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Financial Times: Better for BP to spill the beans than the oil

EXTRACT: Compare this to Shell in Nigeria. It is the dominant operator in the Niger Delta, where rebel saboteurs and kidnappers of oil workers have shut in over 500,000 barrels a day this year, more than Prudhoe produces. The Nigerian authorities may not require the same rigorous safety and environmental standards of Shell and other foreign operators (which have to compensate with rules of their own) as Alaska does of BP.

THE ARTICLE

Published: August 8 2006 03:00 | Last updated: August 8 2006 03:00

It is a tribute to the tightness of today’s oil market that the shutting down of one declining field can send prices shooting back up towards this summer’s record highs, and lead the US government to talk of offsetting it by opening its strategic oil reserve.

But the field in question, Prudhoe Bay in Alaska, is still North America’s largest. It is sensible that its operator, BP, has decided to shut down all the Prudhoe transit pipelines for inspection ahead of any regulatory pressure for it to take such action. For this follows years in which the company let itself be prodded into remedial action on the ageing field.

The shut-down is not surprising given preliminary findings of unexpectedly severe pipeline corrosion that could have led to a repeat of this March’s 6,000 barrel oil spill. The company is already being prosecuted for that.

But it is also clear that in Robert Malone, BP has a new chief who wants to clear up the company’s proliferating regulatory problems in America. These include recent deadly fires at its Texas City refinery and allegations of market-rigging by its US traders in propane gas. This prompts the question of whether such problems are specific to BP’s US operations or more widespread across the group.

There are reasons – related to age, scale and legacy of the US operations – for thinking it is the former. In production since 1977, Prudhoe is one of BP’s oldest fields, and in decline. Oil companies have inherently less financial interest in maintaining declining fields, be they in the North Sea or Alaska, than developing new ones. Nor is it surprising that BP, having become the largest operator in the US, thanks to the acquisition of Sohio in the 1970s and Amoco and Arco in the late 1990s, should have encountered substantial problems there. This expansion has clearly brought legacy problems, in particular the Texas City refinery that BP inherited from Amoco.

Ironically, however, BP may benefit from having a relatively large proportion of its operations (apart from its recent expansion into Russia and Azerbaijan) under the scrutiny of developed countries’ regulators. In Alaska, it may not have taken its latest initiative without the earlier pressure from local regulators.

Compare this to Shell in Nigeria. It is the dominant operator in the Niger Delta, where rebel saboteurs and kidnappers of oil workers have shut in over 500,000 barrels a day this year, more than Prudhoe produces. The Nigerian authorities may not require the same rigorous safety and environmental standards of Shell and other foreign operators (which have to compensate with rules of their own) as Alaska does of BP.

So, in the end, tough regulation along the lines BP has been subjected to in Alaska can be a blessing indisguise.

Copyright The Financial Times Limited 2006

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