DOT Proposes Tougher Safety Regulations For Hazardous Liquids Pipelines

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1 RESEARCH North America Fossil Fuels Oil DOT Proposes Tougher Safety Regulations For Hazardous Liquids Pipelines New Rule Would Expand Reach Of DOT Reporting Requirements; Cost Operators Upwards Of $22.4 Million Per Year October 12, 2015 Policy Brief Author Erin Carson Chief Policy Strategist Janis Kreilis Analyst Contact (212) Key Takeaways: The Department of Transportation s proposal to strengthen hazardous liquid pipeline safety would expand the agency s integrity management requirements related to assessments, repairs, and leak detection The proposal would establish reporting requirements for certain unregulated pipelines, including all gathering lines New conservative repair criteria and response timelines would increase the number of anomalies that qualify for immediate remediation Related Research Shell Cites Restrictive Regulations In Ceasing Arctic Drilling Operations EPA Proposes Mandatory Methane Reduction Despite Declining Emissions Entities Mentioned: American Natural Gas Association American Petroleum Institute Association of Oil Pipe Lines Department of Transportation Environmental Protection Agency Enbridge Energy Partners ExxonMobil Pipeline Company Interstate Natural Gas Association of America National Transportation Safety Board Pipeline and Hazardous Materials Safety Administration This report is for industry information only and we make no investment recommendations whatsoever with respect to any of the companies cited, mentioned, or discussed herein. Please refer to the end of this report for analyst certification(s) and other important disclosures.

2 Insight for Industry Proposed PHMSA Hazardous Liquids Pipeline Safety Regulations Would Expand the Use of Leak Detection Systems and Internal Inspection Tools, Extend Reporting Requirements, and Strengthen Pipeline Repair Criteria On October 1, 2015, the Department of Transportation s (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed changes to strengthen its hazardous liquid pipeline safety regulations. The proposal aims to address mandates from the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (Pipeline Safety Act), which requires improvements in operation, maintenance, and inspection of hazardous liquid pipelines. The requirements were prompted by recent pipeline accidents, notably the 2010 crude oil spill near Marshall, Michigan, which released almost one million gallons of crude oil into the Kalamazoo River. Based on the varying requirements, the PHMSA proposal is estimated to result in annual costs ranging from approximately $1,000 to $16.7 million for the different requirements, with aggregate costs of approximately $22.4 million, and annualized benefits of approximately $3.5 million to $17.7 million. Among the key provisions, the PHMSA proposal would alter repair and replacement criteria for high-risk pipelines under the agency s risk-based management framework by expanding the list of conditions that require immediate repair, shortening timelines for critical repairs, and tightening pressure test standards. The proposal would expand reporting requirements, and work toward a data- and risk-informed approach by requiring operators to integrate available data on the operating environment, pipeline condition, and manufacturing and construction defects to manage risk. It would require all hazardous liquid pipelines to incorporate leak detection systems and establish a timeline for inspections of pipelines affected by extreme weather events. In addition, it would also require annual assessments of protective measures for pipeline segments in High Consequence Areas (HCAs) and set a deadline for the use of internal inspection tools in new and replaced pipelines. The proposal also clarifies that operators of a new pipeline would be required to develop an integrity management (IM) program before the pipeline commences operation as opposed to the current requirement that operators need not develop IM programs until one year after commencing operations. The proposal would expand reporting requirements, and work toward a data- and riskinformed approach by requiring operators to integrate available data on the operating environment, pipeline condition, and manufacturing and construction defects to manage risk The American Petroleum Institute (API) agreed to PHMSA s zero-incident goal, expressing the need for a practical hazardous liquids pipeline safety rule that will complement industry s strong safety standards. The API also pointed to its Recommended Practice 1173, based on the plan, do, check, and act principle, with periodic reviews and corrections to improve the effectiveness of pipeline activities. At the recent Senate Surface Transportation and Merchant Marine Infrastructure, Safety, and Security Subcommittee hearing on the 2011 Pipeline Safety Act, the American Natural Gas Association (AGA) expressed support for the legislation saying that pipeline safety is the industry s top priority. At a hearing before the House Energy and Commerce Committee EnerKnol, Inc. All rights reserved. 2

3 Energy and Power Subcommittee, the Association of Oil Pipe Lines (AOPL) emphasized the industry-wide efforts to improve pipeline safety. The PHMSA proposal will be available for public comment until January 8, PHMSA Relies on Safety Enforcement Penalty as Primary Tool to Ensure Operator Compliance with Safety Requirements PHMSA relies on a range of enforcement actions, including corrective action orders and civil penalties, to ensure that operators remedy safety violations and take measures to prevent future safety problems. From , PHMSA initiated 236 enforcement actions against pipeline operators. Over the same period, PHMSA s proposed civil penalties for safety violations totaled approximately $29.4 million. The agency s proposed penalties for pipeline safety violation reached a record high of $9.7M in 2013 (Figure 1). Figure 1 PHMSA s Proposed Civil Penalties, PHMSA s proposed penalties for pipeline safety violation reached a record high of $9.7M in 2013 Source: PHMSA Most recently, on October 1, PHMSA fined ExxonMobil Pipeline Company with a $2.63 million in civil penalty for a 2013 pipeline spill in Arkansas, which released approximately 5,000 barrels of crude oil in a residential area. The agency issued the highest single civil penalty in 2012, imposing a $3.7 million fine against Enbridge Energy s July 2010 crude oil pipeline failure in Marshall, Michigan. Enbridge Energy Partners estimated expenses exceeding $1.2 billion to clean up oil spilled on its Lakehead pipeline system in Marshall and also reported $16 million in lost revenue from pipeline shipments due to its inability to redirect to other lines while the Lakehead system was out of service. In April, the California Public Utility Commission imposed on PG&E a fine totaling $1.6 billion including other penalties and remedies resulting from the 2010 San Bruno pipeline accident. The 2011 Pipeline Safety Act doubled the maximum PHMSA imposable civil penalty amount against pipeline safety violations from $100,000 to $200,000 per violation and $1,000,000 to $2,000,000 for a related series of violations. EnerKnol, Inc. All rights reserved. 3

4 The PHMSA has used safety enforcement penalties as primary tool to ensure operator compliance with safety requirements. However, as evident from the consequences of recent pipeline incidents, even high penalties are insufficient to account for the full financial impact of pipeline spills. At the same time, PHMSA s operational authority exercised in the form of orders for remedial actions or closures in the event of a pipeline failure remains a highly influential enforcement strategy as it significantly impacts pipeline operators in terms of capital expenditures or lost revenues. PHMSA Proposes Revisions to Hazardous Liquid Pipeline Regulations, Significantly Enhancing Risk Management and Safety of the Nation s 200,000-Mile Pipeline Network The PHMSA s proposed revisions to its hazardous liquid pipeline regulations aim to increase the detection and remediation of unsafe conditions and mitigate the adverse effects of pipeline failures. The eight-part proposal would: Extend reporting requirements to gravity lines that can operate at relatively higher pressures due to significant elevation differences required to provide the force for liquid flow (Low-pressure pipelines such as gathering lines and short-distance pipelines are currently already subject to reporting requirements.) Extend reporting requirements to all hazardous liquid gathering lines Require inspections of pipelines in areas affected by extreme weather, natural disasters, and similar events within 72 hours to ensure safe operations after such events Require periodic inline integrity assessments of hazardous liquid pipelines located outside of HCAs to provide critical information about pipeline conditions, including corrosion and deformation anomalies (HCAs are already covered under IM program requirements) Expand the use of leak detection systems to pipelines in non-hcas to mitigate the effects of failures that occur outside of HCAs Modify IM repair criteria to provide greater uniformity and make them applicable to all pipelines, with an extended timeframe for those outside of HCAs Require all pipelines subject to IM requirements to be capable of accommodating inline inspection tools within 20 years, unless the basic pipeline construction does not permit that accommodation Clarify other regulations to improve certainty and compliance According to PHMSA, the proposed rule could result in compliance costs for 421 operators. The estimated annual costs for the different requirements range from approximately $1,000 to $16.7 million, with aggregate costs of approximately $22.4 million. The wide ranges are attributed to the widely varying requirements, depending on whether they are applicable to pipelines within HCAs, outside HCAs, or both; onshore pipelines, or both on- and offshore; and pipeline length. Based on the potential to mitigate or prevent hazardous incidents, the proposal is estimated to result in annualized benefits of approximately $3.5 million to $17.7 million, depending on the requirement. PHMSA s operational authority exercised in the form of orders for remedial actions or closures in the event of a pipeline failure remains a highly influential enforcement strategy as it significantly impacts pipeline operators in terms of capital expenditures or lost revenues The estimated annual costs for the different requirements range from approximately $1,000 to $16.7 million, with aggregate costs of approximately $22.4 million EnerKnol, Inc. All rights reserved. 4

5 Additionally, the number of operators affected vary for different requirements. The proposal is expected to enhance overall pipeline safety and environmental protection through increased safety, public confidence, quicker leak discoveries and mitigation of environmental damages, and improved risk management. The U.S. energy pipeline network is composed of more than 2.9 million miles of pipeline transporting natural gas, oil, and hazardous liquids (Figure 2). Figure 2 U.S. Energy Pipeline Network Source: DOT In 2013, transmission pipelines transported approximately 8.3 billion barrels of crude oil and 6.6 billion barrels of refined products and natural gas liquids (Figure 3). From , crude oil deliveries by transmission pipelines increased by 11.3 percent. Figure 3 - Barrels of Crude Delivered by Transmission Pipeline ( ) In 2013, transmission pipelines transported approximately 8.3 billion barrels of crude oil and 6.6 billion barrels of refined products and natural gas liquids Source: Association of Oil Pipelines EnerKnol, Inc. All rights reserved. 5

6 The PHMSA has increasingly required implementation of IM programs on pipeline segments in HCAs to provide for continual evaluation of pipeline condition, risk assessment, inspection, data analysis, follow-up repair, and preventive or mitigative actions. HCAs include population centers, commercially navigable waters, and environmentally sensitive regions, such as drinking water supplies or ecological reserves. The IM approach prioritizes safety resources to locations of highest consequence rather than providing uniform treatment to the entire pipeline network. Stemming from Major Pipeline Incidents, PHMSA Proposal Aims to Address 2011 Pipeline Safety Act Safety Mandates The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (Pipeline Safety Act), enacted on January 3, 2012, gives enhanced safety review and civil penalty authority for violations of DOT compliance and safety standards. The Act was passed on the back of several major pipeline accidents in recent years, particularly the 2010 crude oil spill near Marshall, Michigan (Table 1). It imposed several mandates on PHMSA regarding studies, regulations, and other components of the federal pipeline safety program. It increased the maximum penalty level for an individual violation from $100,000 to $200,000 and the fine for a series of violations from $1 million to $2 million. PHMSA adopted the revisions in September 2013 and completed 50 percent of the Act s requirements by 2013 year-end. The 2011 Pipeline Safety Act increased the maximum penalty level for an individual violation from $100,000 to $200,000 and the fine for a series of violations from $1 million to $2 million Table 1 Major Hazardous Liquid Pipeline Incidents since 2010 Source: Congressional Research Service Among other significant provisions, the 2011 Pipeline Safety Act required regulations to use automatic remotely-controlled shutoff valves on new or replaced transmission pipelines; verification of maximum allowable operating EnerKnol, Inc. All rights reserved. 6

7 pressure for gas transmission pipelines; reviews and analysis of leak detection systems; diluted bitumen, and excavation damage, regulations to confirm material strength of previously untested gas transmission pipelines in high consequence areas (HCAs); review to determine whether integrity management regulations should be expanded outside HCAs; review of existing federal and state regulations for all types of gathering pipelines; a survey of the progress in replacing cast iron gas pipelines; and actions to increase state and local emergency responder awareness of the National Pipeline Mapping System. The 2011 Act also authorized funding for the federal pipeline safety program through FY The PHMSA has a total budget authority of approximately $149 million for FY 2015 more than its budget authority in FY The President s FY 2016 budget request would increase PHMSA s total budget authority for pipeline safety to an estimated $178 million. PHMSA Action Responds to Pipeline Accident Investigation Findings and NTSB Recommendations to Update Pipeline Safety Regulations Recent pipeline accidents in San Bruno (California), Allentown (Pennsylvania), and Marshall (Michigan) have elicited persistent scrutiny of state and federal pipeline regulation, drawing criticism from the National Transportation Safety Board (NTSB), which investigates transportation accidents including pipeline accidents. The NTSB identified enhanced pipeline safety through improved oversight as one of its top priorities for In 2014, PHMSA took significant regulatory actions in response to NTSB safety recommendations. In response to NTSB s findings that hurricanes can cause extensive damage to offshore and inland pipelines, the PHMSA s proposal requires operators to perform additional inspection within 72 hours after a weather event or natural disaster. For example, the July 2011 pipeline failure at Laurel, Montana, which released an estimated 1,000 barrels of crude oil into the Yellowstone River and cost approximately $135 million in cleanup costs, following extensive flooding in the area in the prior weeks. Similarly, a 1994 flooding in Texas led to the failure of eight pipelines releasing more than 35,000 barrels of hazardous liquids into the San Jacinto River. The PHMSA regulates less than 4,000 miles of the approximately 30,000 to 40,000 miles of onshore hazardous liquid gathering lines, meaning that as much as 90 percent of the onshore gathering line mileage is currently not subject to minimum federal safety standards (Figure 4). In addition, the NTSB has raised concerns regarding the safety of gathering lines in the Gulf of Mexico and its inlets, which are only subject to certain inspection and reburial requirements. The 2011 Pipeline Safety Act also required a study on modifying or repealing existing exemptions for gathering lines and to determine whether gathering lines located offshore or in the inlets of the Gulf of Mexico should be subject to the same safety standards as all other gathering lines. The PHMSA proposal would require operators of all gathering lines onshore, offshore, regulated, and unregulated to comply with requirements to submit annual, The PHMSA regulates less than 4,000 miles of the approximately 30,000 to 40,000 miles of onshore hazardous liquid gathering lines, meaning that as much as 90 percent of the onshore gathering line mileage is currently not subject to minimum federal safety standards EnerKnol, Inc. All rights reserved. 7

8 safety-related condition, and incident reports. The agency intends to collect information and data that will help determine the adequacy of regulation. Figure 4 U.S. Hazardous Liquid and Natural Gas Pipeline Mileage 2014 Source: Congressional Research Service The proposed revisions could address safety concerns raised by recent increase in construction of shale gas gathering lines that present a greater risk than traditional conventional gathering lines due to their larger size and higher pressure. The ongoing expansion of U.S. natural gas resources extracted from unconventional sources, primarily shale, is prompting infrastructure developments including gathering pipelines to collect gas produced from wells, transmission pipelines to transport gas to markets, drilling equipment, processing and storage facilities. A 2014 study by the Interstate Natural Gas Association of America estimated that approximately 14,000 miles of new gas gathering lines would be constructed each year, on average, through Gathering pipelines in conventional natural gas production usually have a diameter of 20 inches or less and are typically smaller than interstate transmission pipelines. Due to differences in extraction techniques, gathering lines in shale gas production regions across the Marcellus, Utica, Barnett and Bakken exceed 20 inches in diameter and operate at higher pressure. The proposed revisions could address safety concerns raised by recent increase in construction of shale gas gathering lines that present a greater risk than traditional conventional gathering lines due to their larger size and higher pressure The PHMSA proposal aims to facilitate the gradual elimination of pipelines that are incapable of accommodating smart pigs, which are instrumented internal inspection devices sent through pipelines to take physical measurements along the length of the pipeline. The PHMSA would limit the circumstances where a pipeline can be constructed without being able to accommodate a smart pig. Though an exception would still be available for emergencies and where the basic pipeline construction makes smart pig-accommodation impracticable, less urgent circumstances including allowances for construction-related time constraints would be repealed. Modern in-line inspection tools are capable of providing a relatively complete examination of the entire length of a pipeline, including information about threats that cannot always be identified using other assessment methods. EnerKnol, Inc. All rights reserved. 8

9 In its investigation report of the 2010 San Bruno accident, the NTSB recommended that all natural gas transmission pipelines be configured to accommodate internal inspection tools. The NTSB also criticized the California state pipeline safety program which held regulatory responsibility for the ruptured pipeline for its failure to detect the pipeline s problems, and PHMSA for not incorporating effective and meaningful metrics to guide performance-based management of state programs. The NTSB investigation found that damages could have been reduced if the pipeline operator had installed automatic shutoff valves or remotely controlled valves. PHMSA exercises primary regulatory authority over interstate hazardous liquid pipelines and states may submit a certification to regulate the standards and practices for intrastate pipelines. States certified to regulate intrastate lines can also enter into agreements with PHMSA to serve as an inspecting agent for interstate facilities. While the government and industry have taken efforts to enhance pipeline safety over the last 10 years, major pipeline incidents since 2010 suggest the need for significant improvement. The Environmental Protection Agency s (EPA) August proposal to reduce emissions of methane and volatile organic compounds the oil and natural gas sector would also impact pipeline safety, with regard to operations and compliance costs to pipeline companies. Ongoing pipeline extensions driven by increasing shale gas production are influenced by public opinion as well. Controversy surrounding the proposed Keystone XL pipeline project demonstrates the influence of public opinion on the development of major pipeline projects. The effectiveness of PHMSA s enforcement activities and the practical effects of ongoing revisions to different aspects of the agency s pipeline safety regulations remains to be seen. While the government and industry have taken efforts to enhance pipeline safety over the last 10 years, major pipeline incidents since 2010 suggest the need for significant improvement. EnerKnol, Inc. All rights reserved. 9

10 Disclosures Section RESEARCH RISKS Regulatory and Legislative agendas are subject to change. AUTHOR CERTIFICATION By issuing this research report, Erin Carson as author of this research report, certifies that the recommendations and opinions expressed accurately reflect her personal views discussed herein and no part of the author s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURES This report is for industry information only and we make no investment recommendations whatsoever with respect to any of the companies cited, mentioned, or discussed herein. EnerKnol Inc. is not a broker-dealer or registered investment advisor. Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to accuracy and d oes not purport to be a complete analysis of the company, industry or security involved in this report. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any security or to engage in or refrain from engaging in any transaction. Opinions expressed are subject to change without notice. The information herein is for persons residing in the United States only and is not intended for any person in any other jurisdiction. This report has been prepared for the general use of the wholesale clients of EnerKnol Inc. and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this report in any way. If you received it in error, please tell us immediately by return to info@enerknol.com and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other per son. In preparing this report, we did not take into account your investment objectives, financial situation or particular needs. Before making an investment de cision on the basis of this (or any) report, you need to consider, with or without the assistanc e of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. We accept no obligation to correct or update the inform ation or opinions in it. No member of EnerKnol Inc. accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this report and/or further communication in relation to this report. For additional information, p lease visit enerknol.com or contact management team at (212) Copyright EnerKnol Inc. All rights reserved. No part of this report may be redistributed or copied in any form without the prior writte n consent of Enerknol Inc. EnerKnol, Inc. All rights reserved. 10