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BP's hard road ahead
The company's got to do a lot of work to fix its corroding Alaska pipes, and a lot of explaining as to how it happened.
By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- BP estimates it will cost $100 million to replace the 16 miles of corroding pipeline at its giant oilfield in Prudhoe Bay, Alaska.

As if that weren't enough, the company must also face tough questions about why the $200 million a year it says it spent in maintenance wasn't enough to keep the 400,000 barrel per day field, the country's largest, running smoothly.


BP now faces the task of explaining what went wrong and just when it knew of the problem, and it must complete the difficult job of bringing the field back to full capacity.

The maintenance failure led BP to shut down most production after pipeline walls were found to have corroded by as much as 80 percent.

Originally the company said all 400,000 barrels per day would be offline for months. But last Friday, after inspecting the pipes, BP said half the field will remain open, at least for now.

The cost of the project is staggering. That $100 million dollars to replace 16 miles of pipe works out to more than $6 million a mile, far higher than the average pipeline construction costs that Raymond Paul, a spokesman for Association of Oil Pipelines, estimated at around $1 million a mile.

But, of course, building pipelines in the Arctic presents particular challenges.

The first is getting the stuff there.

BP says it has placed orders for all 16 miles of pipe. But the materials are being made at mills in the lower 48 states. From the mills they must be transported via truck to Seattle before being loaded on a barge for the trip to Anchorage.

In Anchorage the pipes, measuring up to 34 inches in diameter, will be put on rail cars up to Fairbanks, then transferred back to trucks for the final leg to Prudhoe Bay, which sits on Alaska's North Slope on the edge of the Arctic Ocean. More than 50 tractor trailers are expected to take part.

"You gotta work with the trucking companies, the rail companies, the barge companies, and that's just to get it to the North Slope," said Neil Chapman, a BP spokesman.

Then the real work begins.

The pipes aren't expected to arrive in Alaska until as late as December, which is of course the dead of winter. Not to mention, it's a time when the state is in near total darkness.

But the frozen ground is better for construction. The heavy equipment doesn't get stuck in the soft tundra.

Finding workers for the project will also be hard.

"There's not a welder free north of the 49th parallel," said Barbara Shook, a senior analyst with Energy Intelligence Group, referring to the border between the continental U.S. and Canada They are all busy working on Canada's massive tar sands project in Alberta. "This is going to be a huge challenge."

Pigless in Alaska?

But why did all this happen in the first place? And why did BP take so long - and have to take such drastic measures - to fix the problem?

The company will, after all, lose an awful lot of revenue on the 200,000 barrels per day that is shut in.

BP's take on those 200,000 barrels is only about 50,000 barrels. The rest is split between the field's other owners, ExxonMobil (Charts) and ConocoPhillips (Charts), or must be used to pay the Alaska tax. But at $70 a barrel, 50,000 barrels still translates into $3.5 million a day.

BP now says the corrosion is believed to have been caused by microbacteria that became trapped under sludge in the bottom on the pipes.

Chapman said it wasn't a mater of money but a problem with BP's overall strategy of relying on chemicals to protect against corrosion. The chemicals couldn't kill the bacteria that were buried under the sludge.

"What we thought was a good program wasn't good enough," said Chapman.

But several questions have been raised as to why the company hadn't cleaned some of its lines for up to a 14-year period until recently.

Government regulators suspected sludge buildup was a possible cause of the corrosion and said BP hadn't cleaned some of the lines since 1992, according to a June 5 letter from the Department of Transportation, which regulates pipelines.

The agency said the 800-mile-long Trans-Alaska pipeline, which carries oil from the North Slope to its terminus at the sea in Valdez, is cleaned every two weeks.

The DOT noted that BP hadn't cleaned the lines, which is done using a device called a scraper pig, after a previous attempt to clean them was abandoned when the pig encountered too much sediment and almost became stuck.

But the letter went on to say that the DOT had "not received a reasonable explanation why BP has not scraper-pigged these lines over an approximate 14-year period," and that "this length of time does not represent sound management practices for internal corrosion control."

BP has not responded to questions regarding the "scraper pig" issue.

BP's bigger problems

The company has consistently defended its maintenance program at Prudhoe Bay and elsewhere, saying it put the safety of its workers first and noting its maintenance budget in the North Slope is $200 million a year, an 80 percent increase since 2001. And BP officials have made explicit apologies since the news broke Monday.

But It's difficult to tell much from that $200 million figure, as it includes maintenance for the entire facility - well heads, pumping stations, landing strips - and not just the pipelines.

And BP, like other oil companies, doesn't break down its maintenance budget in its annual report.

The company, which made a profit of $22 billion in 2005, has recently suffered a string of mishaps.

A 5,000-barrel leak from pipes in the Prudhoe Bay field is what prompted the DOT to order the inspection that resulted in the most recent shutdown.

BP's massive Thunderhorse platform in the Gulf of Mexico has been plagued with problems, pushing its start-up until 2007, a delay of more than two years.

And then there was the Texas City refinery explosion last year that killed 15 workers and injured 170.

All of these have caused some to question BP's overall commitment to maintenance and safety.

"You don't have Exxon and Conoco facilities blowing up," said Shook of the Energy Intelligence Group.

On the $200 million spent per year in Prudhoe Bay, no matter how it breaks down, much thinking went along the lines expressed by Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors.

"Clearly," said Hicks, "it wasn't enough."


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.