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Transportation 5e
Coyle, Bardi, & Novack South-Western College Publishing Copyright 2000

Chapter 7 Pipelines

Transportation 5e Coyle, Bardi, & Novack

Chapter 7 Topics
Brief History Industry Overview Operating and Service Characteristics Competition Equipment Commodity Movement Cost Structure Current Issues
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Chapter 7 Objectives
Analyze the nature of the pipeline industry and carrier organization Explain pipeline market structure, including commodities transported and the competitive environment Identify pipeline operational characteristics, including equipment used, commodity movement, ownership, and service
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Chapter 7 Objectives, contd

Describe industry cost structure, including revenues, economies of scale, and pricing Discuss pipeline safety

Transportation 5e Coyle, Bardi, & Novack

Brief History
Important role since WW II Original purpose: support other modes Pennsylvania Railroad in 19th century Pipelines later operated by oil companies Courts ruled pipelines common carriers

Transportation 5e Coyle, Bardi, & Novack

The Basic Modes of Transportation: Pipelines

Refers only to the oil pipelines, not natural gas Not suitable for general transportation Some research has been performed to move minerals in a liquid medium, but outside of a few attempts to transport slurried-coal via pipeline, no real successes have occurred.

The Basic Modes of Transportation: Pipelines

Accessibility is very low. Cost structure is highly fixed with low variable costs. Own rights-of-way much like the railroads. Major advantage is low rates.

Industry Overview
Significance of pipelines
Carry over 64% of intercity ton-miles Pipeline diameters have increased High volume but low revenue share (4%)

Types of carriers
For-hire carriers dominate the industry About 92% are common carriers
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Industry Overview, contd

Ownership
Most pipelines owned by oil companies Joint ventures common

Number of carriers
Small number of very large carriers 20 firms control 2/3 of crude oil lines Capital costs are barrier to entry
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Industry Overview, contd

Oil carriers
Growth rate has decreased dramatically Operating revenue has also declined Move more than 20% of intercity tonmiles

Natural gas carriers

Comparable in size to oil pipeline sector Growth in number of companies
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Operating and Service Characteristics

Commodities hauled
Limited variety of products handled Oil and oil products (57%) Natural gas (2nd to oil in network miles) Coal (slurry lines) Chemicals (ammonia, propylene, ethylene)

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Operating and Service Characteristics, contd

Relative advantages
Low-cost service Low loss and damage rate Warehousing function (3-5 MPH transit) High dependability

Relative disadvantages
Slow speed Lack of flexibility

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Competition
Very little intramodal competition
Capital costs, scale economies, fixed costs

Limited intermodal competition

Difficult for other modes to match rates Water carriers are closest competitors

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Equipment
Total pipeline investment: > $21 billion Gathering lines
Not larger than 8 inches in diameter Bring oil from fields for storage

Trunk lines
30-50 inches in diameter Used for long-distance movement
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Commodity Movement
Oil first brought to gathering station After refining, stored at tank farms By trunk line to other tank farms Often by truck for final delivery US DOT (RSPA) regulates pipelines Application of sophisticated technology
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Cost Structure
Fixed versus variable cost components
High fixed costs Pipeline owners provide right-of-way Owners incur terminal expenses

Rates
Per-barrel, point-to-point or zone-tozone Tenders (minimum shipment sizes) Transportation 5e Coyle, Bardi,
& Novack

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Current Issues
Potential environmental impact Health hazards of pipeline spills Industry is largely self-policing Pipeline safety record is outstanding Tanker transport involves greater risk

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A. BRIEF HISTORY
The use of pipe for oil transportation started soon after the drilling of the first commercial oil well in 1859 by Colonel Edwin Drake in Titusville Pennsylvania. The first pipes were short and basic, to get oil from drill holes to nearby tanks or refineries.Early transport by teamster wagon, wooden pipes, and rail rapidly lead to the development of better and longer pipes and pipelines. In the 1860s as the pipeline business grew, quality control of pipe manufacture became a reality and the quality and type of metal for pipes improved from wrought iron to steel. Technology continues to make better pipes of better steel, and find better ways to install pipe in the ground and continually analyze its condition once it is in the ground. Early twentieth century shown that ; the oil companies operated the pipelines and control the oil industry by not providing needed transportation service to new producers. Since it play an important role after the post World War II era, the US Supreme Court stated that pipelines would operate as common carrier if there were a demand by shippers of oil for their services.

Where it start..

Pipeline year 1917

Alaska pipeline year 1977 till today

Malaysian scenario

1.

Malaysia account for 15% of total world liquid natural gas (LNG) export. Thus, it need to use pipeline as one of modes transportation.
Currently, the operation of pipelines can be divided into:- crude oil 1,307 km and natural gas 379km. Example of Malaysia pipelines project:Malaysia Thailand Joint Pipelines Authority Project = create and develop two gas pipelines that are connected to each country, which will split the gas production between two processing plants of each country. Offshore Pipelines International Limited (OPIL) was awarded installation of pipelines for the Angsi Project whereby in year 2000, 250km of pipelines were installed Malaysia also used submarine pipelines-installed underwater and used to import water to small islands form nearby continents or larger island with available water. Ex; Penang, which received some of its water supply from the Malaysian peninsula via twin 3.5 km long, 900 mm diameter submarine pipelines.

2.

B. INDUSTRY OVERVIEW

Pipelines are limited in the market they serve and commodities they hauled. The only mode with no backhaul. Ex; only move in one direction through the line. Pipeline diameter have increased in recent year due to increase volume that can move through the pipeline.
Due to US Court, pipelines operate as common carriers which account 92% of all pipeline carrier. Private carrier =8%.

1. Types of carrier

2. Ownership
Type Individual integrated oil companies Joint pipeline companies Railroads, independent oil companies and other industrial companies Ownership / control 46 % pipeline revenue 27% pipeline revenue 27% pipeline revenue

The federal government entered the pipeline business during World War 2 in order to ensure no interruption flow of oil. 3. Oil carrier The pipeline industry experienced rapid growth after WW2, but today the rate of growth and # of employees has decreased. But still it play a major role in transportation network. Ex; transport more than 20% of the total intercity ton-miles.

4. Number of carriers

The oligopolistic industry whereby 20 major integrated oil companies control about two- thirds of the crude oil pipeline mileage.
Small of very large carrier that dominate the industry because;Start up/ capital cost are high.

The economic of scale are such that duplication or parallel competing lines would be uneconomic. Large size operation are most economical compare to other size. Ex, a 12 inch pipeline operating at capacity can transport 3 times as much oil as an 8 inch pipeline.
The tight procedural requirement for entry and high associated legal cost. Industry which has been dominated by the jointly owned large oil companies .Reduce the opportunity for other company to offer their services. 5. Natural gas carrier

Involved with the transportation of natural gas.

There has been a growth in the # of companies since 1975. But in 1985, the operating revenues decreased with the decline of the volume moved.

C. Operating and Service Characteristics 1. Commodities Hauled The 4 main commodities hauled by pipeline are: Oil and oil products = US in 1994, crude oil and oil products accounted 57% of total pipeline use. The largest commodities hauled. Natural gas = second largest whereby the natural gas companies produce about 10% of the gas transport and independent companies produce remaining 90%. Coal = frequently called slurry lines because the coal is moved in a pulverized form in water (1 to 1 ratio by weight) . Once the coal has reached its destination, the water is removed and coal ready to use for generating electricity. Coal pipelines use enormous quantities of water, which cause concern in several state due to scarcity of water and not reusable (no backhaul)

Chemicals = the 3 major chemicals are anhydrous ammonia (used in fertilizer), propylene (used manufacturing detergents), ethylene (use making antifreeze)

A) Relative advantages Low rates because large diameter pipelines operating near capacity. Pipelines have a very good loss and damage record. Pipelines can provide warehousing function because their service is slow. Ex; if the product is not needed immediately, the slow pipeline consider as free warehousing storage. (product move at an average of 3 to 5 miles per hour). Dependability = unaffected by weather condition, very rare mechanical failures and scheduled deliveries can be forecasted very accurately, eliminate the need for safety stock.

2. B) Disadvantages Low speed = if a companys demand is uncertain, it will have to hold higher level inventory stock to overcome any shortages in a short period of time. Limited completeness of service =they offered a fixed route means no door to door service due to limited geographic or accessibility. Limited of products hauled = there is interest in using pipelines for other products because of cost advantage, but the technology has not been fully developed. Ex; new technology of capsule and pneumatic pipelines which can carry bulk product. The origin and destination are fixed Costs are expensive because have to build own right-of-way

3. Competition Intramodal Limited competition because small of companies (slightly more than 100). Oligopolistic market structure = a shared monopoly whereby lead to limited price competition. Economic of scale and high fixed cost led to joint ownership of large diameter pipelines. High start up cost.

Intermodal The level of competition limited but the close competition is water/ tanker. Once pipeline has been constructed between 2 points, it is difficult for other modes to compete because cost extremely low, dependability is quite high, limited risk of damage. The major exceptional is coal slurry pipelines because the need to move pulverized coal in water can make the cost comparable to rail movement.

4. Equipment The US Department of Transport estimates that the total pipeline investment excess of $21 billion.Pipeline can be grouped into :-

Gathering lines

Used to bring the oil from the field to storage before the oil is processes into refined product or transmitted as crude oil. Characteristics : smaller in diameter (not exceed 8 inches), lay on the surface ground to ensure ease of relocation when a well / field runs dry. Used for long distance movement of crude oil or other product such as jet fuel, kerosene, chemicals or coal. Characteristics : 30-50 inches in diameter, permanent and laid underground. Divided into 2 types : crude or product lines Oil trunk lines move oil to tank farm/ refineries in distant location. Oil product lines move gasoline, jet fuel and home heating oil from refineries to market areas

Trunk lines

5. Commodity Movement Process of commodity movement = bring oil form the field 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 product are stored at a tank farm before they are shipped via product line to another tank farm which close to market location. A motor carrier makes the last segment of the trip form farm to distributor. Compressors are used for the movement of natural gas and pumps are used for the liquid items The pipes are constructed of special high quality alloy steel with life expectancy of 50 years or more. High quality electric welding of the seams prevent leakage.

The US Pipelines Safety Act 1992

Require pipeline operator to identify facilities located in unusually sensitive areas and high density population areas by maintaining maps and records. Provide those information to federal and state officials. Preventive approach whereby pipeline is coated with protective paints and resins, special techniques used to control corrosion (karat). Ex; electric current is used to neutralize the corroding electrical forces that come naturally form the ground to pipeline. Computer at the pumping station monitor the flow and pressure of oil system. Any change indicating a leak is easily detected. The pipeline is usually scoured to prevent mixing problem because under one pipeline, kerosene move first, high grade gasoline, medium gasoline, others, last home heating oil.

D. Cost Structure

1) Fixed vs. Variable Cost Components

High portion of fixed cost -provide their own right of way by purchasing / leasing land and constructing the pipeline and pumping station along the right of way. Build terminal facilities. Low variable cost because doesnt have operating vehicles compare to other modes.labor cost very low due to high level of automation. Another variable cost is the cost of fuel for the power system.

2) Rates

The nature of operation (one way movement, limited product and geographic) provide little price differentiation. Endnotes

 Pipelines rates based on per barrel basis (1 barrel = 42 gallons) with minimum shipment sizes (tender) from 500 barrels to 10,000 barrels. Or rates based point to point/ zone to zone.

E. Current Issue A leak could have disastrous effects. There is a much higher risk of oil tanker product leakage compare to pipelines.