Do you know how most leaks are found on oil and gas pipelines?
They get a shrill complaint over the phone from one of the landowners where the pipeline crosses.
It's true, says Dr. David Shaw, one of the authors of a draft "Leak Detection Study" prepared for the U.S. Department of Transportation, for a report that will go to the US Congress early in 2013. Dr. Shaw is a project engineer with independent consulting firm Kiefner & Associates, Inc., a high-end, Ohio-based consulting firm that specializes in pipeline engineering.
The Study - commissioned and funded by the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) - analyzed several leak detection systems. What the Federal Aviation Administration (NYSEARCA:FAA) is to airlines, for example, PHMSA is to the pipeline industry.
"Very often pipeline operators haven't known they have a leak until they get a phone call from somebody saying there's oil in my field," Dr. Shaw said in a recent interview with the Oil and Gas Investments Bulletin.
The PHMSA was first founded in 2001 as a result of several large pipeline spills, and their report only goes to Congress every few years. And now is a time when more pipelines are needed than ever before to transport the huge new supply of shale oil, and Canadian heavy oil, through the continent.
Of course, that has brought more public scrutiny to the industry than ever before-making it a high-stakes report for the industry. Surprisingly, the mainstream media has almost completely ignored the 269-page draft report, which was released in late September.
(And of course, the trade magazines don't cover this issue because that would bite the hand the feeds them-you can't annoy your advertisers!)
You can access the draft report here: https://primis.phmsa.dot.gov/meetings/FilGet.mtg?fil=397. The public and industry had eight weeks to comment on it. Those comments will now be worked into the final PHMSA report that goes to Congress.
Shaw says there is relatively little market penetration of automated leak detection systems. It's still being done semi-manually, through periodic monitoring of pressure and flow by operators.
"It's not sensitive or modern, but that's where the majority of pipeline leak detection is," he says. "We rely on controllers to identify something big happening on their instruments. It's not particularly high-tech. They're (the pipeline industry) trying to avoid these technologies. The question is why?"
"We called them up and asked them. One primary reason is there's no systematic guideline for leak detection system deployment. So one of our macro-recommendations (in the study) was to develop standards and certifications for leak detection systems."
He added: "They (the industry) are particularly worried of regulations that will force them to have specific leak detection procedures."
He says that pipeline leaks, ruptures, and spills are "systematically causing more and more property damage…in a bad year you can have up to $5 billion in property damages due to pipeline related accidents."
Given the volume of public property damage, the report comments that pipeline companies would be "probably justified" in spending $490,000 a year for every 400 miles of pipeline.
He adds that the reality is that "right now companies might spend a tenth of that figure (per year for every 400 miles of pipelines). It just needs pushing along here. Somebody has got to move this technology into practise."
Anthony Swift, an attorney with the Natural Resources Defense Council, said that the report's findings show that industry talk on leak detection systems doesn't match the realities of the situation.
"These systems aren't as effective as many pipeline operators suggest," said Swift.
He is hopeful that the report will lead to better improvements in leak detection engineering and public transparency.
Industry groups such as the American Petroleum Institute (NYSEMKT:API) and the Association of Oil Pipe Lines (AOPL) said that the report is flawed.
"The report includes an extensive recitation and largely academic description of LDS [leak detection systems], their technologies and potential applications," said API and AOPL in a joint statement.
"However, this study presents relatively little in-depth data or analysis of the actual experiences of operators using these technologies, their operational experiences, or benefits and costs in practice. The study hints at many of these issues, but never explores them substantively or with any numerical analysis.
"A critical reader is left unable to make any accurate assessment on the technical, operational or economic feasibility of LDS (Leak Detection Systems-ed)."
Enbridge (ENB-NYSE;TSX) is a member of both API and AOPL. They are researching and testing leak detection technologies that are suitable for its pipelines, including Northern Gateway, said Enbridge Spokesperson Graham White.
"[This initiative] includes an evaluation of fibre optic and odour sensing cables to ensure the technology actually performs as vendors claim," said White.
(Responses to these comments by the pipeline industry from Kiefner and Associates are also available at the public website:
Shaw says the leak detection technology industry has been caught in a Catch-22 situation for years-they find it difficult to develop new products because there aren't any major sales to pipeline operators.
Natural gas pipelines will also get discussed in the report to Congress, though most of it will be on liquids pipelines.
Since the last report, a natural gas pipeline exploded in San Bruno California, just south of San Francisco, killing 8 people. Operator PG&E (PCG-NYSE) was found negligent but regulators also came under scrutiny as being too trusting of the companies operating the pipeline.
In conclusion, leak detection technology around pipelines is not modern, scientific or technical. In today's age, that will just not fly politically.
The challenge for the industry is to either take the lead, increase their leak detection budgets and adopt new technology, or allow government or regulate them into action. What great PR that would be for them!
Both the US and Canada need thousands of miles of new pipelines to get their fast growing supply of oil to market. This could be a big first step in winning over public opinion with billions of tax dollars and profits on the line.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.