BP looking to emerge from rough few years

As oil production declines, company seeks new resources

Posted: Tuesday, June 26, 2007

PRUDHOE BAY - Lowry Brott briefly closes his eyes as if he were listening to the first sounds of oil flowing 30 years ago from Alaska's North Slope into a pipeline that weaves 800 miles through several mountain ranges and hundreds of rivers and streams to Valdez.

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"It was pretty robust," he said. "I'd compare it to a fast-moving freight train; that's what the sound was."

Today, oil production is in steady decline - about 6 percent a year - but North Slope's largest operator, BP PLC, remains bullish about the future because of the region's untapped resources.

But success starts with restoring public and employee faith in the company's ability to operate safely as it approaches the first anniversary of a major Prudhoe Bay shutdown that resulted from poor maintenance on transit pipelines.

"How we get people's confidence back is by telling them not what we are going to do, but what we have done and what we are doing," said Doug Suttles, president of BP Exploration Alaska Inc.

The North Slope covers more than 90,000 square miles - an area slightly larger than Minnesota. More than 25 producing fields and about 2,000 miles of pipeline run through its environmentally-sensitive tundra, where caribou and musk oxen roam in warmer months.

BP says the region is teeming with enough natural gas and heavy crude oil to keep production going for another 50 years.

High oil and gas prices, and significant technology advancements, are spurring exploration even deeper and farther offshore into the Arctic's Beaufort Sea. BP is spending $60 million this year to build a well that will run eight miles laterally from Endicott offshore to a 100 million barrel field of sweet crude.

But a year ago, BP temporarily shut down the nation's largest oil field, which accounts for about 17 percent of the nation's production. The company hasn't stopped hearing from critics. Suttles says he understands people's nerves remain frayed over the supply interruption that lasted several weeks.

Wall Street wonders what's next for the London-based company, also beset by the aftermath of a Texas refinery explosion two years ago, a costly startup delay in the Gulf of Mexico and the abrupt resignation of former Chief Executive John Browne.

"They definitely have learned a lesson but unfortunately it's come at very heavy cost - public image and investor trust," said Fadel Gheit, senior energy analyst for Oppenheimer & Co. "I think there is some apprehension toward them in the marketplace. Investors want to make sure the coast is clear and it's safe to come back. We don't want any more surprises."

BP still faces questions from state and federal lawmakers challenging its safety and facility maintenance practices. Last month, a House committee criticized BP, saying the company put profits over maintenance on the North Slope.

Rep. Bart Stupak, D-Mich., chairman of the House Energy and Commerce investigations subcommittee, said he appreciates BP's candor, especially that of Robert Malone, chairman of U.S. subsidiary BP America Inc. In a hearing, Stupak asked Malone if budget pressures at Prudhoe Bay discouraged preventative maintenance.

"It not only could have, we believe it did," Malone replied.

Stupak found the honesty refreshing, but said BP is not off the hook.

"That doesn't mean BP has it together, yet," Stupak said. "They've got to put back the North Slope, and maintain assets there with a business practice rather than a cost-cutting mentality."

Suttles says the company remains undaunted by the Prudhoe Bay setback, citing increased capital investments and work force, a growth commitment that will continue at least through next year.

The company boosted capital spending 20 percent this year to $685 million. Suttles says BP's investment in Alaska operations next year will easily exceed this year's 20 percent increase. Much of the investment includes $250 million to replace 16 miles of pipeline.

Suttles identifies significant progress in the pipeline repairs - eight of 16 miles have been fixed so far - and other work being done to ensure the company's future in Alaska for decades.

On June 10, the company drilled its first test well for a "heavy" oil that for now cannot be shipped down the trans-Alaska pipeline operated by a consortium of North Slope producers called Alyeska Pipeline Service Co.

Over its lifetime, more than 15 billion barrels of oil have flowed through the 800-mile line, exceeding initial projections of about 10 billion to 12 billion barrels. But extending that life by producing the heavy oil means reducing viscosity, a process BP has yet to perfect.

The test well sits in Milne Point, about 25 miles northwest of Prudhoe Bay. Suttles says BP knows of about 20 billion barrels of heavy oil in the North Slope that would extend the life of the pipeline.

But that oil needs rigorous treatment so it can be shipped like crude. It also requires upgrading in order to be refined. Suttles says BP is hoping to find the right technology, much as Canadian operators have in making oil sands production profitable.

"We know where the oil is; it's just about unlocking the technology to make it work," Suttles said. "It's a five-year program to prove we can manage the risks and we can find the technology."

While BP pursues heavy oil production, it also has its eye on the development of 35 trillion cubic feet of known natural gas reserves. Those field leases belong largely to BP, ConocoPhillips and Exxon Mobil Corp.

Alaska has struggled to get a deal either with North Slope producers or independent pipeline companies to build a line that would run from the North Slope through Canada and into the Midwest.

A proposed deal between former Gov. Frank Murkowski and BP, Exxon Mobil and ConocoPhillips fell part last year. This year, the state passed the Alaska Gasline Inducement Act - or AGIA - to encourage producers and independent pipeline companies to vie for rights to build a pipeline.

The new law is designed to stimulate competition through inducements, but also stipulates some requirements that BP, Exxon Mobil and ConocoPhillips oppose, saying they are too restrictive. That has created concerns that the companies will collectively refuse to sell their gas if they don't agree with the pipeline deal, or attempt to tie up any progress in court.

Natural gas helps North Slope producers enhance oil recovery. By reinjecting the gas, producers flush out additional oil from older fields. But getting the gas to market has implications for North America's long-term energy supply.

Suttles says BP hasn't lost sight of this.

"Any concerns saying we don't want this to happen and we don't want to move the gas is nuts," Suttles said. "We have a lot at stake we want to make this gas move, but I personally don't believe AGIA will move this gas. ... Eventually it will happen because the prize is too big. The question is when. We can't afford to wait too long."

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