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Oil's aging pipelines
What took BP so long to realize its Alaskan pipelines were corroding? It's a 'warning' to the rest of the industry.
By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- As BP shuts down its corroding pipelines in Alaska's North Slope, some analysts are wondering why the problem wasn't caught sooner and say that the company's problems foreshadow a larger mess with the world's aging oil infrastructure.

"It was almost guaranteed to happen," said Charles Clusen, director of the Alaska project for the Natural Resources Defense Council. "These companies have not been putting the money into infrastructure up there."


Fadel Gheit, an oil analyst with Oppenheimer & Co., said it is well known that oil companies in general haven't been spending enough on maintaining their pipelines, wells, platforms and other equipment.

"This thing has been in operation for more than 30 years," Gheit said of BP's North Slope field. "Corrosion has to happen. Something has to give. This is going to be a warning to other companies."

The extent of the corrosion in Alaska, and the fact that it went undetected for so long, caught many in the oil industry by surprise.

"When was the last time they checked that particular line?" said Art Smith, chief executive of John S. Herold, a Houston-based energy consulting firm. "It seems that [it] should have been caught sooner."

Scott Dean, a BP spokesman in Alaska, disputed the claim that the company hadn't spent enough to maintain its pipelines.

Dean said the company spent $71 million on corrosion prevention alone in Alaska in 2006, an increase of 15 percent from 2005 and up 80 percent since 2001.

Dean said the line was last checked internally, which is done using a device mounted with sensors known as a smart pig, in 1992. But he also said the smart pig is usually used on pipelines that run below ground and that the above ground Prudhoe Bay pipes were checked often with other diagnostic tools.

"The results were surprising, and disturbing," said Dean.

Dean said the company is replacing all 16 miles of the larger transit pipes in question, which carry oil from holding tanks in the field to the 800-mile long Trans-Alaska pipeline.

He said the corrosion was most likely caused by water or sediment buildup in the bottom of the pipes, which is a common occurrence in older oil fields like Prudhoe Bay, where the oil coming out of the ground isn't as pure.

The Energy Information Administration, in its short-term energy forecast released Tuesday, said full production at the field wasn't likely to return until February 2007, although some oil could start flowing again in November.

A BP official said the company is also looking at ways to keep some of the production going in the field while repairs are made, Reuters reported.

Costs to replace the pipeline are hard to pin down - experts contacted for this report were reluctant to speculate how much BP might have to spend.

Energy Secretary Sam Bodman said Tuesday it could take months for full production to return, although he said partial production could resume shortly.

He also said the closure shouldn't have a huge impact on consumers; much of the production loss could be made up from other sources and the industry should bear the cost, not consumers.

BP said Monday it began shutting down its Prudhoe Bay oil field in the North Slope after tests, ordered by the Department of Transportation, following a 5,000-barrel spill in the same field in March - the largest ever in the North Slope -showed parts of the transit pipeline had lost up to 70 percent of their mass due to corrosion.

The action shuts in 400,000 barrels of oil, or 8 percent of U.S. domestic production, at a time when tight supply and surging demand have magnified the effects of geopolitical tensions. Oil prices surged 3 percent Monday and came about a dollar shy of the record trading high of $78.40 set in July and within pennies of the closing record of $77.03.

Gheit said investing in infrastructure is a difficult call for oil companies.

When oil prices are low, they are reluctant to make the expenditures since the return on capital doesn't look so hot. But when prices are high they don't want to take production offline to perform maintenance.

But Smith at John S. Herold, who's also a board member of the pipeline company Plains All American, said capital projects in the oil industry are so expensive and the time it takes to complete them so long that companies can't rely on day-to-day or year-to-year oil prices in making investment decisions.

"The industry doesn't have the ability to maximize profits at the expense of infrastructure," he said. "Operations always come first, economics come in second."

The Department of Transportation, which is responsible for regulating pipelines, also seemed satisfied with the industry's investments in that part of its infrastructure.

A DOT spokeswoman pointed to the number of accidents involving pipelines, noting they've been on the decline, falling from 210 in 1986 to 136 last year.

"The systems have to be safe," she said. 'We all rely on them and we all use them."


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.