Talk about bad timing.

Days before Nebraska regulators are set to rule on TransCanada Corp.’s XL extension to its Keystone pipeline, the existing conduit has sprung a major leak. It spilled about 5,000 barrels of oil early Thursday in South Dakota, handing new fodder to environmentalists opposed to the XL project. The company shut the line, and foes were quick to respond.

The spill “should be a stark reminder of the risk Nebraska would be signing up for,” said Anthony Swift, director of the Natural Resources Defense Council’s Canada Project, a group that opposes the pipeline. “The likelihood of spills should weigh into their decision.”

The spill occurred in Marshall County, the company said in a statement. The pipeline, which can carry about 600,000 barrels of crude a day from Alberta’s oil sands to the U.S. Midwest, is expected to remain shut while the company responds to the spill. TransCanada tentatively plans to restart the line Nov. 23, a person familiar with the matter said Friday.

Analysts have said a prolonged shutdown would affect distribution of heavier oil. The line will remain shut until repairs are completed and TransCanada receives approval from the Pipeline and Hazardous Materials Safety Administration, Terry Cunha, a company spokesman, said in an emailed statement.

While a 2011 state law precludes the Nebraska regulators from factoring pipeline safety or the possibility of leaks into the decision on Keystone XL, the spill still sends a difficult signal out at a key time for the company.

“The timing of this outage is not very good from TransCanada’s standpoint,” said John Auers, executive vice president at energy consultant Turner Mason & Co. in Dallas, by telephone. “Theoretically, it should not have an impact in Nebraska. I think TransCanada will handle this spill very well, and get it up and running quickly. It could be a good indication that pipes are safe, and they can handle incidents.”

The longer the pipeline stays down, the more crude will fill storage tanks. As they top out, the discount paid for heavy Canadian oil will need to widen to make shipping by rail cars affordable, according to Kevin Birn, a director at IHS Energy in Calgary. “We always thought we would see increased movements by rail,” Birn said by telephone. “This will accelerate that time line.”

Heavy Crude

The shutdown of the line also comes as falling Venezuelan production and cuts by the Organization of Petroleum Exporting Countries have reduced the availability of heavy crude oil along the U.S. Gulf Coast. Western Canadian Select heavy crude’s discount to West Texas Intermediate futures widened to $14.20 a barrel, according to data compiled by Bloomberg. It was unchanged Friday.

“While it remains too early to assess the length of the outage,” differentials are expected to widen, Tudor Pickering Holt & Co. said in a research report Friday. The extent of the spill could result in a longer-term shutdown, the report said.

A significant change in pricing will negatively affect some drillers. MEG Energy Corp., Imperial Oil Ltd and Cenovus Energy Inc. would see the most impact, Tudor Pickering said.

Meanwhile, a decision by Nebraska’s Public Service Commission on Keystone XL, an $8 billion, 1,179-mile conduit on the drawing boards since 2008, is scheduled for Nov. 20. The board will decide whether to allow the Calgary-based company’s line to cross the state. While any ruling there will certainly face legal challenges, an approval would remove a key hurdle to construction.

The project, as planned, would send crude from Hardisty, Alberta, through Montana and South Dakota to Nebraska, where it will connect to pipelines leading to U.S. Gulf Coast refineries. The company’s open season for gauging producers’ interest closed late last month, and TransCanada executives have indicated that they’ve secured enough shipping commitments to make the project commercially worthwhile.

Death Knell

If Nebraska denies approval, ruling it’s not in the public interest, it could be the death knell for the long-stalled extension, analysts have said. While the decision can be challenged in court, uncertainty over the project’s prospects has loomed over TransCanada’s ability to secure oil producer commitments to use the conduit.

The line is one of three oil-sands pipeline projects that have been approved by either the Canadian or U.S. government over the past year and, with a final approval, could be built as early as this decade. New pipelines are needed to prevent a bottleneck as Canada’s oil-sands production grows.

U.S. Investigating

The existing Keystone system is second only to Enbridge’s mainline in the volume of heavy Canadian oil-sands crude it can deliver to the U.S. Midwest. The U.S. Pipeline and Hazardous Materials Safety Administration has deployed four technical experts to the site of the spill, and is investigating, a spokesman said.

The longer the outage, “the bigger the impact,” he said “I don’t expect it to be down for long as it’s a critical pipeline. There is every incentive for TransCanada to bring it back up.”