Exxon Mobil Corporation (XOM): Its Not So Minor Oil Spill

In the energy industry, oil spills are more common than one might think. Though media attention tends to focus primarily on the most devastating ones, smaller ones do happen from time to time, despite the industry’s renewed focus on safety measures since the infamous BP plc (ADR) (NYSE:BP) Deepwater Horizon incident – the worst accidental oil spill in history.

Just ask Exxon Mobil Corporation (NYSE:XOM)Mobil .

ExxonMobil pipeline ruptures
On March 29, Exxon Mobil Corporation (NYSE:XOM)’s 940-mile Pegasus crude oil pipeline ruptured near Mayflower, Ark. – a town some 25 miles northwest of Little Rock. According to the Mayflower Incident Unified Command Joint Information Center, the spill has been classified as a major one by the U.S. Environmental Protection Agency.

The pipeline, which starts in Patoka, Ill., transports some 95,000 barrels per day of mainly heavy Canadian crude oil to a terminal in Nederland, Texas, that is operated by Sunoco Logistics Partners L.P. (NYSE:SXL) (NYSE:SUN), now part of Energy Transfer Partners LP (NYSE:ETP) . Exxon Mobil Corporation (NYSE:XOM) reversed the line’s flow in 2006 in order to transport crude to the Gulf Coast refining hub.

Pegasus, which is 20 inches in diameter, serves refineries in the Port Arthur and Beaumont regions. According to Bloomberg, there are four major plants near Nederland – operated by Exxon Mobil Corporation (NYSE:XOM), Valero Energy Corporation (NYSE:VLO) , TOTAL S.A. (ADR) (NYSE:TOT), and Motiva Enterprises – that are capable of processing some 1.4 million barrels of crude a day.

At the time it ruptured, the line was transporting Wabasca Heavy Crude from western Canada. Wabasca Heavy is a blend of heavy crude oil produced in Alberta’s oil sands by Cenovus Energy Inc (TSE:CVE), Canadian Natural Resource Ltd (USA) (NYSE:CNQ) , and Suncor Energy Inc. (USA) (NYSE:SU). Due to its physical qualities, it is in high demand by U.S. Gulf Coast refiners.

Effect on benchmark crude prices
The line’s temporary closure, which will reduce the supply of crude from western Canada and the U.S. Midwest, is likely to worsen the glut of oil in those regions. Due to limited transportation options, crude oil in those two regions has been trading at a substantial discount to the global crude oil benchmark, Brent.

In fact, Western Canada Select (WCS) – the benchmark for western Canadian crude – had been trading at a discount more than $30 even to West Texas Intermediate (WTI) – the primarily U.S. crude oil benchmark – until very recently, due to severe limitations in outbound pipeline capacity from Alberta.