Beruflich Dokumente
Kultur Dokumente
Paul A. Metz
Department of Mining and Geological Engineering,
University of Alaska Fairbanks,
Duckering Building 313, P.O. Box 755800,
Fairbanks, Alaska 99775, USA
Fax: +1-907-474-6635
E-mail: pametz@alaska.edu
Doug B. Reynolds
School of Management,
University of Alaska Fairbanks,
P.O. Box 756080, Fairbanks, Alaska 99775, USA
Fax: +1-907-474-5219
E-mail: dbreynolds@alaska.edu
Gang Chen
Department of Mining and Geological Engineering,
University of Alaska Fairbanks,
Duckering Building 315, P.O. Box 755880,
Fairbanks, Alaska 99775, USA
Fax: +1-907-474-6635
E-mail: gchen@alaska.edu
Xiyu Zhou
School of Management,
University of Alaska Fairbanks,
P.O. Box 756080, Fairbanks, Alaska 99775, USA
Fax: +1-907-474-5219
E-mail: xzhou2@alaska.edu
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Z. Rui et al.
received MS in Economics from the University of Lausanne and MBA from
China Europe International Business School respectively. His current research
interests include: merger and acquisition, corporate governance and real estate
mutual funds.
Introduction
Pipelining is an important and economical method to transport large quantities of oil and
natural gas in the petroleum industry. The first pipeline in the USA, two-inch in diameter
and over 8 km long, was built in 1865 (Scheduble, 2002). By 2008, US had a total of
793,285 km of pipelines, among which 244,620 km was for petroleum product and
548,685 km was for natural gas (Central Intelligence Agency, 2008). Historical pipeline
cost data have been analysed and used to estimate the construction costs for the different
types of pipeline cost by various researchers. Parker (2004) used natural gas transmission
pipeline costs to estimate hydrogen pipeline cost with the linear regression method.
Zhao (2000) analysed the diffusion, costs and learning curve in the development of
international gas transmission lines. Heddle et al. (2003) derived a multiple linear
regression model to estimate the CO2 pipeline construction cost. McCoy and Rubin
(2008) developed multiple non-linear regression models to forecast CO2 pipeline cost.
Pipeline cost was compared to LNG and GTL cost as supply options (Gandoolphe et al.,
2003). Zhang et al. (2007) calculated share of material cost using pipeline cost between
1993 and 2004 and indicated that share of material cost is constant for the same diameter
pipelines. The Oil and Gas Journal annually analysed estimated and actual pipeline cost
and forecasts trends for the next year (PennWell Corporation, 1992, 2009). Various
studies on pipeline cost have been conducted by different researchers in different
perspectives.
The purpose of this paper is to conduct a comprehensive analysis on pipeline costs
from 1992 to 2008 with various perspectives: the distribution of pipelines, shares of
pipeline cost components and learning-by-doing in pipeline construction. A number of
data processing and statistical descriptions are applied to the historical data. Causes of
cost differences and learning rate differences are also investigated.
247
between 1992 and 2008. Unfortunately, the data did not show the construction period.
Therefore, cost is defined as real, accounted costs determined at the time of completion.
All pipeline construction component cost are reported in US dollar. The entire dataset has
412 observations of onshore pipelines. The five pipeline cost components are: material,
labour, miscellaneous, right of way (ROW) and total cost. Material cost is the cost of line
pipe, pipeline coating and cathodic protection. Labour cost consists of the cost of pipeline
construction labour. Miscellaneous cost is a composite of the costs of surveying,
engineering, supervision, contingencies, telecommunications equipment, freight, taxes,
allowances for funds used during construction, administration and overheads, and
regulatory filing fees. ROW cost contains the cost of ROW and allowance for damages.
The total cost is the sum of material cost, labour cost, miscellaneous cost and ROW cost
(PennWell Corporation, 1992, 2009).
Figure 1
Chemical engineering plant cost indexes between 1990 and 2008 (see online version
for colours)
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Z. Rui et al.
The annual average growth rate between 1990 and 2008 is shown in Table 1. The
structure support index has the highest average annual growth rate of 4.09%. Engineering
supervision index is almost constant with the lowest average annual growth rate of
0.04%. Pipe index average annual growth rate is 3.02% which is higher than the CE
index average annual growth rate of 2.54%. The index is a useful tool to adjust pipeline
cost data. To make cost data comparable to each other at the same base, different pipeline
cost components are adjusted by different indexes to 2008 dollars. Pipe index and
construction labour index is used to adjust pipeline material and labour cost. CE index is
applied to pipeline miscellaneous and ROW costs.
Table 1
Annual average growth rate of the chemical engineering plant cost index
Index type
Index type
CE index
2.54%
3.30%
Pipe
3.02%
Process instruments
1.10%
Construction labour
0.90%
Equipment
3.07%
2.94%
Electrical equipment
2.31%
Engineering supervision
0.04%
Buildings
2.29%
Process machinery
3.01%
Structural supports
4.09%
In order to better understand pipeline cost, the cost data of pipelines are analysed and
summarised in terms of pipeline diameters, pipeline length, pipeline capacity, year of
completion and location.
249
0.01 mile to 713 miles. There are 258 (62.6% of the total) pipelines in the 0 to 10 mile
group, and 65 pipelines in the 10 to 20 mile group, but only 30 (7.3% of the total) of
pipelines are longer than 60 miles. It indicates that majority of the reported pipelines are
short pipelines.
Figure 2
Histogram of pipelines between 1992 and 2008 (see online version for colours)
Figure 3
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Z. Rui et al.
Figure 4
D
where S = ; V is the pipeline capacity (ft3); S is the pipeline cross-sectional area
2
2
(ft ); L is the pipeline length (ft); D is the pipeline diameter (ft).
Figure 5
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5,215,691,727 ft3. 58.29% of pipelines capacity is less than 30,000,000 ft3, and only
3.64% of pipelines capacity is larger than 400,000,000 ft3.
Figure 6
US natural gas pipeline network region map (see online version for colours)
State*
Number of pipelines
Central
52
Colorado
15
Northeast
157
Pennsylvania
72.5
Southeast
55
Alabama
20.5
Midwest
55
Ohio
18.5
Southwest
30
Louisiana
9.5
Western
48
Washington
11.5
Canada
15
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Z. Rui et al.
Figure 8
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Z. Rui et al.
Figure 12 Annual constructed pipeline volumes (see online version for colours)
255
the three-major peak years in unit total cost. The highest unit total cost was reached
$109/ft3 in 1999, which was almost three-times as high as the bottom point of $39/ft3 in
1998. By contrasting Figure 12 and Figure 13, one can find that these three-peak years in
unit total cost occurred all one year before the peak years in constructed volume. This
evidence indicates that expectation of increased pipeline construction induced an increase
in the current unit cost. Material suppliers would raise prices with expectation for more
demand the next year. The higher expected demand in labour would cause labour
shortage, and the competitive salary and benefits had to be paid in order to hire or keep
more skilled labourers. Miscellaneous cost also increased due to more demand. All these
factors together resulted in high cost one year before the peak year in constructed pipeline
volume.
Figure 13 Annual average unit cost of pipeline cost components (see online version for colours)
As mentioned above, the average pipeline unit cost of total cost is $ 61/ft3, but this cost
includes material cost, labour cost, miscellaneous cost and ROW cost. In order to better
understand the influence of individual cost component for different pipeline groups, the
share of each component cost of pipeline diameters, pipeline lengths and location of
pipelines are analysed in this section. Results are shown in Table 3. For all onshore
pipelines, the labour cost has the highest share of 40% of total cost. Material cost has the
second highest share of 31% of the total cost. The sum of material and labour cost can
sometime reach up to 80% of the total cost. Miscellaneous cost was about 23% of the
total cost. ROW cost accounts for an average of 7% of the total cost. Generally, labour
and material costs dominate the pipeline cost, and the labour cost is still the highest cost
for all groups except for the Central region group.
Table 3 shows that the share of cost components varied under different situations. In
term of pipeline diameters, the share of material cost increased from 19% for
small-diameter pipelines to 34% for large-diameter pipelines, while the share of other
cost components decreased. It indicates that share of cost components related to pipeline
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Z. Rui et al.
size, which agrees with Zhaos (2000) finding. It also indicates that the share of material
cost increased when pipeline diameter increased. In term of pipeline lengths, the share of
material cost rose from 28% for short pipelines to 35% for long pipelines, with share of
the other cost components decreasing except ROW, which was constant at 7% regardless
of the total pipeline length. Therefore, the share of material cost increased when pipeline
diameter and length increased, but the labour cost maintained as the no. 1 cost component
for all diameters and lengths, averaging 40% of total cost. Furthermore, the shares of cost
components were different for different regions. The material cost in the Central region
made up around 41% of the total cost, while it was only 24% of the total cost in the
Northeast and Southeast regions. The share of labour cost is between 34% and 48% in
different regions. Miscellaneous cost was often a small part of the total cost, but the share
of miscellaneous cost in the Southeast region reached to 30% of the total cost, even
higher than share of material cost. The share of ROW cost of US pipelines ranged from
4% to 12% of total cost, while the share of ROW cost in Canada share was only 1% of
total cost. The lower share of ROW cost for Canada pipelines allows us to conclude that
Canada has less ROW issues than the US does. The share of material cost and labour cost
were approximately the same for Canadian pipelines, about 40%. The results agree with
the conclusion that the shares of labour and material costs varied by countries (Zhao,
2000). It also support that the shares of cost components vary in different regions of US
local regions or countries with no pipeline producing capacity may have high material
cost, and the pipeline cost can be reduced by developing technology to produce pipeline
materials (Zhao, 2000). The high share of labour cost was possibly caused by local high
cost of living. For example, the Northeast region had the highest labour cost compared to
the other regions. Hence, studies on share of cost components will provide useful
information for pipeline companies to estimate pipeline cost and reduce the total cost by
some actions, such as improving pipeline production capacity.
Table 3
All data
Diameter
Length
Region
Material
Labour
Miscellaneous
ROW
31%
40%
23%
7%
420 inches
19%
43%
28%
9%
2230 inches
28%
38%
26%
8%
3448 inches
34%
40%
20%
6%
060 miles
28%
41%
24%
7%
60160 miles
31%
39%
23%
7%
160713 miles
35%
39%
20%
7%
Central
41%
38%
18%
4%
Northeast
24%
43%
27%
6%
Southeast
24%
34%
30%
12%
Midwest
26%
37%
27%
11%
Southwest
31%
41%
23%
5%
Western
32%
48%
13%
8%
Canada
39%
40%
19%
1%
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the unit cost required to perform a task decreases as the task is repeated
the rate of improvement has sufficient consistency to allow its use as a prediction
tool (Federal Aviation Administration, 2005).
where Yx is the average cost of the first X units; T1 is the theoretical cost of the first
production unit; X is the sequential number of the last unit in the quantity for which the
average to be computed; b is a constant reflecting the rate costs decrease from unit to
unit; 2b and 12b are called progress ratio and learning rate respectively (Federal Aviation
Administration, 2005; International Energy Agency, 2000).
Learning curve function is normally expressed in log-log paper as a string line.
Straight lines are more easily for analysts to extend beyond the range of data (Federal
Aviation Administration, 2005). Take the logarithms of the both sides to get a straight
line equation,
Y = bX + C
The learning curve effect is a complicated process. Some of major reasons for
learning-by-doing effect are: intensive use of skilled labour, a high degree of capital,
research and development intensity, fast market growth and interaction between supply
and demand (Wilkinson, 2005). In addition, accumulated learning has a start-up and a
steady period. The cost reduction is significant in the start-up period and modest in the
steady period (Grubler, 1998). It is the same for technology development. There are
significant cost improvements during R&D phase followed by more modest improvement
after commercialisation. The longer technology has been in operation, the smaller the
cost decreases (Zhao, 2000). It is possible that no further improvement in cost reduction
occurs for existing and mature technology (Grubler, 1998). The commercialisation of
technology in the oil and gas market is costly and time intensive with an average 16 years
from concepts to widespread commercial adoption (National Petroleum Council, 2007).
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Z. Rui et al.
The range of progress ratio for technology is between 65% and 95%, and between 70%
and 90% for energy technology (Christiansson, 1995).
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Figure 15 Learning curves of material and labour costs between 1992 and 2000 (see online
version for colours)
Both R2 (coefficient of determination) are higher than 0.9, which indicates a very good
fit. The learning rates of labour and material cost are 12.4% and 6.1%, respectively. That
is, doubling the construction of pipeline volume, the labour cost and material cost will be
reduced by 12.4% and 6.1% respectively. But it can be noted that the cost reduction
becomes smaller with increasing volume, same as the finding of Zhao (2000).
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Z. Rui et al.
Table 4
All data
Diameter
Length
Region
Material
Labour
6.10%
12.40%
420 inches
7.40%
13.60%
2230 inches
4.10%
13.60%
3448 inches
8.00%
14.20%
020 miles
6.10%
8.70%
20713 miles
4.80%
15.40%
Northeast
1.40%
6.10%
Southeast
14.60%
11.80%
Midwest
4.80%
8.00%
Western
7.40%
23.00%
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Labour
Miscellaneous
ROW
Total
Lag 0 year
0.01
0.14
0.28
0.23
0.20
Lag 1 year
0.17
0.02
0.12
0.19
0.03
Lag 2 years
0.29
0.23
0.10
0.05
0.18
Lag 3 years
0.26
0.15
0.06
0.41
0.19
Table 6
Labour
Miscellaneous
ROW
Total
Lag 0 year
0.24
0.10
0.08
0.21
0.03
Lag 1 year
0.34
0.16
0.11
0.27
0.05
Lag 2 years
0.49
0.34
0.06
0.17
0.24
Lag 3 years
0.33
0.25
0.03
0.51
0.28
From technology perspective, pipeline transportation has not seen a major technological
breakthrough over the last few decades (Roland, 1998). However, gradual cost reduction
is possible by optimising project design and construction, inspection activities, laying and
welding methods, steel quality and weigh and the period of construction and increasing
competition among inspection service companies (Gandoolphe et al., 2003). The cost
reduction through improved technology for laying, inspection and welding can be
counterbalanced by other factors, such as, high strength and thick pipe used to reduce
potential risk (Zhao, 2000). Compared to other technologies, such as LNG process, the
cost reduction in pipeline transportation is smaller due to less complicated process.
However, offshore pipeline technology has made possible deep-water projects and
contributed to lower unit cost. S-lay method and J-lay methods were used to install
marine pipeline (Gandoolphe et al., 2003). The average learning rate of offshore pipeline
between 1985 and 1998 was 24% (Zhao, 2000). For example, the pipeline installing cost
in Norwegian part of North Sea in 1998 was 44% lower than the corresponding cost for
Statpipe in 1985 (Roland, 1998). The history of onshore pipeline was 100 years earlier
than the offshore pipeline in the USA. Therefore, onshore pipeline construction is in a
more mature stage, and has less learning effect (Zhao, 2000). US Department of Energy
(DOE, 2007) has funded many new projects to develop advanced technologies, such as
robotic platforms, pipeline diameter reductions and expansions and variables types of
pipeline bends. These technologies may be progressively applied to onshore pipeline to
create significant cost reduction.
Besides geographic, environment and technological factors, potential market demand
also influence learning rate of pipelines. As mentioned in unit cost section, potential
demand will cause increasing current unit cost of pipelines. Therefore, expected demand
of pipelines will indirectly influence learning rate of pipelines.
In order to fully explain pipeline construction cost difference, there are more factors
that need to be investigated. Due to limited information, the discussions in this section
focus on a few identified factors affecting pipeline construction cost difference:
development stage of technology, geographic and environmental condition as well as
market situation.
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Z. Rui et al.
Concluding summary
Based on historical data collected from Oil and Gas Journal, the distribution of pipelines
in term of year of completion, pipeline diameters, pipeline lengths, pipeline capacity and
location of pipelines are analysed. Among the data examined, 78.3% of pipelines were
less than 20 miles, 52.9% of them had a diameter of 30 inches or larger and 58% of
pipelines capacities was less than 30,000,000 ft3. The pipelines were located across the
USA, but about 40% of them were located in the Northeast region. The distributions of
cost of pipeline cost components were all right-skewed (Figure 7 to Figure 11), and the
range of cost of pipeline cost components was very large. The trend of annual constructed
pipeline volume and annual average unit cost indicates that expecting of increased
pipeline demand will causes increasing currently unit cost. Shares of cost components are
different for various pipeline diameters, pipeline lengths and locations of pipelines. The
material and labour cost are major component of pipeline construction (Table 3). Results
of learning curve analysis show that learning rate also varied by pipeline diameters,
pipeline lengths, locations of pipelines (Table 4). Furthermore, development stage of
pipeline technology, site characteristics and market condition are identified as the factors
influencing pipeline construction cost difference.
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