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International Herald Tribune: Age and neglect meet in global oil pipelines

By Tom Cahill and Sonja Franklin Bloomberg News
TUESDAY, AUGUST 22, 2006

PARIS BP’s shutdown of the largest U.S. oil field may be the first of many, as decaying pipelines threaten to add to already soaring energy prices in the next decade.

“We’ll look back on this event as the Pearl Harbor Day in energy,” said Matthew Simmons, chairman of energy investment bank Simmons & Co. in Houston. The chance that the leaks and corrosion found at Prudhoe Bay in Alaska by BP, the British oil company, are an isolated occurrence is “zero,” said Simmons, who is writing a book on aging oil infrastructure.

A growing minority of analysts, oil executives and government officials say that the current system for producing and transporting crude will be unable to deliver the energy needed in the next 10 years. Repairs and replacement of pipes, valves and refineries will help push oil to $93 a barrel by 2015, from around $73 today, said Kevin Norrish, analyst with Barclays Capital in London.

Internal corrosion is the biggest reason for pipeline spills in the United States this year, causing 16 percent of all accidents through Aug. 9, according to U.S. Department of Transportation’s Office of Pipeline Safety. Since 1990, the portion of oil lost because the inside of a pipe has been eaten away has grown to 78 percent from 4.7 percent, with 68,624 barrels spilled this year, the agency said.

BP’s admission that some pipes in Prudhoe Bay had not been inspected internally for corrosion in more than a decade was “incredible,” said Charles Maxwell, an oil analyst at Weeden. “They are in deep trouble.”

BP may face criminal charges in the United States over an oil spill in Alaska in March, which prompted inspections that found the Prudhoe Bay corrosion.

Repair of the oil production facilities built in the 1970s is part of the $6 trillion that needs to be spent by 2030 to meet global oil and gas needs, according to the International Energy Agency in Paris.

Record oil prices are encouraging producers throughout Europe and the United States to keep old rigs running, rather than shut them down. BP’s leaky pipeline, built to last 25 years, is now in its 29th year. The average pipeline in the United States is about 50 years old, according to NACE International, formerly the National Association of Corrosion Engineers.

“What we have is an entire generation of oil infrastructure that more or less came on stream at the same time,” said Deborah White, an analyst at Société Générale in Paris who helped plan the Prudhoe Bay field development in the 1970s. “It’s now all of a certain age, fragile, and can’t be pushed quite as hard.”

In the Norwegian North Sea, 8 percent of wells have weaknesses that disrupt production, according to a study for the country’s Petroleum Safety Authority.

A similar amount of offshore oil and gas output probably is being lost worldwide because of faulty wells, said Jan Andreassen, an author of the Norwegian study. Russia’s pipeline monopoly, Transneft, estimates its program to improve its pipeline system will take almost three decades to complete.

Oil consumers depend more than ever on regions like Alaska and the North Sea that were developed in the 1970s, after the Arab oil embargo led the United States and Europe to seek alternative supplies. Oil prices more than doubled in the past three years as demand accelerated.

Benchmark New York crude oil futures jumped 3 percent on the day BP revealed the extent of corrosion in the Prudhoe Bay pipeline, which caused leaks and ate away as much as 81 percent of the steel. Oil futures for October rose $1.20 to $73.30 in trading in New York on Monday.

Statoil, the largest oil and gas provider in Norway, said that production this year could be as much as 25,000 barrels a day below forecast because of extensive maintenance and lower output from older North Sea fields.

Andreassen’s study, published in June, found that 18 percent of 406 wells tested in Norway’s section of the North Sea had weaknesses, and 8 percent had faults that demanded they be shut.

“This is a subject people don’t like to talk about,” he said during a phone interview last week. “This is not particular to Norway. This is an industry problem.”

BP increased its training for management and monitoring of North Sea wells, Jan Erik Geirmo, a spokesman for the BP’s Norwegian subsidiary, wrote in an e-mail message. Andy Corrigan, a spokesman for Royal Dutch Shell of The Hague, said maintenance spending has been “stepped up significantly in recent years.” He was not more specific.

“Corrosion is a complicated business,” said Lois Epstein, senior engineer and oil industry specialist at Cook Inlet Keeper, an environmental group in Anchorage, Alaska. Programs to detect and prevent corrosion can keep it in check, she said. “It can be done well, and they weren’t doing it well,” she said of BP.

The company had judged that internal surveillance was not needed because the pipelines on Alaska’s frozen North Slope are above ground, allowing for direct inspection.

“We thought it was an adequate program,” BP America’s president, Robert Malone, said earlier this month. “Clearly it is not.” BP said it spent $72 million combating corrosion in North Slope pipes this year, up from $60 million in 2005.

Sonja Franklin reported from Calgary, Alberta.

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