The Wall Street Journal: BP Keeps Part Of Prudhoe Open, Easing Concern

By MASOOD FARIVAR
August 14, 2006; Page C6

NEW YORK — A week after BP PLC’s announcement that it was shutting down Prudhoe Bay sent ripples through world oil markets, the decision to continue to partially operate the giant oil field in Alaska has taken the worst-case scenario for oil prices off the table.

Under pressure from federal authorities concerned about supply shortages and Alaskan state officials fearing the loss of hundreds of millions of dollars in royalties and taxes, the United Kingdom’s BP said late Friday it would maintain production in the western part of Prudhoe Bay, the largest producing oil field in the U.S., because it was confident of the integrity of the pipeline there.

In addition, the company pledged to continue rigorous inspections of the route and implement unprecedented oil-spill response measures.

The western operating area currently produces about 150,000 barrels a day of oil and natural-gas liquids, and after planned maintenance is completed, output will be ramped up to 200,000 barrels a day.

The move came after U.S. companies Exxon Mobil Corp. and ConocoPhillips, the two other partners in Prudhoe Bay, both informed their customers that they wouldn’t be able to honor their delivery commitments. BP said it saw no need for such a measure, and refiners on the U.S. West Coast that depend on the field’s crude oil said they could offset the shortfall by drawing down on inventories or tapping into readily available foreign sources of oil such as Saudi Arabia’s.

This all served to calm traders worried about the loss of what would amount to 8% of total U.S. domestic production. With nearly half of the field open, “this now becomes more of a minor annoyance than a major supply disruption,” said Peter Beutel, president of trading-advisory firm Cameron Hanover in New Canaan, Conn.

Between increased imports and high inventories, “it looks now like the West Coast refiners will easily be able to replace the lost Alaskan supply,” Mr. Beutel added.

Over the weekend, refiners welcomed BP’s decision. “Having that additional crude production from the western Prudhoe Bay could only be seen as a plus for the overall supply situation,” said Mary Rose Brown, a spokeswoman for Valero Energy Corp. San Antonio-based Valero, a prominent U.S. refiner, operates a 144,000-barrel-a-day plant in Benicia, Calif.

Still, that the field — which normally produces 400,000 barrels a day — remains partially offline in an already overstretched global supply system is enough to keep prices near records. “We think people have discounted the worst-case scenario,” said Mary Novak, managing director for energy services at Global Insight. However, “it’s another factor that will keep prices in the mid-$70s.”

The price of light, sweet crude-oil futures for September delivery on the New York Mercantile Exchange jumped as high as $77.45 a barrel Tuesday before beginning to slide as supply concerns eased. The contract settled Friday 35 cents higher at $74.35 a barrel, slightly lower on the week.

The pullback from the highs wasn’t all on the back of easing worries about Prudhoe Bay. Anglo-Dutch Royal Dutch Shell PLC’s resumption of some 180,000 barrels a day in production in Nigeria and the foiled plot to bomb several trans-Atlantic flights both weighed heavily on the market. But the Prudhoe Bay story was the biggest market mover.

The Prudhoe Bay glitch reverberated through world markets because it involved supplies in one of the most secure places in the world and came at a time when substantial amounts of global oil production remains offline in places such as Nigeria, Venezuela, Iraq and the Gulf of Mexico. According to Cambridge Energy Research Associates, of the U.S., a complete shutdown of Prudhoe Bay would raise the total amount of shut-in production to 2.3 million barrels a day, or 2.6% of total global output. Against that backdrop, traders’ initial reaction to the potential loss of supply in Alaska was understandable, said Fadel Gheit, an analyst at brokerage house Oppenheimer & Co. in New York.

Not everyone feared the worst-case scenario. Global Insight began telling its clients as early as last Monday that a partial shutdown of Prudhoe Bay was the more likely scenario, according to Ms. Novak.

—- Jessica Resnick-Ault and Angel Gonzalez in Houston contributed to this article.

Write to Masood Farivar at [email protected]

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