US construction plans slide; pipeline companies experience flat 2003, continue mergers

The US natural gas pipeline system appears headed for serious delivery-capacity constraints, if recent proposals are any indication.

For the 12 months ending June 30, 2004, formal plans brought before the US Federal Energy Regulatory Commission for new or expanded pipeline and compression dropped like a rock compared with plans filed in the previous 12-month period (OGJ, Sept. 8, 2003, p. 60), and those were themselves off sharply from plans filed up to June 30, 2002 (OGJ, Sept. 16, 2002, p. 52).

This trend seems to evince last month's dire warnings from the Interstate Natural Gas Association of America about the critical need for additional infrastructure (see accompanying sidebar, p. 54, and OGJ, July 26, 2004, p. 7).

For the calendar year ending Dec. 31, 2003, however, US natural gas pipeline companies reported very solid returns in annual reports to FERC, many of which were only submitted in second quarter 2004.

Annual reports to FERC for 2003 for US oil pipelines, however, paint a distinctly different picture: revenues, incomes, throughput (bbl-miles), and volumes delivered were all flat or down last year.

Click here to view Oil Pipelines in PDF.

Click here to view Gas Pipelines in PDF.

Much of the merger and acquisition activity in the last 1-3 years, especially among oil pipeline companies, reflects some companies' desire to get out of a business with underperforming assets and other companies' desire to snap up those assets at bargain-basement prices.

Oil & Gas Journal has revived this year its list of realigned, renamed, bought, sold, and otherwise new, revived, or deceased companies, based on FERC information and public documents: See accompanying sidebar, p. 56.

And despite the skyrocketing price of steel used to manufacture line pipe, actual-cost statements filed with FERC for the 12 months ending June 30, 2004, were generally in line with or lower than estimates at the time projects were proposed to FERC.

Information sources

Data in this exclusive, annual report on federally regulated interstate natural gas and oil pipelines come mostly from publicly available information from FERC and fall 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.

Such pipeline companies that, in FERC's view, are involved in the interstate movement of oil or natural gas for a fee fall under FERC jurisdiction, must apply to it for approval of its 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 in the note to the long table listing all FERC-regulated natural gas pipeline companies for 2003 at the end of this article (p. 72).

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 requesting 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 in the third quarter of each year. Earlier publication would preclude many companies' information.

2. Data from periodic filings with FERC by those regulated natural gas pipeline companies wanting to expand capacity that FERC must approve. OGJ keeps a record of those filings during each 12-month period ending June 30 of each year.

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, and analyzing their numbers.

What we learn

At the end of this article (p. 68), two large tables present a variety of data on US pipeline companies: revenue, income, volumes transported, miles operated, and investments in physical plants. For 2001 (OGJ, Sept. 16, 2002, p. 52), OGJ began reporting what natural gas pipeline companies spent during the year on operations and maintenance.

How the US natural gas transmission industry has evolved under less regulation is revealed in a review of the table on natural gas companies. This annual report began tracking volumes of gas transported for a fee by major interstate pipelines for 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 have also reflected the recent asset consolidation and merger activity among companies in their efforts to improve transportation efficiencies and increase bottom lines.

Analysis

Comparing annual US petroleum and natural gas pipeline data, especially mileage, has been made difficult by reporting changes over the years. For any calendar year, for example, which companies must file reports with FERC may vary, as some companies become jurisdictional, others non-jurisdictional, and still others merge or consolidate out of existence.

FERC installed its two-tier classification system for natural gas pipeline companies, noted previously, for 1984 (OGJ, Nov. 25, 1985, p. 55) and has further complicated comparisons.

Definitions of the categories can be found at the end of this article, as mentioned, and in FERC Accounting and Reporting Requirements for Natural Gas Companies, para. 20.011.

Only FERC-defined major US gas pipelines are required to file miles operated in a given year. Nonmajor companies may indicate miles operated as part of a general description of their operations but are not specifically required to. Since 1984, more companies have included descriptions of their systems, including miles of pipeline operated.

Reports for 2003 show 68 major gas pipeline companies of 110 pipelines reporting, equal with information for 2002: 68 of 112 companies, up from 63 of 110 companies filing for 2001, and 61 major companies among 113 filing for 2000.

More changes for natural gas pipeline reporting came for 1996: Major natural gas pipeline companies were no longer required to report miles of gathering and storage systems separately from transmission.

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Thus, total miles operated for gas pipelines consist almost entirely of transmission mileage. To continue to convey a reliable 10-year trend, OGJ adjusted Table 1 to reflect only transmission mileage operated since 1993 and only for major pipeline companies.

Reporting requirements for oil pipelines, which include crude oil and petroleum products, underwent a change for 1995 (OGJ, Nov. 25, 1996, p. 39). FERC made an additional change.

Those pipelines whose operating revenues have been at or less than $350,000 for each of the 3 preceding calendar years became exempt from requirements to prepare and file a Form 6.

These companies must 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.

Whether FERC designates an oil pipeline company an interstate common-carrier pipeline determines whether the company must file an annual report.

Click here to view Notable US Pipeline Ownership Changes in PDF.

Activity; rankings

Major natural gas pipeline companies in 2003 saw a healthy jump in their operating revenues, up by more than $1.4 billion or nearly 11%, over 2002; for both major and nonmajor gas pipelines, revenues increased slightly more than $1 billion or more than 7.5%.

Incomes for majors improved by more than 25% or nearly $630 million; for all companies, incomes rose in 2003 by more than $526 million or more than 19%.

For oil pipelines, on the other hand, in 2003: Operating revenues were flat, declining by nearly $108 million or— 1.4%; incomes rose only $61 million or 1.8%.

Deliveries for 2003—for both crude oil and product pipelines—were flat, down by nearly 107 million bbl or less than 1%, with most of that seen in crude oil deliveries (down nearly 77 million bbl). Throughput measured in million bbl-miles (bbl-mile:1 bbl moving 1 mile) increased less than 1%, by 28 billion bbl-miles, on the strength of product throughput rising by nearly 40 billion bbl-miles, or 2%.

That's 2 years in a row for oil pipeline companies to suffer through, even as US refineries are operating at capacity to supply especially gasoline to the motor fuel market.

But just whether a reviving US economy will be stymied by the highest product prices in history, even allowing for inflation, remains to be seen. Airlines are suffering, even if motorists continue to love their gas-guzzling SUVs. But airlines are powerless to pass along the higher fuel costs to a flying public still nervous about terrorists.

One sign of change, however: In spring 2004, there was something like a 6-month wait for orders of fuel-efficient hybrids. And SUVs are selling at deep discounts.

The Association of Oil Pipelines, however, offers a different perspective. AOPL's General Counsel Michele Joy told OGJ that the lower-than-expected numbers primarily reflect changing reporting requirements, rather than lower pipeline volume movements.

"FERC has strongly encouraged reporting of only jurisdictional assets and jurisdictional movements so that previously reported mileage and throughput is dropping out of the reports," she said.

"Many pipelines with offshore operations have been withdrawing their FERC tariffs based on [FERC's] 1992 Bonito ruling [regarding oil transportation entirely on the Outer Continental Shelf] and will not be filing Form 6s [for 2003]. Other pipelines with interstate and intrastate movements that used to report [these] to the FERC have revised their reporting to include only the interstate movements."

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Reflecting the activity evident in the company-merger sidebar that accompanies this article, Joy said there have also been "a number of pipeline asset sales. To the extent that these assets go to smaller entities," they can drop below the full FERC Form 6 reporting threshold.

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Finally, she said that "several pipelines have been required temporarily to reduce pressure after internal inspections, while repairs are made to the pipeline, which of course reduces the amount of product handled by the pipeline.

"I do not believe you are seeing a movement away from pipeline usage."

To provide some perspective on the top players among the nation's regulated oil and natural gas pipelines, OGJ has ranked the top 10 companies, based on data provided in their FERC annual reports. (See tables above.)

Companies' positions in these rankings generally shift from year to year, with some dropping out and others dropping in, reflecting normal fluctuations in companies' activities and fortunes. That's especially true in recent years as assets have changed owners, often more than once, and entire companies have ceased to exist.

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

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

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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).

Again in 2003, as in 2002, ROI for gas pipelines improved, to slightly more than 4% for both major and for all companies: In 2002, it was 3.6% vs. slightly less than 3% for 2001 for major companies; and 3.68% for all companies vs. nearly 3.2% for 2001.

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 (ROI) fell precipitously through 1987 then began a gradual comeback.

For oil pipelines, ROI in 2003 was more than 10.8%, up slightly from 2002 at 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 2003 reported an industry gas-plant investment of nearly $78 billion, up from $74.2 billion in 2002, 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 oil pipeline carrier property in 2003 was flat, falling by about 1% after rising in 2002 by more than $457 (nearly 1.5%) compared with more than 8% in 2000.

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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). For 2003, we have added the base carrier-property investment to allow for comparisons among the anonymous companies.

The five crude oil pipeline companies in 2003 increased their overall investment in carrier property by more than $155 million, or 4.5%; the same companies for 2002 had reduced their overall investment in carrier property by less than 1% over that for 2001.

The five products pipeline companies in 2003 increased their overall investment in carrier property by more than $180 million, or nearly 4% after reducing their investment in 2002 compared to 2001 by nearly 3%.

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Comparisons of data in Table 2 with previous years' must proceed with caution: In 1998, a major crude oil pipeline company listed there merged with two other large pipeline companies. More mergers have followed, including the sale and name change in 2003 of a major product line, making comparisons with previous years' data difficult.

Investment by the five product pipeline companies in 2003 was more than $4.7 billion and reflected a return to growth that had been interrupted in 2002 when investment dropped to more than $4.5 billion, 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.

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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).

The percentage of income in operating revenues for oil pipelines, 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, exceeding 43% in 2002, but remaining there for 2003.

Construction clouds

Applications to FERC by regulated interstate natural gas pipeline companies to modify their systems must, except in certain instances, provide 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.

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Tables 4 and 5 show companies' estimates during the period July 1, 2003, to June 30, 2004, for what it will cost to construct a pipeline or install new or additional compression.

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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 (OGJ, Apr. 26, 2004, p. 26; Nov. 24, 2003, p. 20).

Applications filed in the 12 months ending June 30, 2004, suggest the immediate future of gas pipeline construction along the US interstate system and that future is bleak:

Only 213 miles of pipeline were proposed for land construction with no miles proposed for offshore work. In the 2003 report, more than 900 miles of pipeline were proposed for land construction, and more than 40 miles for offshore expansions. In the 2002 report, more than 1,660 miles of pipeline were proposed for land construction for the 12 months before June 30, 2002; 70 miles were planned for offshore expansions.

The trend is unmistakable and, given projections for US natural gas demand growth, frightening.

By the same token, at the end of June 2004, slightly more than 76,000 hp of new or additional compression were envisioned by the interstate pipelines, all onshore, compared with nearly 245,000 hp of new or additional compression applied for by June 30, 2003, and the more than 550,000 hp for the same period in 2002 (Table 5).

Again, the trend is unmistakable:

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.

Making the point of declining US gas pipeline construction, Table 4 lists 15 land-pipeline construction "spreads," or mileage segments, and no marine projects, compared with:

For the 12 months ending June 30, 2004, the 15 land projects would cost more than $365 million.

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.

Despite the precipitous drop in the number of projects and the mileage, incremental costs appear headed up, after remaining relatively flat for a few years.

For proposed US gas pipeline projects 2003-04, the average land cost was $1.7 million/mile; for 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 the 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.

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 15 land spreads surveyed for 2003-04, costs-per-mile for the four categories showed cost increases in three of the four categories:

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-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.

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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 63% of the cost. Fig. 4 plots a 10-year comparison of land-construction unit costs for the two major components, material and labor.

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

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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.

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, 2004. Fig. 7, for the same period, depicts how total actual costs ($/mile) for each category compare with estimated costs.

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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.

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The 12 months ending June 30 saw completed-project cost filings for 1,200 miles, down from nearly 1,250 miles of pipeline at June 30, 2003, which included more than 430 miles of the completed Gulfstream offshore pipeline, and almost 468,000 hp of new or additional compression.

Click here to view US Pipeline Costs: Estimated vs Actual (Table 7) in PDF.

Correction
Table 7 of the Pipeline Economics Report (OGJ, Aug. 23, 2004, p. 52) contained incorrect totals. Above are the corrected totals:

Click here to view US Compressor-Station Costs (Table 8) in PDF.

Overall, actual land gas pipeline construction costs came in under originally estimated costs by about $69 million. Table 8, on the other hand, shows that actual costs for installing compression exceeded estimated ones by about $15 million.