Prudhoe Bay Oil Field Shutdown; Iran Plays The Oil Card

Aug 7: BP Exploration Alaska, Inc. announced that it has begun an orderly and phased shutdown of the Prudhoe Bay oil field following the discovery of unexpectedly severe corrosion and a small spill from a Prudhoe Bay oil transit line. Shutting down the field will take days to complete. Over time, these actions will reduce Alaska North Slope oil production by an estimated 400,000 barrels per day, reportedly 8 percent of U.S. domestic crude oil production. The decision follows the receipt on Friday, August 4 of data from a "smart pig run" completed in late July. Analysis of the data revealed 16 anomalies in 12 locations in an oil transit line on the eastern side of the oil field.

BP America Chairman and President Bob Malone said, “We regret that it is necessary to take this action and we apologize to the nation and the State of Alaska for the adverse impacts it will cause. However, the discovery of this leak and the unexpected results of this most recent smart pig run have called into question the condition of the oil transit lines at Prudhoe Bay. We will not resume operation of the field until we and government regulators are satisfied that they can be operated safely and pose no threat to the environment.” BP indicated it is identifying and mobilizing additional resources from across Alaska and North America in order to speed inspection of remaining Prudhoe Bay oil transit lines. BP operates 22 miles of oil transit pipeline at Prudhoe Bay. Smart pigging inspection has been completed over about 40 percent of that length. BP previously announced plans to replace a three-mile segment of pipeline following inspections conducted after a large spill discovered on March 2, 2006.

Meanwhile, various media reports indicate that Iran's Deputy Oil Minister Mohammad Hadi Nejad-Hosseinian, in India for two days of talks on a proposed $7 billion gas pipeline, said that global crude oil prices could reach $100 a barrel on geopolitical tension and soaring winter demand. Other Iranian statements have warned of oil prices of $200 if international sanctions were imposed on the country in its nuclear dispute with the U.S.

An August 7, 2006, Standard & Poor's article entitled, The Effect Of A Major Oil-Supply Disruption On U.S. And Global Economies, analyzes a range of options that indicate oil prices could reach $250 oil barrel, under a worse case scenario where Iran would close the Strait of Hormuz, a shipping route for oil tankers from Kuwait, Saudi Arabia and the United Arab Emirates. The most likely scenario according to S&P is based on a limited Middle East conflict with oil prices around $75 a barrel and falling even lower by year's end.

Access a release from BP (click here). Access the BP Alaska corrosion Response website for continued updates and information (click here). Access an extensive Reuters financial analysis (click here). Access links to various media coverage on the Iranian oil issue (click here). Access the S&P for links to the article and an audio playback of a telephone conference call held on July 27, 2006 to discuss S&P's view on the economic impact of increased oil prices (click here, registration required). [*Energy]