This study presents a comprehensive failure analysis of an ASTM A106B steel pipe exposed to sour natural gas, focusing on degradation and cracking mechanisms. A range of experimental methodologies, including visual inspection, chemical spot tests, XRD analysis, SEM-EDS examination, metallographic analysis, and hardness testing, were employed to identify critical material deficiencies. The findings indicate that environmentally assisted cracking (EAC) initiated at the pipe's outer diameter (OD) and propagated inward. The experiments also revealed a hardness gradient across the pipe's thickness and a non-uniform distribution of microstructural inclusions. Additionally, a coupled chemo-mechano-damage finite element analysis (FEA) was conducted to simulate crack propagation driven by hydrogen embrittlement. The FEA used a phase-field approach to model interactions between hydrogen diffusion, mechanical stresses, and microstructural features such as non-uniform inclusion distribution and varying hardness across the pipe wall. The simulations successfully mimicked the crack growth path under sulphide stress cracking (SSC) conditions, demonstrating the influence of material inhomogeneity. The results confirmed that failure initiated at the OD and propagated inward due to hydrogen accumulation at inclusions. These inclusions caused higher gradients of hydrostatic stress, accelerating hydrogen accumulation and crack initiation in regions with a higher inclusion density. Regions of higher hardness were particularly susceptible to failure, as they exhibit lower fracture toughness, which is further degraded by hydrogen diffusion, accelerating the failure process. This study highlights the critical role of microstructural heterogeneities and hydrogen embrittlement in pipeline failure and suggests that the methods presented can be applied to pipelines in hydrogen blending or pure hydrogen transmission, offering key insights for improving material selection and design for pipelines in sour gas and hydrogen environments.