What pipeline problem?
Lost in the fallout from BP's shut-down at Prudhoe Bay is the fact that the system is getting better, and oil supplies are growing, says Fortune's Jon Birger.
(Fortune Magazine) -- Big news stories have a way of morphing into emblems. Killer hurricanes represent global warming's arrival. CEO convictions symbolize corporate greed run amuck. But what happens when a news event is just a news event - when the tip of the iceberg is just a glob of floating ice?
Consider Prudhoe Bay, Alaska, and the brouhaha surrounding BP's troubled oil pipeline there. On Aug. 6, BP announced it would close 22 miles of oil transit lines for extensive repairs, sidelining some 400,000 barrels a day of Alaskan oil production. Days later BP backtracked a bit, saying it would be a partial shutdown affecting only 200,000 barrels a day.
The pipeline was the site of a major spill in March, and subsequent inspections revealed severe corrosion. Critics weren't surprised: Workers had raised safety concerns before, and BP (Charts) acknowledged the pipeline hadn't undergone a "smart pig" inspection since 1992. (Named for the squealing noise they once made, "pigs" are devices used to scrape off buildup or, in the case of high-tech "smart pigs," test for wear and tear.)
Standard operating procedure is for pipelines to be smart-pigged once every five years, says Kirk Langford, head of transmission pipeline inspection for oil-services firm Baker Hughes.
Suddenly the sky was falling. Pundits predicted a $10-a-barrel rise in the price of oil and warned that our pipeline infrastructure was crumbling. Representative Curt Weldon (R-Pennsylvania) and Senator Chuck Schumer (D-New York) accused federal regulators of being asleep at the switch.
Of course, oil didn't rise $10. "Even if you took 400,000 barrels off the market permanently, that wouldn't happen," says oil expert Severin Borenstein, a professor at Berkeley's Haas School of Business. Prices barely budged. Why?
Give credit to all those evil futures traders who've been scapegoated for $70 oil. By bidding up futures prices, traders created incentives for oil companies to build bigger inventories. And those inventories acted as buffers when supplies were disrupted.
Another reason prices didn't increase: new production. A recent report by Cambridge Energy Research Associates identifies 25 new drilling projects, expected to push global production capacity from 89 million barrels daily to 110 million by 2015.
As for the notion that U.S. pipelines are in disrepair, there's no evidence to back that up. Yes, many pipes are 40 or 50 years years old. But according to the federal Office of Pipeline Safety, the number of pipeline accidents in the U.S. has been falling. Accidents dropped from 245 in 1994 to 136 in 2005. There were 57 through July. And with proper maintenance, pipelines should remain safe for decades to come.
BP's current pipeline woes are receiving disproportionate attention because of when and where they occurred - at a time of high prices and in a place where every accident is an argument against further Alaskan drilling.
When energy prices were much lower, even the most horrific pipeline accidents rarely received much national attention. In June 1999, for instance, a pipeline explosion in Bellingham, Wash., killed three people -including two 10-year-olds - and spilled a quarter-million gallons of gasoline into two nearby creeks.
In August 2000, a family of 12 was burned to death when a corroded pipeline exploded near their New Mexico campsite. The latter story merited 89 words on page 22 of the New York Times.
The 1990s were a pipeline-safety low point. With oil below $20 a barrel, many companies simply cut back on maintenance, says Don Deaver, a former Exxon (Charts) engineer who now works as a pipeline consultant.
The accidents that ensued spurred tougher regulation and ultimately improved safety. Higher oil prices helped too. "The incentives to avoid an extended shutdown are so high right now that companies aren't going to take chances," says Steven Kean, chief operating officer of pipeline operator Kinder Morgan.
In the end, what happened at Prudhoe Bay probably says more about BP than the industry or its regulators. For all its holier-than-thou "Beyond petroleum" advertising, BP hasn't always behaved like one of oil's good guys.
Cost-cutting at all costs?
The pipeline shutdown is only its latest black mark. The March spill occurred two years after BP worker advocate Chuck Hamel sent a letter to BP board member Walter Massey warning of corrosion problems.
In June the Commodity Futures Trading Commission accused BP traders of manipulating the propane market. And in 2005 an explosion at BP's Texas City refinery killed 15 workers and injured 170.
Veteran energy banker Matthew Simmons thinks corporate soul-searching is in order. "What created the unbelievable aura of [BP chief executive] Lord John Browne of Madingly? He was the best cost cutter in the industry," Simmons asks, and answers.
"The whole culture at BP has made it a ruthless place to work, which is why I suspect you're going to see a lot more internal people speak out." Bob Malone, the man charged with fixing BP's U.S. operations, rejects the suggestion that recent accidents reflect deeper problems. Still, he acknowledges mistakes and promises change.
For his part, Kinder Morgan's Kean just hopes Prudhoe Bay doesn't give pipeline operators an undeservedly bad name: "You've got to remember there are millions of barrels moving over hundreds of thousands of miles of pipeline, day in and day out."
"You know how they tell you on the airlines that this is the safest part of your journey?" he continues. "Well, the journey on the pipeline is also safer than anything else on the value chain - including you putting gas into your tank."
From the September 4, 2006 issue