US oil pipeline operators’ revenues and profits both posted large increases in 2019, outperforming the natural gas segment. Net incomes increased more than 23.5%. Revenues rose for the fourteenth time in as many years, up more than 15% from 2018.
Natural gas pipeline operators’ revenues and net incomes grew more modestly in 2019. Revenues were up for a third straight year, while profits rose 3.5% to reach an all-time high of nearly $10.8 billion. Pipeline constructions costs jumped 75% from 2018, led by a near doubling in the price of labor.
Details
The rise in oil pipeline profits as compared with revenues caused earnings as a percent of revenue to climb to more than 60%. Natural gas pipeline operators’ net incomes as a share of revenue by comparison were relatively steady at just above 38% (Fig. 1).
Proposed new-build natural gas mileage was up from 2019’s announced build, despite the higher construction costs. Compression construction costs rose by nearly 25%, but planned additions more than doubled even so, approaching 680,000 hp.
Dramatic increases in all land pipeline construction cost areas combined for overall costs more than 75% higher than what was estimated in 2019. Miscellaneous costs grew to $2 million/mile from $1.3 million/mile, while estimated labor costs led the upward charge, increasing to $4.2 million/mile from $2.2 million. Material costs also nearly doubled, to roughly $1.2 million/mile. The roughly $3.5-million increase in total estimated $/mile land pipeline construction costs moved them to $8.1 million per mile, 75% more than 2019.
Actual land pipeline construction costs for projects completed in the 12 months ending June 30, 2020, were roughly $7 million/mile (85%) more than estimated costs. Labor costs alone were almost $6 million/mile more than estimates. Actual compressor station costs were slightly less than estimated costs for projects with final cost filings filed by June 30, 2020.
US pipeline data
At the end of this article, two large tables 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 FERC 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 allow an analysis of the US regulated interstate pipeline system.
- Annual reports. Companies that FERC classifies as 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 2019 at the end of this article.
The deadline to file these reports each year is in April. For a variety of reasons, companies often 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 later in 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 infrastructure, it must—again, with some exceptions—report back to FERC how its original cost estimates compared with what it spent.
OGJ monitors these filings from July 1 to June 30 each year, collecting them, and analyzing their numbers.
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 care be taken in comparing annual US petroleum and natural gas pipeline statistics.
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.
Reports for 2019 show an decrease in FERC-defined major gas pipeline companies: 98 companies of 180 filing, from 100 of 180 for 2018.
FERC made a change to reporting requirements in 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 gas pipeline mileage shrank in 2019 (Table 1), final data showing a decrease of 827 miles, or 0.44%. Oil mileage by contrast surged 1.29%, adding 2,150 miles.
Rankings; activity
Natural gas pipeline companies in 2019 saw operating revenues rise $949 million or roughly 3.5% from 2018, a more moderate increase than occurred the year before. Net income’s growth was even more moderate, rising $190 million (1.8%) after a 68% increase in 2019.
Oil pipeline earnings were stronger, rising $3.3 billion (23.5%), the fourth consecutive year of net income growth following a sharp decline in 2015. Revenues rose $3.9 billion or 15% (Table 2).
Crude deliveries for 2019 increased by nearly 673 million bbl or 5%, while product deliveries rose just 95 million bbl (1.1%).
OGJ uses the 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, earnings for the Top 10 oil pipeline companies rose 22.7% compared with the 19.7% overall increase, suggesting that the upswing was led by the larger operators. The Top 10 companies’ share of the segment’s total earnings grew accordingly, standing at 45% vs. the 44% share of earnings held in 2018.
Net income as a portion of natural gas pipeline operating revenues eased to 38% in 2019, still the second highest level in more than 12 years. The percentage of income as operating revenues for oil pipelines climbed to 60%, the highest ever.
Net income as a portion of gas-plant investment was steady at 5.3%. Net income as a portion of investment in oil pipeline carrier property reached 14.3%, eclipsing 2018’s recent high of 13.5%.
Major and nonmajor natural gas pipelines in 2019 reported total gas-plant investment of roughly $206 billion, the highest level ever, up from $197 billion in 2018, $171 billion in 2017, $158.5 billion in 2016, $158 billon in 2015, $152 billion in 2014, about $147 billion in 2013, more than $142 billion in 2012, $139 billion in 2011, and $125 billion in 2010.
Investment in oil pipeline carrier property continued to surge in 2019, surpassing $138 billion, nearly triple the values seen just 10 years before. Carrier property in 2018 totaled $122 billion, up from $112 billion in 2017 and $99.5 billion in 2016, after reaching $93 billion in 2015, nearly $85 billion in 2014, $68 billion in 2013, topping $54 billion in 2012, hitting roughly $49 billion in 2011, more than $45 billion in 2010, and roughly $42 billion in 2009.
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 2019 increased their overall investment in carrier property by almost $349 million (2.3%), slowing from the previous year and lagging the overall segment. All companies but one increased investment in carrier property, the outlier reducing its investment by just $438.
The five products pipeline companies, by contrast, saw their overall investment in carrier property accelerate in 2019, adding more than $317 million, or 3.3%.
Comparisons of data in Table 3 with previous years must be done with caution as mergers, acquisitions, and sales can make comparisons with previous years’ data difficult.
Fig. 2 illustrates how investments in the crude oil and products pipeline companies were divided.
Construction costs
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 detail.
Tracking the mileage and compression horsepower applied for and the estimated costs can indicate levels of construction activity over 2-4 years. Tables 4 and 5 show companies’ estimates during the period July 1, 2019, to June 30, 2020, 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.
- Roughly 367 miles of pipeline were proposed for land construction in the 12 months ending June 30, 2020, with no offshore work submitted. The land level was up from the roughly 246 miles proposed for land construction in 2019, but still well below the roughly 545 miles proposed for land construction in 2018, much less than the nearly 2,500 miles proposed for land construction in 2017 and the 2,192 miles proposed for land construction in 2016.
- New or additional compression proposed by the end of June 2020 measured nearly 680,000 hp, up sharply from the 292,000 hp proposed with the same timing in 2019 and the 287,000 hp proposed the year before. The proposed horsepower additions were in the same general range as the nearly 600,000 hp proposed in 2017 but still nowhere near the 2.2 million hp proposed in 2016.
Putting the increased US gas pipeline construction in perspective, Table 4 lists 18 land-pipeline “spreads,” or mileage segments, and 0 marine projects, compared with:
- 18 land and 0 marine projects (OGJ, Oct. 7, 2019, p. 46).
- 11 land and 0 marine projects (OGJ, Oct. 1, 2018, p. 60).
- 27 land and 1 marine projects (OGJ, Oct. 2, 2017, p. 71).
- 33 land and 0 marine projects (OGJ, Sept. 5, 2016, p. 89).
- 46 land and 0 marine projects (OGJ, Sept. 7, 2015, p. 114).
- 31 land and 0 marine projects (OGJ, Sept. 1, 2014, p. 122).
- 26 land and 2 marine projects (OGJ, Sept. 2, 2013, p. 117).
- 11 land and 0 marine projects (OGJ, Sept. 3, 2012, p. 118).
- 31 land and 0 marine projects (OGJ, Sept. 5, 2011, p. 97).
- 8 land and 0 marine projects (OGJ, Nov. 1, 2010, p. 108).
Only two of the spreads in 2020 measured 100 miles or more, the longest proposed project being 116.6 miles for a project serving the Permian basin in New Mexico and Texas.
For the 12 months ending June 30, 2020, the 18 land projects filed would cost an estimated $3 billion, compared with the 18 land projects for $1.1 billion proposed a year earlier which featured fewer miles and lower labor costs.
These statistics cover only FERC-regulated pipelines. Many other pipeline construction projects were announced in the 12 months ending June 30, 2020, but were outside FERC’s jurisdiction.
Estimated $/mile costs for new projects as filed by operators with FERC jumped year-on-year. For proposed onshore US gas pipeline projects in 2019-20 the average cost was $8.1 million/mile. In 2018-19 the average cost was $4.6 million/mile, down sharply from the $9.95 million/mile average estimates from 2017-18. The 2020 and 2018 figures are the highest costs recorded.
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.
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 18 spreads filed for in 2019-20, cost-per-mile projects rose in all categories. They fell in all categories except ROW in 2018-19. In 2011 miscellaneous charges passed material to become the second most expensive cost category and in 2017 they passed labor costs to become the most expensive category of all. For the past 2 years, however, labor moved back to the top:
- Material—$1,200,419/mile, up from $691,474/mile for 2018-19.
- Labor—$4,230,959/mile, up sharply from $2,243,051/mile for 2018-19.
- Miscellaneous—$1,991,146/mile, higher than the $1,294,388/mile estimated cost for 2018-19.
- ROW and damages—$660,139/mile, up from $379,154/mile for 2018-19.
The reversal of labor and miscellaneous costs’ rankings has been driven by continued high demand for labor at the same time that proposed projects have gotten smaller, the latter shrinking the amount operators feel they need to set aside for contingencies.
Table 4 lists proposed pipelines in order of increasing size (OD) and decreasing lengths within each size.
The average cost-per-mile for the projects rarely shows clear-cut 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 cost-component splits for pipeline construction.
Labor is the most expensive category and the most volatile. Labor’s portion of estimated costs for land pipelines rose to a recent high of 52.4% in 2020, from 48.7% in 2019, 40.6% in 2018, 35.8% in 2017, 47% in 2016, 37.8% in 2015, 42.4% in 2014, 38.8% in 2013, 44.6% in 2012, 44.3% in 2011, and 44.5% in 2010. Material costs for land pipelines, meanwhile, were generally flat from the year before at 14.9% of total cost, from 15% in 2019, 13.1% in 2018, 22.4% in 2017, 13% in 2016, 19.3% in 2015, 13.6% in 2014, 23.2% in 2013, 16% in 2012, and 14.5% in 2011.
Fig. 4 plots a 10-year comparison of land-construction unit costs for 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, and other factors.
Completed projects’ costs
In most instances, a natural gas pipeline company must file with FERC what it ended up spending on an approved and built project. This filing must occur within 6 months after a pipeline’s successful hydrostatic testing or a 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 actual costs for pipeline and compressor projects reported to FERC during the 12 months ending June 30, 2020. Fig. 7, for the same period, depicts how total actual costs ($/mile) for each category compare with estimated costs.
Actual costs for pipeline construction were almost $7-million/mile more than estimated costs for the same projects. The bulk of this difference came in labor costs, which were roughly $6 million/mile (147%) more than projected for the 12 months ending June 30, 2020. All other listed costs were also greater than estimated.
One pipeline project completed in the 2019-20 window reported more than $2 billion in labor costs alone. Mountaineer Xpress, developed as part of TC Energy’s Columbia Gas Transmission system, laid 170.9 miles of 24-, 30-, and 36-in. OD pipe in West Virginia at an overall cost of more than $3.1 billion, including labor costs greater than $2.2 billion. Total estimated cost had been $1.6 billion.
Some projects listed in Table 7 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 7. 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 various diameters together.
The 12 months ending June 30, 2020, saw more than 400,000 hp completed, roughly 41% less than the year before. Actual compression costs of $2,391/hp were 3.5% lower than estimates, with lower miscellaneous costs outstripping labor costs which were more than 36% more than what initially had been filed (Table 8).
