Gas Prices Near Record On Oil Field Loss

Gas Prices Near Record On Oil Field Loss

Wednesday, August 9th 2006

The fast rise in oil prices after BP’s announcement that it was shutting down one of its biggest oil fields for repairs that could take months appeared to have leveled off Tuesday morning.

Oil prices fell in several markets, but the price was still more than $1 above last week, putting pressure on prices at the pump.

Light sweet crude for September delivery on the New York Mercantile Exchange slipped 33 cents to $76.65 a barrel in electronic trading by midday in Europe. September Brent at London’s ICE Futures exchange fell 40 cents to $77.90 a barrel.

BP said it discovered corrosion so severe that it will have to replace 16 miles of pipeline at the huge Prudhoe Bay oil field. The news Monday put pressure on prices at the pump during the peak summer driving season and prompted the government to consider dipping into its emergency stockpile.

Most of the crude oil produced out of Alaska’s North Slope each day goes to refineries in Washington, California and Hawaii, said Joe Sparano, president of the Western States Petroleum Association, a trade group based in Sacramento, Calif.

Sparano said it’s too soon to tell how the shutdown will ultimately affect consumers. “Until we know the full extent of any necessary repairs and how long they might take, it’s impossible to predict what the impact might be,” he said.

The average U.S. retail price of a gallon of unleaded, regular gasoline was $3.036 on Monday – near its all-time high of $3.057, reached Sept. 5 after Hurricane Katrina hit the Gulf Coast. Gasoline futures also rose, indicating the market expects further increases.

The Energy Department said it is prepared to provide oil from the government’s emergency supplies if a refinery requests it. “If there is a request for oil we’ll certainly take a serious look at that,” spokesman Craig Stevens said.

The government has about 700 million barrels in storage on the Gulf Coast to be used in case of a serious supply disruption. The Energy Department in the past has lent some of the oil to refineries when there were disruptions.

Bob Malone, chairman of BP America, said that in a worst-case scenario, it could take weeks or months to replace the pipelines. But the company said it will try to put portions of the network back into operation as they are repaired.

“We estimate it could take between 2-3 months to get it back on line,” Bruce Lanni, an industry analyst with A.G. Edwards, wrote in a research note. “However, there are no assurances that it will return to current capacity, given the complexities and age of the reservoirs.”

Washington state’s largest refinery has enough oil stockpiles to keep the shutdown from becoming a major problem in the next two or three weeks, said Mike Abendhoff, spokesman for BP’s Cherry Point refinery in northwest Washington.

“If it prolongs and goes six weeks, eight weeks, three months or four months, then it’s going to require us to be more creative in where we get our crude from,” he said.

BP operates the Prudhoe Bay oil field for itself and for other oil companies, including ConocoPhillips and Exxon Mobil. Prudhoe Bay and other oil fields on Alaska’s North Slope feed oil into the 800-mile trans-Alaska pipeline. The North Slope produces approximately 800,000 barrels a day; Prudhoe Bay accounts for half of that.

BP discovered corrosion in the transit lines only after the U.S. Transportation Department ordered their inspection following a spill of up to 270,000 gallons in March. It was the biggest spill in North Slope history, and has become part of a criminal investigation into the company’s Alaskan operations.

The loss may hit Alaska hardest. Eighty-nine percent of the state’s income is from oil revenue, and central to that cash flow is Prudhoe Bay. The expected loss of 400,000 barrels per day at today’s oil prices means $6.4 million lost daily in royalties and taxes, Revenue Commissioner Bill Corbus said.

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