The Prudhoe Bay giant oil field has been shut down indefinitely due to an oil leak and discovery of extensive sections of thinned pipe walls in pipelines. Sections of two of three feeder pipelines from Prudhoe Bay will have to be replaced according to British Petroleum, the operator of the pipelines and the holder of a 26% stake in the Prudhoe Bay field. A total of 16 miles of pipe will have to be replaced.
The feeder lines transport crude oil from the Prudhoe Bay oil field to the 800 mile-long trans-Alaska pipeline which runs from the Beauford Sea off of northern Alaska to the Pacific Ocean off of southern Alaska.
The Prudhoe Bay oil field produces about one-half the oil produced on the Alaska North Slope.
About 16 miles of the two Prudhoe Bay feeder pipelines will have to be replaced due to the thinned pipe wall sections. The loss of metal is due to primarily to corrosion.
A statement issued indicated that 70 - 81 % of pipeline metal had been lost due to corrosion. Repairs or replacement of the pipelines is required when 80% of pipeline metal is lost.
Apparently, at least one small leak was also found.
It will take a week or so just to shut down the pipeline. The time to replace the thinned pipe sections will likely take "months." Some of the pipeline down time may be avoided if bypasses, etc can be used.
Over 400,000 barrels per day of oil production will be lost during the repairs. This amounts to about 8% of total U.S. oil production. On a monthly basis, the lost production would be 12,000,000 barrels. In the overall scheme of the oil business, that is not much of a loss.
Fortunately, U.S. crude oil inventory is at a five-year high of about 350 million barrels, largely as a result of the past non-winter. Higher gasoline prices also contributed to the buildup of oil as a few people actually cut back on driving. A new large source of oil hitting the market has been from the Canadian oil sands which are producing more efficiently than I had ever dreamed possible. Still another reason for the oil buildup is the much higher prevailing value of oil. The oil patch is literally humming with folks looking for new oil fields or working to increase oil production from existing fields. See Oil Company Stocks for more information.
Psychological Impact of the Prudhoe Bay Pipelines Shutdown
So the actual physical impact from the Prudhoe Bay pipelines shutdown will be less than it could have been. However, the psychological impact may be something again. Hurricane season is just starting. Another Katrina-type hurricane could change everything. Also, impact from geopolitical developments, e.g., Hezbollah - Lebanon - Israel clash, could change things in a hurry.
On an optimistic note, assuming no hurricanes in the Gulf of Mexico, a ceasefire in Lebanon, a slowing U.S. economy, fairly normal weather patterns, etc., the psychological impact of the Prudhoe Pipelines shutdown might be as low as 3 or 4 dollars increase per barrel. We could even see a temporary spike up in oil price followed by a substantial price decline. The reason for the decline is that there is already a substantial risk premium in the price of oil. If all the factors involved in the risk premium actually occur, then, after the initial price rise, the oil price can only go down as the risk premium is used up. Such a oil price decline could be substantial if, by the middle of September, the above optimistic factors are in place.
Assuming the above optimistic scenario, that might be a good time to invest in oil stocks which would no doubt be declining rapidly as this scenario unfolds. The logic in investing in oil here is that most of the basic oil shortage problems, e.g., Peak Oil, China, India, SUVs, etc are still with us and Prudhoe Bay won't matter much in the long run........
Let's look at the pessimistic side of things: no resolution of the Lebanon problem, a hurricane or two in the Gulf, the Iraq War worsens, Iran becomes even more belligerent, etc. Oil could easily spike to $80 or $90 per barrel and remain there for awhile. Then, if we have a real winter, look out!
Fortunes will be made by oil speculators during the next few months as the factors discussed above, play out. It probably won't be me making the fortune because I usually guess wrong. (I slightly favor the optimistic scenario. One last oil investment opportunity!!)
No, Prudhoe Bay won't matter much in the larger scheme of things in the long run. The giant oil field is rapidly playing out. Only 3 billion barrels of the original 16 billion barrels remain to be recovered. That figure to be recovered will likely drop further if the old field has to be shut in for a lengthy period.
Oil exploration started at Prudhoe Bay in 1968 and production began in 1977. Initial production was close to 2,000,000 barrels per day but that slowly dropped to about 1,000,000 barrels per day in early 2005. One year later, it appears the depletion rate has increased since the amount of oil to be lost in the complete Prudhow Bay field shutdown is said to be 400,000 barrels per day.
Of course, the pipeline people knew of the potential pipeline corrosion problem and have been adding millions of gallons of corrosion inhibiter per year to counter it. In March 2006, a severe leak occurred in the pipeline and British Petroleum faces criminal charges in the matter.
The Prudhoe Bay feeder pipelines and the trans-Alaska pipeline have stringent inspection requirements and the inspections involve use of both X-ray and ultrasonic equipment as well as other pipeline inspection equipment, and, of course, visual inspections. Some questions have been raised as to whether the inspections have been carried out as required.
It should be noted that the Alaskan pipelines , which environmentalists once thought would decimate wildlife in their footprint, have apparently had little effect on wildlife. As a matter of fact, the population of "threatened" wildlife has multiplied about three-fold since construction of the pipelines. No, the pipelines did not cause the wildlife numbers to go up dramatically! Instead, it is believed that native Americans in the area do less hunting than formerly because they are now working daily jobs in the thriving oil patch.
Conclusions for Prudhoe Bay Pipeline Leaks. Two feeder lines connecting the Prudhoe Bay oil field to the trans-Alaska pipeline are to be taken out of service for several months to replace pipeline sections thinned by corrosion. The amount of oil lost to U.S. refineries will be substantial but oil inventories in the U.S. are high and no shortages are forecast because of the pipeline problems at Prudhoe Bay.
Oil Crisis, Peak Oil, & Fuel Shortages