VECO, ASRC Energy mobilizing for work

As contractors hustle to get sleeves in place on existing pipe, plan replacement, producers could take $1 billion earnings hit

By Steve Quinn

AP Business Writer

Pete Leathard, the CEO for energy services firm VECO, thought his round of golf was going bad — but it got worse when his cell phone rang Aug. 6 as he approached the 15th hole.

The caller told him the Alaska North Slope’s Prudhoe Bay, the nation’s largest oil field, would be shutting down because of leaks and severe pipeline corrosion, cutting off 8 percent of the domestic oil supply.

“I thought this is bad — real bad,” said Leathard, whose company has 800 employees working on the field. “The first thing I did was make a call to start getting our people mobilized.”

Now, contractors and suppliers are running a marathon at a sprinter’s pace to help field operator BP PLC replace 16 miles of pipeline on this aging oil field by early next year.

It’s the kind of plan that typically requires several months lead time, but must now be drafted in weeks if BP is to successfully resume producing 400,000 barrels a day. BP revised its initial decision to close the entire field, and will instead keep one side open — allowing the production of up to 200,000 barrels of oil and natural gas daily.

Even as BP says it can now operate lines at reduced capacity, Leathard understands the stakes: a state economy that relies heavily on the energy industry for revenue; the health of support companies like VECO; the public’s eroding trust in Big Oil.

“This is a major event, for a field this size to be shut down,” Leathard said.

Little room for error

Teams of inspectors and welders are examining pipelines, then reinforcing them with steel sleeves. Hundreds more workers are expected to get the call from other U.S. and Canadian regions.

Additional equipment has been ordered from other sites, including cranes, plus scores of pickups needed immediately for the additional work force.

BP said it had completed its orders for pipe to replace 16 of 22 miles of existing transit lines at Prudhoe Bay. The pipe will be supplied by U.S. mills with delivery anticipated in the fourth quarter of 2006, the company said Aug. 11.

“Steve Marshall (president of BP in Alaska) had originally indicated steel would come from U.S. Steel and Nippon,” BP spokesman Neil Chapman told Petroleum News.

But thanks to “fantastic response from our suppliers and other suppliers all of our pipe will be coming from U.S Steel in Ohio and VM Star’s mill in Texas,” Chapman said. “The transportation companies and steel companies have been extremely helpful.”

Some of the pipe is expected to arrive as soon as October. This means coordinating shipping schedules as well as getting steel companies to produce orders. It’s this part contractors say could be the difference between meeting the deadline, or grappling with a prolonged repair.

“The lead time on the pipeline, that will be as much of a challenge as anything,” said Mike Stophlet, president and CEO for Arctic Slope Regional Corp. Energy Services.

“We need to get it in transit and get it up here pretty fast,” he said. “In some cases it may or may not even be sitting in the mills already prepared.”

BP concedes this point, but remains confident for a fourth quarter delivery, said Chapman.

“The delivery distance we are taking is thousands of miles in some cases,” he said. “Some has to go to Utah in order to be bent, then moved to Seattle where it’s barged to Anchorage.”

“There might be some parts getting up here earlier, but the ultimately delivery of the complete order, we’re looking at the fourth quarter.”

Analyst: earnings loss could hit $1 billion

The British company has not disclosed how costs will be shared by its production partners, ConocoPhillips Co. and Exxon Mobil Corp.

Additionally, one analyst pegs the impact on the companies’ third-quarter production earnings to be more than $1 billion among the three companies.

Irving, Texas-based ExxonMobil, which owns 36.4 percent of the operations, stands to lose the most, about $387 million, wrote A.G. Edwards’ analyst Bruce Lanni in a research note. Prudhoe Bay represents about 3 percent of the company’s worldwide production.

ConocoPhillips, which owns 36.1 percent, could see a $384 million hit to third quarter earnings. The field represents slightly more than 6 percent of the Houston-based company’s worldwide earnings.

London-based BP has a 26.4 percent share in Prudhoe Bay, and could have a $281 million impact to its earnings, Lanni wrote. Prudhoe Bay is about 2.3 percent of its worldwide production.

Leathard and Stophlet speak with calm about what lies ahead, saying their companies are accustomed to meeting tight deadlines, but add they understand the urgency.

“When you’re back on your heels and hustling, it ends up making these efforts more of a challenge, no question about it,” Stophlet said. “But panicking does help the matter, either. The key is to stay focused on what you have to do.”