1990 U.S. INTERSTATE PIPELINES' EFFICIENCY CONTINUES IMPROVING

Warren R. True
Pipeline/Gas Processing Editor

The U.S. gas-transmission industry may look back on 1989-90 as the period it turned the corner in adjusting to the new realities of a less regulated environment.

For 1990, sharply higher volumes of gas transported for others and higher net incomes offset flat revenues and declining gas sales for major and nonmajor U.S. interstate natural-gas pipeline companies.

These improvements followed similar increases in 1989 after industry revenues and incomes appeared in free-fall for 1985-87 (Table 1 and Fig. 1).

And even regulated, U.S. common-carrier oil pipelines saw more success in 1990, as operating revenues and incomes improved (Table 1) despite fewer miles operated, less crude oil and product delivered, and lower overall trunkline traffic.

These data along with others from annual reports filed with the U.S. Federal Energy Regulatory Commission (FERC) are tracked in this annual Oil & Gas Journal Pipeline Economics Report. (See company tables pp. 57-63) .

Additionally, this year's annual Journal report for the first time contains cost information for completed pipeline projects with comparisons to their estimates at the time of proposal.

HISTORIC CHANGE

The shift of interstate natural-gas pipelines from their historic role as merchants of gas to transporters continued in 1990.

Volumes of gas moved for others by these companies last year increased by more than 16% for major companies and by almost 10% overall. This follows an increase in 1989 of more than 9% for majors and more than 15% for all companies.

Gas sold by these same companies, however, declined again last year: by almost 17% for majors and by almost 20% overall. In 1989, the decline was 13% for majors and 5% for all companies reporting.

For common-carrier oil pipelines, moving both crude oil and product, operations continued to be sluggish but revenues improved by almost 10% and incomes by more than 5% for data tracked in by Journal Pipeline Economics Reports.

On the construction front, U.S. projects proposed to the FERC for the 12-month period ending June 30 (Table 2) amounted to more than 3,000 miles.

This is a notable amount of proposed mileage and indicates confidence by those companies in the growth of natural-gas use, especially as a relatively clean-burning fuel in light of the public's growing environmental concerns.

The depressed levels of gas pricing during 1991 does not seem to have dampened pipeline companies' interests in gaining access to new markets or new sources of supplies.

Cost figures for these projects are taken from estimates accompanying companies' applications to the FERC for approval to build the systems. This year, Oil & Gas Journal introduces coverage of the actual costs for some of these projects proposed, in some cases, much earlier than the dates of their completion (Table 3).

INCOMES AND MILEAGE

Net incomes for regulated major interstate natural-gas pipeline companies improved significantly last year, up by more than 6% ($135 million). Incomes for combined major and nonmajor gas pipelines were up by more than $383 million (15.4%).

Operating revenues, on the other hand, were generally flat when compared to 1989: for majors, these showed an increase of only $148 million (0.57%). Overall, operating revenues for majors and nonmajors fell by $148 million ( 0.46%).

Operating revenues for major and nonmajor natural-gas transmission companies were falling beginning with 1983 until a slight uptick for 1988 (Fig. 1). Similarly, net incomes fell in 1983 and for 2 years beginning with 1986 and 1987. The increase in 1989 was the largest of the decade, eclipsing a big jump in 1985.

Petroleum-liquids pipeline companies' net incomes in 1990 increased by 5% (almost $113 million) on operating revenues that increased 9.8% ($636.5 million). That increase in revenues reverses a 5-year trend begun in 1985. The hike in income resumes the generally upward movement for the decade 1981-91 (Fig. 1 and Table 1).

Pipeline mileage reported by major natural-gas companies was essentially flat for 1990 compared with 1989, rising 2.75% (more than 6,600 miles). Majors operated more than 7,500 new miles of transmission line last year, an increase of 4.15%. Year to year, field-line use fell slightly, storage line use was flat.

For major and nonmajor pipeline companies, there was little change in the U.S. interstate gas-pipeline system for 1990 compared with 1989. Transmission lines increased slightly more than 1%; line for field and storage decreased fractionally.

Liquid pipeline companies showed virtually no change ( O.16%) in total pipeline mileage utilized during 1990 compared with 1989. Mileage for gathering and crude oil fell; product pipeline mileage increased slightly last year.

Total mileage reported for 1990 was 442,974 with 168,364 miles for crude oil and product pipelines and 274,610 miles for gas transmission, field, and storage (Table 4).

CONSTRUCTION PACE

For the 12-month period ending June 30, more than 3,000 miles of pipeline construction were proposed to the FERC, of which 36 miles were planned for offshore Gulf of Mexico (Table 2).

This total mileage was proposed in 129 construction projects, 3 of which were for off shore.

For the 12-month period July 1, 1989, to June 30, 1990, 7,291.03 miles of pipeline were proposed of which 60.08 miles were planned for offshore.

A large portion of the land construction filed for approval with the FERC during the 1989-90 period consisted of projects being refiled as a result of changes in volumes, diameters, lengths, or compression.

These refilings comprised approximately 2,100 miles of the mileage proposed for the 1989-90 period.

Excepting these 2,100 miles of refilings, the remaining mileage of approximately 5,000 miles was a significant amount of gas pipeline proposed.

The amount proposed in the more recent period, although less, still reflects healthy construction prospects for the near term.

Oil & Gas Journal's Worldwide Construction Report (OGJ, Oct. 28, p. 81) lists 110 individual pipeline projects totaling more than 8,700 miles of U.S. pipeline construction reported by surveyed companies as either proposed, planned, or under way.

By comparison, OGJ's Oct. 15, 1990, construction report also listed 105 U.S. pipeline projects proposed, planned, or under way, totaling almost 12,000 miles.

The difference in mileages represents, to some extent, the withdrawal of a few large projects such as Wycal's Wyoming-California line.

Natural-gas pipeline projects reported in this year's construction report total more than 7,400 miles of pipeline. The report a year ago listed gas-pipeline projects totaling more than 10,500 miles.

Prospects for many of these lines being built are better now than at any time in the last 5 years. The strong prospects for natural gas have much to do with this outlook combined with the shelving of several competing projects.

Nonetheless, many projects, primarily for gas-pipeline construction, continue to compete for the same markets, as Table 2 shows, or may still become uneconomical in the currently depressed natural-gas markets.

Crude-oil projects in the latest Oil & Gas Journal Worldwide Construction Report total 13 comprising more than 900 miles. The construction report a year ago also listed 13 crude-oil pipeline projects totaling more than 1,000 miles.

Finally, the latest Journal report shows six product-pipeline projects with more than 380 miles of pipeline. The report a year ago listed five totaling 350 miles.

PROJECTS' ACTUAL COSTS

Table 2 reflects cost estimates for projects proposed to the FERC for construction approval. Not all projects proposed are built, however.

Actual costs for a project which is approved and built must be filed with the FERC within 6 months after the line's completion. That point is determined by the line's successful hydrostatic test, its commissioning date.

Table 3 shows such actual costs for projects completed and reported to the FERC for the period Jan. 1, 1989, to June 30 of this year. Some of these projects may have been proposed or even approved much earlier than the surveyed period. Others may have been filed for, approved, and built less than a year before completion.

And in its initial filing, each of these projects may have been reported in segments. (That's how projects are broken out in Table 2.)

Completed-cost information, however, is reported to the FERC for an entire filing.

Nonetheless, this is the first time such actual-cost information has been published.

Overall, actual costs exceeded anticipated ones by almost $18 million (9.36%).

The greatest variation occurred in estimated and actual costs for labor: For the projects reported, actual labor costs exceeded estimated ones by more than $21 million (28.9%). R.O.W. and damages were underestimated by $813,853 (11.3%).

Estimates for costs of materials and for miscellaneous items were closer; operators overestimated material costs by $3.5 million (4.75%) and miscellaneous costs by $505,052 (1.38%).

Subsequent Oil & Gas Journal Pipeline Economics Reports will continue reporting what companies tell the FERC they spend to build pipelines.

U.S. INTERSTATE NETWORK

Revenue, income, and mileage changes cited earlier are evident on the pipeline-company tables (p. 57).

These data are based on annual reports of regulated interstate pipeline companies and provide a variety of detail on each of them, including pipeline mileage, crude oil and refined-products deliveries, natural-gas sales and gas transported for other companies, operating revenues, and net incomes.

Beginning with the 1988 Pipeline Economics Report (OGJ, Nov. 28, 1988, p. 33), the Journal began tracking volumes of gas transported for others by major interstate pipeline systems. This provides a method of keeping track of the changing nature of the U.S. gas-transmission industry.

SYSTEM UTILIZATION

Comparisons between any years of U.S. petroleum and natural-gas pipeline mileages must be made with care for two reasons:

The number of companies required to file reports with the FERC varies each year.

And, secondly, the FERC's system for classifying interstate natural-gas pipeline companies changed with the 1984 reporting year (OGJ, Nov. 25, 1985, p. 55).

Since 1984, FERC-regulated gas pipeline companies have been classified as "major" or "nonmajor" based on total natural-gas transmissions for each of the 3 immediately previous reporting years. (See FERC Accounting and Reporting Requirements for Natural Gas Companies, para. 20-011.)

Major pipeline companies are those whose combined gas sold for resale and gas transported or stored for a fee exceeded 50 bcf at 14.73 psi (60 F.) in each of the 3 previous calendar years.

Nonmajors are companies not classified as majors and which have had total gas sales of volume transactions exceeding 200 MMcf at 14.73 psi (60 F.) in each of the 3 previous calendar years.

One effect of this change has been that companies classified as nonmajor are exempt from filing certain data. Chief among the excluded figures are mileage and gas-sales or transportation figures.

Many nonmajor companies nonetheless file such data voluntarily, but consistency exists only among major companies.

In comparisons, figures for nonmajor companies should be excluded from a calculation of total U.S. interstate pipeline utilization for any given year because of their unreliability year to year.

Therefore, combining 1990 mileage data for all regulated liquids-pipeline companies (168,364) with mileage reported by the major natural-gas pipeline companies (46 companies reporting 248,334 miles) yields a total figure of 416,698. This represents a 1.5% increase of 6,376 miles over comparable figures reported for 1989 (168,637 + 241,685 = 410,322).

The 1989 figures represented a decline from 1988's total of 424,522 miles.

This compares with a small increase for 1988 over 1987 of 4,210 miles for all liquids and major natural-gas pipelines.

Whether a liquids pipeline company must file an FERC annual report (Form 6) is determined by whether the FERC designates the company as an interstate common-carrier pipeline.

These reports for 1990 show that gathering lines decreased by 1,000 miles (-3%) and crude lines, by 160 miles (-O.29%). Products lines increased by 887 miles (1.11 %) over totals reported for 1989.

These figures are in line with the erratic pattern of liquids-pipeline utilization for the past 10 years (Table 4).

Natural-gas transmission lines for all companies were flat compared with 1989's, up by 1,227 miles (0.45%), and up slightly for major companies, by 6,649 miles (2.75%).

Field lines for all companies showed a small decrease of 1,053 miles (-1.67%) and, among major companies, a loss of 945 miles (-1.72%).

For all companies, storage lines decreased last year over 1989: down 1,227 (-O.45%) but gained fractionally for majors, up 23 (0.54%).

DELIVERIES

Throughput for liquids-pipeline companies in 1990 was essentially flat when compared with 1989.

And for all natural-gas pipelines, sales of gas fell significantly in 1990, by almost 1.4 tcf (-19.5%), and for majors, by more than 934 bcf (-16.8%).

These latter figures reflect the ongoing major story of the pipeline industry: the shift of natural-gas pipeline companies to transporters of gas from their historic role as buyers of gas for resale.

This shift has been evolving for almost 7 years and was evident in 1990 in the volumes of gas regulated interstate pipeline companies transported for others.

For last year, all regulated U.S. interstate gas pipelines carried more than 21 tcf of gas for others; of those volumes, majors carried almost 20 tcf.

For all companies, volumes of gas transported for others rose by more than 1.9 tcf (10%) when compared to volumes carried in 1989; for majors, the rise was more than 2.8 tcf (16.5%).

Volumes of gas transported for others in 1990 by all interstate gas-pipeline companies (21.08 tcf) comprised 78.6% of total volumes (26.8 tcf) moved through the U.S. system, up from 72.9% for 1989 and from 68% for 1988.

For major companies (whose total volumes exceeded 24.6 tcf), the share was a bit larger: more than 81.2%. This share also represented an increase over the 1989 figure, up from 75.5%, and over the 1988 figure, up from 71%.

Crude-oil and product deliveries last year approached 11.4 billion bbl, a minimal increase over 1989 of 97.4 million bbl (0.86%).

Crude-oil deliveries through the U.S. interstate system rose slightly last year by 127.9 million bbl (1.99%). At the same time, product deliveries declined by 30.5 million bbl ( O.63%).

Trunkline traffic for U.S. crude-oil and product pipelines also showed a small decline last year when compared to 1989. It fell by 4.9 billion bbl-miles (-O.14%) over that for 1989.

Crude-oil trunkline traffic declined 27 billion bbl-miles (-1.41%). Product traffic rose slightly, by 22 billion bbl-miles (1.4%).

RANKINGS

Oil & Gas Journal ranks the top 10 natural-gas and liquids pipeline companies in three categories (mileage, barrel-mile throughput, and operating income) for oil pipeline companies and four categories (mileage, natural-gas sales, volumes transported for others, and operating income) for natural-gas pipeline companies (pp. 42-43).

These rankings are broken out from the pipeline-company tables (pp. 57-60).

For all natural-gas pipeline companies, net income as a portion of gas-plant investment continued a trend which began in 1988.

This portion stood at 5.2% for 1990, up from 4.6% for 1989, and 3.1% for 1988. The 1988 figure was up from 2.9% in 1987. It was 3.4% in 1986, 4.5% in 1985, and 8.7% in 1984.

For major gas pipelines, net income as a portion of gas-plant investment countered the trend, hitting 4.7% for 1990 after reaching 4.8% in 1989. The figure had risen to 3.2% for 1988. It fell to 2.6% in 1987 from 3.2% in 1986. It was 4.3% in 1985, and 7.6% in 1984.

The term "gas plant" refers to the physical facilities--compressors, metering stations, and pipelines--used to transport natural gas.

For 1990, all gas companies reported an industry gas-plant investment totaling almost $55.3 billion compared to $54.2 billion for 1989 and $51 billion for 1988.

Majors' gas-plant investment in 1990 was $47.9 billion compared to $44.1 billion for 1989 and $44 for 1988.

For interstate common-carrier liquids pipeline companies, net income as a percentage of investment in carrier property held at 9% for 1990, the same as in 1989. In 1988 it was 10.3%; in 1987, 11.6%.

Liquids pipelines' investment in carrier property for 1990 increased by almost $1.2 billion (4.8%) to $25.8 billion over 1989 which had shown a smaller $306 million (1.26%) increase over 1988.

Another measure of the profitability of oil and natural-gas pipeline companies in recent years is the percentage net income represents of operating income. Through 1987, trends for liquids-pipeline companies and for natural-gas pipeline companies had been heading in opposite directions for 10 years.

For liquids-pipeline companies in 1990, income as a portion of operating revenues fell to 32.7% from 34.2% for 1989 and 36.5% for 1988.

By contrast for all natural-gas pipeline companies, income as a percentage of operating revenues has been recovering in recent years.

Last year saw a continued strengthening in this area: net income of all companies as a portion of operating revenues was 8.9% compared to 7.7% for 1989 and 4.8% for 1988.

For majors in 1990, income as a percentage of operating revenues was 8.7% after being 8.2% in 1989 and 5.3% in 1988.

TRACKED COMPANIES

In this annual Pipeline Economics Report, Oil & Gas Journal has for several years been tracking investment by five crude-oil pipeline companies and five products-pipeline companies.

Table 5 indicates that investment by the five crude-oil pipelines stood at $1.82 billion at the end of 1990 compared to $1.75 billion at the end of 1989. That year's figure compares with $1.71 billion at the end of 1988.

Investment by the five products pipeline companies was $3.01 billion for 1990 compared to $2.942 billion at the end of 1989 and $2.934 billion at the end of 1988.

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

CONSTRUCTION ACTIVITY

As Fig. 2 shows, the costs of line pipe and fittings and of laying pipelines make up more than 67% of the cost of a pipeline system. These elements of pipeline construction costs have risen very little for the past few years, after rapidly increasing before 1982.

COST TRENDS

Table 6 lists a 1 0-year land-construction cost trend for natural-gas pipelines with diameters ranging from 8 to 36-in.

The table's data are based on a mix of actual costs of completed pipeline construction and projected costs filed under CP dockets with the FERC.

As the table reflects, the average cost per mile for any given diameter may fluctuate from one year to the next as projects' costs are affected by geographic location, terrain, population density, or other factors.

The cost-per-mile trends from 1990 to 1991 are up, with four of seven diameter classifications showing increases. These are for 8, 24, 30, and 36-in. categories.

Yearly fluctuations in these figures are illustrated in construction figures for a 12-in. pipeline. These had leaped between 1984 and 1985 by 90%, fell in 1988 by more than 30%, jumped again in 1990 by 233%, then fell for 1991 by 68%.

PLANS AND MILES

Table 2 lists 126 land-pipeline construction projects and 3 offshore for a total of 129, compared to 169 land and 2 offshore reported in last year's Pipeline Economics Report.

Land projects proposed during the period surveyed represent more than 3,050 miles of pipeline at an estimated price tag of more than $1.8 billion and three offshore projects totaling 36 miles estimated to cost of almost $23 million.

Total estimated costs for these projects, land and offshore, reach $1.84 billion.

Total costs of projects surveyed in last year's Pipeline Economics Report ran more than $6 billion divided between $6.008 billion for land and $50 million for offshore.

All projects proposed during the period covered (July 1, 1990, to June 30) represent a marked decrease in proposed mileage over the previous 12-month period covered. But several projects in that earlier period, as noted, were refilings, totaling about 2,100 miles.

Nevertheless, the more than 3,000 miles for the current period surveyed suggests the growing strengths of natural gas in commercial, residential, and power-generation use.

COST TRENDS, COMPONENTS

Cost-per-mile figures may reveal more about cost trends than aggregate costs.

For proposed U.S. gas-pipeline projects in the 1990-91 period surveyed, the average land cost per mile was $593,936 compared with $830,882/mile for the 1989-90 period, a healthy decrease.

For offshore projects, the 1990-91 figure was $2,339,865/mile compared with the 1989-90 figure of $834,057, a substantial increase.

Combined land and offshore projects show an average cost of $594,442/mile for this year's coverage; for the 1989-90 period, the figure was $830,908/mile.

Analyses of the four major categories of pipeline construction costs--material, labor, right-of-way (R.O.W.), and miscellaneous--can also indicate trends within each group.

R.O.W. figures include the cost of obtaining right-of-way and of any allowance for damages.

"Miscellaneous" generally includes surveying, engineering, supervision, contingencies, allowances for funds used during construction (afudc), administration and overheads, and FERC filing fees.

For the 129 projects surveyed for the 1990-91 period covered in this report, cost-per-mile data for the four categories are as follows:

Material--Land, $217,348/mile; offshore, $212,734/mile; combined, $217,294/mile.
Labor--Land, $228,984/mile; offshore, $306,752/mile; combined, $229,890/mile.
R.O.W. and damages--Land, $25,994/mile; offshore, $81/mile; combined, $25,692/mile.
Miscellaneous--Land, $121,610/mile; offshore, $117,765/mile; combined, $121,565/mile.

Table 2 lists proposed pipelines in order of increasing diameter and increasing lengths within each pipeline diameter. The average cost per mile for the projects shows no clear-cut trend 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 incremental cost for construction.

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

Fig. 3, derived from Table 2 for land and offshore pipelines, shows the major cost-component split for pipeline construction cost.

Material and labor are shown to make up more than 75% of the cost of constructing land pipelines and more than 81% of the cost for offshore pipelines.

Fig. 4 plots the average pipeline construction cost for land and offshore gas-pipeline construction projects listed in Table 2.

COMPRESSOR STATIONS

Compressor-station costs make up another major cost element of natural-gas pipelines. Table 7 lists 59 land compressor-station projects. FERC applications for these projects cover the same period as for pipelines: July 1, 1990, to June 30.

Costs for new land compressor stations range from a low of $607/hp for a 2,000-hp station in New York to a high of $5,158/hp for a 1,000-hp station in Massachusetts. Cost-per-horsepower figures show no particular correlation with compressor-station size or location.

Fig. 5 shows the cost split for land compressor stations based on data in Table 7.

EFFECT OF SIZE

Another element affecting the capital expenditures for pipeline construction is the distribution of the diameter and mileage.

As an aid in determining the detailed costs for each major element in pipeline and compressor-station construction for the pipelines and compressor stations, several tables covering specific projects are included in this report (p. 56).

These give detailed cost breakdowns for each major component in a construction-cost estimate. They cover cost information from the FERC applications for the 1990-91 period surveyed and listed in Table 2.

These detailed tables represent both a variety of land geographic locations in the U.S. and pipeline and compressor stations for both land and offshore facilities.

OPERATING COSTS

Once a gas pipeline is laid, compressor stations constructed, meters installed, and operating costs become the next consideration.

As an aid in estimating this element, transmission expenses for interstate gas pipelines for 1988 and 1989, have been included (Table 8). Data for these years are the most recent available in aggregate from the FERC.

Table 8 is based on 251,878 miles of pipeline operated and 6.4 tcf of gas sold for 1988 majors and on 254,059 miles of pipeline operated and 5.6 tcf of gas sold for 1989 majors.

The highest component of transmission-operating expenses is transmission and compression of gas by others: for majors in 1988, this component was $3,717/mile or $147/MMcf; for majors in 1989, this component was $3,363/mile or $154/MMcf.
The second highest cost component of transmission-operating expense is gas for compressor-station fuel: for majors in 1988, $1,492/mile or $59/MMcf; for majors in 1989, $1,484/mile or $68/Mmcf.
The highest cost component of maintenance expense covers compressor-station equipment: for majors in 1988, $866/mile or $34/MMcf; for majors in 1989, $989/mile or $45/MMcf.
The second highest cost component for maintenance is the maintenance of pipelines: for 1988 majors, $435/mile or $17/MMcf; for majors in 1989, $453/mile or $21/Mmcf.
Table 8 indicates that the highest component of transmission expenses for natural-gas pipelines is the operation expense: for 1988 majors, $8,647/mile or $342/MMcf; for 1989 majors, $8,412/mile or $384/MMcf.
Unit-maintenance expenses for 1988 majors were $1,631/mile or $64/MMcf; for 1989 majors, $1,780/mile or $81/MMcf.
During 1988, major natural-gas pipeline companies spent slightly more than $2.178 billion for operation expenses and $410.8 million on maintenance. Total expenditures by 1988 majors for operation and maintenance expenses reached almost $2.589 billion.
Total operation expenses for majors in 1989 fell slightly to 2.137 billion, a drop of almost $31 million (1.4%). This follows a small drop of 2.2% from 1987 to 1988 noted in last year's report.
Total maintenance expenses in 1989 rose to slightly more than $452 million from a 1988 cost of $410.8 million, a marked rise of more than 10%.
Total transmission expenses showed a slight rise between 1988 and 1989.ln the latter year, they reached $2.589 billion.
On a unit basis, the total 1988 transmission expense for majors was $10,278/mile or $407/MMcf of gas sold; for 1987 majors, it was $10,457/mile or $402/MMcf.