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Crude oil could hit $300 a barrel

Saeed Shah / London Indpendent | August 22 2006

The price of crude oil could hit $300 (£158) a barrel if BP's pipeline corrosion crisis in Alaska turns out to be an endemic problem for the industry, according to the leading oil industry analyst Matthew Simmons.

Mr Simmons, a US-based industry commentator and financier, said BP's discovery of unexpectedly severe corrosion in its pipelines at Prudhoe Bay, Alaska, could just be the tip of the iceberg. He described the sudden emergence of the issue as the "Pearl Harbour Day" for energy.

He said that if drastic remedial work was required to fix or rebuild pipelines across the world, the flow of crude oil could halve, sending prices soaring.

Mr Simmons, who shot to prominence by arguing that the world's biggest producer, Saudi Arabia, was running out of oil, said: "The industry cut too many corners when prices were low. For 25 years, there was not a proper maintenance programme. We backed ourselves into a system - rigs, pipelines and refineries - that rusted away."

He said the oil industry was now confronted with a dual problem: the view that oil supply has "peaked" and, now, the issue of corrosion of infrastructure.

"The anecdotal evidence is so widespread that it is undeniable. Until we had something as stunning as Prudhoe Bay, the industry was able to say that incidents were one-offs or that these allegations came from disgruntled employees," Mr Simmons said.

Aside from the BTC pipeline from the Caspian Sea, recently completed by BP, most of the major oil pipelines in the world were built in the 1970s or earlier, including those in Alaska. Replacing these would cost billions. The Trans Alaska Pipeline alone would cost some $30bn to rebuild. Last month Russia was forced to shut its massive Druzhba pipeline, which is more than 40 years old, because of a leak.

Mr Simmons, who founded the Simmons and Company oil industry finance house, said he believed that Saudi Arabia has an "endemic" corrosion problem. BP had for years dismissed allegations of poor maintenance of its Alaska facilities by former and existing employees.
Mr Simmons said: "If it turns out that these whistleblowers were accurate, then somebody ought to go to jail."

BP has had to shut half its production at Prudhoe Bay after two leaks were discovered at small feeder pipelines, with an initial incident in March spilling some 5,000 barrels of oil, while a second leak became apparent this month. A prolonged shutdown at Prudhoe Bay, North America's largest oilfield, is likely to cause serious fuel shortages on America's West Coast. BP has already said that it will replace 16 miles of pipeline.

BP yesterday denied new allegations that surfaced, which claimed that the company manipulated data to avoid replacing pipelines at Prudhoe Bay.

Robert Wine, a BP spokesman in London, said: "We deny the allegations of changing data and we continue to work with the EPA [Environmental Protection Agency] and other regulators."

He said until the problem emerged in March, BP believed its maintenance regime in Alaska was "appropriate" and the company continued to believe its maintenance elsewhere was appropriate.

Mr Wine added: "We have investigated all claims [from whistleblowers] where enough specific information was provided."

BP could face criminal charges over the Alaska leaks. It is under separate regulatory investigation over a fatal explosion at its giant oil refinery in Texas last year, where it is also alleged that poor maintenance was to blame. BP's chief executive, Lord Browne of Madingley, could be forced by a Texas court to give sworn testimony on how much he knew about the state of the refinery.


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