The rusty oil and gas industry: a tale of corrosion

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 is a global problem, it is likely to be most serious in the USA as it has the largest and oldest oil transportation and refining system on earth. Many key US 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.