US pipeline companies solidly profitable in 2002, scale back construction plans

Sept. 8, 2003
Federally regulated US oil and natural gas pipeline companies in 2002 reported another profitable year, according to annual report filings with the US Federal Energy Regulatory Commission, even as the natural gas pipelines in that group scaled back construction plans from levels of recent years.

Federally regulated US oil and natural gas pipeline companies in 2002 reported another profitable year, according to annual report filings with the US Federal Energy Regulatory Commission, even as the natural gas pipelines in that group scaled back construction plans from levels of recent years.

Incomes for all companies increased last year, while all oil pipeline companies and FERC-defined major natural gas pipeline companies also increased their operating revenues. Major gas pipeline companies, 68 of 112 companies reporting for 2002, operated 93% of all regulated mileage and moved 97% of volumes transported for a fee in the year.

All pipeline companies held level or increased their deliveries of hydrocarbons from a year earlier, and all companies increased their investments in operating facilities.

On the other hand, construction plans by natural gas pipelines, monitored by Oil & Gas Journal for 12 months ending June 30, 2003, declined in comparison with plans announced in previous 12-month period, as shown in applications by these companies to FERC. But the incremental cost ($/mile and $/hp) estimated by those companies rose slightly.

Other reports filed during the same 12-month period from natural gas pipelines compared actual costs with those estimated in initial filings. Trends showed actual costs exceeded estimates.

Whence the numbers

Information that forms the basis for this report is for the most part available publicly from FERC and falls into two broad categories:

1.Data from annual reports filed by regulated oil and natural gas pipeline companies with FERC for the previous calendar year.

Companies that, in FERC's determination, are involved in the interstate movement of oil or natural gas for a fee are jurisdictional to FERC, must apply to FERC for approval of transportation rates and therefore must file a FERC annual report: Form 2 or 2A, respectively, for major or nonmajor natural gas pipelines; Form 6 for oil (crude or product) pipelines.

The deadline each year is Apr. 1. For a variety of reasons, many companies miss that deadline, apply for extensions, but eventually file a report. OGJ begins in March gathering copies of these reports directly from the companies and searching public databases at FERC for them.

That deadline and the numerous delayed filings explain why publication of this OGJ report on pipeline economics occurs as late as the third quarter of each year. Earlier publication would exclude many companies' information.

2.Data from periodic filings with FERC by those regulated natural gas pipelines related to capacity-expansion plans that FERC must approve. OGJ keeps a record of those filings during each 12-month period ending June 30.

When a FERC-regulated natural gas pipeline company wants to modify its system, it must apply for a "certificate of public convenience and necessity." This filing must explain in detail the planned construction, justify it, and—except in certain instances—specify what the company estimates the construction will cost.

Not all applications are approved; not all that are approved are built. But, assuming a company receives its certificate and builds its facilities, it must—again, with some exceptions—report to FERC how what it actually spent compares with what it estimated to spend.

OGJ spends the year July 1 to June 30 monitoring these filings, collecting them, analyzing their numbers.

Such companies comprise so large a portion of their respective groups that OGJ's Top 10 listings provide snapshots of overall industry trends and events.

Operating revenues and incomes for all companies offer a view of the conditions of these industries (Fig. 1; Table 3).

Calculating return on investment—net income as a portion of gas-plant investment or income as a percentage of an oil pipeline's carrier property—can also indicate companies' performances and health. The term "gas plant" refers to the physical facilities used to move natural gas: compressors, metering stations, and pipelines; "carrier property" has similar significance for an oil or product pipeline (Table 2).

ROI for gas pipelines improved in 2002, compared with revised ROI for 2001: 3.6% last year vs. slightly less than 3% for 2001 for major companies; and 3.68% for all companies vs. nearly 3.2% for 2001.

In 2000, ROI stood at 4.2%, compared with 3.8% in 1999. In 1998, it was 4.7%; 1997, 3.8%; 1996, slightly more than 4%; 1995, 4.9%.

For the 1990s, this indicator of companies' health rose steadily. In 1984, it stood at 8.7%—when FERC began (with Order 436) restructuring the interstate gas pipeline industry, culminating in 1992 with Order 636.

Beginning with 1985, net income as a portion of gas-plant investment fell precipitously through 1987 then began a gradual comeback.

For oil pipelines, ROI in 2002 was up, to nearly 10.5% vs. 9.35% in 2001; slightly more than 9% for 2000; 8.6% in 1999, which had reversed a 2-year decline: 6.8% in 1998 and 7.3% in 1997.

Major and nonmajor natural gas pipelines in 2002 reported an industry gas-plant investment of $74.2 billion, up from almost $71 billion in 2001, $68 billion in 2000, nearly $66 billion in 1999, more than $63 billion in 1998, and almost $60 billion in 1997.

Investment in carrier property in 2002 rose by more than $457 (nearly 1.5%) compared with more than 8% in 2000.

OGJ for several years has tracked carrier-property investment by five crude oil pipeline and five products pipeline companies chosen as representative in terms of physical systems and expenditures (Table 2).

The five crude oil pipeline companies in 2002 reduced their overall investment in carrier property by less than 1% over that for 2001. The five products pipeline companies also reduced their investment, by nearly 3%.

As with much else in both pipeline segments, oil and natural gas, comparisons of data with previous years' must proceed with caution: In 1998, a major crude oil pipeline company listed in Table 2 merged with two other large pipeline companies. More mergers have followed.

In 2002, investment by the five product pipeline companies was more than $4.5 billion and reflected the first drop for this group in several years. In 2001, investment by these companies stood at more than $4.6 billion, continuing a trend evident for much of the 1990s: more than $4.2 billion in 2000; barely more than $4 billion in 1999; nearly $3.8 billion in 1998; slightly less than $3.7 billion in 1997; $3.6 billion in 1996; $3.5 billion in 1995; and $3.3 billion in 1994.

Fig. 2 illustrates the investment split in the crude oil and products pipeline companies.

Another measure of the profitability of oil and natural gas pipeline companies in recent years is the portion net income represents of operating income (Table 3).

For oil pipelines, the percentage of income in operating revenues had been hovering in the mid-20s for the first 5 years of the 1990s; for the last 7 years, however, it pushed into the 30s, reaching almost 39% in 2001, and last year it exceeded 43%.

Construction

As stated, regulated natural gas pipeline companies that need to modify their systems in interstate service must apply to FERC. Such applications, except in certain instances, state the estimated costs of those modifications in varying degrees of details.

Tracking the mileage and compression horsepower applied for and the estimated costs can indicate levels of construction activity over 2-4 years. OGJ has been doing that since this report began more than 45 years ago.

Shown in Tables 4 and 5 are natural gas pipeline companies' estimates during the period July 1, 2002, to June 30, 2003, for what it will cost to construct a pipeline or install new or additional compression.

Those tables cover a variety of locations, pipeline sizes, and compressor-horsepower ratings.

Not all projects that are proposed are approved. And not all approved ones are eventually built. OGJ's twice-yearly construction survey tracks those that proceed.

Applications filed in the 12 months ending June 30, 2003, suggest the immediate future of gas pipeline construction along the US interstate system:

  • More than 900 miles of pipeline were proposed for land construction; more than 40 miles for offshore expansions. This compares with more than 1,660 miles of pipeline proposed for land construction for the 12 months before June 30, 2002 (Table 4); 70 miles were planned for offshore expansions.
  • At the end of June 2003, nearly 245,000 hp of new or additional compression were applied for, compared with more than 550,000 hp for the same period a year earlier (Table 5). (All applications are for land-based compression.)

Again in 2003, compression-project plans speak volumes about the near-term future for new natural gas movements in the US:

  • Plans proposed 2002-03 were less than half of the more than 500,000 hp of new or additional compression envisioned by companies 2001-02 when companies were moving rapidly to expand their gas deliveries into the growing US markets in the West, Northeast, and Florida. But for 3 years in a row, construction of more than 1.25 million hp is under way or contemplated, as much evidence as anything to support some market analysts' views of a 30 tcf US market by 2015.
  • Of the total amount of compression applied for 2002-03, more than 75% is for added capacity at existing stations.

Much of this added compression is tied to pipeline looping of existing systems (Table 4), also easier and quicker to get approved than new pipeline over virgin right-of-way.

Table 4 lists 37 land-pipeline construction "spreads," or mileage segments, and 2 marine projects, compared with:

  • 83 land and 3 marine projects (OGJ, Sept. 16, 2002, p. 52).
  • 49 land and 2 marine projects (OGJ, Sept. 3, 2001, p. 66).
  • 115 land and 6 marine projects (OGJ, Sept. 4, 2000, p. 68).
  • 39 land and no marine projects (OGJ, Aug. 23, 1999, p. 45).
  • 34 land and 2 marine projects (OGJ, Aug. 31, 1998, p. 33). The report for 1998 included data from Canada.

For the 12 months ending June 30, 2003, the 37 land projects would cost nearly $1.3 billion.

Projects' cost projections indicate much about where companies believe unit construction costs ($/mile) are headed. These cost-per-mile figures in fact reveal more about cost trends than do aggregate totals.

For proposed US gas pipeline projects 2002-03, the average land cost was $1.28 million/mile; for offshore, more than $3 million/mile.

For the 2001-02 period, the land pipeline cost estimates were for more than $1.2 million/mile; for offshore, $1.5 million/mile. For 2000-01 period, they were slightly more than $1.3 million/mile for land projects; for the offshore projects, more than $2.5 million/mile.

Cost components

Variations over time in the four major categories of pipeline construction costs—material, labor, miscellaneous, and right-of-way (ROW)—can also suggest trends within each group.

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Materials can include line pipe, pipe coating, and cathodic protection.

"Miscellaneous" costs generally cover surveying, engineering, supervision, contingencies, telecommunications equipment, freight, taxes, allowances for funds used during construction (AFUDC), administration and overheads, and regulatory filing fees.

ROW costs include obtaining rights-of-way and allowing for damages.

For the 37 land spreads surveyed for 2002-03, costs-per-mile for the four categories showed cost increases in three of the four categories:

  • Material—$386,496/mile, up from $361,722/mile for 2001-02.
  • Labor—$553,599/mile, down from $589,404/mile.
  • Miscellaneous—$287,786/mile, up from $215,942/mile.
  • ROW and damages—$58,619/mile, up from $46,504/mile.

For the 2 offshore spreads for the same period, costs-per-mile in all categories exceeded estimates for work proposed during 2001-02:

  • Material—$591,290/mile, compared with $328,115/mile for 2001-02.
  • Labor—$1,441,101/mile, vs. $680,443/mile.
  • Miscellaneous—$1,148,353/mile vs. 497,258/mile.
  • ROW and damages—$2,681 vs. no costs for 2001-02.

Table 4 lists proposed pipelines in order of increasing size (OD) and increasing lengths within each size.

The average cost per mile for the projects shows few clear-cut trends related to either length or geographic area.

In general, however, the cost per mile within a given diameter indicates that the longer the pipeline, the lower the unit (per-mile) cost for construction. And, lines built nearer populated areas tend to have higher unit costs.

Additionally, road, highway, river, or channel crossings and marshy or rocky terrain each strongly affects pipeline construction costs.

Fig. 3, derived from Table 4, shows the major cost-component splits for land and offshore pipeline construction costs.

Material and labor for constructing land pipelines make up more than 73% of the cost; for offshore lines, nearly 64%. Fig. 4 plots a 10-year comparison of land-construction unit costs for the two major components, material and labor.

Fig. 5 shows the cost split for land compressor stations based on data in Table 5.

Table 6 lists 10 years of unit land-construction costs for natural gas pipelines with diameters ranging from 8 to 36 in. The table's data consist of estimated costs filed under CP dockets with FERC, the same data shown in Tables 4 and 5.

Table 6 shows that the average cost per mile for any given diameter may fluctuate year to year as projects' costs are affected by geographic location, terrain, population density, or other factors.

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Completed projects' costs

In most instances, a natural gas pipeline company must file with FERC what it has actually spent on an approved and built project. This filing must occur within 6 months after the pipeline's successful hydrostatic testing or the compressor's being placed in service.

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Fig. 6 shows 10 years of estimated vs. actual costs on cost-per-mile bases for project totals.

Tables 7 and 8 show such actual costs for pipeline and compressor projects reported to FERC during the 12 months ending June 30, 2003.

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Click here to view Compressor Stations in PDF.

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Fig. 7, for the same period, depicts how total actual costs ($/mile) for each category compare with estimated costs.

Some of these projects may have been proposed and even approved much earlier than the 1-year survey period. Others may have been filed for, approved, and built during the survey period. If a project was reported in construction spreads in its initial filing, that's how projects are broken out in Table 4.

Completed-projects' cost data, however, are usually reported to FERC for an entire filing, usually but not always separating pipeline from compressor-station (or metering site) costs and lumping several diameters together.

The 12 months ending June 30 saw a leap in the number of completed-project cost filings, nearly 1,250 miles of pipeline and almost 500 hp of new or additional compression. Especially noteworthy for the pipeline construction were the numerous filings for large-diameter line: more than 100 miles of 42-in. line and nearly 10 miles of 48 in.

Overall, actual land gas pipeline construction costs exceeded originally estimated ones by more than $100 million.

For the single offshore report—the 36-in. Gulfstream pipeline from Alabama to Florida—actual costs upon completion exceeded those estimated at the time of application by more than $32 million.

Table 8 shows that estimated costs for installing compression exceeded actual by nearly $51 million.