Assessment methodology of structural integrity of gas pipeline is very important. For assessment of gas pipeline, many tests under various conditions have to be done. But test of real gas pipe is very dangerous and expensive. The objectives of this study are to develop micro-mechanical model for assessment of structural integrity of natural gas pipeline and develop damage model for assessment of defects in pipeline. We developed phenomenological damage simulation method for assessment of failure of natural gas pipeline, and developed user-subroutines in ABAQUS for implementation. This paper proposes a new method to simulate ductile failure using finite element analysis based on the stress-modified fracture strain model. A procedure is given to determine the stress-modified fracture strain as a function of the stress triaxiality from smooth and notched bar tensile tests with FE analyses. For validation, simulated results using the proposed method are compared with experimental data for cracked bar (tensile and bend) tests, extracted from API X65 pipes, and for full-scale burst test of gouged pipes, showing overall good agreements. Advantages in the use of the proposed method for practical structural integrity assessment of natural gas pipeline are discussed.