Let’s start with a comparison.
On December 26, militants in Libya blew up a pipeline carrying crude to the country’s largest export terminal, Es Sider. The explosion saw the OPEC member’s production drop from 100,000 to 70,000 barrels a day.
It took engineers just under a week to carry our repairs, replacing damaged parts from the pipeline. Production recommenced before the dawn of the New Year.
Meanwhile in the UK, the North Sea’s Forties pipeline was closed on December 11, after the discovery of a hairline crack by owners Ineos. Two days later, a force majeure – a legal measure used by suppliers when unforeseeable circumstances render then unable to fulfil a contract – was declared.
Ineos needed just over three weeks to remedy the problem, with the pipeline declared up and running again on Dec 31.
The disparity between repair times for the two respective incidents is worth mulling over. How come National Oil Corp, Libya’s state-run oil company, needed roughly two weeks less to fix its own pipeline woes?
Part of the answer to that question perhaps lies in the tensions that have beset the North African country since the 2011 uprising that toppled long-time despot Muammar Gaddafi. The Libyan oil industry is used to shutdowns and disruptions at the hands of protests, violence and blackouts.
In contrast, the overall failure frequency of pipelines in the UK is minimal. According to research undertaken by the UK Onshore Pipelines Association, there have been, on average, 0.087 incidents per 1000 km, per year, over the last five years.
Pandemonium: Price surges and unhappy traders
All of this means that when there is an incident in the UK, such as the Forties closure, it is magnified manifold. Understandably so, perhaps, given Forties’ role as one of the beating hearts of crude oil conveyance. At a length of 234 miles, it is responsible for close to 40% of North Sea oil and gas production, shifting around 450,000 barrels a day from more than 80 fields.
Hence the pandemonium that greeted the news in December. According to Oil and Gas UK, the loss in production from the fields connected to the pipeline amounted to £20 million a day.
Speaking to the Financial Times, one oil trader described the incident as unprecedented. “We have never had a force majeure on Forties like this,” he said. “People are shaking their heads.”
In the immediate aftermath of the announcement of closure, oil prices touched $66 a barrel – their highest level in over two years – while UK gas prices surged to 99p a therm, their highest in four years.
Nothing to do with us: Ineos places blame at the feet of BP
While traders scrambled for answers, Ineos, unsurprisingly, soft-pedalled. Various statements from the private chemicals company portrayed work on the pipeline to be “going well”. If any party was culpable, it hinted, it was previous owners BP – to whom Ineos paid $250m for the pipeline only two months before in October.
This was underscored when the cause behind the crack was revealed to be that the pipeline had been resting on a sharp ridge of Scottish granite rock on land – just south of Aberdeen – which had gone unidentified.
“It was a failure that BP hadn’t seen before and we don’t expect to see again,” Ineos director Tom Crotty, said pointedly.
Crotty, speaking in December, went on to describe the condition of the pipeline, post-purchase, from BP, as being “more of a Ford Mondeo than a Mercedes”, while promising Ineos “will probably spend more on maintenance than the previous owners”.
But traders are seldom interested in such excuses; only action. Ineos subsequently faced criticism for a lack of clear disclosure of an action plan to fix the problem, while some pondered the vulnerability of other parts of the pipeline. It also gave rise to fresh concerns that high sulphur levels in the crude could create corrosion problems in the future.
“Traders, bank analysts, none of us should have to guess how much of this pipeline has been corrupted. Ineos should be answering these questions straight,” another London-based trader told the FT.
These concerns were hardly abated when drone images released by Ineos of the damaged section of the pipeline in question, showed what appeared to be a haphazard repair operation, with minimal number of engineers on site, as well as poor lighting.
Shaky confidence: Ineos cleared but second shutdown show flaws remain
But for all the question marks around Ineos’s communications strategy during the shutdown, there is a line of argument in defence of the company. Namely, from the get-go, it said it would take two to four weeks to bring the pipeline back on line. Ineos fulfilled that promise.
The extent of its response to the crisis was also validated by the UK Health and Safety Executive, which on January 5 claimed to be “satisfied” by the repair efforts following an investigation.
That said, on February 7th – just over a month after Forties was reopened – the pipeline system was down yet again. Ineos confirmed the cause to be the closure of a feed control valve linking the Kinneil gas plant to the pipeline, triggering an automatic shutdown. As a result of the news, UK gas prices rose 6% to 54p per therm.
If any lesson is to be drawn from the Forties ‘crisis’ it’s that confidence in the oil and gas infrastructure in the North Sea is shaky. Rather than taking solace from Ineos’ ambiguous press releases, analysts and traders were understandably more concerned about whether such incidents might take place again anytime soon.
Operating under such a spectre of uncertainty is never healthy for any industry. If the Forties pipeline were to endure a similar incident in the near future, Ineos will be expected to perform better in its response.