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Oil Surges Above $76 as BP Shuts Alaska Field, Largest in U.S.

Crude oil surged above $76 a barrel, the biggest gain in two weeks, after BP Plc said it will shut Alaska's Prudhoe Bay field, where 8 percent of U.S. oil is produced.

The closure of the largest oil field in the U.S. because of pipeline corrosion and a rupture will cut supplies to West Coast refineries during the country's peak gasoline demand. At the same time, Nigerian militants are crimping African crude output as conflict in the Middle East and disagreement about Iran's nuclear program contribute to fear of further supply reductions.

``What BP is telling you is a greater problem with the whole of the Alaskan oil infrastructure,'' said Mark Tinker, head of strategy at Execution Ltd. in London.

Crude oil for September delivery rose as much as $1.91, or 2.6 percent, to $76.67 a barrel on the New York Mercantile Exchange. The contract traded at $76.21 at 12:55 p.m. in London. Brent crude oil for September settlement gained $1.13, or 1.5 percent, to $77.30 on the ICE Futures exchange in London.

``The discovery of this leak and the unexpected results'' of pipeline tests ``have called into question the condition of the oil transit lines at Prudhoe Bay,'' BP America Chairman and President Bob Malone said today.

Some 400,000 barrels a day of production is being shut, BP's spokesman Ronnie Chappell said. A pipeline that leaked four to five barrels of oil was closed at 6:30 a.m. Alaskan time Sunday, BP said. The London-based company operates Prudhoe Bay for partners including Chevron Corp., ConocoPhillips and Exxon Mobil Corp.

How Long?

``We haven't been told how long it's going to be down for. It's a big field, so it will take days to shut down,'' said Ivor Pether, who helps manage about $15 billion at Royal London Asset Management. ``They absolutely have to'' shut it, he said.

The Prudhoe Bay closure has cut the world's ``effective'' spare oil supply capacity by 20 percent to about 1.6 million barrels a day, Jonathan Wright, an analyst at Citigroup, wrote today in an e-mailed report.

``There is plenty of crude on water,'' said Tovin Honeysett, a trader with BNP Paribas in London, referring to oil already in tankers. ``The question is, how they will get it around to the West Coast.?''

Oil has risen 25 percent in New York this year on concern that faltering supply to the U.S., the world's largest energy consumer, won't keep up with rising demand. Militant attacks have slashed output in Nigeria, Africa's largest producer, by about one-third. Production from Mexico's Cantarell field, one of the world's largest, will fall 8 percent this year.

Deaths in Nigeria

Gunmen killed five Nigerian oil workers contracted to a Royal Dutch Shell Plc venture and injured three others on Aug. 3, Shell said Aug. 5. The men worked for Survicom Services Nigeria Ltd.

Three Filipinos working for a unit of Michael Baker Corp. were abducted last week, said the unit's Nigeria general manager, Richmond Leeb. The same week, a German working for Bilfinger Berger AG went missing in the country, the construction company said.

A Nigerian group calling itself the Movement of the Niger Delta People claimed responsibility for the German oil worker kidnapping, the Vanguard newspaper said. The group said they abducted the man after oil service companies failed to live up to commitments to local communities, the newspaper reported.

Oil rose to a record $78.40 on July 14 on concern that conflict in the Middle East, home to one-third of global supply, may spread. The fighting between Israel and Hezbollah, an Iran- supported Islamic militia group, intensified today. U.S. Secretary of State Condoleezza Rice said the United Nations may vote as soon as today on a resolution about the conflict.

Middle East Spread

``The key concern for the whole region is what would happen if it's spread to the rest of the region, and clearly that will be a very different scenario,'' said Steve Brice, head of Middle East research at Standard Chartered Plc. ``For the moment it looks like a low probability.''

Hezbollah triggered the conflict by kidnapping two Israeli soldiers July 12. Ninety-five Israeli soldiers and civilians have been killed since the start of the war, the army and police said. In Lebanon, fighting has caused about 700 deaths and injured more than 2,700 people, according to Lebanese police.

Speculation that supplies from Iran may be disrupted if the UN imposes sanctions to halt the Islamic republic's nuclear research has also pushed prices higher this year.

Iran ``will not agree to suspension'' of its uranium enrichment program, Ali Larijani, Iran's nuclear negotiator, said at a press conference in Tehran yesterday. The UN ``resolution will have no effect on Iran's determination. Iran will continue its nuclear activity.''

UN Deadline

The UN Security Council last month gave Iran until Aug. 31 to accept a European Union-proposed package of incentives to end uranium enrichment work. Iran faces economic sanctions if it rejects the plan.

``With Iran producing around 4.5 percent of the world supply, the key concern is if they are going to interrupt that,'' Brice said. ``It's not in Iran's interests'' to cut oil exports because that would cut world oil demand in the longer term.

Oil may rise to $250 a barrel if Iran disrupts crude shipments through the Strait of Hormuz, Michael Davies, an analyst at Sucden (U.K.) Ltd. in London, wrote today in an e- mail, citing a Standard & Poor's report. Kuwait, Saudi Arabia and the United Arab Emirates send tankers through the strait.

Almost a quarter of the world's oil flows through Hormuz, the opening to the Persian Gulf.

Editorial Notes: Contributor Stephen Johnson writes:
As the global infrastructure continues to age, reliability issues as evidenced here will increasingly plague the industry, right at the worst time possible.
Contributor Aaron Wissner writes:
This is a serious supply disruption. One wonders how long this supply will be off-line. It sounds like there are serious issues with the pipelines.
Contributor Marc writes:
Interesting recognition of Cantarell's rapid decline - 8% this year is the figure cited. And yet another reference to supply disruptions through the Strait of Hormuz, this one coming with a $250 per barrel speculative price tag. I have to ask myself, are we being "prepped" for a big price spike?
Bill Tamblyn writes:
As I see it this [Prudoe Bay closure] raises the odds, at least a bit, that the monthy peaks we saw last December, and the 12-month-average peaks we saw this March and February, were THE peaks for Oil Production and Oil Supply as defined by the EIA.
Bill has produced two graphs showing these curves: -AF UPDATE: More comments: Closing Prudhoe Bay (The Oil Drum) Links and excerpts of news coverage. Much discussion. Prudhoe Bay Open Thread and News Dump 2 (The Oil Drum). Alaska joins axis of evil (unreliable oil suppliers) by Jerome a Paris. (Also at Daily Kos) -BA

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