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Transportation 5e Coyle, Bardi,& Novack
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Transportat ion5eCoyle, Bardi, & Novack
South-Western College PublishingCopyright 2000
Chapter 7
Pipelines
Microsoft PowerPoint 95 Slides to Accompany
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Transportation 5e Coyle, Bardi,& Novack
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Chapter 7 Topics
Brief History
Industry Overview
Operating and ServiceCharacteristics
Competition
Equipment
Commodity Movement
Cost Structure
Current Issues
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Chapter 7 Objectives
Analyze the nature of the pipeline industryand carrier organization
Explain pipeline market structure,including commodities transported and thecompetitive environment
Identify pipeline operational
characteristics, including equipment used,commodity movement, ownership, andservice
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Chapter 7 Objectives, contd
Describe industry cost structure, includingrevenues, economies of scale, and pricing
Discuss pipeline safety
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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
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The Basic Modes ofTransportation: Pipelines
Refers only to the oilpipelines, not natural gas
Not suitable for general
transportation Some research has been
performed to move mineralsin a liquid medium, butoutside of a few attempts totransport slurried-coal viapipeline, no real successeshave occurred.
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The Basic Modes ofTransportation: Pipelines
Accessibility is very low.
Cost structure is highlyfixed with low variable
costs. Own rights-of-way much
like the railroads.
Major advantage is lowrates.
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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 ton-
miles
Natural gas carriers Comparable in size to oil pipeline sector
Growth in number of companies
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Operating and ServiceCharacteristics
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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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: > $21billion
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 sophisticatedtechnology
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Cost Structure
Fixed versus variable costcomponents
High fixed costs Pipeline owners provide right-of-way
Owners incur terminal expenses
Rates Per-barrel, point-to-point or zone-to-
zone
Tenders (minimum shipment sizes)
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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
A BRIEF HISTORY
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A. BRIEF HISTORYThe use of pipe for oil transportation started soon after the drilling of the first commercial oilwell in 1859by Colonel Edwin Drake in Titusville Pennsylvania.
The first pipes were short and basic, to get oil from drill holes to nearby tanks orrefineries.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 areality 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 pipein 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 theoil 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 statedthat pipelines would operate as common carrier if there were a demand by shippers of oil fortheir services.
Where it start.. Pipeline year1917 Alaska pipeline year 1977 tilltoday
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Malaysian scenario
Malaysia account for 15% of total world liquid natural gas (LNG) export. Thus, itneed 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:-
1. MalaysiaThailand Joint Pipelines Authority Project = create and develop twogas pipelines that are connected to each country, which will split the gasproduction between two processing plants of each country.
2. Offshore Pipelines International Limited (OPIL) was awarded installation ofpipelines for the Angsi Project whereby in year 2000, 250km of pipelines wereinstalled
Malaysia also used submarine pipelines-installed underwater and used to importwater to small islands form nearby continents or larger island with available water.
Ex; Penang, which received some of its water supply from the Malaysianpeninsula via twin 3.5 km long, 900 mm diameter submarine pipelines.
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B. INDUSTRY OVERVIEW
Pipelines are limited in the market they serve and commodities they hauled. The onlymode 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 movethrough the pipeline.
1. Types of carrier
Due to US Court, pipelines operate as common carriers which account 92% of all pipelinecarrier. Private carrier =8%.
2. Ownership
The federal government entered the pipeline business during World War 2 inorder to ensure no interruption flow of oil.
3. Oil carrier
The pipeline industry experienced rapid growth after WW2, but today the rate ofgrowth and # of employees has decreased.
But still it play a major role in transportation network. Ex; transport more than20% of the total intercity ton-miles.
Type Ownership / control
Individual integrated oil companies 46 % pipeline revenue
Joint pipeline companies 27% pipeline revenue
Railroads, independent oil companies and other industrial companies 27% pipeline revenue
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4. Number of carriers
The oligopolistic industry whereby 20 major integrated oil companies controlabout 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 wouldbe 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 oilcompanies .Reduce the opportunity for other company to offer their services.
5. Natural gas carrierInvolved with the transportation of natural gas.
There has been a growth in the # of companies since 1975. But in 1985, theoperating revenues decreased with the decline of the volume moved.
C Operating and Service Characteristics
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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 productsaccounted 57% of total pipeline use. The largest commodities hauled.
Natural gas = second largest whereby the natural gas companiesproduce about 10% of the gas transport and independent companiesproduce remaining 90%.
Coal = frequently called slurry lines because the coal is moved in apulverized form in water (1 to 1 ratio by weight) . Once the coal hasreached its destination, the water is removed and coal ready to usefor generating electricity. Coal pipelines use enormous quantities ofwater, 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 infertilizer), propylene (used manufacturing detergents), ethylene (usemaking antifreeze)
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A) Relative advantages
Low rates because large diameter pipelines operatingnear 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 freewarehousing storage. (product move at an average of3 to 5 miles per hour).
Dependability = unaffected by weather condition, veryrare mechanical failures and scheduled deliveries can
be forecasted very accurately, eliminate the need forsafety stock.
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2. B) Disadvantages
Low speed= if a companys demand is uncertain, it will have to holdhigher level inventory stock to overcome any shortages in a short periodof time.
Limited completeness of service =they offered a fixed route means nodoor to door service due to limited geographic or accessibility.
Limited of products hauled = there is interest in using pipelines for otherproducts because of cost advantage, but the technology has not been
fully developed. Ex; new technology of capsule and pneumatic pipelineswhich can carry bulk product.
The origin and destination are fixed Costs are expensive because have to build own right-of-way
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3. Competition
Intramodal
Limited competition because small of companies(slightly more than 100).
Oligopolistic market structure = a shared monopolywhereby lead to limited price competition.
Economic of scale and high fixed cost led to jointownership of large diameter pipelines.
High start up cost.
Intermodal
The level of competition limited but the closecompetition is water/ tanker.
Once pipeline has been constructed between 2 points,it is difficult for other modes to compete because costextremely low, dependability is quite high, limited riskof damage.The major exceptional is coal slurrypipelines because the need to move pulverized coal inwater can make the cost comparable to rail movement.
4 E i t
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4. Equipment
The US Department of Transport estimates that the total pipeline investment excess of $21billion.Pipeline can be grouped into :-
Gatheringlines
Used to bring the oil from the field to storagebefore the oil is processesinto refined product or transmitted as crude oil.
Characteristics : smaller in diameter (not exceed 8 inches), lay on thesurface ground to ensure ease of relocation when a well / field runs dry.
Trunklines
Used forlong distance movement of crude oil or other product such asjet fuel, kerosene, chemicals or coal.
Characteristics : 30-50 inches in diameter, permanent and laidunderground.
Divided into 2 types : crude orproduct lines
Oil trunk lines move oil to tank farm/ refineries in distant location.
Oil product lines move gasoline,jet fuel and home heating oil fromrefineries to market areas
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5. Commodity Movement
Process of commodity movement = bring oil form the fieldto 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.
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The US Pipelines Safety Act 1992
Require pipeline operator to identify facilities located in unusuallysensitive areas and high density population areas by maintainingmaps and records. Provide those information to federal and stateofficials.
Preventive approach whereby pipeline is coated with protectivepaints and resins, special techniques used to control corrosion
(karat). Ex; electric current is used to neutralize the corrodingelectrical forces that come naturally form the ground to pipeline.
Computer at the pumping station monitor the flow and pressure of oilsystem. Any change indicating a leak is easily detected.
The pipeline is usually scoured to prevent mixing problem becauseunder one pipeline, kerosene move first, high grade gasoline,
medium gasoline, others, last home heating oil.
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D. Cost Structure1) 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 costbecause doesnt have operatingvehicles 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
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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.
