Analysis: U.S. regulators get tougher on oil pipelines

WASHINGTON Mon Aug 6, 2012 5:48pm EDT

The Enbridge Tower is pictured on Jasper Avenue in Edmonton August 4, 2012. REUTERS/Dan Riedlhuber

The Enbridge Tower is pictured on Jasper Avenue in Edmonton August 4, 2012.

Credit: Reuters/Dan Riedlhuber

WASHINGTON (Reuters) - Conditions placed on Enbridge Inc (ENB.TO) to restart an oil pipeline highlight the tougher stance U.S. regulators are taking after a series of high-profile spills.

The Pipeline and Hazardous Materials Safety Administration on Monday gave Enbridge the greenlight for resumption of the 318,000-barrel-per-day Line 14, which spilled 1,200 barrels of oil on a rural Wisconsin field in late July, after the agency said the Canadian firm agreed to a more stringent set of safety requirements.

The company plans to restart the line on Tuesday.

The U.S. regulatory agency is in the spotlight after two big accidents in 2010 - BP Plc's (BP.L) Macondo disaster in the Gulf of Mexico and another Enbridge leak of 20,000 barrels into Michigan's Kalamazoo River in one of the biggest spills onshore.

And analysts say as these spills have focused more attention on pipeline safety, the once-obscure PHMSA is getting more comfortable with flexing its recently enhanced muscles.

"Pipeline accidents have a high profile right now," said Andy Black, head of the Association of Oil Pipelines trade group.

The U.S. Transportation Department, which oversees the PHMSA, began a new pipeline safety effort in 2011, urging operators to replace aging infrastructure and winning Congressional support for more resources and enforcement powers.

Based on interviews with industry experts and a Reuters review of the agency's recent enforcement record, the change has been noticeable, and the message is clear: If pipelines are found wanting, do not count on a rubber stamp to resume oil flows. That message may be doubly true for Enbridge, which has suffered a string of incidents -- one on the same pipeline years earlier.

Last Tuesday, the agency issued Enbridge a corrective action order, a tough but not uncommon response to a spill. Since 2007, the PHMSA has issued 23 such orders.

But the agency went a step further on Thursday. It demanded an exhaustive safety plan for the entire 1,900-mile (3,060-km) Lakehead pipeline system, not just Line 14. Those were among the toughest terms for any order since a pair of BP oil spills in Alaska in 2006.

"This is PHMSA saying: ‘We mean business,'" said industry consultant Don Deaver, a former Exxon pipeline engineer.

According to a PHMSA statement released on Monday, Transportation Secretary Ray LaHood will hold weekly meetings with an agency team to ensure the company is complying with safety requirements along its Lakehead System, a key artery for supplying U.S. refiners with Canadian crude.

The order also required Enbridge to hire an independent auditor to help oversee implementation of the new safety plan and report back to PHMSA on progress.

In addition, Enbridge agreed to temporarily reduce pressure along the line until the cause of the leak is determined and "remedial actions are taken".

BLACK EYE

The Wisconsin spill was the latest black eye for Enbridge's pipeline network, the main conduit for Canadian crude exports and one of the largest systems in the world. The company says it has had a 99.999 percent success rate in delivering 12 billion barrels over the past decade and is investing $800 million this year as it strives for a perfect record.

But LaHood blasted Enbridge last week, demanding the company demonstrate why it should be able to keep operating the pipeline without a complete replacement or major overhaul.

The rupture on Line 14 left a 4-foot by 6-inch (1.2-metre by 15-cm) gash, according to the initial report. The cause of the pipeline failure has not been determined.

The agency's pipeline oversight has faced some criticism in the past.

In a report released last month on Enbridge's 2010 spill in Michigan, the National Transportation Safety Board charged that PHMSA's review of Enbridge's oil spill response plan in that case was "inadequate."

The Line 14 disruption helped trigger a record surge in Chicago wholesale gasoline premiums as local refineries operated by BP and Exxon Mobil Corp (XOM.N) faced tighter supplies. The price spiked eased on Monday, however, in part due to news of the restart.

CORRECTIVE ACTION

Following the spill, oil markets focused attention on PHMSA's corrective action order, a list of demands the agency can issue whenever it determines that a pipeline is "hazardous to life, property, or the environment."

The agency determines how and when to apply an order, based on the age of the pipe, the commodities being transported, the operating pressure, the surrounding area and any other factors "deemed important" by the PHMSA associate administrator.

According to a Reuters review of such orders over the past five years, most followed large pipeline leaks or spills in sensitive areas.

The remedies tend to follow a fairly clear pattern.

The orders typically require the PHMSA's permission for a company to resume operations on the pipeline in question. They usually set out a number of additional measures: running the pipeline at reduced pressure; conducting mechanical or metallurgical tests within a month, and additional tests within several months; and reporting more frequently to regulators.

Richard Kuprewicz, head of pipeline consulting firm Accufacts Inc, said Enbridge's history was a major reason why a relatively small spill received such scrutiny.

Besides the 2010 spill, Enbridge's Line 14 experienced a leak of 1,500 barrels in Wisconsin back in 2007 -- an incident that did not result in a corrective order. In November of that year, another Enbridge line caught fire in northern Minnesota, killing two workers.

"There are other issues showing up that indicate the integrity management program is seriously incomplete," Kuprewicz said.

HARD TO PLEASE

It also seems to be getting more difficult for companies to satisfy the PHMSA, whose most powerful enforcement tool is blocking the operation of a line. The agency has rarely fined a company more than $1 million; the $3.7 million penalty it issued against Enbridge a month ago for the 2010 spill was the largest ever.

"The fines are still small - a drop in the bucket compared to the revenues that pipeline companies generate," said Deaver, the former Exxon engineer.

Of five corrective orders issued to oil companies between 2007 and early 2010, none resulted in the closure of a pipeline for more than a week, according to the agency's own data. The longest outage - five days - occurred on Line 2 of Enbridge's Lakehead system, which spilled 2,237 barrels of crude in Neche, North Dakota, in January 2008, the data showed.

But outages have tended to last far longer since the Michigan spill in mid-2010 heightened public anxiety over oil pipelines. Of 14 incidents that resulted in corrective action orders since that leak, at least eight have resulted in pipeline closures of 25 days or more.

For example, Exxon Mobil's Silvertip line received a corrective order after a spill in Yellowstone County, Montana, last year and was shut for 85 days. Another Exxon pipeline in Louisiana was still shut after a leak on April 28; the company has requested a hearing to discuss aspects of the order.

(Editing by Lisa Von Ahn and Marguerita Choy)

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