ANCHORAGE, Alaska – In a sudden blow to the nation's oil supply, half the production on Alaska's North Slope was being shut down Sunday after BP Exploration Alaska, Inc. discovered severe corrosion in a Prudhoe Bay oil transit line.
BP officials said they didn't know how long the Prudhoe Bay field would be off line. "I don't even know how long it's going to take to shut it down," said Tom Williams, BP's senior tax and royalty counsel.
Once the field is shut down, in a process expected to take days, BP said oil production will be reduced by 400,000 barrels a day. That's close to 8 percent of U.S. oil production as of May 2006 or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.
The shutdown comes at an already worrisome time for the oil industry, with supply concerns stemming both from the hurricane season and instability in the Middle East.
"We regret that it is necessary to take this action and we apologize to the nation and the State of Alaska for the adverse impacts it will cause," BP America Chairman and President Bob Malone said in a statement.
A 400,000-barrel per day reduction in output would have a major impact on oil prices, said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo.
"Oil prices could increase by as much as $10 per barrel given the current environment," Emori said. "But we can't really say for sure how big an effect this is going to have until we have more exact figures about how much production is going to be reduced."
Victor Shum, an energy analyst with Purvin & Gertz in Singapore, said he expected the impact to be minimal.
"The U.S. market is actually well-supplied; crude inventories are very high," he said. "So while this won't have any immediate impact on U.S. supplies, the market is in very high anxiety. So any significant disruption, traders will take that into account, even though there is no threat of a supply shortage."
Light, sweet crude for September delivery was up 36 cents to $74.95 a barrel in midmorning Asian electronic trading on the New York Mercantile Exchange.
Malone said the field will not resume operating until the company and government regulators are satisfied it can run safely without threatening the environment.
Officials at BP, a unit of the London-based company BP PLC, learned Friday that data from an internal sensing device found 16 anomalies in 12 locations in an oil transit line on the eastern side of the field. Follow-up inspections found "corrosion-related wall thinning appeared to exceed BP criteria for continued operation," the company said in a release.
Steve Marshall, president of BP Exploration Alaska, Inc., said at an Anchorage news conference that testing in the 16 areas found losses in wall thickness of between 70 and 81 percent. Repair or replacement is required if there is over an 80 percent loss.
"The results were absolutely unexpected," he said.
Marshall said Sunday night that the eastern side of Prudhoe Bay would be shut down first, an operation anticipated to take 24 to 36 hours. The company will then move to shut down the west side, a move that could close more than 1,000 Prudhoe Bay wells.
Marshall said BP is looking at repairing, bypassing or totally replacing the line.
Only one of BP's three transit lines is operating. The third was shut down in March after up to 267,000 barrels of oil spilled. BP installed a bypass on that line in April with plans to replace the pipe.
While they suspect corrosion in both damaged lines, they can't say for sure until further tests are complete. Corrosion is primarily caused by carbon dioxide that comes up with water, oil and gas during drilling.
BP puts millions of gallons of corrosion inhibitor into the Prudhoe Bay lines each year. It also examines pipes by taking X-rays and ultrasound images.
"Up until Friday of this weekend we were of the opinion the techniques we were using were ultimately reliable," Marshall said.
Workers also found a small spill, estimated to be about 4 to 5 barrels. A barrel contains 42 gallons of crude oil. The spill has been contained and clean up efforts are under way, BP said. "Our production while all this is in place is going to be marginal," said Will Vandergriff, spokesman for Gov. Frank Murkowski. "That presents some technical problems because it's a high capacity line and it's meant to be filled."
Vandergriff said he did not know exactly what potential problems a sudden drop in oil flow might cause the pipeline. Alyeska Pipeline Co. officials could not immediately be reached for comment.
A prolonged shutdown would be a major blow to domestic oil production, but even a short one could be crippling to Alaska's economy.
According to forecast figures from the Alaska Department of Revenue, a 400,000 barrels of oil per day production drop would mean approximately $4.6 million per day lost to the state. That is money going to both the state treasury and the state's oil wealth savings account, the Alaska Permanent Fund.
"That starts adding up to big bucks in a hurry," said House Finance Co-Chairman Mike Chenault, R-Nikiski. "It could start having a disastrous effect on the state as early as today."
BP said it was sending additional resources from across the state and North America to hasten the inspection of the remaining transit lines. About 40 percent of the lines have been inspected.
BP previously said it would replace a 3-mile segment of pipeline following inspections conducted after up to 267,000 gallons of oil spilled onto the frozen ground about 250 miles above the Arctic Circle in March.
House Speaker John Harris said it was admirable that BP took immediate action, although it's sure to hurt state coffers.
"This state cannot afford to have another Exxon Valdez," said Harris, R-Valdez.
The Exxon Valdez tanker emptied 11 million gallons of crude oil into Prince William Sound in 1989, killing hundreds of thousands of birds and marine animals and soiling more than 1,200 miles of rocky beach in nation's largest oil spill.