Alaska Pipeline Closes

Drop in Production by BP, Others Threatens to Push Oil Toward $100 a Barrel

Alyeska Pipeline Service Company

Workers discovered the pipeline leak at a pump station, above, and isolated its source as of late Saturday.

JANUARY 10, 2011

By GUY CHAZAN

BP PLC and other oil producers were forced to shut down nearly all their output on Alaska’s North Slope, after a leak led to the closure of the Trans Alaska Pipeline.

Analysts said the shutdown of the 800-mile pipeline network could trigger a jump in oil prices unless the flow of oil resumes quickly, as the region represents a significant slice of domestic U.S. oil output. Some analysts said the disruption could help drive crude-oil prices toward $100 a barrel from below $90 now.

Alyeska Pipeline Service Co., which operates the pipeline network, said the spill has had no apparent impact on the environment or wildlife. Alyeska said no oil was leaking as of Sunday evening. About 10 barrels of oil had been spilled and most of it had been cleaned up, Alyeska said.

The shutdown, however, was a “significant event,” BP spokesman Steve Rinehart said. BP and other oil companies operating on the Slope, including ConocoPhillips, have periodically been forced to cut output because of major power outages or when heavy winds interrupted tanker loadings at the port of Valdez, he said. But the latest shutdown means “a big reduction” in the middle of winter “when we have temperature and weather challenges” as well, Mr. Rinehart said. The temperature at the pump station where the incident occurred is about four degrees Fahrenheit.

BP said it was too early to say what impact the shutdown would have on the company’s first-quarter earnings.

Total production on the North Slope is around 630,000 barrels a day—about 9% of total domestic U.S. output.

Associated Press

The Trans Alaska Pipeline runs from Alaska’s North Slope to Valdez. Above, a section north of Fairbanks in 2005.

Alyeska shut down the pipeline system at 8:50 a.m. local time Saturday after workers discovered oil leaking into a basement at a pump station on the North Slope.

Alyeska then told BP and other producers in the region to reduce their output by 95%. Alyeska is owned by BP, Conoco, Exxon Mobil Corp, Chevron Corp. and Koch Industries.

Alyeska said it didn’t know how long it would take to reopen the pipeline system, which carries oil from northern Alaska to the southern coastal city of Valdez, the northernmost ice-free port in North America.

An extended pipeline outage in the middle of Alaska’s harsh winter could complicate efforts to restart production. Oil becomes waxy and gelatinous when subject to freezing temperatures. To get it moving again, it would need to be reheated. BP has deployed crews to pump methanol, an antifreeze, to keep its own pipelines from freezing.

Alyeska said it is considering bypassing the damaged underground line using nearby pipes.

The area expected to be hardest hit is the U.S. West Coast, whose refineries rely heavily on Alaskan crude and whose drivers pay some of the highest prices for gasoline in the U.S.

“You can’t replace 600,000 barrels per day overnight, especially when there’s no other production close by,” said Ed Morse, head of commodities research at Credit Suisse.

While the pipeline shutdown is just a “seasonal blip” for the time being, if it drags on “it could be a strong factor in potentially pushing up oil towards $100 a barrel,” he said. If Saudi Arabia decided to increase production to compensate, it would take more than 60 days to do so. Crude-oil futures in New York closed Friday at $88 a barrel on the New York Mercantile Exchange.

In after-hours screen trade on Nymex on Sunday evening, crude futures were at $89.56 a barrel.

With West Coast inventory levels already tight, analysts said it would take only a few days for the shutdown to have an appreciable impact on the oil market.

Yet analysts said there is little likelihood of severe supply shortages on the West Coast—at least for now. A large volume of crude oil is held in storage at the Valdez terminal, and refineries can buy more Middle Eastern, Russian and Latin American grades on the spot market. And once the pipeline returns to service, it will be relatively easy for companies to catch up on lost production, a BP spokesman said.

Alyeska said the source of the leak appeared to be underground piping that is encased in concrete. It said the source had been isolated and crews began recovering oil from the site at 4 p.m. local times on Saturday.

Alyeska briefly shut down the network last May, after a power outage at a different pumping station caused a tank to overflow and spill several thousand barrels of oil into a gravel containment area. While the system was shut down, Alyeska ordered producers to cut their pipeline shipments to 16% of normal, according to a statement on Alyeska’s website.

—Cassandra Sweet contributed to this article.

Write to Guy Chazan at [email protected]

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