessary to take this drastic action of an orderly and planned shutdown of the Prudhoe Bay oilfield,” BP North America Chairman and President Bob Malone told reporters Monday at a news conference in Anchorage. “On behalf of the BP Group, I apologize for the impact it is having on the nation and the state of Alaska.”

BP‘s chief executive, John Browne, and other executives have had much to apologize for lately in the United States. In June, U.S. regulators accused BP‘s propane traders of trying to corner the propane market and manipulate prices in 2004. The company has denied wrongdoing.

In March 2005, BP agreed to spend $81 million to settle claims that toxic emissions at its Carson plant went unreported for years. The same month, an explosion at the company’s Texas City refinery killed 15 workers.

The corrosion problem, a defect that develops over time and can be prevented with regular cleaning and inspections, prompted Rep. John D. Dingell (D-Mich.) to lash out at the company: “It’s appalling that BP let this critical pipeline deteriorate to the point that a major production shutdown is necessary.”

Some experts say they expect no immediate impact on fuel supplies or prices because both oil and gasoline inventories nationwide and in California are currently adequate. In addition, it will take several days to completely close off the Prudhoe Bay production, and there are additional supplies of Alaskan oil in tankers already en route to the West Coast and in storage tanks awaiting shipping.

“There’s no panic yet. But the issue is, How long is this pipeline going to be down?” said Andrew Lipow, an industry consultant in Houston. “There’s plenty of gasoline in inventory… and that can cover us for the next few weeks.”

But views differ over how much gasoline prices might jump in California and the Pacific Northwest because of the BP shutdown. Some have suggested that gasoline could reach the next big benchmark, $4 a gallon, whereas others have said the market could adjust relatively quickly, with only a slight increase at the pumps — a dime or so per gallon.

BP‘s action Monday triggered a rally in wholesale gasoline prices on the Los Angeles spot market, where refiners can buy supplies for immediate delivery. The wholesale cost of a gallon of regular averaged $2.48 for the day, up 6.75 cents from Friday’s trades, according to the Oil Price Information Service. That’s roughly the equivalent of $3.18 a gallon at retail after adding 70 cents for taxes, transportation costs and ethanol.

The statewide average pump price in California on Monday was $3.192 for a gallon of self-serve regular, according to a weekly survey by the U.S. Department of Energy, virtually unchanged from a week ago. The nationwide retail average rose 3.4 cents over the last week, to $3.038 a gallon, the government said Monday.

Consumers will get a better idea how Prudhoe Bay will hit their pockets next month, when refiners in Alaska, California, Hawaii and Washington state don’t receive the 400,000 barrels per day of Alaskan oil they were counting on.

Whether retail fuel prices soar or merely inch up will be determined mostly by whether the affected refiners can find replacement supplies before their plants and inventories run short.

Five of California’s 14 fuel-producing refineries regularly use crude oil from the Alaskan North Slope, said Claudia Chandler, the California Energy Commission’s assistant executive director for communications. She would not identify the affected California plants.

Some of California’s major refiners said Monday that the supply disruption would have no short-term impact on their operations. Chevron Corp., which runs two large plants in the state, said only that “we continue to meet the supply needs of our refineries.”

ConocoPhillips Co., which owns a 36% interest in Prudhoe Bay production, said in a statement, “The company has contingency plans to deal with supply interruptions, but we continue to evaluate the effect of the shut-in on the operations of our West Coast refineries.”

BP did not discuss the impact on its Carson plant, a big user of Alaskan crude oil and one of California’s largest refiners. That plant is important to Southern California, because it supplies Arco gas stations throughout the region.

As a group, the refineries in California and along the West Coast are among the most sophisticated in the nation and can, with some adjustments, process nearly any kind of crude oil. That allows them to pay cut-rate prices for low-quality crude — which is more plentiful worldwide — and reap larger profits on the fuels they produce.

“The problem won’t be getting the crude. It’s available. The problem is getting it to the West Coast,” said Tim Hamilton, a consultant for the Santa Monica-based Foundation for Taxpayer and Consumer Rights, a consumer advocacy group. “If they cannot replace this crude oil, and do so very, very fast, then the price in the West will have to go up to slow consumption down by 400,000 barrels per day.”

That’s a cut of 16.8 million gallons a day of gasoline, diesel and jet fuel across the West. Californians consume 44 million gallons of gasoline and 10 million gallons of diesel daily.

If crude supplies run short and production falters, Hamilton said, “the question is, if we go to $3.75, will the public let go of the nozzle? If not, we’ll go to $4. And if not there, we’ll go to $5.”

That scenario is unlikely, especially now that the government has offered up replacement oil from the Strategic Petroleum Reserve, according to David Hackett, president of Irvine-based Stillwater Associates, an industry consulting firm.

“This isn’t a $4 deal because there is a way to replace the crude oil, and gasoline inventories are at a comfortable level out here,” he said. “There’s a lot of flexibility.”

Under one scenario, refiners can ask for oil from the reserve so it can be shipped to the West. But because there are no pipelines to carry it across the Rocky Mountains, the supplies would have to travel weeks, through the Panama Canal.

What’s more likely, Hackett said, is that companies with refineries on the Gulf Coast and in the West — and that includes all the largest refiners — will divert some oil tankers to the West and then replace that oil with loans from the reserve.

“If some boat turns left instead of right out of a port and heads to Los Angeles instead of Houston, the [refiner] could backfill that in the gulf with inventories or oil from the strategic reserve,” he said.

Judy Dugan, research director at the Foundation for Taxpayer and Consumer Rights, said the fallout from the BP debacle could mean that the high profits already flowing to oil companies in California would rise.

The world’s largest oil companies recently reported second-quarter earnings that included billions of dollars in record-high profits.

“Every increase in the price of crude oil is translated immediately into more gravy for the oil companies, because they don’t just pass through the price of crude oil; they take on indefensible profits for the oil itself and then again at the refinery,” Dugan said. “Drivers will pay through the nose for this very preventable emergency.”

Judging from profit figures from an industry consulting firm, West Coast refiners could probably pay higher prices for emergency oil supplies and still book a healthy profit.

In June, West Coast refiners collected operating profit of $33.22 for every barrel of gasoline, diesel and jet fuel they sold — 79 cents per gallon. That profit, which is substantially higher than in any other region in the United States, is what’s left for the refinery after subtracting for the cost of crude oil and additives, as well as fixed and variable costs, according to figures published by the Oil & Gas Journal.

Profits like those leave West Coast refiners plenty of “wiggle room,” according to Tom Kloza, chief oil analyst at the Oil Price Information Service.
Times wire services contributed to this report.

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