The rusty oil and gas industry: a tale of corrosion

In 1968, following a frustrating decade-long unsuccessful search for oil on the coastal plains of Alaska, Atlantic Richfield was about to end any further drilling when its North Slope exploration team discovered the super giant Prudhoe Bay oil field. This discovery ushered in not only oil on Alaska’s North Slope, it also became the last great frontier for oil in America and played a major role in maintaining America’s performance as one of the world’s three largest oil producers for almost two decades after oil production peaked in the Lower 48 States in 1970.

Following the Prudhoe Bay discovery, the next ten years unleashed an extensive exploration boom to hopefully find several other giant North Slope Alaskan oil fields rivaling Prudhoe Bay, but the search for the giant finds proved illusive and only uncovered several other 100,000 to 200,000 barrel a day oil field finds – all a far cry from Prudhoe Bay’s size, whose oil output quickly ramped up to 1.5 million barrels a day in 1977 when the Alaskan Pipeline was finally in operation. The field was able to maintain this high production rate through the summer of 1989 after which it began to decline, despite massive added wells being drilled and all the gas that the oil field produced being re-injected to prop up the field’s reservoir pressure to minimize the decline rate. By the summer of 2006, Prudhoe Bay’s oil output had fallen to 400,000 barrels per day, almost 75percent less than its peak output.

America’s Environmental Movement finally brought an end to further exploration in most parts of Alaska’s North Slope as this became one of their key green battlegrounds over the past two decades. In a fruitless effort to counter cessation of further oil exploration, the oil industry constantly argued that great technical progress had been made to safely produce and maintain the expensive, technically advanced North Slope oilfields. Although much of the North Slope oil output was getting increasingly mature, the North Slope operators argued that world-class oil field stewardship was keeping the North Slope of Alaska environmentally pristine, proof the great stewardship of a frontier region and safe oil production could co-exist.

This optimistic news of pristine oil field practices on the North Slope came to an abrupt end in March 2006 when a Prudhoe Bay worker spotted a large stain in the snow covering the massive pipeline system that gathers oil from approximately 1000 individual wells to be transported to the entry point of the Alaskan Pipeline. One Prudhoe Bay’s oil reaches the entrance to the pipelines, the oil’s impurities, including a rising percent of saline water and hydrogen sulfide (which causes Prudhoe Bay crude to be called sour crude) are stripped out so “clean” crude can then be piped from sea level up 8500ft to cross the Brooke’s Range and then flow down to the Port of Valdez on Alaska’s southern coast.

The snow stain turned out to be 220,000 gallons of Prudhoe Bay sour crude that was leaking from a section of the gathering pipeline system. When the section of damaged pipe was carefully inspected, a stunning level of internal corrosion was discovered in various locations that reduced the pipe’s metal wall’s thickness in certain areas to the flimsiness of a beer can.

These leaks led to a court-enforced internal inspection (through a technique known as “smart pigging” of the pipeline) of a much wider part of the Prudhoe Bay gathering system. By early August, 2006, BP, the operator of Prudhoe Bay issued the early results of this pigging process and then announced that some or all of the field needed to shut down to cope with repairing or replacing a far wider spread internal corrosion of this massive gathering system than anyone imagined when the snow stains first appeared.

It is far too early to know the final extent of Prudhoe Bay’s corrosion problems. Actions plans are underway to by-pass parts of the pipeline and continue to produce from half of the gathering system wells where no leaks have appeared. But, until a thorough smart pigging internal test of the Western system begins in mid-to-late November, the true extent of corrosion throughout this key source of oil to the US west coast will not be known.

How such an expensive and technically complex gathering system, operating under the intense scrutiny of state and federal regulators and the microscopic observation of America’s Environmental Movement, fell into such a state of awful corrosion will be questioned and litigated for years. Legislative changes will likely mandate tougher and more frequent inspection practices.

From my perspective as someone who has followed oil field practices for several decades, it is stunning to learn how little high quality inspection of both the gathering system and also the individual wells had taken place, and sad to read a growing number of reports that too many maintenance corners were cut. But, a far bigger issue is emerging to possibly haunt the global oil system as the next decade unfolds: Prudhoe Bay, as mature as it became, is still one of the world’s newer giant oil fields. Almost 30 times as much oil comes from oil fields and gathering systems that are decades older than Prudhoe Bay. And, many of these far older oil fields are in parts of the world that have never pretended to have any gold-standard maintenance programs in place or any enforcement of minimum maintenance practices. If Prudhoe Bay’s oil system is so corroded, what does this imply for so many far older well completion strings, tank farms, pipelines and refineries that were subject to far less attention to corrosion control than Prudhoe Bay?

Age-old problem

Corrosion problems in the oil and gas industry are not new. Corrosion and oil and gas have gone hand in hand ever since oil was first discovered. Crude oil and natural gas often contain various impurities that are inherently corrosive. Even refined finished oil products such as gasoline and diesel corrode metal over time. Some light, sweet crude grades are relatively benign from a corrosion standpoint, while sour crude grades containing hydrogen sulfide are always highly corrosive. Various corrosive bacteria are often found in either the crude or the water cut that begins to increase in volume as an oil field ages. The rising water cuts are highly saline – yet another source of corrosion.

Now that Prudhoe Bay’s corrosion has become so evident, it also raises the visibility of the aging backbone of the world’s oil supply. Serious concerns should focus on how old the world’s pipelines, tank farms, tankers and refineries have become, and how rusty they are.

The only relatively new important oil and gas basins are the North Sea and deepwater developments offshore Brazil, West Africa and the Gulf of Mexico. But, in all these areas, reports of rust, metal fatigue and cracks are too frequent for any comfort that these “new systems” are in good shape.

Steady increases in oilfield corrosion problems have quietly loomed as very serious threats to sustainable production for the past couple of decades throughout the Middle East, West Africa, China, Russia, Indonesia, Argentina and Venezuela. But the problems stayed below most observers’ radar screens for too long. Maintenance problems are rarely thoroughly discussed in oil company board rooms, let alone in any of our media outlets, unless a bad spill occurred, a tanker sank or a refinery exploded.

Over the past several decades, a suite of expensive techniques to mitigate these corrosion issues were developed. None prevent corrosion -- all merely mitigate the extent of the corrosion. The use of cathode protection by applying sacrificial anodes to capture the corrosion, improvements in the exotic internal coatings of pipelines, the use of “smart pigs” to crawl through a pipeline and inspect by a rotating camera precise readings of wall thickness have all represented major technical advances to identify corrosion problems before something finally leaks or breaks.

The specialty chemical sector of the oil service industry has created a suite of corrosion inhibitors, emulsifiers and other exotic but expensive additives to put into pipelines, tank farms, and on wellhead and down hole production tubing. None of these specialty chemicals ever prevent corrosion over time, they simply minimize or postpone the problem and are expensive to use.

Every corrosion fighting tool is expensive to employ and easy to postpone if quarterly earnings need boosting. As oil prices stayed low for the past 25 years, the best performing oil companies were those most proficient in cost-cutting. By the late 1990’s, several of the world’s largest oil companies, led by BP and Shell, were singled out by analysts as being the most capital efficient, a mantra for being able to cut non-essential costs to the bone.

When a company is excelling at cost-cutting and down-sizing, one of the easiest ways to cut costs is to reduce routine maintenance. For a short period of time, it does not matter and since many of the industry’s most important infrastructure assets were either in far away places around the globe or buried underground, “out of sight, out of mind” became an added inducement to delay prudent maintenance before a tipping-point of rust took over.

Whether Prudhoe Bay’s corrosion problems are the tip of a far larger industry-wide problem is unknown today. It will take a massive inspection campaign to determine the extent of serious corrosion throughout the oil fields of the world. A betting person, looking at the age of the oil system and the extent to which costs were cut across the board through the 1982-2002 era of low oil prices, would likely assume the worst and be happy if the inspection reports are not as bad as they could easily be.

If serious corrosion a global problem, it is likely to be most serious in the USA since our country has the largest and oldest oil transportation and refining system on earth. Many key U.S. oil and natural gas pipeline systems now exceed their original design life. There are tank farms at Cushing, Oklahoma that were built in the 1920’s. The core refinery unit of a large refinery owned by Shell and Saudi Aramco located in Port Arthur, Texas, was originally built in 1902. Parts of many of these aged facilities have been replaced over time, but like an old office building or house, some core components still stand and some must now be almost beyond saving.

Even the North Sea, the last really new frontier in oil and gas of any great size, is experiencing rapid increases in leaks, cracks and rusting stairways on many of its multibillion dollar platforms.

As the oil and gas system aged and energy prices stayed so low for so long, the industry’s asset base eroded into a massive rust belt. The industry is now experiencing record profits. It needs to use these profits to quickly rebuild the entire global oil and gas infrastructure the world depends on to deliver over 80 million barrels of oil each day and 40 percent of the same volumes of energy in the form of natural gas.

If a rebuilding program is ignored, the problems seen in Prudhoe Bay are likely to soon be replicated across the entire industry and will significantly reduce the world’s ability to deliver usable energy supplies to a hungry planet with a voracious appetite for increased use of oil and gas.

It might turn out that no further growth in the use of oil and natural gas happens if supplies of both are now peaking. But, the worst of all future energy worlds would be a shrinking supply and a simultaneous collapse of the current delivery system. It is time to rebuild the oil and gas infrastructure to avoid a nasty “double whammy”!

Matthew R. Simmons is Chairman of Simmons & Company International, a specialized energy investment banking firm. The company has completed approximately 629 investment banking projects for its worldwide energy clients at a combined dollar value in excess of $84 billion.
Simmons began a small investment bank/advisory firm in Boston. Among his early clients were several subsea service companies. By 1973, almost all of his clients were oil service companies. Following the 1973 Oil Shock, Simmons decided to create a Houston-based firm to concentrate on providing highest quality investment banking advice to the worldwide oil service industry. Over time, the specialization expanded into investment banking covering all aspects of the global energy industry.

Today the firm has approximately 145 employees and enjoys a leading role as one of the largest energy investment banking groups in the world. Its offices are in Houston, Texas; London, England; Boston, Massachusetts and Aberdeen, Scotland.

Simmons’ recently published book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy has been listed on the Wall Street Journal’s best-seller list. He has also published numerous energy papers for industry journals and is a frequent speaker at government forums, energy symposiums and in boardrooms of many leading energy companies around the world.