We design a leak detection system consisting of an adaptive observer based on a set of two coupled one dimensional first order hyperbolic partial differential equations governing the flow dynamics. It is assumed that measurements are only available at the inlet and outlet of the pipe. Convergence properties are provided showing that the leak size estimation problem can be tackled independently from how the leak is distributed along the pipe. This is key to obtaining a simple estimation scheme for the leak location. Simulations are provided to demonstrate the ability of the system to detect, quantify and locate leaks.