NATHAN VANDERKLIPPE, Globe and Mail, Feb. 18, 2011
Just before 9:30 p.m. on July 25, 2010, emergency workers in Calhoun County, Michigan, received a 911 call from someone reporting a “bad” odour. It smelled, the caller suggested, like a natural gas leak.
Wet'suwet'en Nation members like David de Wit are expressing their opposition to Enbridge's proposed Gateway pipeline by erecting a cabin squarely in its path.(Andrew Querner for ROB Magazine)
For Canada’s Enbridge Inc. (ENB-T57.470.090.16%), that call was the first hint that oil was pouring out of a two-metre gash in a key link of its massive crude oil pipeline network. It would soon become clear that this was the worst spill in the company’s history, one that will cost an estimated $550-million (U.S.) to clean up. And that tally pales in comparison to the billions the rupture has cost Canada’s oil producers, who saw prices plunge as domestic supplies built up after the pipeline outage.
Wet?suwet?en Nation members like David de Wit are expressing their opposition to Enbridge?s proposed Gateway pipeline by erecting a cabin squarely in its path.
Enbridge’s proposed pipeline stirs strong emotions along the route
Now, after months of cleanup work, most of the crude has been scoured from the river and its banks. A U.S. government-mandated repair program, which saw Enbridge use 65 crews to fix 400 locations over the span of several months, is nearly complete. And Enbridge chief executive officer Pat Daniel has in recent weeks promised that things are nearly back to normal.
But the spill has raised new questions about the age of the Enbridge pipeline network – the single most important link between Alberta’s oil and buyers in the U.S. and Eastern Canada – and about the broader infrastructure of North America’s massive system of oil transportation. Much of that system is decades old and built using protective coatings that have been shown to break down over time. Its future performance has important implications for both Canada’s energy industry and the economy of the broader country, for which energy is now the single most important export.
In terms of pure oil lost, the Michigan spill was but a fraction of the BP spill – the leaking Gulf of Mexico well poured out 250 times more crude. But for Canada, the stakes of what happens with Enbridge are as high as they were for U.S. Gulf operators. In 2009, the Enbridge network carried 71 per cent of Canada’s crude exports, supplying a substantial portion of U.S. imports. For Canada, then, concerns about pipelines pose not just a corporate conundrum – they are a serious national economic issue.
Pipelines have long been considered virtually invincible, a transportation corridor so certain that investors have come to expect extraordinary and predictable performance. Enbridge’s 2009 annual report highlighted an average 13.5 per cent annual shareholder return over more than 55 years.
The problems that have dogged Enbridge for the past seven months have, however, provoked new concern over how the company will continue to operate half-century-old assets in coming years.
The Michigan spill “is a harbinger of things to come,” said Glen Perry, a prominent Alberta pipeline builder who helped found the Alliance natural gas pipeline.
“What we’re learning is some of that old pipeline doesn’t have a 100-year life, even though maybe they hoped it did,” he said. “I don’t know what the life is. But for sure these old lines are going to have to eventually get replaced. And I think what Enbridge is seeing is just the front end of that.”
The industry has long held that a well-maintained pipeline should last forever – and that, as a result, the construction date is largely irrelevant. Indeed, thanks in part to newly rigorous inspection rules, spills from crude pipelines have decreased by 35 per cent since the 1980s, and Enbridge itself has a spill rate that is roughly half the industry average.
Age doesn't present a risk for its pipelines, since the company closely monitors all aspects of its network to check for compromises or possible weak spots, Enbridge says. The company spends heavily each year on sensors, spot inspections and other measures to ensure its pipelines are running safely. When problems are detected, the company dispatches experts to identify the source and replace any needed sections.
“The age of the pipe shouldn't make any difference,” Enbridge’s Mr. Daniel said in an interview. He acknowledged that age brings deterioration in coatings, wear and tear and metal fatigue. But, he said, the company replaces sections of pipe when needed, and has the tools to find any issues before they turn into spills. Those tools, he said, are improving at such a rapid rate that the company can more than compensate for any age-related issues.
“To the extent we have deterioration in coating, we're going to be ahead of the game because of better detection technology,” he said.
Enbridge has pointed out that the Michigan spill was its worst in 60 years, and the company stresses that safety is a chief concern. Mr. Daniel said what the company is learning from the mishap will only help create a more reliable pipeline network.
“We don’t think that age itself brings any extra risk,” said Andrew Black, president of the Washington, D.C.-based Association of Oil Pipe Lines. “Pipeline operators have really good techniques to manage internal and external corrosion right now.”
But some corrosion experts say that argument does not match with science on how pipeline coatings degrade over time – and Enbridge’s own engineers have acknowledged that old pipeline technology has proven problematic.
Those fears are heightened by the fact that the continent’s major pipe networks are undeniably old. Forty-one per cent of U.S. oil pipe was built in the 1950s and 1960s; another 15 per cent of the country’s 281,000-kilometre network was built before then. In Alberta, 40 per cent of pipe was built before 1990.
One of the chief threats to a pipeline is corrosion. Pipelines aren’t built with stainless steel, which is far too expensive. They are instead built with thin carbon steel. Left alone, it would rust quickly, which is why companies go to substantial lengths to protect it. They use “cathodic protection,” which involves running a current through the metal that inhibits rust formation. And they wrap the pipe in coatings meant to protect them.
Those coatings, however, aren’t all created equal. In the 1950s and 1960s, most companies used either asphalt or polyethylene, a plastic. The latter is what covered the ruptured Enbridge pipe – and although the cause of that failure may not be officially determined until late this year, investigators have said they found “surface cracks and indications of corrosion.”
That makes sense to Frank Cheng, who holds the Canada research chair in pipeline engineering and serves as director of a pipeline corrosion laboratory at the University of Calgary.
“After more than 30 or 40 years service, this coating could fail,” he said.
Mr. Cheng has conducted field research on the performance of older pipes, and has criticized the industry for directing its research efforts toward new technologies at the expense of continuing to evaluate those already installed.
Pipeline problems tend to come from the outside. In oil lines, external corrosion causes more damage than any other problem. From 1991 to 2010, in fact, external corrosion was responsible for $288-million (U.S.) in property damage in the U.S. alone.
And problems with older pipelines are beginning to surface with alarming regularity. In the U.S., three natural gas pipeline blasts since September have killed 14 people. The National Transportation Safety Board, whose pipeline investigation team includes just four people, is now so swamped that a spokesman said work on spills like that in Michigan has “slowed down” – although a report is still expected within 18 months.
The growing attention has also sparked legislative concern, including a bill proposed by Democratic Senators that would further strengthen inspection rules, which were already tightened a decade ago after an August, 2000, gas pipeline explosion in Carlsbad, N.M., that produced a scorching fireball and killed 12 campers.
A year after that blast, officials in New Mexico said corrosion was to blame for 48 per cent of pipeline accidents in that state.
Mr. Cheng has found that corrosion is especially pernicious in the high-pressure environments of most pipelines, especially when combined with the less-effective coatings, like polyethylene, that are common in older lines.
“In my experience with buried pipelines, in the soil, the coating will have degradation over time. That’s for sure,” he said. “A pipeline – even if it is buried in a very mild soil condition – industry and society still needs to worry about it, because it’s [there for] such a long time period.”
Last year, Enbridge spent nearly $150-million on what’s called “pipeline integrity management.” Maintaining a pipeline is a complex business that involves digging up sections to inspect for problems, flying aerial patrols and running sensors through lines that CEO Mr. Daniel has said “provide a millimetre-by-millimetre view” of potential issues.
Companies use a variety of tools to detect problems. They push devices called “smart pigs” through pipe that are equipped with sophisticated magnetic and ultrasonic sensors that can detect a decrease in pipe thickness of just 10 per cent. Thin spots are important, since it can indicate corrosion is wearing away the pipe.
But finding problems isn’t as simple as looking for those anomalies. In fact, the pigs are so sensitive, they will detect potential problems even on a brand-new pipe.
“Normally those are not injurious,” Mr. Daniel said in a recent interview.
In Michigan, he said, “the feature at this location did not appear to be injurious based on modern technology and analysis.” The company has since dug up any other parts of its pipe that showed a similar feature. Enbridge believes the spill will ultimately lead to a future with fewer problems, rather than more.
The company’s reliability “will get even better, and as a result of the learnings from this we will be even less likely to have an issue going forward,” Mr. Daniel said.
But Enbridge’s own engineers say the Michigan spill could stem from the age of that pipe.
“We don’t know the full story yet, in terms of the cause, but some of it may have to do with the construction materials and the techniques that were available in the ‘60s,” said Ray Doering, a senior pipeline engineer with Enbridge. “They were using things like tape coating, which over time have proven to be not the best coating technology.”
Still, Enbridge has argued that any increased risk from old pipe is offset by new technology, which can detect more problems than ever before.
Pipeline workers have “all these great tools” that can pinpoint issues “before they become something dangerous to the pipeline,” Mr. Doering said.
That message has resonated in the industry. Last December, Mr. Daniel and Stephen Wuori, Enbridge president of liquids pipelines, met with members of the Canadian Association of Petroleum Producers (CAPP) board, which includes some of Canada’s most powerful oil and gas executives. They wanted to discuss the reliability of the Enbridge system, which moves two-million barrels a day of Canadian crude and handles 12 per cent of U.S. imports, and is an issue of critical importance to the oil patch. Outages related to the Michigan spill caused such a serious backup of oil in Canada that domestic prices, which are set as a discount to U.S. prices, dove by more than $10 a barrel. The losses hit a broad cross-section of companies.
“The industry as a whole lost quite a bit of revenue over the course of the summer,” said Chris Seasons, the president of Devon Canada who serves as CAPP chair. “And we’d prefer not to see that happen again.”
During their presentation, the Enbridge executives detailed their maintenance program, and pointed out that the Michigan spill was by far the worst in six decades of operation.
“They feel very confident that there is still a lot of life left in their pipeline system,” said Chris Seasons, the president of Devon Canada who serves as CAPP chair. “I’ll speak for myself: I like what they had to say, and got some encouragement from that.”
The high cost of reliability
The notion that pipelines will continue to last is a deeply-held industry tenet.
“We have lots of pipelines that are in service now that are 50, 60 years old and operating fine,” said Glenn MacIntosh, the owner of Pipeline Integrity Contractors Ltd. who chairs the Edmonton section of NACE International, the society formerly known as the National Association of Corrosion Engineers.
He makes an analogy to antique vehicles.
“If they’re well-maintained, they’re still fine,” he said. “Are the cars today better? Obviously. But it doesn’t mean that something that has been maintained isn’t capable of functioning adequately.”
Not only that, but even if pipelines do break down, it’s not companies like Enbridge that tend to suffer. Instead, repair costs are generally passed on to oil and gas producers. But in general, they don’t worry too much. If costs on Enbridge’s two-million-barrel-a-day system were to increase by $100-million a year, for example, the rise in tolls would amount to just 14 cents a barrel, said Carl Kirst, an analyst with BMO Nesbitt Burns. The price of oil can easily fluctuate 10 times that in a day.
“Any allegation or view that somehow [Enbridge] management is skimping on maintenance because they don’t want to spend the money, I think quite frankly is just misplaced,” Mr. Kirst said.
The seeming impregnability of pipelines is so ingrained that companies don't generally record an “asset retirement obligation” for their pipe - an accounting measure designed to reflect the cost of disposing something at the end of its life.
“The expectation, financially, is that they will last forever,” said UBS analyst Chad Friess.
But there is a growing sense among both researchers and industry observers that the older pipelines get, the more expensive – and riskier – they become. In its 2009 annual report, Enbridge acknowledges that “as pipelines age, the level of expenditures required for inspection and maintenance may increase.”
Mr. Friess believes the price of keeping Enbridge’s pipes going could double in coming years.
“There is the potential that repair costs and maintenance costs and inspection costs could rise quite dramatically with these pipelines to make sure they don’t have any leaks,” he said.
The more important issue is reliability. Even if Enbridge can prevent spills, digging and fixing aging pipe with greater frequency – thereby creating more disruptions to the flow of crude – could hurt Canada’s energy exports.
“If the guys can’t get the oil to the end market,” Mr. Friess said, “it’s a pretty big concern.”