Abstract — A bank of nonlinear adaptive observers is used for fault diagnosis in oil and gas drilling where managed pressure drilling (MPD) is applied. The particular fault considered is formation of a pack-off, causing increased friction in one part of the annulus. The process model is a simplified hydraulics model with a Newtonian fluid. All states in the model are assumed measurable, an assumption based on planned implementation of the wired drill pipe measurement technology. A fault detection observer is used to detect that a pack-off is being formed somewhere in the annulus. Then a set of fault isolation and approximation observers, one for each possible fault, is used to isolate the location of the pack-off and estimating its magnitud...