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The Wall Street Journal: BP’s Reputation: Consultant Warned BP Of Pipe-Network Corrosion

It’s not just BP’s reputation that is suffering in America. The oil major’s U.S. mishaps are hurting its shares too. BP’s latest setback is another halving of output at its Prudhoe Bay field in Alaska. BP stock has underperformed the sector since March — shortly after Prudhoe’s problems first emerged. Two weeks ago the market value of archrival Royal Dutch Shell, at $235 billion, even overtook BP’s for the first time in four years. (See related article below – “Consultant Warned BP Of Pipe-Network Corrosion.”)

This isn’t how Lord Browne wants to leave BP when he steps down as chief executive in 2008. The firm was half Shell’s size when he took the reins 11 years ago. At its 2004 peak, when Shell was engulfed in a reserves scandal, BP was valued 30% higher than its competitor, as a multiple of debt-adjusted cash flow. The premium is now 13%.

Where BP’s premium goes, so does Lord Browne’s. After all, most of the firm’s recent problems lead to the top of the firm. The Texas City fire, the renegade BP traders who tried to corner the U.S. propane market, and the leaky Alaskan pipeline all stem from an incorrect balancing of profit and safety goals. Senior BP officials risk a roasting at a U.S. congressional hearing in September by otherwise oil-friendly Republican politicians.

That may well prove embarrassing. What matters more is BP’s reputation further afield. Like other oil majors, BP is looking for access to large reserves, most of which are in the hands of unwelcoming governments that no longer need oil majors’ skills or cash. BP’s slip-ups devalue one of the few bargaining chips it has left: good project management.

Consultant Warned BP Of Pipe-Network Corrosion

By MATTHEW DALTON and JOHN M. BIERS
August 24, 2006; Page A3

Federal investigators probing BP PLC’s operations in Alaska are reviewing two-year-old documents from an engineering firm that included warnings of accelerated corrosion in its pipeline network, an indicator of the same type of conditions that forced the partial shutdown of the giant Prudhoe Bay oil field this month.

While the London oil company has acknowledged some responsibility for the corrosion problem, BP has defended its overall pipeline maintenance as robust and characterized the incidents as unforeseeable. Environmental Protection Agency investigators are presenting evidence to a federal grand jury investigating criminal charges against BP related to its pipeline-maintenance program in Alaska. An EPA spokesman declined to comment.

Separately, a BP spokesman said late yesterday the company, which operates Prudhoe Bay on behalf of a consortium, has had to curtail remaining production at the field by almost one-half because of a mechanical failure in an oil-processing facility. The spokesman, Daren Beaudo, said the move would reduce production to 110,000 barrels a day from the 200,000 barrels a day that it had been able to continue. He said repairs could take several days. At full strength, the field produced 400,000 barrels of oil a day.
 
BP’s own regulatory reports on its pipeline maintenance and analysis of these reports prepared in 2004 by an engineering consulting firm, Coffman Engineers, don’t show a direct cause for the problems that led to the shutdown of the pipelines. But they portray a pipeline system vulnerable to localized corrosion, with large blind spots where problems would be difficult to detect. They also show that Coffman flagged isolated incidents of “accelerated corrosion” as early as 2004 based on 2003 data from BP.

Coffman’s work for BP is being examined by the EPA, said Dan Stears, manager of Coffman’s corrosion-engineering department. “Our reports were quite accurate as far as the corrosion mechanism that BP needs to address,” Mr. Stears said, adding that Coffman suggested BP needed to take measures to prevent corrosion over its entire pipeline network.

BP and Alaska officials have pointed to other language in the Coffman reports praising BP’s practices. Company spokesman Steve Rinehart said the Coffman reports were concerned with pipelines different from the ones that proved problematic. Coffman said its work encompassed the pipelines in question.

BP Alaska President Steve Marshall said at a hearing before state lawmakers last week that the Coffman reports didn’t flag the lines that proved problematic because they were seen as less vulnerable to corrosion.

At the same hearing, Alaska Department of Environmental Conservation Commissioner Kurt Fredriksson cited the praise for BP’s program and said the reports focused concern on lines different from the ones that proved problematic. (See article.)

BP is under fire from state and federal investigators for a maintenance program that led it to shut part of Prudhoe Bay, the largest oil field in the U.S., after finding severe corrosion in a pipeline. Problems with the pipeline system first publicly surfaced when a pipeline spilled over 200,000 gallons of oil in March.

One of BP’s primary methods for detecting corrosion inside its pipelines involves the use of pieces of metal, called coupons, inserted into the pipeline flow and then inspected to determine whether corrosion has occurred. BP then injects into its pipelines chemicals that inhibit corrosion based on the monitoring data.

BP’s monitoring reports show the company used few coupons on its transit pipelines, where the oil leaked in March and severe corrosion was found at the end of July. Out of a total of 1,495 locations monitored using coupons, only five were placed over the 22 miles of transit pipelines, which carry oil from processing facilities to the 800-mile-long Trans-Alaska Pipeline.

Mr. Rinehart said in hindsight the company should have placed its coupons in different locations.

BP’s maintenance reports show the company detected very low rates of pipeline corrosion throughout its system since 1997. Still, the heavy reliance on coupons and similar techniques raises questions about how confident the company could have been in the integrity of its pipeline as a whole.

The company didn’t run a standard industry test on the corroded pipeline using a “smart pig” — a mechanical device that runs along the inside of the pipeline to detect corrosion. “If you want to find this type of random, spotty corrosion, you’ve got to do 100% ultrasonic scanning from the outside, or the smart pig approach,” said Larry Tatum, an anticorrosion specialist with the National Association of Corrosion Engineers.

BP has said, looking forward, its anticorrosion programs will strongly feature the use of smart pigs.

–Jim Carlton contributed to this article.

Write to Matthew Dalton at [email protected] and John M. Biers at [email protected]

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