Pipeline Fire in Northern Minnesota Has the Potential to Cause Some Real Problems

A pipeline fire in northern Minnesota has the potential to cause some real problems in the US, especially for people in the upper Midwest. This is a perfect example of a low-probability random event with severe consequences, a so-called “black swan” event. If you live in the Midwest you are about to find out how local oil and gas markets are. Also people may find out about the seldom discussed emergency supply system that Uncle Sam can impose if necessary. Text in bold is my emphasis. From Yahoo:

An explosion crippled the main pipeline supplying Canadian crude to U.S. Midwest refineries on Wednesday, forcing operator Enbridge to halt nearly a fifth of U.S. imports and sending crude prices as much as $4 higher.

One of the set of four lines will require repairs and regulator inspections, while the largest is "not likely" to start up any time soon, Larry Springer, a spokesman for Calgary, Alberta-based operator Enbridge Inc, said on Thursday.

The smaller two lines were several hundred feet from the fire and appear to be undamaged, but will be inspected soon before they are restarted, Springer said by phone. He was not able to give a specific time frame for restarting any of the network.

Two employees were killed in the blast and fire on the 450,000 barrels per day (bpd) Line 3, which had been shut earlier to inspect a leak, Springer added. Enbridge said in statement that the cause of the explosion had not yet been determined.

The explosion about 3.0 miles southeast of its Clearbrook, Minnesota, terminal, shut down a line that carries an estimated 1.9 million bpd of Canadian crude, equivalent to about 9 percent of total U.S. oil demand.

Oil prices roared more than 4 percent higher on the news, with traders fearing that the outage would leave mid-continent refiners short of crude. By 5:15 a.m. EST U.S. futures were up $3.51 at $94.13 a barrel, rebounding from Wednesday's fall.

"My initial impression is that (this) will put a halt to the slide in oil prices and put us back on the march towards $100 a barrel," ANZ senior commodities analyst Mark Pervan said. "The timing is pretty bad. We are coming to the strongest demand period for crude with the approach of the northern winter."

Canada is the biggest supplier of foreign crude to the United States, accounting for almost one-fifth of its over 10 million bpd of imports, government data show.

Nearly all of that is delivered via the Enbridge system.

The outage comes two years after powerful hurricanes knocked out a swathe of U.S. Gulf of Mexico oil production, which prompted the International Energy Agency and the U.S. government to release government-held emergency oil reserves.

The U.S. holds 700 million barrels in its Strategic Petroleum Reserves (SPR) in four sites around the Gulf, although there is limited capacity to pump those supplies to northern refiners.
The head of the IEA's oil and industry markets division said the West's energy watchdog was closely monitoring the outage.

"You have to look at whether there are opportunities for re-routing supplies... and how long it's going to take for repairs," Lawrence Eagles said.

A county official said the fire could burn for three days.

"The area under fire now is 100 feet by 100 feet," Jeanine Brand, County Attorney and Public Information Officer for Clearwater County, said by telephone.

Enbridge was not able to say what caused the blast but said it was working with federal and state authorities to begin a thorough investigation.

A lasting disruption to Lines 3 and 4 -- which combined pump over 1.1 million bpd of mainly heavy and medium crude -- would put a strain on landlocked Midwest refiners such as Flint Hills Resources and Marathon Oil Corp, which have few immediate alternatives to the Canadian supplies.

That in turn could drain stocks in the Cushing, Oklahoma, delivery point for New York Mercantile Exchange (NYMEX) oil futures, although the Enbridge line does not flow directly there.

Refineries owned by Exxon Mobil Corp, BP Plc and Murphy Oil Corp are also linked to the pipeline.

Previous disruptions caused by leaks on the Enbridge system earlier this year have been patched up quickly enough to avoid any significant impact on customer deliveries, and the company was hopeful of restarting the smaller lines quickly.

"There is nothing from any other sources that would make us think there is any damage (to Lines 1 and 2), but as prudent operators we have to inspect them before we start them back up," Enbridge's Springer said.

The fire occurred at a main juncture in the line shortly before the U.S. portion splits into a network of other lines.

It supplies 62 percent of the crude refined in the Chicago area and 82 percent of Ontario's demand, according to the Web site of U.S. arm Enbridge Energy Partners, L.P.