Alaska Pipeline Shutdown Gives Taste of Things to Come (BP, COP, XOM, CVX, RDS-A)

The Alaska oil pipeline from Prudhoe Bay to Valdez was shut down early Saturday morning following a spill of about 10 barrels of oil into the basement of a pump station on Alaska’s North Slope. The pipeline operating company has told oil production companies to reduce their output by 95% until further notice.  The shutdown affects BP plc (NYSE: BP), ConocoPhillips Corp. (NYSE: COP), Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and privately held Koch Industries.

The reduction in output effectively turns off delivery of about 630,000 barrels of crude/day, most of which goes to the US West Coast. The Alaska pipeline ships about 9% of current US daily consumption.  The flow stoppage is sending the price of oil higher today, and every day that the pipeline is shutdown the price will go higher. But this could be just the beginning.

The Alaska pipeline opened for business in 1977, and at its peak shipped about 2 million barrels/day. Ever since then, production on the North Slope has fallen and the pipeline now carries about one-third of its nominal capacity. In order for the pipeline to maintain operation, a minimum of 200,000 barrels/day need to be shipped. Since it opened, the pipeline has carried about 16 billion barrels of oil out of the North Slope.

Exploration both onshore and offshore has been halted, partly due to the Gulf of Mexico blowout and partly to environmental concerns related to the Arctic National Wildlife Refuge, or ANWAR. Oil companies want to explore a piece of the Refuge, about 1.5 million acres of the 8 million total, where there is the best chance to strike oil. The US Geological Survey has estimated that the amount of recoverable oil is between 5.7 and 16 billion barrels. That’s probably high, but even if it’s off by 50%, that’s still a lot of oil

Other companies, notably Royal Dutch Shell plc (NYSE: RDS-A), have applied to explore offshore the North Sea in the Chukchi and Beaufort Seas. The permits have been held up as a result of the offshore drilling moratorium after the Gulf of Mexico disaster. Shell and others have paid about $2.6 billion for leases to explore in the Chukchi Sea, which at least one estimate believes contains 30 billion barrels of crude. That is almost certainly too optimistic.

All the potential oil onshore and offshore of Alaska won’t be produced for years yet. Until that happens, flows of crude from the North Slope will dwindle further until it is no longer technically possible to keep crude flowing through the Alaska pipeline. Production from Canada’s oil sands is expected to grow, and eventually replace North Slope oil, but there are no plans to ship the synthetic crude in enough quantity to the US West Coast to make up for the lost North Slope supply.

And Canadian supply can also be disrupted. A fire at an oil sands upgrader has halted 110,000 b/d of synthetic crude from being shipped to the US. The US supply is now more than 700,000 barrels/day short.

It’s only a matter of time until North Slope crude heads south again. It’s also only a matter of time until the flow stops for good.

Paul Ausick