Special Report: Pipeline profits, capacity expansion plans grow despite increased costs

Sept. 14, 2009
Natural gas pipeline operators saw their profits reach new highs in 2008, rising by more than 7% compared with 2007, despite a 9% drop in revenues year over year. Net profits totaled $5.1 billion against revenues of $19.8 billion.

Natural gas pipeline operators saw their profits reach new highs in 2008, rising by more than 7% compared with 2007, despite a 9% drop in revenues year over year. Net profits totaled $5.1 billion against revenues of $19.8 billion.

The resulting earnings as a portion of revenues—25.78%—was the highest figure yet recorded by Oil & Gas Journal for the industry.

Oil pipeline profit growth also outstripped revenue growth: 4.67% vs. 2.75%.

Natural gas profits continued to be funneled into infrastructure, with additions to gas plant totaling nearly $12.2 billion, a roughly 89% increase from 2007 levels.

Operators also increased planned capacity expansions. Proposed mileage increased by more than 242%. Compression plans followed a similar pattern, rising more than 270% to total 664,755 hp.

The greater quantity of proposed pipeline projects came despite continued upward momentum in material costs. Estimated pipeline costs rose 10.25% to more than $3.7 million/mile. Pipeline labor prices maintained their premium to material and miscellaneous costs as the single most expensive per-mile item but this gap shrunk, with material costs rising more than 25% to more than $1.3 million/mile.

Higher-cost labor meanwhile affected the balance between estimated and actual costs for both pipeline and compressor projects completed in the 12 months ending June 30, 2009. Actual land pipeline costs exceeded projected costs by more than $300,000/mile, with a $360,000/mile difference in labor costs more than compensating for lower than predicted material and miscellaneous costs.

Higher than anticipated labor costs contributed the entire difference between estimated and actual compressor costs, with projects completed by June 30, 2009, running $137/hp more expensive than had been predicted and actual costs for both material and miscellaneous expenses lower than estimated costs.

The difference between estimated and actual costs was even sharper for offshore projects, with actual costs running nearly $2.2 million/mile higher than estimates.

US pipeline data

At the end of this article, two large tables (beginning on p. 73) offer a variety of data for US oil and gas pipeline companies: revenue, income, volumes transported, miles operated, and investments in physical plants. These data are gathered from annual reports filed with the Federal Energy Regulatory Commission by regulated oil and natural gas pipeline companies for the previous calendar year.

Data are also gathered from periodic filings with FERC by those regulated natural gas pipeline companies seeking FERC approval to expand capacity. OGJ keeps a record of these filings for each 12-month period ending June 30.

Combined, these data enable an analysis of the US regulated interstate pipeline system.

• Annual reports. 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 distinction between "major" and "nonmajor" is defined by FERC and appears as a note at the end of the table listing all FERC-regulated natural gas pipeline companies for 2008 at the end of this article (p. 77).

The deadline to file these reports each year is Apr. 1. For a variety of reasons, a number of companies miss that deadline and apply for extensions, but eventually file an annual report. That deadline and the numerous delayed filings explain why publication of this OGJ report on pipeline economics occurs in the third quarter of each year. Earlier publication would exclude many companies' information.

• Periodic reports. 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 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 back to FERC how its original cost estimates compared with what it actually spent.

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

OGJ's exclusive, annual Pipeline Economics Report began tracking volumes of gas transported for a fee by major interstate pipelines in 1987 (OGJ, Nov. 28, 1988, p. 33) as pipelines moved gradually after 1984 from owning the gas they moved to mostly providing transportation services.

Volumes of natural gas sold by pipelines have been steadily declining, so that, beginning with 2001 data in the 2002 report, the table only lists volumes transported for others.

The company tables also reflect asset consolidation and merger activity among companies in their efforts to improve transportation efficiencies and bottom lines.

Reporting changes

The number of companies required to file annual reports with FERC may change from year to year, with some companies becoming jurisdictional, others nonjurisdictional, and still others merging or being consolidated out of existence.

Such changes require that care be taken in comparing annual US petroleum and natural gas pipeline statistics.

Institution by FERC of the two-tiered (2 and 2A) classification system for natural gas pipeline companies after 1984 further complicated comparisons (OGJ, Nov. 25, 1985, p. 55).

Only major gas pipelines are required to file miles operated in a given year. The other companies may indicate miles operated but are not specifically required to do so.

For several years after 1984, many nonmajors did not describe their systems. But filing descriptions of their systems has become standard, and most provide miles operated.

Reports for 2008 show an increase in FERC-defined major gas pipeline companies: 83 companies of 130 filing for 2008, from 77 of 121 for 2007.

The FERC made an additional change to reporting requirements for 1995 for both crude oil and petroleum products pipelines. Exempt from requirements to prepare and file a Form 6 were those pipelines with operating revenues at or less than $350,000 for each of the 3 preceding calendar years. These companies must now file only an "Annual Cost of Service Based Analysis Schedule," which provides only total annual cost of service, actual operating revenues, and total throughput in both deliveries and barrel-miles.

In 1996 major natural gas pipeline companies were no longer required to report miles of gathering and storage systems separately from transmission. Thus, total miles operated for gas pipelines consist almost entirely of transmission mileage.

FERC-regulated major natural pipeline mileage edged higher in 2008, reaching its highest level since 1995 (Table 1). Final data show an increase of 195 miles, or 0.1%.

Rankings; activity

Natural gas pipeline companies in 2008 saw operating revenues drop by more than $1.9 billion, or nearly 9% from 2007. Net incomes, however, continued to rise, leading to a rebound in earnings as a percent of revenue to 25.78%, the highest level OGJ has yet recorded.

Oil pipelines saw much the same dynamic at work, with earnings rising 4.67% despite slower growth in revenues.

Liquids deliveries for 2008 via pipeline dropped more than 960 million bbl, or 6.9%, led by a more than 11% fall in product deliveries. Throughput measured in million bbl-miles (bbl-mile: 1 bbl moving 1 mile) fell roughly 0.6%, by more than 21.6 billion bbl-miles, with a products throughput drop of nearly 152 billion bbl-miles, or 7.6%, more than erasing gains in crude throughput.

OGJ uses FERC annual report data to rank the top 10 pipeline companies in three categories (miles operated, trunkline traffic, and operating income) for oil-pipeline companies and three categories (miles operated, gas transported for others, and net income) for natural gas pipeline companies.

Positions in these rankings shift year to year, reflecting normal fluctuations in companies' activities and fortunes. But also, because these companies comprise such a large portion of their respective groups, the listings provide snapshots of overall industry trends and events.

For instance, the growth in liquids pipeline earnings was driven by the top 10 companies in the segment, which grew their share of total earnings to 61.48%, led by an 87.1% jump in earnings at the highest-income company, Kinder Morgan Operating LP "A."

Company financial data for all companies provide a view of the ongoing condition of the oil and gas pipeline industries (Fig. 1; Table 2).

For all natural gas pipeline companies, for example, net income as a portion of operating revenues rebounded to 25.78% in 2008, more than erasing recent declines and setting a new record for the figure.

The percentage of income as operating revenues for oil pipelines also rebounded in 2008, reaching 42.53% after falling to 41.76% in 2007 from nearly 44% in 2006.

Net income as a portion of gas-plant investment countered the increases seen in income as a portion of revenue for natural gas pipelines, slipping to 4.83% after having risen to 4.99% in 2007. Even so, it remained above the 4.7% level seen in 1998.

For oil pipelines, net income as a portion of investment in carrier property in 2008 fell to 10.5%, continuing a drop from the 11.5% reached 2006. Income as part of investment in carrier property in 2004 stood at 11.4%, having risen steadily toward that level from 6.8% in 1998.

Major and nonmajor natural gas pipelines in 2008 reported an industry gas-plant investment of nearly $105.8 billion, the highest level ever, up from more than $95.5 billion in 2007, $88.3 billion in 2006, $84 billion in 2005, more than $83 billion in 2004, nearly $78 billion in 2003, $74.2 billion in 2002, almost $71 billion in 2001, and $68 billion in 2000.

Investment in oil pipeline carrier property also continued to rise in 2008, reaching $39.1 billion, after hitting almost $35.9 billion in 2007, which in turned followed a rebound to $32.7 billion in 2006 from the lowest level seen since at least 1997, $29.5 billion in 2005.

OGJ for many 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 3). In 2003, we added the base carrier-property investment to allow for comparisons among the anonymous companies.

The five crude oil pipeline companies in 2008 increased their overall investment in carrier property by more than $1.4 billion, or nearly 44%; the same grouping of companies increased overall investment in carrier property in 2007 by just $40.2 million, or 1.3%. All of the companies in the group increased their investment, but the bulk of the increase came as a result of increased construction expenditures at the largest company.

The five products pipeline companies, by contrast, increased overall investment in carrier property by $234 million, or 3.89%, down from the $463 million (8.35%) increase of 2007. As with the crude oil lines, all companies in the products pipeline group increased investment in 2008.

Comparisons of data in Table 2 with previous years' must be done with caution: In 2004, a major crude oil pipeline company listed there sold significant assets, making comparisons with previous years' data difficult.

Investment by the five product pipeline companies in 2008 was more than $6.2 billion, continuing a return to growth started in 2003 when investment of more than $4.7 billion was up from 2002's $4.5 billion level.

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

Construction surges

Applications to FERC by regulated interstate natural gas pipeline companies to modify certain systems must, except in certain instances, provide estimated costs of these 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 50 years ago.

Tables 4 and 5 show companies' estimates during the period July 1, 2008, to June 30, 2009, for what it will cost to construct a pipeline or install new or additional compression.

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

Not all projects proposed are approved. And not all projects approved are eventually built.

Applications filed in the 12 months ending June 30, 2009, surged after falling sharply the previous year.

• More than 2,176 miles of pipeline were proposed for land construction, and no new offshore work. The land level is up from the roughly 900 miles of pipeline proposed for construction in 2008, reaching its highest level since the more than 2,700 miles proposed in 1998.

• New or additional compression proposed by the end of June 2009 measured 644,755 hp, up substantially from the 238,400 hp proposed in 2008 but still short of the 713,000 hp reached in 2007.

Putting the upturn in US gas pipeline construction in perspective, Table 4 lists 21 land-pipeline "spreads," or mileage segments, and no marine projects, compared with:

  • 19 land and 0 marine projects (OGJ, Sept. 1, 2008, p. 58).
  • 25 land and 1 marine project (OGJ, Sept. 3, 2007, p. 51)
  • 42 land and 1 marine project (OGJ, Sept. 11, 2006, p. 46).
  • 56 land and 4 marine projects (OGJ, Sept. 12, 2005, p. 50).
  • 15 land and 0 marine projects (OGJ, Aug. 23, 2004, p. 60).
  • 37 land and 3 marine projects (OGJ, Sept. 8, 2003, p. 60).
  • 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).

The disparity between the mileage growth and spread growth in 2009 shows that many of the newly proposed projects are big, with 7 of the 21 measuring 100 miles or more and 3 measuring more than 300 miles.

For the 12 months ending June 30, 2009, the 21 land projects would cost just more than $8.1 billion as compared with the $3 billion planned for 19 projects a year earlier.

The larger number and scale of these filings indicate the need to move newly developed natural gas resources to consuming centers, despite current softness in demand.

Projects' cost projections indicate much about where companies believe unit construction costs ($/mile) are headed. Estimated $/mile costs for the new projects continued to rise.

For proposed US gas pipeline projects 2008-09 the average land cost was $3.7 million/mile; in 2007-08, the average land cost was $3.3 million/mile; in 2006-07, the average land cost was $2.7 million/mile; for 2005-06, the average land cost was $1.95 million/mile; for 2004-05 the average land cost was $2.2 million/mile; and for 2003-04 the average land cost was $1.7 million/mile.

Cost components

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

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, administration and overheads, and regulatory filing fees.

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

For the 21 land spreads filed for in 2008-09, costs-per-mile projections for three of the four categories showed increases, with only miscellaneous charges easing:

  • Material—$1,312,014/mile, up from $1,045,846/mile for 2007-08.
  • Labor—$1,414,728/mile, up from $1,344,389/mile for 2007-08.
  • Miscellaneous—$759,028/mile, down from $837,246/mile for 2007-08.
  • ROW and damages—$242,358/mile, up from $154,729/mile for 2007-08.

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 rarely shows clear trends related to either length or geographic area. In general, however, the cost-per-mile within a given diameter decreases as the number of miles rises. Lines built nearer populated areas also tend to have higher unit costs.

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

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

Despite the increases in other categories, labor remained the single largest portion of land construction costs. Labor's portion of estimated costs for land pipelines, however, shrank to 37.95% in 2009, from 39.76% in 2008, 37.93% in 2007, and 32.35% in 2006. Material costs for land pipelines continued to rise in absolute terms and took much of the percentage share surrendered by labor, making up 35.19% of total costs in 2009 as compared with 30.93% in 2008, 36.44% in 2007 and 38.17% in 2006.

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 pipeline 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.

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 put in service.

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, 2009. Fig. 7, for the same period, depicts how total actual costs ($/mile) for each category compare with estimated costs.

Per-mile pipeline construction costs for completed projects fell by nearly 6.4%, after jumping nearly 51% a year earlier and more than 86% the year before that. Sharply lower $/mile costs for offshore work in the 12 months ending June 30, 2009, balanced continued incremental increases in $/mile costs of both material and labor for land pipeline projects.

Even so, actual costs were 17.6% higher than projected costs for the 12 months ending June 30, 2009, with the price of labor running nearly 63% higher than had been anticipated.

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 typically 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, 2009, saw more than 295,000 hp of new or additional compression completed, continuing the increases seen the year before when the 196,000 hp completed reversed previous declines; 96,000 hp having been completed in 2007, 106,000 hp completed in 2006, and 153,000 hp of new or additional compression completed in 2005 vs. 468,000 hp in 2004.

More than half of the 2008-09 horsepower came from five projects.

Actual compression costs ran $137/hp higher than estimates, with labor costs more than double initial estimates overwhelming lower-than-expected costs in the other categories (Table 8). Despite the year-on-year widening of the gap between estimated and actual costs, however, $/hp actual costs dropped by 34% from 2008.

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