Crude Petroleum Pipelines

Industry Snapshot

In the late 2000s, there were 394 establishments involved in transportation of crude oil by pipeline across the United States. Crude oil production in the United States peaked during the 1970s when daily output reached 9.4 million barrels per day. By the 2000s, production had declined significantly, and in 2008, oil production hit 4.95 million barrels per day. As a result, U.S. pipelines declined from almost 226,000 miles of pipelines in 1975 to approximately 215,000 miles in 2008. Total revenue for the industry was estimated at $3.7 billion, and the value of the pipeline infrastructure was estimated at $35 billion.

Notwithstanding the dependence of the world's economy on crude oil as a fundamental source of energy, the crude petroleum pipelines industry experienced limited growth, stemming from profound structural changes in both the global market for crude oil and the world economic order. Changes in factors affecting the consumption and production of crude oil affects crude petroleum pipeline establishments since the demand for pipelines to transport crude oil is a derived demand. In the mid-2000s, U.S. and global demand for crude oil was growing rapidly, driving prices above $94 per barrel in 2009.

The crude petroleum pipeline industry faced several challenges in the late 2000s. These challenges include increasingly stricter environmental protection regulations, the development of natural gas as a substitute for crude oil-based energy products, the depletion of crude oil reserves, and the difficulty in securing right-of-way access for pipeline production.

Organization and Structure

The crude petroleum pipeline industry consists of capital-intensive companies. As start-up costs for capital-intensive organizations are high, entry into the industry is restrictive, as indicated by the relatively small number of firms operating with headquarters in the United States. On the other hand, the day-to-day maintenance of capital-intensive industries tends to be relatively moderate, enabling successful companies within the industry to take advantage of economies of scale.

The overwhelming majority of crude petroleum pipeline companies with corporate offices in the United States operated as subsidiaries of other corporations. Of the companies headquartered in the United States, only a few were independently listed on any stock exchange. Many of the subsidiary companies were affiliated with the major oil company giants. Examples include ExxonMobil Pipeline Company and Chevron Pipe Line Company. The maintenance of a vertically integrated relationship between the oil industry and the crude petroleum pipeline industry indicates a desire on the part of the giant oil companies to control the entire process of production and the natural economies that emerge from capital-intensive industries.

In addition, the Federal Energy Regulatory Commission (FERC) oversees the liquids pipeline industries, legislating and monitoring them. The FERC strives to make pipeline transportation an equitable means of shipping petroleum products rather than regulate the construction of pipelines and crude petroleum prices. Through the FERC, shippers can gain fair access to pipeline transportation, have fair service conditions on a pipeline, and have reasonable rates for transporting petroleum products via pipelines.

Background and Development

The concept of using pipelines to transport liquids can be traced to the ancient Romans and Chinese, who developed systems of pipelines and viaducts, using gravity as the mechanism for transporting water. Such early pipeline transportation systems were limited by the terrain of the surrounding countryside due to the lack of an effective lift mechanism.

The discovery and subsequent drilling of crude oil in Pennsylvania by Col. E. L. Drake in 1859 created the need for a cost-effective method to transport the crude to market. Drake laid a two-inch cast-iron pipeline about 6.2 miles long, and the crude petroleum pipeline industry was born. However, the operation of the pipeline was short-lived because a group of local teamsters, fearing the elimination of their jobs, destroyed the pipeline soon after it began operation. Nonetheless, pipeline transportation of crude petroleum proved to be both viable and cost-effective, and the industry grew concurrently with the nation's expanding oil industry.

Until World War I, crude pipelines were made almost exclusively from wrought or cast iron. After the war, steel became the primary material used to construct pipelines because of improvements in steel quality. When steel was used, pipe diameter could be increased from 8 to 26 inches. Furthermore, the introduction of electric arc welding in the 1930s eliminated the "weak link" of screwed couplings.

During the 1930s and through World War II, significant developments occurred in the crude oil pipeline industry. The use of the "spread" method of pipeline construction lowered construction costs and made the use of pipelines to transport crude oil more competitive. Moreover, the size of pipeline projects grew in the United States as well as internationally. In 1934, a 12-inch pipeline was constructed over the 620 miles from Kirkuk, Iraq, to the Mediterranean Sea. During World War II, a 24-inch crude petroleum pipeline 1,240 miles long was laid from Texas to New York. Advances in the materials used in the construction of pipeline and in the construction techniques allowed for the development of pipeline that could withstand greater pressure per square inch and that could transport more crude in less time.

Crude petroleum pipeline construction reached its peak after World War II. Driven by a demand for oil that doubled roughly every 10 years, "Big-Inch" pipelining became prevalent on a worldwide scale. Pipe size increased from 24 inches to 56 inches in diameter, expanding the capacity to transport crude oil. A better understanding of corrosion led to the development of pipe coatings of bitumen or coal tar enamel over glass-fiber wrappings. With the development of X-ray scanning technology, pipeline could be examined for weaknesses that otherwise would have been undetected. During the 1960s, construction of crude petroleum pipelines moved offshore with discovery of oil in the Gulf of Mexico, the Arabian Gulf, and the North Sea.

From 1970 through the 1990s, growth in the crude petroleum pipeline industry became stagnant domestically as well as internationally. While interstate liquid pipeline mileage totaled 173,532 miles in 1972, that figure had dropped to 168,364 by 1990. Construction of new domestic crude oil pipelines dropped from 1,966 miles in 1980 to 240 miles in 1990. In the United States, retirement of old pipelines outpaced the construction of new pipeline, following a worldwide trend. World totals of new construction in 1980 were 8,129 miles. New construction was 652 miles in 1990.

Although crude oil production decreased, the use of pipelines to transport crude oil increased, as compared to other forms of transportation. According to the Association of Oil Pipelines, in 1992 crude oil production equaled 647.1 billion ton miles. Of that total, pipelines carried 343.3 billion ton miles (53 percent), water carriers transported 301.3 ton miles, and the remaining small amount was transported by truck or railroad. By 2002, crude oil production had fallen to 384 billion ton miles, but pipelines carried 286.6 billion ton miles (74.7 percent), and crude transported by water had dropped to 95.7 billion ton miles (24.9 percent). Therefore, although crude oil production ton miles dropped more than 40 percent, pipeline ton miles declined just 17 percent for that 10-year period. By 2004, crude oil production had fallen further to 374.1 billion ton miles, with pipelines carrying 283.7 billion ton miles (75.9 percent), and crude transported by water further dropped to 88.7 billion ton miles, or 23.7 percent, representing nearly a 1 percent increase in pipeline transport and a 1 percent decrease in water transport from 2003.

This trend of stagnant growth in the crude petroleum pipeline industry has been attributed to several events. Low oil prices, caused by a surplus or glut in the market for crude oil, had a significant influence on the market for crude oil pipelines. In addition, stagnant domestic and world economies caused uncertainty and increased risk, especially for industries in which the time between project development and project completion was measured over several years. Furthermore, political instability led to a restructuring as markets adjusted to events such as the end of the Cold War, the aftermath of the first Gulf War, and the amalgamation of European countries in the European Community. Finally, preservation of the environment became a global concern, and the world's industrialized nations adopted a more active role in regulating the environmental impact of most industrial activities.

The primary players in the crude petroleum pipeline industry continue to be the giant multinational or state-owned oil companies. Given the commitment of the multinational companies to maintain control over the entire process of production, capital maintenance and development of crude pipeline are likely to continue at a pace calculated to maximize return on investment. Similarly, state-owned oil companies have the ability to take advantage of large-scale operations and can utilize their unique position to expand operations. Furthermore, multinational and state-owned oil entities are able to absorb short-term market irregularities and capitalize on their tremendous market power. About 80 percent of the crude petroleum pipeline companies with corporate headquarters in the United States operated as subsidiaries of other corporations. The majority of these were affiliated in some manner with the large oil companies.

With the impact of industry on the environment becoming a global issue, domestic as well as international organizations have become politically active in attempts to protect the environment from the excesses of industrialization. In the United States, the Environmental Protection Agency (EPA) was given broad powers to oversee and regulate industrial activities in order to control environmental pollution. Legislation affecting the crude petroleum pipeline industry includes the Oil Pollution Liability Act of 1990. The crude petroleum pipeline industry may continue to feel the effects of this trend toward increased regulation in the form of increased risk of litigation and higher operation costs.

Projections for domestic and world crude oil consumption reflect modest increases of 5 to 10 percent. Although the industry has shown signs of recovery, given the maturity of the crude petroleum pipeline industry and the relative longevity of pipeline once constructed, increases in sales revenue, profits, and new construction may become stagnant again after a few years. Consequently, intriguing new uses for old pipeline systems were being explored, including the use of existing pipeline to encase fiber-optic lines used in the telecommunications industry. Williams Telecommunication, the sister company of Williams Pipe Line Company of Tulsa, Oklahoma, was regarded as an innovator in this field. As new technologies are developed, the crude petroleum pipeline industry has the opportunity to respond in unique and innovative ways.

In 1998, crude oil prices dropped to the lowest they had been since 1973. However, in late 1999, OPEC gained control of its production quotas again, and prices increased more than $10 per barrel. The volatile market again caused global uneasiness and heightened interest in alternative markets and sources.

To that end, the November 1999 agreement between Turkey, Georgia, and Azerbaijan to build a 1,080-mile pipeline from the Caspian Sea to the Mediterranean was especially important. Several multinational corporations and U.S. companies, including ExxonMobil, Chevron, Texaco, and the newly-merged BP-Amoco, contributed $50 billion to the project. The new pipeline would bypass Iran and Russia, securing U.S. access to the Caspian basin. It would also have the secondary effect of enhancing the presence of American political and commercial interests in Central Asia. The Caspian basin deposits were believed to be second in size only to the Persian Gulf, but seismic results indicate that they are substantially smaller, about the size of those in the North Sea.

On the domestic scene, Pacific & Texas Pipeline and Transport Company entered into a joint venture agreement in November 1999 to build and operate a 1,075-mile, 42-inch crude oil pipeline which would run from the Port of Los Angeles to Midland, Texas. A fiber-optic system would be entrenched alongside the pipeline, thus contributing to cost-sharing and environmental conservation. The other party to the joint venture was Pan Kai Development USA, Inc. Bethlehem Steel, Ingersoll Rand, and Westinghouse were involved in the actual construction of the pipeline.

Crude oil production in the United States was expected to increase from 4.8 million barrels a day in 2001 to 5.3 million barrels a day in 2007 (with actual production totaling 4.95 million barrels in 2008) before declining to 4.2 million barrels a day by 2025. Increased production was targeted to occur primarily offshore. In the mid-2000s demand for crude oil globally and within the United States reached record highs. The International Energy Agency projected that global oil consumption would increase 1.8 million barrels a day during 2005 to reach 84.3 million barrels a day. While the rapid industrialization of China and India stressed global output capacities to their limits, the petroleum-thirsty United States increased supply demand as well.

According to the Association of Oil Pipe Lines. Texas, Alaska, California, Louisiana, and Oklahoma were the top crude oil-producing states in the mid-2000s. The United States accounted for approximately 8 percent of the world's production of crude oil yet consumed 25 percent. In the late 2000s, interstate pipelines carried over 13 billion barrels of petroleum products annually. Of this, about 59 percent was crude oil, or 7.6 billion barrels. One barrel of crude oil could be refined into over 19 gallons of gasoline, plus smaller amounts of other petroleum products. The cost of transporting one barrel of petroleum product from a Houston refinery to a consumer in New York was about $1, or 2.5 cents per gallon of gasoline.

Current Conditions

Despite the growing demand for crude oil, the pipeline industry in the United States remained stagnant as supplies of easy-to-extract crude oil were diminishing. For example, production at Alaska's largest oil field was falling 3.5 percent annually, and in 2005 the Trans-Alaska Pipeline transported about half of what it did in the 1980s. In 2005, it carried about 900,000 barrels a day, compared to 2 million barrels a day in 1988. In 2009, it was averaging about 600,000 barrels per day. Capital investments needed to explore, drill, and transport harder to reach supplies prohibited expansion in the industry. For pipeline operations alone, it can take between 4 and 15 years to complete regulatory requirements, construction, and implementation of a new pipeline.

Record high prices for oil, along with encouragement from the federal government to expand U.S. production as a means to limit dependence on foreign supply could motivate oil companies to consider expanding operations. In 2005, legislators considered opening sections of the Arctic National Wildlife Refuge for oil exploration, a plan that remained hotly contested in 2007. While some major oil companies, including BP Group and ConocoPhillips, had plans in place to invest millions in expanding production, others began to focus more on the more penetrable market of natural gas.

In the late 2000s, nearly 400 establishments operated in this industry. In 2008, oil production hit 4.95 million barrels per day, and there were 215,000 miles of pipelines. The value of the pipeline infrastructure was estimated at $35 billion.

Industry Leaders

The leading U.S. liquid pipeline companies in 2008 included Shell Pipeline Company LP, which operated more than 10,000 miles of pipeline across 21 states, carrying 2 billion gallons of petroleum products annually. The company also managed more than 1,200 miles of offshore pipelines and 600 miles of onshore pipelines. A subsidiary of Shell Oil Products, Shell Pipeline employed 540 people and had estimated revenues of $116.2 million in 2008.

Enbridge (U.S.), a subsidiary of Canadian-based Enbridge, Inc., is based in Houston, Texas. Enbridge (U.S.) maintains an interest in numerous pipeline operations, including Alliance Pipeline, Chicap Pipe Line, Enbridge Pipelines (in Toledo, Ohio), Frontier Pipeline, Mustang Pipe Line Partners, Olympic Pipe Line, Spearhead Pipelines, and Vector Pipeline. Enbridge moves more than 2 billion barrels of crude oil a day. In 2005, Enbridge bought Shell's Gulf of Mexico natural gas pipeline system. The parent company, Enbridge Inc. generated revenue totaling $13.2 billion in 2008.

ExxonMobil Pipeline, a subsidiary of ExxonMobil, which posted revenue of more than $477 billion in 2008, moves 3.5 million barrels of crude oil and other petroleum and chemical products through 8,000 miles of pipeline running through 23 states, in addition to Canada and the Gulf of Mexico. The Alyseska Pipeline Service Company is owned by a consortium of oil companies including BP (47 percent) ConocoPhillips (28 percent), and ExxonMobil (20 percent). The 800-mile pipeline, constructed in 1977, serves Alaska's oil field, carrying crude oil from Alaska's North Slope to Prince William Sound. Marathon Ashland Petroleum LLC is a joint venture owned by Marathon Oil Corporation (62 percent) and Ashland, Inc. (38 percent). The diversified company, which owns seven refineries, also operates about 8,400 miles of pipeline.

Workforce

In the late 2000s, control of the domestic pipeline industry was in the hands of between 25 and 40 companies, with approximately 16,000 employees. The relatively small number of employees in the industry reflects the capital-intensive nature of crude petroleum pipeline companies. Employment trends in the crude petroleum pipeline industry, which is the major segment of the industry in which establishments are primarily engaged in the transportation of petroleum and other commodities (except natural gas), reflect a trend toward downsizing labor.

Research and Technology

The basis for technological advances in the crude petroleum pipeline industry centers on the search for improved materials, the development of improved methods of welding or "jointing" the pipe, the refinement of specialty pipe for use under extreme environmental conditions, and the investigation of new applications and alternative uses for the pipeline.

Refined steel pipe remains the industry mainstay, allowing for pipe sizes up to 56 inches in diameter. The utilization of new industrial processes permitting refinement of the alloying process remains the most promising area of technological advance in this area. The fatigue life of "Big-Inch" pipe is also affected by conventional arc welding and jointing techniques. Arc welding makes steel pipe susceptible to hairline cracks and hardening in the areas of the pipe close to the welds. Alternative methods indicating the most promise include flash butt welding, friction welding, electron beam welding, screwed and bonded coupling, and cold forging.

The materials used to construct the pipe and the jointing technique used to bond pipe together are determined in large part by the environmental conditions at the site of the pipeline. Therefore, research and development will center on creating pipe resilient to temperature extremes and able to withstand the pressures of offshore and underwater.

Alternative applications of crude petroleum pipelines include using the lines to transport other materials, as well as use of retired pipeline to encapsulate fiber-optic communication lines. Coal slurry is regarded as a primary alternative for transport using the lines, as both domestic and international analysts maintain that coal reserves may constitute as much as four times the amount of oil available. Research to find ways to modify existing pipeline for such use continues, and such innovations may pave the way for extensive changes in the crude petroleum pipeline industry.

In the mid-2000s, pipelines were monitored 24 hours a day, 365 days a year using real-time data about the rate of flow and speed of transport. Advances in safety design and monitoring helped reduce the number of spill incidence and the volume of product lost per accident 60 percent since the 1970s.