SIC 4613
PETROLEUM PIPELINES, REFINED



This category covers establishments primarily engaged in the pipeline transportation of refined petroleum products of petroleum, such as gasoline and fuel oil. Linking all petroleum pipeline industries together is Industry Group 461: Pipelines, Except Natural Gas, which includes the other major subcategories of the petroleum pipeline industry, SIC 4612: Crude Petroleum Pipelines and SIC 4619: Pipelines, Not Elsewhere Classified.

NAICS Code(s)

486910 (Pipeline Transportation of Refined Petroleum Products)

Industry Snapshot

Pipelines are the leading method of transporting refined petroleum, and they are an especially important mode of transportation in the United States where large volumes of oil must be moved over land. 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—essentially any product made from the distillation of crude oil or redistillation of unfinished petroleum derivative.

The United States has an extensive network of pipelines for the transport of refined petroleum owned and managed, for the most part, by the large, vertically integrated operations of the major oil companies. In 2001, firms in the industry operated a network moving petroleum products through 91,000 miles of pipeline, or approximately 51 percent of the all petroleum pipelines (crude and refined) totaling 177,000 miles. Though pipeline grew at a crawling pace from the mid-1980s through the mid-1990s, the late 1990s ushered in a more successful period for the industry, and demand for refined petroleum products was predicted to increase modestly in the United States and abroad. In 2001, total value of petroleum pipeline put in place (carrying both crude and refined products) totaled $943 million.

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" collecting crude oil from individual wells and transporting the output to a large-diameter "trunk line" for shipment to a refinery. Next, pipelines move refined products to markets. In 2000 U.S. oil refineries moved 7.5 billion barrels of petroleum products.

The ups and downs of the industry have been attributed to several economic forces. The growth of pipelines in general is linked, and ultimately limited by, oil production. Thus, industries like petroleum pipelines in general, and refined products pipelines in particular, are subject to competition from other transport industries such as water carriers, motor carriers, and railroads. As a method of transportation, pipelines transport about 50 percent of refined petroleum, compared to water carriers, which transport about 40 percent. Railroads and trucks transported the remaining percentage of total petroleum (total crude and refined products).

On the negative side, however, three major spills in the 1990s put a dent in the pipeline industry's relatively clean safety and environmental track record. More stringent environmental regulations are being put in place as the twenty-first century approaches and, as might be expected, the larger, vertically integrated producers are in the best position to manage the transition.

Organization and Structure

Between 40 and 50 companies were estimated to be in some way involved in the operation of refined petroleum pipelines in 1998, with 32 officially reporting to the Department of Energy. Market concentration was also relatively high in the refined petroleum pipeline industry, which has been under allegations of antitrust violations. 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. Nonetheless, of those firms whose principal business was identified to be refined petroleum pipelines, the top six firms controlled only 11 percent of the market.

The petroleum industry consists of four distinct, but connected, vertical levels as outlined by author and analyst Stephen Martin. These are: 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 including 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. Having the advantage of economies of scale, pipelines have construction costs that are proportional to pipeline radius, but pipeline capacity is roughly proportional to the square of the radius. Thus, 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 in the mid-1970s (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; water carriers' share of the market declined from 50 percent in 1985 to about 40 percent in 1995. Aside from their economies of scale, pipelines are viewed (with the exception of recent history when two accidents have marred their record) as a safer and more environmentally sound method of transporting petroleum. 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, however, no company can deny access to independent shippers in order to gain market share. Throughout the twentieth century, however, oil companies have been accused of using exclusive control over pipelines to gain expanded control of markets. Because pipelines are such a critical link in the petroleum production process, much regulation exists at the federal level, primarily from the Interstate Commerce Commission (ICC), in order 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; and, to avoid the market power of the railroads. By the turn 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 (90 percent) by the Standard Oil Company. 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 being used in 1930, as firms discovered that many different products could be shipped through the same pipeline. The emerging cities in the Midwest and West, moreover, created new markets for refined petroleum, and pipelines won out as the least expensive method of transporting 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 much transportation of oil products was diverted from tankers to pipelines. Tankers were needed for the war effort, and it was becoming 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 availability of water carriers after World War II is cited as the only impediment to the complete monopolization of the oil transport industry by the pipeline. Other modes of transportation—rail and trucking—held only small niches of the oil transportation market. Figures on inter-modal 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 competitive threat.

Despite the success of the pipeline industry, a major concern of federal regulators has been that the oil companies exert 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 the force of competition, here 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, it was mandated that the nation's cities burn cleaner gasoline to cut carbon monoxide levels. The law led to greater reduction of carbon monoxide by 1995, and forced cities with severe air pollution to use even cleaner gasoline. However, the National Petroleum Refiners Association estimated that the Clean Air Act cost the industry between $10 and $30 million.

The law created problems for pipeline companies, who were now 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 have increased over the years, even if only marginally at times.

Despite the industry's renewed economic success, pipe fractures and spills have besmirched its reputation as the safest method of transport. A 1993 spill occurred in the Potomac River near Washington, D.C., and in 1994 a more virulent pipeline disaster dumped about 1.2 million gallons into the San Jacinto River, outside Houston, and 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, owned by Colonial Pipeline Co. The report indicated that the pipeline contained frail, corroded, and cracked portions as well as profound pressure control problems. The report also stated that without repair, operation of the pipeline could prove 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, a pipe segment ruptured in Greenville, South Carolina, spewing about a million gallons of fuel into the Reedy River—the fifth largest pipeline spill in the United States. After mending this fracture, Colonial agreed to test and repair the whole pipeline. Colonial estimated that the repairs would run 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.

Two major refined pipeline projects in the latter 1990s were the cross-border pipeline connecting Brownsville, Texas, to Matamoros, Mexico, 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 being constructed for the Penn Octane Corporation to sell directly to Pemex, the state-owned Mexican oil company, as well as independent distributors.

With respect to the refined products industry, several major changes occurred in 1998 and 1999. Mergers, consolidations, divestitures, and frank exits within the industry brought many smaller companies into the fold. By 1999, small refining companies constituted 36 percent of the total U.S. refining capacity. On the other end of the spectrum, one of the biggest mergers was the December 1998 $53 billion transaction joining BP America with Amoco (the new company known as BP-Amoco). Not far behind was the December 1999 merger of Mobil Corporation with Exxon Corporation, an $87 billion transaction considered the largest industrial merger ever. As a condition precedent to the final merger, Mobil agreed to sell off its 300 retail gas stations in New Jersey in order to satisfy the Federal Trade Commission's and 29 states' antitrust claims.

Current Conditions

In 2000 U.S. petroleum pipeline companies transported 7.5 billion barrels of petroleum products. Whereas the miles of pipeline dedicated to crude oil transportation has steadily declined since 1965 (from over 149,000 miles to just over 86,000 in 2000), pipelines transporting refined petroleum products have 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 is projected to increase from 16.8 million barrels per day at the beginning of 2002 to between 19.8 million barrels per day and 20.4 million barrels per day. Almost all growth will come from existing facilities, primarily in the Gulf Coast. After working at utilization rates as low as 69 percent during the early 1990s, refineries' utilization rate in 2001 was 93 percent.

The pipeline industry faces numerous ongoing issues, primarily centered around 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.

Industry Leaders

According to the Pipeline & Gas Journal 19th Annual 500 Report, in 1999 the leading company for throughputs was Shell Pipe Line LP (formerly Equilon Pipeline Company LLC), which was formed from the combined Shell Pipe Line Corp. and Texaco Pipeline Inc., with a daily throughput of 1.33 million barrels.

When ranked by products deliveries, the top 5 companies in 1999 were: Colonial Pipeline Co. (708 million barrels); SFPP Kinder Morgan, LP (382 million barrels); Buckeye Pipe Line Co., LP (313 million barrels); Shell (301 million barrels); and Marathon Ashland Pipe Line LLC (289 million barrels).

With respect to revenues, the leading 5 companies for 1999 (reporting 1997 operating revenues) were: Exxon Pipeline ($588 million); Colonial Pipeline ($562 million); BP Pipelines (Alaska), Inc. ($550 million); Shell ($378 million); and Enbridge Energy Partners (formerly Lakehead Pipe Line Co., LP; $288 million).

Research and Technology

The companies themselves have adopted new technology to enhance supervisory control and data acquisition (SCADA) systems, such as 32-bit computers and distributed processing to increase efficiency. Colonial Pipeline and Amoco Gas are two companies that are installing new SCADA and software systems. These new systems are projected to increase efficiency and ease of use in the management of data traffic. For example, using these systems, pipeline systems can easily be drawn and monitored or scanned with graphics software.

Finally, deterioration 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. As a result, the NTSB is studying 400 pipelines to develop techniques for identifying damaged pipelines.

Further Reading

"Cross-Border Pipeline Nears Completion." Pipeline & Gas Journal, November 1999, 10.

Lawson, Robert. "Pipelines' Future Depends on Industry, Government, Public Cooperation." The Oil and Gas Journal, 25 November 2002, 48-51.

Perone, Joseph R. "Mobil Agrees to Sell New Jersey Gas Stations for Merger with Exxon." The (Newark) Star-Ledger, 1 December 1999.

Tubb, Jeff, et. al. "P&GJ's 19th Annual 500 Report." Pipeline & Gas Journal, November 1999, 42.

U.S. Department of Energy. The U.S. Petroleum and Gas Industry Performance Profile: Executive Summary, 2002. Available from http://www.eia.doe.gov .

U.S. Department of Transportation, Bureau of Transportation Statistics. U.S. Oil and Gas Pipeline, 2002. Available from http://www.bts.gov .



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