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Investors Chronicle: Leaky pipes force BP to close Prudhoe Bay (“BP’s reputation is severely damaged”)

11 August 2006

BP is shutting down its huge Prudhoe Bay oilfield, in Alaska, after a pipeline leak. And as Prudhoe accounts for around for 8 per cent of US domestic production, the impact on global markets has been immediate. Oil hit $77 a barrel, and shares in Europe and the US dipped.

BP has already closed 200,000 barrels of daily production, and is now making good progress in completing what Bob Malone, chairman and president of BP America, called “an orderly and planned shutdown.” No time frame for the length of the shutdown has been given, although US Energy Secretary Samuel Bodman has indicated that six months is likely.

The key issue now for BP is to replace 16 miles of transit pipes on the Prudhoe field, following inspections that should be completed within four to five weeks. The company is already in talks with major steel companies to source the replacement pipes. No cost estimate for this replacement work has been given, although in late July the company highlighted plans to spend an additional $1bn (£524m) on pipeline replacement and refinery work.

One consolation for BP is that although the Prudhoe Bay operation is significant in US production terms, its importance as a profit centre for BP is gradually declining. It accounts for around 2.5 per cent of production, but in future years real growth is expected from the company’s assets in Azerbaijan, the Gulf of Mexico and Angola. So broker Citigroup has maintained BP as a top stock pick, with a target price of 750p, arguing that the Prudhoe Bay issues are “short term in nature”, and that the impact on earnings would be “relatively modest at 2 per cent”.

However, BP’s reputation is severely damaged. This latest setback follows an oil leak in March that caused a 200,000 gallon spill, the largest since operations at Prudhoe Bay began in 1977, and it may hamper the company’s ability to move freely in the US market. Last year, an explosion at a BP refinery in Texas killed 15 workers. The compensation bill for that calamity is expected to run to several hundred million dollars. In addition to those troubles, there have been several reports that the company had been made aware of corrosion problems on its Alaska field two years ago.

BP shares fell by 2 per cent following the news. Longer term, the outlook remains favourable, but at 616p, the shares are fairly priced for now. 

Alastair Ford

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