By James Taylor Monday, 10 January 2011

Another blow for BP as Alaskan leak shuts down production

BP's latest leak may not be as damaging to the environment as the Gulf of Mexico spill - but in terms of its finances and its reputation, it's still a big setback...

BP will have been hoping for a fresh start in 2011: a year of quiet recovery, free from the woes that made 2010 such an annus horribilis. But no such luck: it emerged this weekend that there's a leak in the pipeline BP uses to transport oil from Prudhoe Bay in Alaska, forcing it virtually to close down production from what is North America's biggest oil field. Not only is this likely to put a dent in BP's earnings - and by pushing up the oil price, result in us all paying more at the petrol pumps - it's also a major setback for BP's efforts to recast itself as a paragon of best safety practice (this isn't even the first time it's had trouble with this particular pipeline). No wonder, then, that its share price plunged over 2% this morning...

The good news, as far as it goes, is that the human and environmental consequences of this latest leak are likely to be much less serious than those of the Gulf of Mexico explosion. But it’s still, as BP put it, a 'significant event', not least because of the importance of this field. The largest reserve in the US, it accounts for about 15% of all North American oil output. So shutting down 95% of production, for an as yet indeterminate period of time, will lead to a big shortfall in supply for BP - and, to a lesser extent, for the industry as a whole. The inevitable consequence has been a rise in the oil price, which could mean pricier petrol for us poor souls.

BP isn't the only firm that will suffer financially as a result of this shut-down (which, by all accounts, could take as long as a week to fix/ work-around). ConocoPhilips and ExxonMobil both have 36% stakes in the Prudhoe Bay field, and 28% and 20% stakes respectively in the consortium that owns the pipeline. However, BP is the biggest shareholder in the pipeline, and the operator of the field. So it's can't really pin the blame on anyone else. Particularly since it's had trouble with this pipeline before: back in 2006, it nearly had to close the entire field after tests found evidence of corrosion.

Since Bob Dudley took the reins last year, he's made great play of his efforts to put safety at the heart of everything BP does - even explicitly recognising it in the bonus calculation. At the time, this seemed like a sensible way of bringing about the step change in culture - and the reputational transformation - that BP clearly needed. But unfortunately, incidents like this inevitably negate much of that good work. Let's hope it can get the problem fixed quickly, before the damage gets any worse.

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