Currently numerous approaches with various applicability have been generated in order to detect damage in pipe networks. Pipeline faults such as leaks and partial or complete blockages usually create serious problems for engineers. The model-based leak, as well as block detection methods for the pipeline systems gets more and more attention. Among these model-based methods, the state observer and state feedback based methods are usually used. While the observability, as well as controllability, are taken to be the prerequisites for utilizing these techniques. In this work, a new technique based on the extended Kalman filter observer is proposed in order to detect and locate the blockage in the pipeline. Furthermore, the analysis of observability and controllability in the pipe networks is investigated. Important theorems are given for testing the observability as well as controllability of the pipeline system.