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James Burgess

James Burgess

James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…

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How to Profit from the Growing Trend in Pipeline Safety

As of 2012, the total mileage of interstate natural gas transmission pipelines surpassed 303,000 miles in the United States, and for crude oil and petroleum products, there are over 150,000 miles of pipeline in place. Taken together, that is roughly equivalent to having pipelines stretch around the circumference of the Earth more than 18 times. And that does not even take into account smaller distribution pipelines, which have a much more extensive network throughout the country.

But a lot of that infrastructure is aging, and over time it experiences wear and tear. When pipelines corrode or degrade, they can rupture and cause oil spills. In 2013, there were 623 reported incidents of pipeline spills, in which more than 119,000 barrels of oil were spilled, according to the U.S. Department of Transportation. This led to $328,775,712 in property damage.

Pipeline incidents
When considering the entire network of pipeline infrastructure, it becomes clear that pipeline operators have a challenging task maintaining their assets. Corrosion, stress, and damage to pipelines are inevitable.  

There are several contributing factors to corrosion or erosion in pipelines. High sulfur content from heavy crude can play a role. Corrosion can also occur when water that is mixed in with oil becomes separated in the pipeline. Water can begin to corrode steel, and that process only worsens if sand or other debris mixes with the water. That problem becomes worse if oil flows slow down, making it more likely that water will separate.

Corrosion tends to occur in curves and bends in the pipeline. For example, if a pipeline runs down a valley and then back up, corrosion tends to occur in that “six o’clock” section of the pipeline – the curved elbow at the bottom where water can collect.  

All of this is to say that pipeline operators need to have eyes and ears on the thousands of miles of pipeline in their portfolio.

Pipeline owners have tools at their disposal to slow and prevent corrosion. They can send a cocktail of chemicals through their lines in order to spread a protective covering around the pipe. This can slow corrosion. But, overtime, corrosion will still set in, so monitoring is important in order to catch acute problems.

“Smart pigs” can be used to check on corrosion. This is a device that travels through the pipeline, measuring the inner surface. Companies can also ultrasound the outer layer of the pipeline to check on thickness.

But one company has put together a suite of solutions that can alter pipeline safety in a big way. Augusta Industries (CVE: AAO), through its subsidiary FOX-TEK, offers the pipeline industry a way to prevent breach of corrosion, which could stop pipeline spills and leaks before they happen.

The answer lies in an integrated approach to pipeline safety, which includes inspections, high-tech monitoring equipment, and automated and continuous data collection and analysis.

Augusta uses fiber optics to detect bends, strain, and seismic movements in pipelines – warning signs of a problem. It uses sensors that are permanently installed, non-electric, and non-invasive. They don’t need inspection after they are installed, and if placed in known areas of concern – over a river, or down through a valley, for example – these stretches of pipeline can be continuously monitored.

A second part of their system uses a matrix of pins welded onto the outside of a pipeline in a non-intrusive manner. A current is run through the system, and based on the electrical resistance measured, Augusta can detect changes in temperature and potentially thinning of the pipeline wall. This is known as electric field mapping (EFM).

Perhaps most importantly, Augusta has developed proprietary software known as DMAT (Data Management Analysis Tool), which remotely collects the data from the electrical pin sensors. The DMAT system provides the client with confidential access to graphs and reports. This makes monitoring and data analysis much easier for clients, which are major pipeline operators. Augusta automatically produces reports on the condition of the pipelines they monitor, rather than the pipeline owners having to do costly inspections and analysis on their own.

Pipeline operators often implement mitigation measures to reduce corrosion by sending chemical solutions into the pipeline. Augusta’s package offers validation – pipeline operators have access to sophisticated data that can confirm the progress of their pipeline integrity and chemical mitigation programs.

This presents a big growth opportunity for pipeline safety. There are five big reasons why I like Augusta Industries and its FOX-TEK subsidiary:

1.    The market is huge: as mentioned above, the tens of thousands of miles of pipelines in the U.S. and Canada are carrying the bulk of continent’s oil and gas production. That means there is a lot of potential for growth. Using Augusta’s EFM monitoring system, pipeline operators can prevent smaller problems from turning into bigger ones. This will allow them to extend the lives of their pipeline systems, improving returns on their assets. Augusta makes monitoring easier, and could find an increasingly receptive audience in the corporate boardrooms of pipeline companies.

2.    Environmental concerns: pipeline regulation is not necessarily getting stricter. Even the head of the Pipeline & Hazardous Materials Safety Administration has bemoaned his lack of power to enforce higher safety standards. But regulation is not the only obstacle to the industry. To build new pipelines, the industry will need the support of communities that will live with pipelines. Operators will be able to go to stakeholders and demonstrate that they are using the latest technology and proactively monitoring safety. And the companies will have the data to prove it, which can go a long way to getting public buy-in. In the age of booming oil production as well as controversies like Keystone XL, this is more important than it used to be.

3.    Data Analysis: fiber optics and sensors monitoring the condition of pipelines is not necessarily a new thing. But Augusta’s killer app is its data analytics. Not only is its monitoring 24/7 (instead of periodic readings like some of its competitors), but it can produce the analysis. Augusta provides the client with graphs, charts, facts, and figures automatically. The pipeline operator does not need to do a ton of analysis internally, a process that is expensive and can take several months after inspections. Augusta can even sell its data services to a pipeline that is doing its own monitoring. The company sends Augusta the data it has collected, Augusta crunches the numbers, and charges a fee.


4.    The ability to reduce the cost of safety: the problem with improving pipeline safety has been cost. But Augusta insists that its technology can actually save them money over the long run by avoiding pipeline breaches before they happen. Their systems can also obviate the need to hire and pay for number crunchers and inspectors. Saving pipeline owners money is a proposition that sells itself and this breakthrough could open up the market for Augusta.

5.    Augusta already has a strong client list: one of the company’s largest clients is Enbridge (NYSE: ENB), the massive pipeline operator in Canada. But it also has other big clients, including Chevron (NYSE: CVX), Shell (NYSE: RDS.A), and Spectra Energy (NYSE: SE). Augusta is now looking abroad for more opportunities. In South America in particular it is making inroads with pipeline operators. The market abroad is growing just as fast as in the U.S., so there is no shortage of opportunities.

Building pipelines are expensive. This is why pipeline owners want to extend the lives of their assets. Monitoring and slowing the process of corrosion allows them to do that, and in the meantime, they can minimize damage and safety incidents while saving money. Through its subsidiary FOX-TEK, Augusta Industries provides services for pipeline operators that amounts to a win-win for each side.

For investors this provides an opportunity to bet on the North American oil and gas boom without the risk that comes with individual companies drilling or building pipelines. As long as oil and gas are flowing, there will be a need to protect and monitor pipelines. Augusta offers those services in a new way and will likely see rapid growth in the coming years.

By. James Burgess of Oilprice.com

Legal Disclaimer/Disclosure: Augusta Insudtries is an Oilprice.com sponsor. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this Report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. We make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Oilprice.com only and are subject to change without notice. Oilprice.com assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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