Fault detection and isolation (FDI) in oil pipeline systems (OPS) is a very critical issue because faults in these systems such as leaks or equipment malfunctions may cause significant safety accidents and economic losses. These are the challenging factors, along with the environmental regulations for developing efficient FDI approaches for OPS. This paper proposes a model-based distributed FDI approach, which uses a structural model of the system in conjunction with algorithms to generate diagnostic tests that may be implemented in local diagnosers along the OPS. The proposed approach allows detection and isolation of faults in pipeline sections (pipeline segments), pump stations, as well as process control equipment. In this way, simulation of the obtained diagnostic tests in a benchmark application shows that all faults of interest (pipeline segment faults and sensor faults) are detected and isolated.