Down the Pipe

July 31, 2013 | Last updated on October 1, 2024
6 min read

As the regulatory review process continues for proposed energy projects such as Keystone XL, Northern Gateway and the modification of Enbridge Inc.’s Line 9, the federal government is moving forward with new regulations to increase pipeline operators’ financial responsibility. Insurance officials agree ruptures are not caused by faults in the pipelines themselves, but nonetheless add that some carriers are more interested than others to cover pipeline risk.

“If the pipeline system is constantly monitored for thickness and corrosion, a rupture should only happen rarely,” notes an e-mail from Munich-based Allianz Global Corporate and Specialty AG (AGCS), which insures property, but not liability from oil pipeline spills. The majority of ruptures are caused by impacts from moving objects, such as rocks, cars and trucks, AGCS reports.

Impacts from vehicles are “notorious” for damaging pipelines, comments Gary Hirst, national director of Burns & Wilcox Canada, a Farmington Hills, Michigan-based brokerage that has opened an office in Calgary to sell to Canada’s energy sector. Factors that can contribute to this damage include whether or not the pipeline is buried, and how it “intersects either a road or a railway line,” Hirst notes.

But are pipeline risks in line with cautions voiced by pipeline opponents? “If you had talked to me a couple of years ago, I would have said, ‘It’s blown out of proportion due to politics and so forth,’ but there’s definitely an exposure there,” says John Welter, managing director of Aon Risk Solutions’ environmental services practice, part of London-based Aon plc. “There have been a number of documented releases from pipelines,” Welter says, adding that these seem to have increased in the last several years.

Some carriers, he reports, “suffered some very large losses insuring pipelines, so they have dramatically pulled back on that appetite, and maybe even to the point where they won’t even consider a risk. But other insurers with better loss experience on pipelines will still entertain it.”

For his part, Hirst says his view is that in Canada, pipeline insurance coverage is usually very broad. “I have found that the carriers tend to fall over themselves to insure the pipelines because it’s just a method of transportation and they view it actually as one of the better risks,” he notes.

“I think it actually is a very safe mode of transporting petroleum or natural gas. My perception is pipeline transportation is a lot less fraught with risk then sticking it on a truck or on a railway,” Hirst adds.

To illustrate, Hirst cites the derailment of a Canadian Pacific Railway train carrying flammable cargo over a Calgary river bridge that was damaged as a result of the severe flooding in June. He made the comment the day before the deadly derailment in Lac-Mégantic, Quebec involving a Montreal Maine and Atlantic Railway train.

An investigation by the Transportation Safety Board of Canada (TSB) is continuing, and the federal government has announced changes will be made to help avert a similar occurrence in future.

CAREFUL CONSIDERATION

The results of the TSB investigation are sure to get close scrutiny at TransCanada Corp., which is seeking permission from the United States government to build its proposed 1,400-kilometre Keystone XL pipeline. “TransCanada is not involved in shipping oil by rail, but we pay close attention to any recommendations and lessons from incidents such as this to help improve the safe, reliable operation of our own assets,” notes an e-mail from TransCanada.

The company applied more than five years ago to build Keystone XL, which if approved, would cross the U.S. border near Morgan, Montana and then connect with existing pipeline facilities in Nebraska. The U.S. State Department is currently publishing and reviewing comments that were received during a public meeting in April.

On this side of the border, Enbridge’s Northern Gateway is going through the approval process. This project would include a 1,170-kilometre crude oil pipeline from Bruderheim, Alberta to a marine terminal on the Pacific Ocean near Kitimat, British Columbia, allowing tanker ships to then carry crude oil to Asia.

A joint review panel, established by the National Energy Board (NEB) and the Canadian Environmental Assessment Agency, completed hearings in June and is working on an environmental assessment report.

Enbridge is also looking to make changes to the company’s Line 9 – which runs more than 800 kilometres from Sarnia, Ontario to Montreal – to allow crude oil to be sent east.

NEB has already approved the reversal of flow on part of Line 9, and plans to hold hearings on Enbridge’s application to reverse the flow of the remainder, as well as to increase the line’s capacity. Oral hearings are now scheduled after October 1.

Line 9 has been plagued with protests from activists concerned about spill risk, which is also a concern to opponents of Northern Gateway. The Province of British Columbia argued in its submission to the joint review panel that Enbridge’s spill plans “remain preliminary,” the pipeline would run through remote areas that would be difficult to access in the event of a spill, and “the rugged topography of Western British Columbia is prone to slope failures.”

Enbridge reports it is “considering a number of measures to protect the pipeline where it crosses terrain exposed to avalanche and other slope hazards.”

Pipelines and storage facilities are exposed to natural hazards such as earthquakes, ice storms, landslides, avalanches and forest fires, the Raincoast Conservation Foundation notes in its submission to the Northern Gateway joint review panel.

Commenting on pipelines in general, Welter warns that even the best pipelines can fail. Citing an example in California, he reports that “it was one of the most well-engineered pipelines that I had ever seen, but because of a landslide, part of the line was exposed, basically hanging over a cliff and it finally gave way and then a lot of the crude ended up in an environmentally sensitive area, so there was a lot of cost associated with that.” 

NECESSARY COVERAGE

To deal with spill risks, the joint review panel has imposed several “potential conditions” on Enbridge should Northern Gateway receive approval. “Northern Gateway’s financial assurances plan must provide a total coverage of $950 million for the costs of liabilities for, without limitation, clean-up, remediation and other damages emanating from project operations,” the panel ruled in April.

Enbridge would also be required to have a “core financial coverage” of at least $600 million, which would need to include “third-party, stand-alone liability insurance and other financial assurance instruments deemed appropriate.”

Obligations of this nature will not necessarily apply solely to the Northern Gateway pipeline. Natural resources minister Joe Oliver announced June 26 the federal government has plans to introduce new requirements that would, among other things, oblige operators of major crude oil pipelines to have “minimum financial capability” of $1 billion so they can respond to incidents and repair damage.

Once the changes come into force, the thought is NEB will stipulate if this “financial capability” must include a certain level of insurance coverage.

BEYOND SPILLS

Having access to $1 billion should be “more than adequate” for pipeline spills, suggests Welter. “I’m not familiar with pipeline losses going that high,” he says, adding that when there is a spill, the costs to the company can range from $5 million to $50 million.

Welter warns that many firms with pipeline and terminal assets rely on sudden and accidental coverage within their casualty program. This, however, is not always enough, he points out.

“A lot of times, once there is a release and they’re in there doing the clean-up and they discover other things that are not maybe attributable to the release, but gradual contamination over time… that would be excluded,” Welter says.

As such, he adds, Aon advises clients to consider whether or not they have coverage for gradual contamination, fines and penalties.

Effective July 3, NEB is able to impose “administrative monetary penalties” of as much as $25,000 per day on individuals and up to $100,000 per day on companies that fail to comply with pipeline safety rules.

“99.9996% of crude oil is safely transported, but we must strive to do even better with a goal of no serious spills,” Oliver said during a press conference announcing the new federal requirements. “As technology advances and as regulations become even tighter, safety standards are raised.”