UPDATE 3-TransCanada shuts Keystone pipeline, firms oil price

Thu Oct 18, 2012 5:16pm EDT

* 590,000 bpd pipeline expected down for 3 days

* "Small anomaly" detected on pipe

* WTI crude pares losses, Canadian oil falls

* US DOT sends inspector

By Jeffrey Jones

CALGARY, Alberta, Oct 18 (Reuters) - TransCanada Corp said on Thursday it has shut down its major pipeline for moving Canadian crude oil from Alberta to the central United States after detecting a "small anomaly" on the pipe, lifting benchmark oil prices well off the day's lows.

TransCanada, the country's largest pipeline company, said the 590,000-barrel-a-day Keystone pipeline is expected to be shut for three days as crews investigate the pipe, causing some Canadian crude supplies to back up.

The pipeline has the capacity to transport a quarter of Canada's crude oil exports to the United States, so outages can have big impacts on markets on both sides of the border.

The company said the potential defect was discovered on Wednesday by an in-line inspection tool, known as a "pig", and no leaks were found. It declined to give the location of the anomaly, citing security reasons.

"Once re-start happens we expect normal operations and flows for the remainder of October," TransCanada spokesman James Millar said. "We may have to make up some volumes in November but we are still evaluating this."

The U.S. Department of Transportation's pipeline safety office said it deployed an inspector to review test results and observe repairs on a section of the pipeline between Missouri and Illinois.

The Pipeline and Hazardous Materials Safety Administration has taken a tougher stance on pipeline companies after recent high profile leaks including an Enbridge Inc spill of 20,000 barrels of oil into Michigan's Kalamazoo River in 2010.

West Texas Intermediate crude, which was down $1.18 a barrel early in the session, pared losses following a Reuters confirmation of a report by market surveillance firm Genscape, and even climbed into positive territory for awhile. WTI ended down 2 cents at $92.10 a barrel.

"The market is in a phase where there is a strong reaction to infrastructure issues, although refinery snags are of greater import given low refined product storage levels," said John Kilduff, partner at Again Capital LLC in New York. "Still, if this crude oil pipeline issue does not clear quickly, we will see further gains."

The outage also prompted a $3 a barrel drop in the price of Western Canada Select heavy crude oil, to $20 a barrel under WTI, its deepest discount in 11 weeks, trade sources said.

Light synthetic crude, derived from the Alberta oil sands, fell to 25 cents a barrel over WTI from $3 over on Wednesday, according to Shorcan Energy Brokers.

The Keystone pipeline, which extends to Wood River, Illinois, and to the massive Cushing, Oklahoma, storage hub from Hardisty, Alberta, is the first phase of TransCanada's Keystone system and has been in operation since 2010.

The next phase, between Cushing and Gulf Coast refineries, is under construction amid opposition from some landowners. The contentious Keystone XL project, between Alberta and southern Nebraska, still requires U.S. federal approval after President Barack Obama rejected the initial application early this year.

TransCanada has re-applied to build that $5.3 billion portion of the system, hoping for an approval early next year.

Environmentalists seized on the outage as showing why Washington should block Keystone XL.

"Canadian tar sands are not inherently better or safer, quite the opposite, they require the construction of massive and unstable infrastructure that will eventually fail," Joe Mendelson, climate and energy policy director for the National Wildlife Federation, said in a statement.

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