Is a leaking pipeline indicative of an operator’s failed attempt to consider all relevant risk factors when the pipeline has had leaks in the past? In the context of pipeline integrity management regulations, the Court of Appeals of the Fifth Circuit said no.  On August 14, 2017, the Court vacated, in part, a final order issued by the Pipeline Hazardous Materials Safety Administration (“PHMSA”) to ExxonMobil Pipeline Company (“ExxonMobil”), which found that ExxonMobil failed to properly consider the susceptibility of certain portions of its Pegasus Pipeline to seam failure and assessed a civil penalty of $2.6 million.  The opinion in ExxonMobil Pipeline Company v. United States DOT determined that, despite an oil leak from its Pegasus Pipeline, ExxonMobil was not in violation of PHMSA regulations requiring it to consider all risk factors that reflected the risk conditions on a certain pipeline segment because ExxonMobil “carefully [underwent] an informed decision-making process in good faith, reasonably taking into account all relevant risk factors in reaching a decision” that the pipeline was not at risk of seam failure.  2017 U.S. App. LEXIS 15144 (Aug. 14, 2017).

In March 2013, the 859-mile long Pegasus Pipeline, transporting crude oil from Patoka, Illinois to Nederland, Texas, ruptured, spilling several thousand barrels of oil near Mayflower, Arkansas. Subsequent to its investigation, PHMSA issued a final order finding ExxonMobil violated several pipeline safety regulations, including failing to consider all risk factors in establishing an assessment schedule for its integrity management program (“IMP”) in its high consequence areas of the Pegasus Pipeline.  49 C.F.R. § 195.452(e).  The Pipeline Safety Act and PHMSA regulations require pipeline operators to create an IMP for all pipelines that could affect a high consequence area, which include highly populated areas and environmentally sensitive areas.  The pipeline integrity regulations set forth certain assessment methods available to operators, and include additional requirements for pipelines constructed with low-frequency electric resistance welded steel (“LF-ERW”) because of a higher rate of seam failure.  The regulations include no specific method for operators to determine whether LF-ERW pipe is susceptible to longitudinal seam failure, but PHMSA commissioned and published a third-party report which provides a methodology of determining seam-failure susceptibility.  Because the Pegasus Pipeline contained LF-ERW pipe, ExxonMobil was subject to those additional regulatory requirements.

PHMSA’s final order included four violations based on ExxonMobil’s alleged failure to consider all risk factors in its pipeline assessment schedule. PHMSA cited past occurrences of seam failure as the basis for its conclusion that ExxonMobil erroneously determined that the pipeline was not susceptible to seam failure and did not properly assess the pipeline’s integrity.  In its appeal of the final order, ExxonMobil referred to a number of seam evaluations it conducted beginning in late 2004.  Each of those evaluations applied the methodology published by PHMSA for LF-ERW pipe, with expert testimony establishing that ExxonMobil properly followed the methodology in its consideration of risk factors and its conclusion that the pipeline was not susceptible to seam failure despite the leak in 2013.     

The Court agreed with ExxonMobil, finding PHMSA acted arbitrarily and capriciously with respect to five of its violations in the final order. The regulation on which four of the violations were based, 49 C.F.R. § 195.452(e)(1), is a process-based regulation and does not compel a certain outcome, but rather leaves it up to the operator to make the decision on seam failure susceptibly.  Specifically, the Court held that the use of “consider” in the regulation meant that the pipeline operator had to “carefully undergo an informed decision-making process in good faith, reasonably taking into account all relevant risk factors in reaching a decision.”  The fact that the release occurred, the Court said, “did not necessarily mean that ExxonMobil failed to abide by the pipeline integrity regulations in considering the appropriate risk factors.”  Because the Court found that ExxonMobil conducted its seam-failure evaluations properly in accordance with the PHMSA-published report, ExxonMobil had sufficiently established that it considered all relevant risk factors in accordance with the regulations.  Accordingly, the Court vacated the final order and penalty amount with respect to those violations based on the consideration of risk factors. 

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