U.S. orders major Enbridge oil pipeline review after leak

CALGARY/WASHINGTON Fri Aug 3, 2012 12:57am BST

Greenpeace protestors begin the cleanup of a simulated oil spill outside the Enbridge oil pipeline offices in Vancouver, British Columbia June 13, 2012. REUTERS/Andy Clark

Greenpeace protestors begin the cleanup of a simulated oil spill outside the Enbridge oil pipeline offices in Vancouver, British Columbia June 13, 2012.

Credit: Reuters/Andy Clark

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CALGARY/WASHINGTON (Reuters) - The U.S. pipeline regulator raised pressure on Enbridge Inc on Thursday over the latest spill on its U.S. oil pipeline network, demanding that it submit a plan to improve the safety of the entire 1,900 mile system before restarting a key Midwest line.

The U.S. Pipeline and Hazardous Materials Safety Administration said it added new conditions to this week's corrective action order for the restart of Line 14 to address failures on that pipeline as well as a string of others in recent years on its U.S. system, part of the world's longest network for transporting oil and petroleum products.

Enbridge responded immediately, saying it would submit the new plan by day's end and that many of the improvements sought on the U.S. system were already under way. But regulators who have made no secret of their dismay and anger over a series of recent leaks on Enbridge lines must still approve the plan.

"PHMSA has communicated its longstanding concerns about this pattern of failures with (Enbridge) over the past several years," PHMSA wrote in the amendment to its order. "Given the nature, circumstances, and gravity of this pattern of accidents, additional corrective measures are warranted."

The move came as Enbridge's top executives defended the company's safety record amid growing public pressure. They said quick action to stop the flow of crude from the 318,000 barrel per day pipeline in rural Wisconsin showed it had bolstered safety procedures after a devastating 2010 Michigan oil spill.

The added demands are almost certain to mean the pipeline remains idle for even longer, potentially months if regulators also require it to implement reforms, according to experts. That could tighten supply of light, sweet crude for Chicago-area refineries at the height of the U.S. driving season.

Benchmark gasoline jumped over 1 percent on Thursday as Midwest premiums spiked this week to a near record high. Canadian crude oil producers are also worried that a lengthy outage could also back up crude supplies in Alberta, weighing on prices or even forcing them to shut in production.

The situation is being watched closely by the energy industry, environmentalists, Canadian regulators and Enbridge's investors. The company, which transports most of Canada's oil exports to the United States, is struggling to win approval to restart the pipeline and proceed with a C$3.2 billion ($3.2 billion) expansion of the Canadian and U.S. Midwest parts of its network to eliminate bottlenecks.

Line 14 ruptured on Friday near Grand Marsh, Wisconsin, spilling more than 1,000 barrels into a field. Enbridge said it has made repairs.

DEFECTS, PREVIOUS SPILLS

Thursday's order appeared to be the most exhaustive from PHMSA since two incidents on BP's Alaska pipeline system in 2006 spilled oil onto the tundra, according to a Reuters review of major oil pipeline incidents over the past five years.

"This is a very serious corrective action order," said Richard Kuprewicz, head of Accufacts Inc, a pipeline consulting firm. "(It) calls for basically a management audit of certain critical processes within the company, given the recent failures and apparent breakdowns that may be signaling that the management team is losing control of their systems."

It is rare for PHMSA to add conditions to a corrective order, although it has done so in the past, most recently in the case of Enbridge's Line 6B, which spilled nearly 20,000 barrels of crude into Michigan's Kalamazoo River in July 2010. That pipeline remained shut for two months after the leak, although it was allowed to restart just days after the amended order.

On Tuesday, PHMSA had set out 12 safety measures, tests and analyses Enbridge must undertake before it can restart the pipeline. U.S. Transportation Secretary Ray LaHood blasted Enbridge over the leak, demanding that the company explain why they should be allowed to keep running the line - built just 14 years ago - without a major overhaul or replacement.

The regulator noted that defects had been discovered when Line 14 was built in 1998 and that it had ruptured in Wisconsin in 2007, spilling 1,500 barrels of oil. It also noted the 2010 rupture of Line 6B in Michigan, one of the nation's biggest on-shore oil spills ever. It cost $750 million in repairs.

Besides developing a plan to address all its safety issues, Enbridge must appoint an independent expert to oversee its implementation, PHMSA said.

Despite PHMSA's strong words, company executives said on a conference call to discuss second-quarter financial results that heightened attention to leaks is driven more by the debate over Canadian oil sands development and Enbridge's contentious C$6 billion Northern Gateway pipeline to Canada's West Coast than by Enbridge's own safety record.

Still, much of the call focused not on the 7 percent increase in adjusted quarterly profit but on the Line 14 leak and other incidents, as analysts and investors grow more concerned about the increased regulatory scrutiny and other ways that the issue is clouding Enbridge's business prospects.

SHARES FALL

Enbridge shares fell 1.5 percent to C$39.90 on the Toronto Stock Exchange, losing close to 20 Canadian cents after word of the amendment to the PHMSA order. They have lost 5 percent since July 26, the day before the Wisconsin spill.

"Normally it's environmentalists who focus in on that, but it is potentially starting to have an impact on their actual business and that's why people are starting to take notice on the investing side," UBS Securities analyst Chad Friess said.

Besides complicating approvals for new projects, ruptures force Enbridge to spend more on maintenance and testing. That has an impact on profit the costs cannot be passed on to shippers within a regulated toll structure, he said.

President Al Monaco pointed to Enbridge's operational risk management plan, involving pipeline integrity, leak detection, control center operations and corporate safety culture. The plan was improved in response to the Michigan incident.

"We have had a very good record of safety over the years and frankly we're proud of it," he said. "The reality is when you have major incidents as we did in 2010, you have to look at things and kick things up a notch."

Last month, the U.S. National Transportation Safety Board harshly criticized Enbridge for its initial response to the Michigan spill. On Wednesday, Canada's National Energy Board said it would audit Enbridge's pipeline control-room procedures as it studies the NTSB report.

Some of the Line 14 crude has been rerouted to other Enbridge pipelines, but the company said it did not yet know if the outage will force it to ration space for the month.

(Editing by Marguerita Choy, Andrew Hay and Bernard Orr)

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