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Prudhoe Bay blindsides oil markets

Sam Fletcher
Senior Writer

Traders were watching the Israeli-Lebanese war, supply disruptions in Iraq and Nigeria, and international wrangling over Iran's nuclear ambitions when the next major energy crisis came whistling down from Alaska's North Slope to blindside world markets.

On Aug. 6, BP Exploration Alaska Inc. found a small spill of crude from a 22-mile transit line connecting Prudhoe Bay, the largest US oil field, to the Trans-Alaska Pipeline System. The world was stunned by BP's initial announcement that it would shut in the field's 400,000 b/d of production to assess and repair corroded sections of the line; the shut-in later was reduced to 200,000 b/d.

When markets reopened Aug. 7, the September contract for benchmark sweet, light US crudes traded at $74.55-$77.30/bbl before closing at $76.98/bbl, up by $2.22, or 3%, in the biggest 1-day percentage gain for a lead contract in 4 months on the New York Mercantile Exchange.

But on Aug. 10, a terrorist plot targeting commercial airline flights en route to the US dropped energy prices back below Aug. 4 levels. Traders dumped energy holdings in fear of reduced demand for jet fuel and gasoline. By Aug. 11, the September contract closed at $74.35/bbl.

By then, BP had shut in 200,000 b/d and was cautiously optimistic that it could maintain some production from the field while making repairs. Even so, observers said it would be 5-6 months before the field is back to full operation, with a cumulative loss of maybe 50 million bbl of production in that period. "Prudhoe is an aging field with declining output. It is far from certain that [previous] output will be reachable when the shut-in production is put back on line," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland (OGJ Online, Aug. 9, 2006).

Apparently determined never again to be slow in reacting to a national emergency, the Bush administration immediately said it would consider loaning Strategic Petroleum Reserve oil to West Coast refiners if they ask (OGJ Online, Aug. 7, 2006). There was no immediate response from refiners, however. Saudi Arabia and Mexico pledged to help supply any shortages, and Energy Sec. Samuel Bodman said crude from those countries might be diverted to California to make up the loss.

The Organization of Petroleum Exporting Countries said it "stands ready to do all in its power to correct any imbalance in the market." However, it said, "For the time being, the organization remains confident that the world is still adequately supplied with oil and that no shortage will occur."

Supply problems
Many outside observers are skeptical that additional crude from either OPEC members or SPR could reach West Coast refineries in a timely manner. VLCC tankers that bring foreign crude into East Coast and Gulf Coast ports are too big to pass through the Panama Canal, so the crude would have to be transported in smaller vessels in loads of 500,000 bbl. From the Caribbean, it would take 2-3 weeks for such a cargo to reach the West Coast through the canal.

"For the West Coast to seek supply replacement from the [Gulf Coast] and SPR could become the recipe for a real disaster," Jakob warned. "The region most at supply risk in the next 2 months is the [Gulf Coast] due to tropical storm disruptions, and any storm there would further delay the resupply of the West Coast." Moreover, he said, "There is not much spare capacity in Latin America. Venezuela production has not recuperated from the 2003 shutdowns. Mexico's June crude production was down 140,000 b/d from last year as it is facing faster-than-expected declining output at Cantarell [oil field]." He said, "The additional demand [from California refineries] will come in the peak Asian crude demand season (winter) and as new refineries in India and China should also start to pull more crude (the Chinese crude oil tanks for strategic reserves are also ready for any fill decision)."

The Prudhoe Bay shutdown is "further evidence that consensus views on the path of [increased] non-OPEC output are too optimistic," said Paul Horsnell, Barclays Capital Inc., London, in an Aug. 9 report. With the status of crude supplies questionable in the face of sustained strong demand, Barclays Capital increased its estimated average price for benchmark US light, sweet crudes to $72.60/bbl for 2006, up from $68/bbl previously. The company is projecting that crude price to average $78.60/bbl for the rest of this year, dropping to an average $76.60/bbl in 2007 and $72.30/bbl in 2010. "We are also extending the deck by introducing a forecast for 2015 of $93/bbl," Horsnell said.

(Online Aug. 14, 2006; author's e-mail: samf@ogjonline.com)



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