Oil Crisis May Spark Pain At The Pump

GENERIC: Rising Gas Prices, Consumer, Pump
BP PLC said Monday it will replace 73 percent of the pipelines from the nation's largest oil field and that production could be closed for weeks or months, crimping the nation's oil supplies at a time of peak demand. Meanwhile, the Energy Department reported the price of gasoline was on the rise again – up four cents – and it looks like that is just the beginning, reports CBS News correspondent Bob Orr.

Even before BP began shutting down the pipeline, gas prices hovered near record highs, averaging more than $3 a gallon, reports Orr. Gasoline has not been this expensive since Hurricane Katrina ravaged Gulf Coast oil rigs last year, driving the price of regular gas to $3.06. With the loss of Alaskan crude, prices are expected to hit new average highs – jumping as much as 10 to 15 cents a gallon.

BP, the world's second-largest oil company, began shutting down the pipelines on Monday and said it would replace 16 miles of the 22 miles of transit pipeline it operates in the Prudhoe Bay field after a leak was discovered Sunday.

Company officials told a news conference that they did not immediately know how much it would cost to replace the pipelines. They will continue to keep the oil field closed and bring parts back into service once it's safe to do so.

Once complete, the shutdown will cut production by 400,000 barrels a day, about 2.6 percent of supply including imports, according to data from the U.S. Energy Information Administration.

The nation will feel the impact, but car-dependent California and its neighbors along the Pacific coast will take a direct hit, CBS News correspondent Bill Whitaker reports.

"In terms of the West Coast, this is an even bigger event than Katrina was for the people on the Gulf Coast. The West Coast gets 25 percent of its domestic production from this, from this field," Tom Wallin, an energy analyst, tells CBS News.

The news drove oil prices up by $2 a barrel and boosted gasoline prices.

"BP deeply regrets it has been necessary for us to take this drastic action," said Bob Malone, chairman of BP America.

"Secretary Bodman this morning directed staff to get in touch with BP and the affected refineries to try to get a clearer picture of the impact of the situation," Craig Stevens, Department of Energy spokesperson, told CBS News in a telephone statement.

Stevens said an asset in the Strategic Petroleum Reserve can be used in cases of severe supply disruption. He added that currently, there are 688 barrels of crude oil in the SPR should a refinery ask for a loan.

"Make no doubt about it: You're going to probably see an immediate increase in the price at the pump in the coming days because of the situation in Alaska," Phil Flynn, an oil analyst, told Orr.

On Monday, BP began shutting down the entire Prudhoe Bay field, 650 miles north of Anchorage, to further inspect the lines for corrosion.

BP discovered corrosion in the transit lines only after the Department of Transportation ordered an inspection following a 270,000-gallon spill in March at another section of the field.

Transit lines move the oil to flow stations for transport down the trans-Alaska pipeline for shipment 800 miles south to Valdez, where it's shipped to the Lower 48 aboard tankers.

BP officials said the line where the leak was found was last checked for weakness in 1992, using a technology called a "smart pig" in which a device is sent down the tubes to assess pipeline integrity.

BP had not done a routine maintenance "pigging" on its transit lines because the company didn't think it was necessary because those lines carry clean crude from which water was removed.

Steve Marshall, president of BP Alaska, said the company believed ultrasonic testing of pipeline wall thickness was an acceptable substitute on those lines.

In hindsight, he said, that has proven not to be sufficient.

"Clearly, we are already in the process of adjusting considerably our corrosion program," Marshall said, adding that the company will significantly increase its maintenance and surveillance of the transit lines both now and when they are replaced. The company is spending $72 million this year to inhibit corrosion, up from $60 million last year.

The aging pipeline system on the North Slope has been fraught with problems lately. BP, which posted a net profit of $7.3 billion for the three months ending June 30, operates the Prudhoe Bay field.

In March, BP was blamed for the rupture of a pipeline at the same Prudhoe Bay field, leading to an extension of a criminal investigation into the company's management of its Alaskan operations.

Marshall said tests Friday indicated that there were 16 anomalies in 12 areas in an oil transit line on the eastern side of Prudhoe Bay. Tests found losses in wall thickness of between 70 and 81 percent. Repair or replacement is required if there is more than an 80 percent loss.

BP also said Sunday that workers found a small spill of about 4 to 5 barrels, which has been contained and is being cleaned up.

Because of the disruption of supplies, the Energy Department is prepared to provide oil from the government's emergency supplies if a refinery requests it. Stevens said the department will be in contact with BP and West Coast refiners later Monday to assess the situation.

The reserve has about 700 million barrels in storage on the Gulf Coast to be used in case of a serious supply disruption. The Energy Department in the past has lent oil from the reserve to refineries when there were disruptions because of pipeline or other problems.

"If there is a request for oil, we'll certainly take a serious look at that," he said.

Bill Hedges, BP's technical expert on corrosion, said the Prudhoe Bay pipelines initially were designed to last 25 years, but have now lasted 29 years, with many of them in "excellent condition."

BP's anticorrosion program is intended to prolong the life of the oil field another 50 years so that the infrastructure can be used to bring natural gas to U.S. markets. The company's reliance on ultrasonic technology will have to be re-evaluated, he said.

"My assumption is that we didn't do it in the right spots," he said.

BP, along with oil giants ConocoPhillips and Exxon Mobil, are in negotiations with the state to build a $25 billion natural gas pipeline to Canada to ship the 35 trillion cubic feet of known natural gas reserves on the North Slope.

The troubles at the Alaskan oil field add to other problems for BP in the United States, where the company is the largest oil producer, following an explosion at its Texas City refinery that killed 15 workers in March 2005 and a trading scandal.

The shutdown comes six months after the North Slope's biggest-ever oil spill was discovered on a Prudhoe Bay transit line. BP installed a bypass on that line in April with plans to replace the pipe. Only one of BP's three transit lines is now operating.

BP puts millions of gallons of corrosion inhibitor into the Prudhoe Bay lines each year. It also examines pipes by taking X-rays and ultrasound images.

BP has a 26 percent stake in the Prudhoe Bay field, meaning its own production would be cut by 100,000 barrels a day, or around 2.5 percent of the company's worldwide production, said spokesman David Nicholas. He declined to provide any forecast on the impact of the shutdown on earnings.