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BP's Bad News

BP (NYSE: BP  ) has been having a run of bad news. Sunday, it announced that 400,000 bpd (barrels per day) of production from Alaska's Prudhoe Bay field will be shut down because of corrosion in a transit pipeline. This amounts to 8% of U.S. production and nearly 0.5% of daily global production. Oil prices rose again Sunday night on the news. While this problem is certainly bad for BP, I think it is just one more piece of evidence that Americans are living with an aging energy infrastructure that is literally showing its cracks.

Shutting off the oil
This is the second time in a month that BP has shut in production in Alaska. Back in March, a pipeline leak went undetected, resulting in a 6,400 barrel (200,000 gallon) oil spill. In response to the incident, BP increased its spending, accelerated pipeline inspections, and created a plan to "restore the integrity" of its Alaskan oil field pipelines. Apparently, as the inspections progressed, it found problems.

The shut-in will affect more than BP. Prudhoe Bay is a major oil field, with ExxonMobil (NYSE: XOM  ) and ConocoPhillips (NYSE: COP  ) as the other large shareholders. Chevron (NYSE: CVX  ) and Forest Oil (NYSE: FST  ) have smaller stakes. There is no current estimate for how long the production will be shut in, but this Fool is willing to bet weeks.

I guess the American consumer can pick his poison. Option 1: Shut down oil production and complete necessary repairs at the expense of another increase in oil prices. Option 2: Keep the oil flowing with the risk of another major environmental incident. I'd rather see the oil companies select option 1 every time, with full knowledge I'll pay a bit extra at the pump.

Plenty of shoes
The current pipeline leak is just one more shoe dropping in the never-ending energy "crisis." Hurricanes devastate the Gulf of Mexico oil fields and refineries. Rebels in Nigeria blow up pipelines. Pipelines in Alaska corrode and leak. Heat waves expose the fragility of the power grid.

Why are all of these things seemingly happening at the same time? First, the global supply and demand situation is very tight; therefore, rebels in Nigeria have a much bigger impact than they would have had in 1998. Second, after the 1986 price crash, profits stopped flowing from the oil patch, and investments in infrastructure dried up. Add the NIMBY (not in my backyard) attitude toward new power plants, transmission stations, oil refineries, pipelines, or anything else related to energy, and we find most of the nation's energy infrastructure stretched awfully thin.

Final thoughts
BP has committed to spending billions to improve its pipelines and refineries. Other companies are also spending big money to upgrade their facilities. Marathon Oil (NYSE: MRO  ) is spending $2.2 billion to expand its Garyville, La., refinery by 180,000 bpd. This project won't be complete until the end of 2009. In other words, it will take a long time and a ton of money before our energy infrastructure is back in top form. Meanwhile, the nation's aging refineries, pipelines, power plants, and power grid are being pushed to the max.

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Robert Aronen does not own shares in any company mentioned. Please feel free to share your comments with him.

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