Chapter 6

Pipelines

Pipelines Industry Overview

• Pipelines are limited in the markets they serve and very limited in the commodities they can haul.

• Pipelines are the only mode with no backhaul; that is, they are unidirectional with products that only move in one direction through the line.

Significance of Pipelines

• Pipeline diameters have increased in recent years, and the larger diameters have increased capacity significantly because of the increased volume that can move through the pipeline.

• The larger diameter has also allowed the total network (in kilometres) to decrease.

Ownership

• With some exceptions, oil companies have been the owners of the oil pipelines.

• Some pipelines are joint ventures among two or more pipeline companies because of the high capital investment necessary for large-diameter pipelines.

• Individual, vertically integrated oil companies control the largest share of the pipeline revenues followed by jointly owned pipeline companies.

• Railroads, independent oil companies, and other industrial companies control the remaining percentage.

Number of Carriers

• There are a number of reasons for the limited number of pipeline companies.

• First, startup costs (capital costs) are high.

• Second, like railroads and public utilities, the economies of scale are such that duplication or parallel competing lines would be uneconomic

Number of Carriers cont’

• Large-size operations are more economical because capacity rises more than proportionately with increases in the diameter of the pipeline and investment per kilometre decreases, as do operating cost per barrel.

• For example, a 12-inch (30.5 cm) pipeline operating at capacity can transport three times as much oil as an 8-inch (20.3 cm) pipeline. (pi x radius squared)

OIL CARRIERSNATURAL GAS CARRIERS• Another part of the pipeline industry is

involved with the transportation of natural gas, which, like oil, is an important source of energy.

• The movement data for natural gas are recorded in cubic metres, rather than ton-kilometres.

Operating and Service Characteristics

COMMODITIES HAULED

• Pipelines are a very specialized carrier in that they transport a very limited variety of products.

• The four main commodities hauled by pipeline are oil and oil products, natural gas, coal, and chemicals.

OIL AND OIL PRODUCTS• The bulk of pipeline movements are crude oil and

oil products.• The length of haul in the oil pipeline industry is

medium in length compared to other modes. • Crude oil movements average about 800 miles

(1280km) per shipment, and product lines average about 400 miles (640 km) per movement.

NATURAL GAS• Natural gas pipelines are an important part of our

total pipeline network.

COAL• Coal pipelines are frequently called slurry lines

because the coal is moved in a pulverized form in water (one-to-one ratio by weight).

• Once the coal has reached its destination, the water is removed and the coal is ready for use.

• Coal pipelines are primarily used for transporting coal to utility companies for generating electricity.

COAL cont’

• Coal pipelines use enormous quantities of water, which causes concern in several western states where their installation has been proposed, because there is a scarcity of water and the water is not reusable (no backhaul).

CHEMICALS• Chemical lines are another type of product line,

although only a limited number of different types of chemicals are carried by pipelines.

• The three major chemicals are anhydrous ammonia, which is used in fertilizer; propylene, which is used for manufacturing detergents; and ethylene, which is used for making antifreeze.

Relative Advantages

• A major advantage offered by the pipeline industry is low rates.

• Pipeline transportation can be extremely efficient, with large-diameter pipelines operating near capacity.

• Average revenues for pipeline companies are below one-half of a cent per ton-mile, which is indicative of their low-cost service.

Relative Advantages cont’

• Two additional user cost advantages complement the low rates.

• First, pipelines have a very good loss and damage record (L and D).

• This record is attributed in part to the types of products transported, but it is also related to the nature of the pipeline service, which provides underground and completely encased movement.

Relative Advantages cont’

• The second important cost advantage is that pipelines can provide a warehousing function because their service is slow.

• In other words, if the product is not needed immediately, the slow pipeline service can be regarded as a form of free warehousing storage. (Products move through pipelines at an average of 3 to 5 miles per hour / 4.8 to 8km per hour)

Relative Advantages cont’• Another positive service advantage of pipelines is

their dependability. • They are virtually unaffected by weather

conditions, and they very rarely have mechanical failures.

• Although the service time is slow, scheduled deliveries can be forecasted very accurately, diminishing the need for safety stock.

• The risk of terrorism is reduced when the pipelines are buried in the ground.

Relative Disadvantages

• Although the pipeline’s slow speed can be considered an advantage due to its use as a free form of warehousing, in some instances the pipeline’s slow speed can be considered a disadvantage.

• For example, if a company’s demand is uncertain or erratic, it will have to hold higher levels of inventory to compensate for possible shortages because the pipeline will not be able to deliver an extra amount of the product in a short period of time.

Relative Disadvantages cont’

• Pipelines are also at a disadvantage when it comes to completeness of service because they offer a fixed route of service that cannot be easily extended to complete door-to-door service.

• That is, they have limited geographic flexibility or accessibility.

• However, because the source of the pipelines and the location of the refineries are known and are fixed for a long period of time, the fixed-route service factor may not be a critical problem.

• Frequently, pipelines depend on railroads and motor carriers to complete delivery, which adds to user costs.

Relative Disadvantages cont’

• The use of pipelines is limited to a rather select number of products: crude oil, oil products, natural gas, coal, and a limited number of chemicals.

• Frequency of service (the number of times a mode can pick up and deliver during a particular period) is a characteristic of interest to some users.

• On one hand, the large tenders (shipment size requirements) and slow speed of pipelines reduces the frequency.

• On the other hand, service is offered 24 hours a day, 7 days a week.

Relative Disadvantages cont’

• Pipelines are generally regarded as somewhat inflexible because they serve limited geographic areas and limited points within that area.

• Also, they carry limited types of commodities and only offer one-way service.

• Finally, the operations technology precludes (excludes) small shipment sizes.

• In summary, pipelines offer a good set of services for particular types of products, but they have some serious limitations for many other products.

Competition

INTRAMODAL• Intramodal competition in the pipeline

industry is limited by a number of factors.• First, there are a small number of

companies. • The industry, as noted previously, is

oligopolistic in market structure, which generally leads to limited price competition.

INTRAMODAL Competition cont’• Second, the economies of scale and high

fixed costs have led to joint ownership of large-diameter pipelines because the construction of smaller parallel lines is not very efficient.

• Finally, the high capital costs preclude (excludes) duplication of facilities to a large extent.

Competition cont’

INTERMODAL• The serious threats to the pipeline industry are in

terms of traffic diversion to other modes of transportation.

• Technically, pipelines compete with railroads, water carriers, and motor carriers for traffic.

• However, even with these forms of transportation, the level of competition is limited.

INTERMODAL Competition cont’

• The most serious competition is water, or tanker operations, because their rates are competitive with pipelines.

• However, the limited coverage of water carrier service also limits its effective competitiveness.

• Trucks have increased the number of products they carry that can also be carried by pipelines.

• However, truck service complements rather than competes with the pipeline because trucks often perform a distribution function for pipelines (i.e., delivery).

INTERMODAL Competition cont’

• Once a pipeline has been constructed between two points, it is difficult for other modes to compete.

• Pipeline costs are extremely low, dependability is quite high, and there is limited risk of damage to the product being transported.

• The major exception is probably coal slurry pipelines because the need to move the pulverized coal in water can make the costs comparable to rail movements.

• Water carriers come closest to matching pipeline costs and rates as indicated.

Equipment

• Pipelines can be grouped into other categories in addition to for-hire or private carriers.

• For instance, they are frequently classified as gathering lines or trunk lines, particularly in reference to the movement of oil.

• The trunk lines are further classified or subdivided into two types: crude and product lines

Equipment cont’

• The gathering lines are used to bring the oil from the fields to storage areas before the oil is processed into refined products or transmitted as crude oil over the trunk lines to distant refineries.

• Trunk lines are used for long-distance movement of crude oil or other products, such as jet fuel, kerosene, chemicals, or coal.

Equipment cont’

• Gathering lines are smaller in diameter, usually not exceeding 8 inches (20.3 cm), whereas trunk lines are usually 30-50 inches (78.2 – 127 cm) in diameter.

• Gathering lines are frequently laid on the surface of the ground to ensure ease of relocation when a well or field runs dry.

• Trunk lines, on the other hand, are usually seen as permanent and are laid underground.

Equipment cont’

• The term trunk line is often used in conjunction with oil movements and can refer to crude oil trunk lines or oil product lines.

• Oil trunk lines move oil to tank farms or refineries in distant locations, whereas oil product lines move the gasoline, jet fuel, and home heating oil from refineries to market areas.

• Technically, however, any long-distance movement via a large-diameter, permanent pipeline implies a trunk-line movement.

Commodity Movement

• Gathering lines bring oil from the fields to a gathering station, where the oil is stored in sufficient quantity to ship by trunk line to a refinery.

• After the oil is refined, the various products are stored at a tank farm before they are shipped via product line to another tank farm with a market-oriented location.

• A motor carrier most frequently makes the last segment of the trip, from the market-oriented tank farm to the distributor or ultimate customer.

Commodity Movement cont’

• Trunk lines are usually more than 30 inches in diameter and are the major component of the pipeline system.

• Stations that provide the power to push the commodities through the pipeline are interspersed along the trunk line.

• Figures 6.1 and 6.2 illustrate the major interstate and intrastate pipelines in the United States.

Commodity Movement cont’

• Compressors are used for the movement of natural gas, and pumps are used for the liquid items that move through the pipelines.

• Computers at the pumping stations continually monitor the flow and pressure of the oil system. Any change indicating a leak is easily detected

Commodity Movement cont’

• Routine visual checks and searches by airplane are sometimes used to locate leaks.

• Great care is rendered, not only because of the potential losses but also because of the lawsuits that could ensue as a result of damage to property and the environment.

Commodity Movement cont’

• There are 15 grades of crude oil and a range of products including jet fuel, kerosene, and aviation fuel that flow through these pipelines.

• When two or more grades of crude oil or two or more products move through a system at one time, the “batches” may need to be separated by a rubber ball called a batching pig

Commodity Movement cont’

• However, this is not always necessary because the different specific grades of the products helps to keep them separated.

• Any mixing (shop) that does occur is only of minor lower-grade items with which they are mixed.

• Usually, products are scheduled 1 month in advance with kerosene moving first, then high-grade gasoline, then medium-grade gasoline, then various other products, with home heating oil last.

• Before the cycle starts again, the pipeline is usually scoured to prevent mixing problems.

Cost Structure

FIXED- VERSUS VARIABLE-COST COMPONENTS

• Like the railroad industry, the pipeline industry has a high proportion of fixed costs with low capital turnover.

• The pipeline owners have to provide their own right-of-way by purchasing or leasing land and constructing the pipeline and pumping stations along the right-or-way.

Cost Structure cont’

• The property taxes, amortizations of depreciation, the return to investors, and preventative maintenance all contribute to the high ratio of fixed to variable expenses.

• In addition to the right-of-way costs, the terminal facilities of pipelines contribute to the high level of fixed costs.

• The same types of expenses associated with the right-of-way, such as depreciation and property taxes, are incurred by the pipeline terminals.

• As stated previously, the pipeline industry has significant economies of scale.

• The high fixed costs and the economies of scale help to explain the joint ownership and investment in large-diameter pipelines.

• Pipelines do not operate vehicles like other modes of transportation because the carrying capacity is the pipe itself, which is best regarded as part of the right-of-way

Cost Structure cont’

• This unique element of the pipeline operation helps to explain the low variable costs because vehicles are frequently a major source of variable expense.

• Labour costs are very low in the pipeline industry because of the high level of automation.

• Another variable cost is the cost of fuel for the power system.

• The pipelines employ about 8,000 people compared to about 10 million in the motor carrier industry for comparable ton-miles on an intercity basis.

Cost Structure cont’

Cost Structure cont’

RATES• Pricing in the pipeline industry is unique

compared to its major modal competitors. • First of all, pipelines do not use the freight

classification system that underlies the class rates of railroads and motor carriers.

• The limited number and specialization of commodities make such a practice unnecessary.

• A crude oil pipeline or natural gas pipeline has little need for an elaborate classification system.

Cost Structure cont’

• Even though pipelines have high fixed costs, the differential pricing practices common in the railroad industry are virtually nonexistent among pipelines.

• The nature of operation (one-way movement, limited geographic coverage of points, limited products, etc.) provides little opportunity to provide differential pricing practices

Cost Structure cont’

• Pipelines quote rates on a per-barrel basis (one barrel equals 42 gallons equals 159 litres).

• Quotes for rates are typically point-to-point or zone-to-zone.

• Also, minimum shipment sizes, usually called tenders, are required; these range from 500 barrels to 10,000 barrels.

• Pipeline rates are very low, which is reflected in the fact that they carry more than 15 percent of the total intercity ton-miles and receive only about 2 percent of the total revenues.

• END