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Gas prices about to go up..

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BuckWrestler141

BuckWrestler141

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http://money.cnn.com/2006/08/07/news/international/oil_alaska/index.htm?cnn=yes

New worry for drivers: BP shuts oilfield
Damaged pipeline in Alaska affects about 8% of U.S. oil production.
August 7 2006: 8:34 AM EDT


NEW YORK (CNNMoney.com) -- In a blow to drivers already struggling with high gasoline prices, BP was forced to shut off about 8 percent of the nation's oil supply after discovering "unexpectedly severe corrosion" in the Alaskan pipeline.

BP announced early Monday that the pipeline problems had caused it to begin the first shutdown ever in the biggest oilfield in the United States, Alaska's Prudhoe Bay.

Oil futures, already near record highs hit in July, shot higher on the announcement, and gasoline futures also rose.

U.S. light crude surged $1.13 to $75.89 a barrel in electronic trading early Monday, while Brent crude trading in London rose 99 cents to $77.16. Gasoline futures rose 3.85 cents to $2.27 a gallon.

Oil analyst Peter Beutel, president of Cameron Hanover, said shutting down an oil field is an expensive and risky step that is only taken in extreme circumstances. He said that suggests the 400,000 barrels a day produced in Prudhoe Bay could be shut off for some time to come.

"They wouldn't be shutting down Prudhoe Bay if this wasn't absolutely necessary," said Beutel. "Once you shut it down, you don't know what will happen when you come back. It could cause all types of problems."

Beutel said he expects about a 5 cent a gallon rise in gasoline futures due to the pipeline problems.

The outage will cut global daily oil output by about half a percent, putting more strain on an already tight market. Beutel said he believed the news in Alaska was outweighing even new threats out of Iran to shut production there if that country is hit with United Nations sanctions over its nuclear program.

"This is almost all Alaska," he said about Monday's price hikes. "It doesn't look like something that will have a quick fix or can be ignored by the markets. I think it's going to be measured in weeks, not days, and it could drag on for months."

Beutel said the shutdown is significant for markets because it was the one supply of oil that traders did not believe to be at risk from either geopolitical events, such as fighting in the Middle East, or hurricanes that threaten U.S. production in the Gulf of Mexico.

Still Beutel said he believes the impact will be less severe than caused by hurricanes Katrina and Rita in 2005. And he also expects a quick announcement of the release of oil from the U.S. Strategic Petroleum Reserve to mitigate the lost supply.

"The Bush administration has made clear it will lend barrels from SPR to combat supply disruptions," he said.

The U.S. Energy Department will consider loaning emergency supplies of crude oil to refiners caught short of supply following the shutdown, a department spokesman said Monday.

Fadel Gheit, oil analyst for Oppenheimer & Co., said he also wouldn't be surprised to see the SPR move to distribute oil to cover the shortfall from Alaska.

"It would be more to calm down the nervous market," said Gheit. "There's plenty of oil around the world (without the SPR), but it would be a wise thing to do. It's all perception and in the markets perception is reality."

Gheit said the problems with the pipeline should not be a surprise, that it's been well known that oil companies are not doing enough regular maintenance on their infrastructure.

When the price of oil was low, they were reluctant to spend on that kind of maintenance, he said. But when prices soared in recent years, the cost of shutting down a pipeline or other facilities to do maintenance was too much of an "opportunity cost," which is a measure of lost production.

"This thing has been in operation for more than 30 years. Corrosion has to happen. Something has to give," Gheit said. "This is going to be a warning to other companies."
Click to expand...
 
Maintenance on the Alyeska pipeline has been noted as a criminal disgrace for over 15 years now.

They had a multi-body (i.e. several research institution study) research project in the 90's to identify and solve the then well known problems. The study told them one thing, it gave them several diferent engineering schedules, material choices and chemical solutions to overcome the problem. Due to that "lost production" mentality described above they elected to adopt a less stringent schedule, over a longer period of time, implementing a "solution" that was far less sturdy than the most modest proposal contained in the study proper.

As part of the project effort it was required that a paper be given at national engineering conference. When it became clear that the pipeline owners were going to blithely ignore the studies output, not doing what was really needed, the lead researcher re-cast the tenor of his paper - literally overnight. What was meant to be a nice piece of PR for big oil became a hot topic of conversation - at least at the conference itself.

The entire study is buried somewhere. The paper given at the conference is now no longer available, mysteriously gone? More like suppressed.

BP and the Alyeska operators have no-one but themselves to blame for this. Their stewardship of Alyeska has long been sub-par. It is not a coincidence that they suddenly develop a realization that maintenace of the pipeline is a good and wise thing, when the lack of its production is easily proppped up by jacking prices elsewhere.
 
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