Prices Calm After Forties Pipeline System Shut Down News – But For How Long?

Emergency work on the Forties North Sea pipeline initially shook the markets with Serica Energy Plc (LON:SQZ) shares falling around 5% on the news, which also sent brent crude soaring to above $65 a barrel.

Prices then calmed but pipeline-owner INEOS' announcement that deliveries of crude are now under force majeure might send prices soaring once more. “At this stage it is still too early to say how long the repair will take to complete, but it is expected to be a matter of weeks rather than days,” INEOS is quoted as saying. The result was that brent crude jumped to its highest since 2015.

On Thursday it was announced by INEOS that the crack in the pipeline discovered last week near Netherley in Aberdeenshire had not grown in size; the small hairline crack had been “stabilised” and the safety cordon around the pipeline has now been halved. However, INEOS, who acquired Forties from BP at the end of October, is still deciding how to fix the crack, and there's no news on timescales.

A spokesman for the company said that it was too early to say how quickly an effective repair can be made but “at this point but it is expected to be a matter of weeks rather than days.”

The Forties pipeline system, carries around 30% of the UK's oil or about 450,000 barrels per day. It handles nearly a quarter of North Sea output and carries oil from the Forties Oil Field, the oldest and largest field in the North Sea. Forties is currently operated by Apache North Sea which holds 97.14% interest in the field. Other stakeholders in the field include Esso Exploration and Production UK (2.61%) and Shell UK (0.25%).

In a press statement yesterday, INEOS said: “Safety remains our highest priority and local residents, FPS customers and other stakeholders are all being kept fully informed of the situation as it develops. We continue to work closely with Government and other stakeholders including the local authorities to minimise the impact of the closure as far as possible on communities, our customers and the country.”

The news that the crack is not growing will calm traders. It's clear that the initial volatility was an overreaction. Futures prices for Brent crude had risen initially as oil prices surged earlier this week to the highest in more than two years, almost hitting $66 a barrel as concerns mounted about the vulnerability of the UK's energy network. But prices are now almost back to their level before the shutdown was disclosed.

It goes without saying that these events are highly unusual in the North Sea. But by suspending their contractual obligations in the wake of the emergency, INEOS are leaving themselves open to the accusation that the crack is worse than they're disclosing. Any speculation can only have an adverse effect, pushing prices up exponentially.

Even if the price rises might seem like a plus for investors, the emergency is nothing but bad news for the company, for consumers and for UK oil. According to industry-body, Oil and Gas UK, "The shutting down of the Forties pipeline does cause significant issues for our industry, financially, operationally and commercially – 40% of oil production is now shut in and the resulting lost production is worth around £20m per day at current oil prices to industry."

The upshot is that while markets have calmed for the time being there is scope for speculation to accumulate about the scope of the damage. And if that speculation is not nipped in the bud firmly, we will likely see volatility return to the markets again.

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fortiesIneosUnited KingdomNorth SeaSerica EnergyAberdeeForties Pipelinevolatility

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