DEADHORSE, Alaska—Painful reminders of the fallout from the cheap-oil era of a decade ago are never far from Robert Malone, the top North American executive of oil giant BP.
In March, he traveled 250 miles north of the Arctic Circle to look in on BP's efforts to rebuild the pipeline system that leaked 200,000 gallons of oil last spring onto Alaska's North Slope. But before donning an arctic parka to head into the 52-degrees-below-zero wind chill, Malone had to interrupt a meeting with workers to mark a solemn occasion: the moment, precisely two years earlier, when an explosion at the oil giant's Texas City refinery killed 15 people.
The can-do culture of BP's past pushed it to explore the depths of oceans, deal with unsavory political regimes, pioneer the era of oil-industry consolidation and test the limits of technology. Malone was in Alaska trying to reignite BP's can-do spirit after nearly a decade in which the company scrimped on routine maintenance and ignored safety issues that led to the disaster in Texas and the spill in Alaska.
And now, an inability to tackle daunting technological challenges has forced BP to delay pumping from one of its brightest prospects for the future: BP's massive Thunder Horse platform in the Gulf of Mexico. A nearly 3-year delay in the startup of the world's largest floating oil platform, which covers an area the size of three football fields, is setting back the arrival of enough oil to boost total U.S. production by nearly 5 percent.
Rarely has one company faced such grave trouble at so many places in such a thin slice of time. The breakdowns form a composite of the challenges an oil giant faces at a time when fields like Prudhoe Bay are running short of oil, the refinery infrastructure in places like Texas City is out of date and overtaxed, and the prospects for success in exploration are dicier than ever.
The crisis at BP is symptomatic of challenges oil companies face in trying to slake the world's thirst for oil. The six "super-major" independent oil companies together take in nearly $1.5 trillion each year. Yet the residue from the cutbacks and scrimping during the days of $10-a-barrel oil in the late 1990s has left the industry ill-equipped to handle even the slightest hiccup.
The U.S. got a taste of the industry's fragile state when Hurricanes Katrina and Rita hit in 2005 and took out more than 25 percent of U.S. refining capacity, forcing shortages and price hikes. And now consumers are paying the price again: As the summer driving season gets under way this weekend, Americans are paying a record nationwide average of $3.10 a gallon at the pump.
The BP connection is hitting perhaps hardest of all in Chicago. In part because of recent problems at BP's Whiting refinery, Chicagoans are paying among the highest gas prices in the U.S.: about $3.59 a gallon.
The Chicago connection is more than an ironic happenstance. Many of BP's problems can be traced to its 1999 acquisition of Amoco Corp. The Amoco purchase, followed soon after by BP's merger with Arco, transformed BP from a mid-size major into one of the world's very largest oil giants. Yet, because of Amoco's own poor maintenance record, the deal saddled BP with a huge backlog of trouble just as the industry's finances were hitting bottom. BP's immediate response to the tight times, a 25 percent cut in fixed costs, may have contributed to its problems at Texas City and Prudhoe Bay.
BP may operate with billion-dollar budget cycles, but the problems that take it down can start with something as tiny as a pinprick. A hole that size in the Prudhoe Bay pipeline system forced a months-long shutdown of half of North America's largest oil field beginning in August 2006. The Texas City explosion occurred because a single valve was left open too long. And Thunder Horse is behind schedule, costing BP $3 billion in lost revenue, because a 6-inch length of pipe was not correctly plumbed.
Getting to the root of the problems, and fixing them, would be a huge job under any circumstances. At BP, the world's third-largest independent oil producer, with revenues of $266 billion last year, the complexity is compounded by turmoil at the top. BP's visionary longtime leader, John Browne, was forced to step down in early May after admitting he lied to a court in an effort to conceal how he used company assets to help his boyfriend start a business.
Now the pressure is on Malone, a 55-year-old BP career oil man who hails from scrubby Daingerfield, Texas, population 2,517. Malone, his soft-spoken Texas twang intact though he has lived in Ohio, Alaska, and London much of his adult life, was installed as head of BP's North American operations soon after the Prudhoe pipes first leaked in spring 2006.
In his prior job, heading BP's global shipping operation, Malone moved oil tankers through the Persian Gulf and the pirate-infested Straits of Malacca. Yet his new assignment, turning around BP's American operation, he considers more difficult. And the hardest part, Malone said while inspecting repairs in Alaska and trying to charge up workers to do their work quickly and correctly, will be changing the corporate culture.
The challengeAs Malone's corporate jet set down at the tiny Deadhorse airport in late March, the first part of his mission was fairly simple: assess progress on the reconstruction of the Prudhoe pipeline system that twice sprung leaks last year. The first dumped 200,000 gallons of oil onto Alaska's North Slope in March 2006. But the second incident was almost worse: Two small leaks in August that exposed a pipeline that in many places had corroded almost entirely through.
Fixing and replacing the pipes is costly, laborious work. The tougher task, though, is the job of transforming a corporate culture that had allowed oil to eat through the Prudhoe pipes unnoticed. Years of cost-cutting and management shuffles had created frustration among Prudhoe managers. And now, in the year since the first spill, rampant overtime work and intense pressure have exhausted workers and taxed their ability to finish the job.
Much is riding on Malone's changes, not only for Prudhoe but for all of BP America from the Arctic Circle to the Gulf of Mexico. To compete in the new era of high prices, climate-change activism and cutthroat competition for oil resources, BP and others in the industry are quickly finding there is no room for error.
Over a two-year period BP will replace 16 miles of pipe at Prudhoe, the central spine of the system that pumps up to 10 percent of U.S. production into the 800-mile Trans-Alaska Pipeline System.
It's difficult and daunting work, as Malone witnessed first-hand.