COVID constrains liquids pipeline earnings, gas system investments

US oil and gas pipeline operators’ profits slumped in 2020 as the economic slowdown brought about by the COVID-19 pandemic slowed shipment of crude, refined products, and natural gas. Net incomes for liquids pipelines fell by nearly 22%. Revenues fell for the first time in at least 15 years, down 3% from 2019.

Natural gas pipeline operators’ net incomes were more resilient, slipping about 2% on flat revenues (Fig. 1). These companies’ investments in additions to gas plant, however, dropped by more than 27%, as the willingness to engage in capital spending waned given the uncertain demand environment. Applications for new pipeline construction fell to near zero, but costs for projects that were proposed continued to rise, led by a 65% increase in money allocated to miscellaneous expenditures.

Details

The steep decline in oil pipeline profits as compared with revenues caused earnings as a percent of revenue to fall to roughly 48.5%, the lowest level since 2016. Natural gas pipeline operators’ net incomes as a share of revenue by contrast eased by just one percentage point to 37%.

Proposed new-build natural gas mileage was down from 2020’s announced build as increases in infrastructure spending paused during the pandemic. Compression construction costs rose by more than 84%, with proposed work falling to less than one-third of the previous year’s planned additions, at just below 200,000 hp.

The dramatic increases in miscellaneous land pipeline construction costs more than outstripped decreases in all other categories. Miscellaneous costs grew to $3.3 million/mile from $2 million/mile, while estimated labor costs eased to $3.9 million/mile from $4.2 million. “Contingencies” are the most variable of the costs included as miscellaneous, with the amount set aside for such purposes often growing as uncertainty does. Material costs fell by nearly one third, to roughly $824,000/mile from $1.2 million/mile. The roughly $250,000 increase in total estimated $/mile land pipeline construction costs moved them to $8.3 million per mile, 3% more than 2020.

Actual land pipeline construction costs for projects completed in the 12 months ending June 30, 2021, were roughly $600,000/mile more than estimated costs, with higher-than-expected labor again making up the bulk (~$500,000/mile) of the difference. Even so, operators came closer to the target than in 2020, when labor costs alone were almost $6 million/mile more than expected. Actual compressor station costs were slightly less than estimated costs for projects with final cost filings filed by June 30, 2021.

US pipeline data

At the end of this article, two large tables (beginning on p. 60) 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 2020 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 2020 show an decrease in FERC-defined major gas pipeline companies: 104 companies of 182 filing, from 98 of 180 for 2019.

FERC-regulated major natural gas pipeline mileage shrank in 2020 (Table 1), final data showing a decrease of 3,411 miles, or 1.8%. Oil mileage by contrast jumped 2.5%, adding 4,311 miles.

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.

Rankings; activity

Natural gas pipeline companies in 2020 experienced a scant $4.3 million (0.02%) revenue increase from 2019. Net income, meanwhile, fell $262 million (2.4%) after a $190 million (1.8%) increase in 2019.

 Oil pipeline earnings were off more dramatically, falling nearly $4.3 billion (22%) to end four consecutive year of net income growth. Revenues decreased by almost $1 billion or 3% (Table 2).

Crude deliveries for 2020 decreased by nearly 2 billion bbl or 14%, while product deliveries fell just 162 million bbl (2%).

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 fell 23.6% compared with the 22% overall decrease, suggesting that the drop was led by the larger operators. The Top 10 companies’ share of the segment’s total earnings shrank accordingly, standing at 44% vs. the 45% share of earnings held in 2019.

Net income as a portion of natural gas pipeline operating revenues eased to 37% in 2020, below the levels of either of the past 2 years, but still the third highest level in more than 13 years. The percentage of income as operating revenues for oil pipelines dropped to 48.5%, coming off an all-time high of 60% in 2019.

Net income as a portion of gas-plant investment was off slightly at 5.2%. Net income as a portion of investment in oil pipeline carrier property dropped to 10.4% from 2019’s recent high of 14.3%.

Major and nonmajor natural gas pipelines in 2020 reported total gas-plant investment of roughly $213 billion, the highest level ever, up from $206 billion in 2019, $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, and $139 billion in 2011.

Investment in oil pipeline carrier property continued to surge in 2020, surpassing $149 billion, more than triple the values seen just 10 years before. Carrier property in 2019 totaled $138 billion, up from $122 billion in 2018, $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, and more than $45 billion in 2010.

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 2020 increased their overall investment in carrier property by more than $349 million (2%), 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 $50,469.

The five products pipeline companies, by contrast, saw their overall investment in carrier property accelerate in 2020, adding almost $659 million, or 6.7%.

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 mixed

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, 2020, to June 30, 2021, 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 77 miles of pipeline were proposed for land construction in the 12 months ending June 30, 2021, with no offshore work submitted. The land level was down substantially from the roughly 367 miles proposed in 2020 as capital-expenditure driven activity slowed to a crawl. The 246 miles proposed for land construction in 2019, were well below the roughly 545 miles proposed in 2018, much less the nearly 2,500 miles proposed for land construction in 2017.
• New or additional compression proposed by the end of June 2021 measured nearly 200,000 hp, well down from the 680,000 hp proposed in 2020 and more in line with the 292,000 hp proposed with the same timing in 2019 and the 287,000 hp proposed the year before. Nearly 600,000 hp were proposed for installion in 2017.

Putting the reduced US gas pipeline construction in perspective, Table 4 lists 9 land-pipeline “spreads,” or mileage segments, and 0 marine projects, compared with:

• 18 land and 0 marine projects (OGJ, Oct. 3, 2020, p. 42).
• 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).

Only one spread in 2020 measured 30 miles or more, a lateral running 35.8 miles through Utah.

For the 12 months ending June 30, 2021, the 9 land projects filed would cost an estimated $643 million, compared with 18 land projects filed for $3 billion a year earlier. Estimated construction costs were relatively flat compared with recent year-to-year volatility, and the projects proposed were both smaller and less numerous.

These statistics cover only FERC-regulated pipelines. Many other pipeline construction projects were announced in the 12 months ending June 30, 2021, but were outside FERC’s jurisdiction.

Estimated 2020-21 $/mile costs for new onshore projects as filed by operators with FERC were $8.3 million/mile. In 2019-20 the average cost was $8.1 million/mile. Cost estimates for each of the past 2 years are two of the three highest recorded, exceeded only by the $9.95 million/mile average estimates from 2017-18.

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 9 spreads filed for in 2020-21, project cost-per-mile fell in all categories except miscellaneous, with the gains there outstripping the other components combined. Costs rose in all categories in 2019-20. 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 3 years, however, labor has reclaimed the top spot:

• Material—$823,936/mile, down from $1,200,419/mile for 2019-20.
• Labor—$3,897,871, off from $4,230,959/mile for 2019-20.
• Miscellaneous—$3,276,458/mile, sharply higher than the $1,991,146/mile estimated cost for 2019-20.
• ROW and damages—$337,818/mile, roughly half the $660,139/mile cost for 2019-20.

The renewed surge in miscellaneous costs was prompted in large part by expanded contingency, administrative, and overhead estimates made in an effort to address pandemic-related uncertainty.

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 2021 portion of estimated costs for land pipelines was off sharply from its recent high of 52.4% reached in 2020, falling to 46.8%. Labor’s portion of costs was 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, and 44.6% in 2012, and 44.3% in 2011.

Material costs portion of land pipeline costs fell to a recent low of 9.9% in 2021 from 14.9% in 2020, 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, and 16% in 2012.

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 terrain, population density, and other factors.

Completed project 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, 2021. 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 more than $600,000/mile higher than estimated costs for the same projects, much narrower than 2020’s $7-million/mile difference. The bulk of the current year’s difference came in labor costs, which were roughly $500,000/mile (19.6%) more than projected. Right-of-way costs were also greater than estimated, with miscellaneous costs marginally lower.

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, 2021, saw almost 325,000 hp completed, roughly 19% less than the year before. Actual compression costs of $2,979/hp, 1% lower than estimates, with lower materials and miscellaneous costs balancing labor and land costs higher than what initially had been filed (Table 8).