A jacketed underground pipeline made of 304 stainless steel tubing to transport utility water in a petrochemical plant at ambient temperature was perforated after few months of operation. Perforation started preferentially at the outer bottom surface of the pipe in the weld heat-affected zones where the insulating coating was damaged. Detailed microstructural characterization was carried out to determine the cause of failure using optical metallography, x-ray diffraction, scanning electron microscopy combined with energy dispersive spectroscopy, and transmission electron microscopy. Experimental results indicated that the failure occurred by interaction between the outer bottom surface of the pipe and surrounding environment leading to pitting and stress corrosion cracking in the presence of chloride ions. This could have been aided by residual welding stresses and the characteristic low stacking fault energy of the material.