Refined Petroleum Pipelines

Industry Snapshot

Pipelines are the leading method of transporting refined petroleum and are an especially important mode of transportation in the United States where large volumes of oil must be moved over land. The manufacture of refined petroleum is classified in SIC 2911: Petroleum Refining. Fuels classified as refined petroleum products include gasoline, kerosene, distillate fuel oils, residual fuel oils, and lubricants, which are essentially any product made from the distillation of crude oil or redistillation of unfinished petroleum derivative.
The extensive network of pipelines that transport refined petroleum is predominantly owned and managed by the large, vertically integrated operations of the major oil companies. In 2008, firms in the industry operated a network moving more than 17.8 billion barrels of petroleum and petroleum products through approximately 215,000 miles of pipeline per day. Petroleum products accounted for about 40 percent, while crude oil accounted for 60 percent. The entire national infrastructure was valued at an estimated $33 billion.

The pipeline network contains gathering systems of pipelines, which are used to bring crude petroleum from the oil fields and pump it to storage. Then oil fields have a network of small-diameter "gathering lines" that collect crude oil from individual wells and transport the output to a large-diameter "trunk line" for shipment to a refinery. Next, pipelines move refined products to markets.

The ups and downs of the industry were attributed to several economic forces. The growth of pipelines in general is linked to, and ultimately limited by, oil production. Therefore, industries such as petroleum pipelines in general, and refined products pipelines in particular, are subject to competition from other transport industries, including water carriers, motor carriers, and railroads. In the mid-2000s, pipelines transported about 62 percent of refined petroleum, compared to water carriers, which transported about 28 percent. Railroads and trucks transported the remaining percentage of petroleum products.

Organization and Structure

About 20 companies controlled the operation of refined petroleum pipelines in the late 2000s, with the eight largest organizations dominating 80 percent of the market. Because of the heavy involvement of the large oil interests, it is difficult to differentiate the pipeline components of their operations from the other components.

The petroleum industry consists of four distinct, but connected, vertical levels--production, refining, marketing, and transportation. The refined products segment manufactures finished products ranging from petroleum coke to motor gasoline to fuel oil, heating oil, and jet fuel. Connecting the mines to the refinery and the refinery to the market are specialized transportation networks that include pipelines, trucks, railroads, and, most notably, water carriers (tankers and barges).

Pipelines have historically been the most cost-effective means of transportation of petroleum products. According to the Association of Oil Pipe Lines, pipelines transport about 17 percent of the nation's freight, but only consume 2 percent of U.S. freight expenditures. Pipelines have construction costs that take advantage of economies of scale and are proportionate to pipeline radius, but pipeline capacity is roughly proportional to the square of the radius. For example, if pipeline radius is doubled, pipeline capacity will increase by a factor of about four.

While the share of railroads and truck methods has remained virtually unchanged, pipelines' share rose to around 60 percent through 1977, declined to 45.5 percent in 1983, and bounced back to a 54 percent share in the 1990s. Water carriers surpassed pipelines for a short period in the early 1980s but have largely played second fiddle to pipeline market share as their share of the market declined from 50 percent in 1985 to about 40 percent in 1995 before falling to about 28 percent by the mid-2000s. Aside from their economies of scale, pipelines are viewed as a safer and more environmentally sound method of transporting petroleum with the exception of two accidents in the 1990s. Historically, spills from pipelines have been dwarfed by tanker spills.

Pipeline operations are large, capital-intensive facilities, and are often part of larger companies operating pipelines for their own use. By law, no company can gain market share by denying access to independent shippers. During the twentieth century, however, oil companies were accused of using exclusive control over pipelines to gain expanded control of markets. Because pipelines are a critical link in the petroleum production process, A great deal of regulation, primarily from the Interstate Commerce Commission (ICC), exists at the federal level to ensure access of all producers to pipelines and to set rates. In addition to monitoring competitive practices, the ICC sets rates and collects reports that are required to be filed by the companies.

Background and Development

According to analyst Stephen Martin, the first attempt to transport petroleum by pipe was made by James Hutchings in 1862. Although he failed, his efforts drew attention to other possible means of transporting oil, specifically to the low cost of pipelines, as well as to avoid the market power of the railroads. By the beginning of the twentieth century, there were 6,800 miles of crude oil pipeline in the United States. The market for pipelines at the time was dominated by the Standard Oil Company, which had a 90 percent market share. By 1906, the Interstate Commerce Act made interstate pipelines subject to federal regulation, a move directed largely at abuses by Standard Oil.

Refined petroleum pipelines began to be used in 1930, as firms discovered that many different products could be shipped through the same pipeline. Moreover, emerging cities in the Midwest and West created new markets for refined petroleum, and pipelines were the least expensive method to transport the growing number of refined petroleum products. More than 3,800 miles of refined petroleum pipelines were placed in operation from 1930 to 1931 and another 2,300 miles through 1941.

During World War II the transportation of most oil products was diverted from tankers to pipelines. Tankers were needed for the war effort, and it became increasingly difficult for the U.S. Navy to devote resources to protect ships transporting oil from the Gulf Coast to the eastern seaboard. As an added boost to the industry, the federal government helped build the War Emergency Pipeline (WEP), which spanned 1,475 miles and was used for the transport of refined petroleum. The only impediment to a complete monopoly in the oil transport industry by the pipeline was considered to be the availability of water carriers after World War II. Other modes of transportation, such as rail and trucking, held only small niches of the oil transportation market. Figures on intermodal competition showed that by the early 1970s, pipeline costs were one-fifth as high as rail rates and one-twenty-eighth as high as truck rates. Water transport costs were the only serious competition.

Despite the success of the pipeline industry, a major concern of federal regulators was that the oil companies exerted substantial market control over production and distribution. In 1976, 90 percent of crude pipeline shipments reported to the ICC originated in pipelines that were owned or controlled by the 16 major U.S. oil companies. Nearly 75 percent of refined petroleum shipped that came from refineries went into pipelines owned by the major companies. Only 13 percent of refined petroleum was moved by pipeline firms not involved in other segments of the oil industry.

The expansion of the refined petroleum pipeline industry and its profitability are ultimately limited by two key forces. The first is competition in the form of other modes of transporting oil, most notably water carriers such as oil tankers. This includes cost competitiveness, environmental safety, and the industry's ability to absorb the costs of increased environmental regulations. The health of this industry is also limited ultimately by the production of the refined petroleum products that it transports.

In 1992, as part of the revised Clean Air Act, the nation's cities were mandated to burn cleaner gasoline to cut carbon monoxide levels. The law led to increased reduction of carbon monoxide by 1995, and forced cities with severe air pollution to use cleaner gasoline. However, the National Petroleum Refiners Association estimated that the Clean Air Act cost the industry between $10 and $30 million.

The Clean Air Act created problems for pipeline companies, which were required to sell different gasolines in different cities at the same time. Gas sold in one city might have tighter restrictions than those of a gas sold in another city serviced by the same pipeline. This forced firms to separate different batches of gasoline along pipelines, which was more expensive for pipeline companies. Nonetheless, overall refinery throughputs increased over the years, even if only marginally at times.

Pipe fractures and spills have tarnished the industry's reputation as the safest method of transport. A 1993 spill occurred in the Potomac River near Washington, D.C., and in 1994, a more dangerous pipeline disaster dumped about 1.2 million gallons into the San Jacinto River, outside Houston, which caught on fire. In 1996, the U.S. Transportation Department's Office of Pipeline Safety issued a report that revealed the serious condition of the country's largest pipeline, which extends from Texas to New Jersey and is owned by Colonial Pipeline Co. The report indicated that the pipeline contained frail, corroded, and cracked portions as well as serious pressure control problems. The report also stated that without repair, operation of the pipeline could become hazardous to the environment and to life, according to the Wall Street Journal. The pipeline, which delivered over 75 million gallons of fuel per day, ran only 20 feet away from homes and businesses in areas. A few months prior to the report, the fifth largest pipeline spill in the United States occurred when a pipe segment ruptured in Greenville, South Carolina, spewing about 1 million gallons of fuel into the Reedy River. After mending this fracture, Colonial agreed to test and repair the entire pipeline. Colonial estimated that the repairs would cost almost $21 million.

The U.S. Department of Transportation reported in 1999 that there were 86,500 miles of products, or refined oil, pipeline in the country, as of 1997. When added to the 114,000 miles of crude oil pipeline, the total miles of pipeline were over 200,000, approximately 65 times the entire width of the country.

Although pipeline grew at a crawl from the mid-1980s through the mid-1990s, the industry experienced greater success in the late 1990s as demand for refined petroleum products was predicted to increase modestly in the United States and abroad. In 2001, the total value of petroleum pipeline put in place to carry both crude and refined products was $943 million.

Two major refined pipeline projects in the late 1990s were the cross-border pipeline connecting Brownsville, Texas, to Matamoros, Mexico, which was scheduled for completion near the end of 1999, and a joint pipeline project between Williams Company and Texaco Pipeline Inc., connecting Texas, Oklahoma, and some Kansas lines to provide a new route for Gulf Coast refined products and liquid petroleum gas. The Texas-Mexico pipeline was constructed for the Penn Octane Corporation to sell directly to Pemex, the state-owned Mexican oil company, as well as to independent distributors.

Several major changes occurred in the refined products industry in 1998 and 1999. Mergers, consolidations, divestitures, and closures within the industry brought many small companies into the fold. By 1999, small refining companies comprised 36 percent of the refining capacity in the United States. At the other end of the spectrum, one of the biggest mergers was the $53 billion transaction joining BP America with Amoco to form BP-Amoco in December 1998. Not far behind was the $87 billion merger of Mobil Corporation with Exxon Corporation to form ExxonMobil in 1999, which was considered the largest industrial merger to occur. As a condition of the final merger, Mobil agreed to sell its 300 retail gas stations in New Jersey to satisfy the Federal Trade Commission's and 29 states' anti-trust claims.

In 2000, U.S. petroleum pipeline companies transported 7.5 billion barrels of petroleum products. While the miles of pipeline dedicated to crude oil transportation steadily declined beginning in 1965 from over 149,000 miles to just over 86,000 in 2000, pipelines transporting refined petroleum products increased over the same period, from 61,443 miles in 1965 to over 91,000 in 2000.

According to the Energy Information Administration, production at U.S. refineries was projected to increase from 16.8 million barrels a day at the beginning of 2002 to between 19.8 million barrels a day and 20.4 million barrels a day by the mid- to late 2000s. Almost all growth was expected to come from existing facilities, primarily in the Gulf Coast. After working at utilization rates as low as 69 percent during the early 1990s, the utilization rate for refineries in 2001 was 93 percent.

Merger and acquisition activity in the pipeline segment, which was extensive after deregulation, continued in the mid-2000s. San Antonio-based Valero L.P.'s deal with Kaneb Services and Kaneb Pipe Line Partners for $2.8 billion, which closed in the first quarter of 2005, brought Valero's pipeline total to 10,000 miles, making it the second largest petroleum pipeline operator in the United States. Royal Dutch/Shell, another industry leader, sold some of its deepwater Gulf of Mexico pipeline operations to focus on its more profitable upstream Gulf operations. Because pipelines tend to provide a steady, if not robust, return on investment, other large diversified companies also entered the market to expand their portfolios. According to research firm John S. Herold, in 2003, North American gas pipeline sales and acquisitions were $9.6 billion and liquid pipeline deals amounted to $1.9 billion. Such activity was expected to continued through the mid-2000s.

The pipeline industry faced numerous ongoing issues, mostly centered on the integrity of the infrastructure and its overall safety. Depending on future regulatory and legislative actions, pipelines will likely be required to commit capital to system integrity management at the expense of new expansion. In 2002, the U.S. Department of Transportation and the U.S. Department of Energy provided $8 million for improvements in pipeline integrity and reliability.

Current Conditions

There were about 600 establishments engaged in this industry in the late 2000s, although not all were refineries. Environmental, legal, and regulatory constraints, as well as the necessity of large capital investment, was expected to deter any new refinery facilities from being built (no refinery had been built since the 1970s), but expansion at existing refineries was expected to increase overall capacity.

The biggest challenge facing pipeline companies in the mid- and late 2000s was the enactment of new environmental regulations that limited ultra-low sulfur fuels like diesel to 15 parts per million (ppm) for on-highway use. New Environmental Protection Agency standards to improve air quality had gone into effect in 2006. The problem for pipeline companies was the intermixing of other products within the pipelines that could contaminate the ultra-low sulfur products. For example, sulfur levels as high as 3,000 for jet fuel could be contaminated by sulfur levels of 5,000 for heating oil. New pipeline procedures to prevent transmixing could reduce pipeline volume 8 to 12 percent.

Industry Leaders

In the mid-2000s Shell Pipe Line LP, based in Houston, Texas, was one of the nation's leading pipeline companies. A subsidiary of Shell Oil, the company operated about 10,000 miles of pipeline which move 2 billion gallons of refined and crude product each year across 21 states. The company also managed more than 1,200 miles of offshore pipelines and 600 miles of onshore pipelines. In 2008, the company generated $116 million in revenue.

ExxonMobil Pipeline, based in Houston, Texas, and owned by parent ExxonMobil, which posted 2008 revenue at $477 billion, ran crude and other petroleum products through about 8,000 miles of pipelines that span 23 states, Canada, and the Gulf of Mexico.

Other significant industry leaders included Valero L.P., based in San Antonio, Texas, which became a major player in the pipeline industry in 2005 when it added Kaneb Pipeline to its portfolio, with pipeline totaling near 10,000 miles. Marathon Ashland Petroleum LLC, of Findlay, Ohio, was owned by Marathon Oil Company and Ashland, Inc., and moved refined and crude product through 8,300 miles of pipelines. Colonial Pipeline, a joint venture with interest owned by Koch, Citgo, and Shell, had about 5,500 miles of pipeline in the mid-2000s. Buckeye Pipe Line Company LP, based in Emmaus, Pennsylvania, operated about 2,650 miles of pipeline between Massachusetts and Illinois.

Enbridge (U.S.), Inc., of Houston, Texas, was a subsidiary of Canadian-based Enbridge, Inc., which generated approximately $13.2 billion in revenue in 2008. Enbridge owned an array of U.S. pipeline systems, including Alliance Pipeline, Chicap Pipe Lines, Enbridge Pipelines (Toledo, Ohio), Frontier Pipeline, Mustang Pipe Line Partners, Olympic Pipe Line, Spearhead Pipelines, and Vector Pipeline. In the mid-2000s, the company added to its U.S. assets with the purchase of Shell Gas Transmission for $613 million, and in 2005, Enbridge bought Shell's Gulf of Mexico natural gas pipeline system.

Research and Technology

Companies in the industry adopted new technology to enhance supervisory control and data acquisition (SCADA) systems to increase efficiency. SCADA systems increase efficiency and ease of use in the management of data traffic. For example, by using SCADA, pipeline systems can easily be drawn and monitored or scanned with graphics software.

Finally, the decline in pipeline safety has plagued certain companies in the industry. Despite the relatively good safety record of oil pipelines, the National Transportation Safety Board (NTSB) began studying pipeline safety in the wake of two spills of diesel fuel caused by the ruptures of Colonial Pipeline Company pipelines near Simpsonville, South Carolina, and Reston, Virginia, in 1991 and 1993, respectively. New technology in pipeline materials, coatings, and advanced corrosion warning greatly enhanced the safety of pipelines by the mid-2000s.

In the mid-2000s, attention focused on the safety of pipelines in light of potential terrorist attacks. Technology-based protection measures to prevent sabotage included installation of state-of-the-art surveillance equipment and upgraded computer security systems to avoid cyber-security breaches.