On Tuesday, a natural gas pipeline leak caused a tremendous explosion in West Virginia that melted a highway, its guardrails, and burned down several nearby houses. Miraculously, no one was killed . The size of the explosion, and the impact it had on its surroundings, thrust the downside of pipelines and natural gas into the spotlight, while raising an important question: Is our increasing reliance on natural gas too dangerous for America?
Statistically, transporting our energy -- oil and gas -- by pipeline is safer than transporting it by truck. However, as the nation's pipeline infrastructure continues to age, events similar to Tuesday's incident may become more and more common.
Of the 2.6 million miles of pipeline that crisscross the U.S., most carry natural gas. More than 60% of these lines were laid before 1970, while 37% were from the 1950s or earlier. These pipes are safe for the most part, as long as they are inspected and maintained regularly .
Data from the Pipeline and Hazardous Materials Safety Administration, the agency responsible for pipeline safety regulation and oversight, shows that, since 1986, there has been no real meaningful change in the overall annual number of significant pipeline incidents, and the rate of deaths and injuries caused by pipeline failures has more or less declined.
However, the percentage of incidents caused by "material weld equipment failure" has increased significantly .
From 1986, there wasn't a single year that experienced more than 16% of its incidents due to material weld equipment failures before 2002. After 2002, there wasn't a single year where that type of failure accounted for fewer than 20% of all incidents. In 2010, 2011, and 2012, material weld equipment failure incidents accounted for 30%, 31%, and 32%, respectively, of all failures .
Many of these failures can be detected and prevented with proper oversight. Consider the 2010 tragedy in California when a PG&E (PCG -0.51%) pipeline exploded and killed eight people and incinerated nearby houses. The city of San Francisco is now suing the PHMSA for doing an inadequate job enforcing the federal Pipeline Safety Act. The lawsuit follows a report by the National Transportation Safety Board that faulted the agency for having blind faith in pipeline operators, and failing to identify and correct problems at PG&E for decades . The accident occurred because welding defects weakened the pipeline's constitution.
More recently, the NTSB issued a similar report criticizing Canadian pipeline operator Enbridge (ENB -0.05%) and the PHMSA for negligence and weak oversight. Apparently, weakness in its Line 6B pipeline through Michigan was detected as early as 2004, but no one did anything about it. When the line finally ruptured in 2010, the ensuing actions of Enbridge employees pointed to a disturbing lack of preparedness .
In both cases, proper oversight and action on the part of either the operator or PHMSA could have prevented these accidents.
As a result of at least two high-profile, highly-critical reports about PHMSA's apparent inability to oversee anything, the agency is toughening up. It handed Enbridge the largest fine in its history for the Michigan spill, totaling $3.7 million. Last month, a PHMSA spokeswoman declared that the agency was going to act aggressively to address issues identified by the NTSB, including "strengthening enforcement of pipeline safety rules, raising awareness of the dangers of distraction, and focusing transportation funding on making sure our existing infrastructure is safe and in a state of good repair ."
If that is the case, the agency has quite the challenge ahead. A recent study by researchers at Duke University and Boston University found more than 3,000 gas leaks under the city of Boston's streets. Though the study wasn't originally intended to assess explosion risks in the city's pipeline system, researchers did identify six locations where concentrations of gas exceeded safety thresholds. The study found that the leaks were distributed evenly across Boston's neighborhoods, and were largely associated with old cast-iron pipes .
Three thousand leaks, one city. Even if PHMSA started doing its job, it would be difficult to achieve a pristine safety record if pipeline operators aren't simultaneously getting more proactive about maintenance. And that is where investors come in.
When it comes to investing in pipelines, we all have an important decision to make. Do we enjoy the high yields and lucrative distributions? Or do we pass up investing altogether because pipelines leak and, sometimes, it looks like companies don't care that much? What does the market have to say about all this, anyway?
I've shown before that pipeline leaks haven't had much of an impact on share price -- Enbridge's stock is up close to 15% this year, damning NTSB report and all. And Enbridge isn't the only one. Plains All American (PAA -0.39%), Buckeye Partners (BPL), and countless others have also had spills in recent months. But who knows how long the market's spill-proof pattern will last? One terrible spill, and one 24-7 news cycle can wreak havoc on investments.
When the Exxon Valdez leaked oil all over Prince William Sound in 1989, Main Street shuddered, but Wall Street barely flinched. Shares of Exxon, now ExxonMobil (NYSE: XOM), suffered only a 3.9% drop, and recouped all losses four weeks later -- all the while never reducing its dividend . While BP's (BP -0.14%) Gulf of Mexico spill was more significant by volume, the media coverage was exponentially greater, reminding everyone just how terrible the whole thing was, every single day. Its stock plummeted nearly 50% in the three months following .
After the tanker spill, Exxon redefined itself as the gold standard of safety in the oil business -- and this is the true investing takeaway. Companies that transport dangerous commodities like oil and gas have a social responsibility to uphold, which, by and large, involves an unwavering commitment to safety. Pipeline operators like NiSource, Enbridge, PG&E, and all the rest must establish safety cultures in the work place through programs like Exxon's Operations Integrity Management System, and investors should hold them accountable until they do.