Chapter 6 Water Carriers and Pipelines 1. Introduction Domestic water and pipeline carriers Both account for substantial shares of intercity freight volume

Chapter 6Water Carriers

and Pipelines

1

IntroductionDomestic water and pipeline carriers

Both account for substantial shares of intercity freight volume For some commodities, one or both are the dominant

modesMost freight carried tends to be high volume,

low value, and of limited varietyChapter includes

Types of carriers, market structure, competitionOperating and service characteristics,

equipment and cost structure Current issues

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Brief History: Water Transport

First principal form of long distance freight and people transport

Important contributor to early U.S. economic and social developmentLinked initial population/industrial

concentrations along coast and rivers Waterways are natural ways

Public expenditure for improvements occasionally necessary

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Water Transport Industry OverviewSignificance of Water Transport

A primary transporter of dry bulk commoditiesbulk petroleum, petroleum products and

chemicals13% of intercity freight ton-miles in 2005Market share decline since 1980s due to

Economy changing from manufacturing to service-based

Supply chain orientation emphasizes faster modes

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Water Transport Industry Overview Types of Carriers

Classification by legal form of carriagePrivate carriers

Own the freight transported Own or lease the vessels May transport exempt commodities on a for-hire

basis Excluded from federal economic regulation Three or fewer commodities transported in the same

barge unit also exempt from economic regulation

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Water Transport Industry Overview Types of CarriersFor-hire water carriers are carriers that charge

a fee for services. Includes Exempt carriers

Excluded from federal econ. regulation adm. by STB Carriers are exempt when transporting dry or liquid

bulk commodities Most goods transported by water are bulk

commodities, thus most for-hire carriers are exempt from economic regulations

Regulated common carriers Common carriers Contract carriers

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Classification by waterway usedInternal or inland carriers

Operate barges and towboats on principal U.S. rivers

Most found on river systems flowing north to south through central U.S.

Great Lakes carriers Provide services between ports on Great Lakes Lake ships tend to remain on lakes Some lake ships access Atlantic and Gulf coast

ports via St. Lawrence Seaway

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Coastal carriers Operate ocean-going ships and barges along

Atlantic, Pacific and Gulf of Mexico coasts Moves large quantities of crude oil from Alaska

ports to refineries along Pacific CoastIntercoastal carriers

Operate ocean going ships and barges between coasts

Moves large quantities of oil from Gulf to Atlantic ports

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Water Transport Industry Overview Number and Categories of Carriers

Relatively small number of small firmsApprox. 680 domestic for-hire carriers in 2006

Number of carriers rapidly declining since 2000

Inland carriers earn highest share of revenuesInland carrier revenues flat over last decade Coastal carriers earn next highest shareGreat Lakes carrier revenues are growing due

to increase in higher valued freight9

Water Transport Industry Overview Competition

Moderate intramodal competition Small number of carriers on each waterway system

Intense intermodal competition With rail for dry bulk commodities (grain, ores, coal)

Competition focused around central U.S. river system and the Great Lakes

With pipelines for oil and petroleum products Competition focused along coasts and Mississippi River

system

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Water Transport Industry Overview Operating and Service Characteristics

Principal competitive advantagesLow cost transport service for large volumes

over medium to long distances Average cost = $.72 per ton-mile Average shipment distances

400 miles for inland carriers 1,500 miles for coastal carriers

Relatively large carrying capacity Barges: 1,500-3,000 tons per barge (50-100

truckloads) Lake vessels: 20,000 tons

Fuel efficient11


Principal competitive disadvantagesSpeed of service

Slowest mode for dry cargoesWeather-related service disruptions

Vulnerable to ice, flood, and drought conditionsAccessibility limitationsPackaging requirements for high-value goods

Service disadvantages may add cost for user and create tradeoffs with low rate advantage

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Commodities hauledWater carriers well suited for low value-to-

weight cargoes where transport rates are significant part of total delivered cost

Distribution of waterborne traffic (2007) Coal and coke 29.3% Petroleum 26.5% Crude materials 17.6% Food and farm products 12.5% Chemicals 8.2% Mfg. goods and equipment 5.7%

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Water Transport Industry Overview Equipment Vessels

Have large openings into cargo holds to facilitate cargo loading and unloading

Watertight walls divide holds enabling carrying of multiple types of commodities

Largest vessel: tanker 18K – 500K ton capacity Used largely to transport petroleum

Barges – powerless vessel towed by towboat Used largely on inland waterways Low marginal cost to add barge to a tow

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Water Transport Industry Overview Terminals

FunctionsFacilitate intermodal transfersProvide temporary storage in port area

Require significant capital investmentFacilities include ship loading/unloading

equipment, land for storage, road and rail access Most are publicly provided and operatedSome are owned by large bulk commodity

shippersRecent improvements focus on mechanization

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Water Transport Industry Overview Cost Structure

Relatively high variable, low fixed costsFixed costs: about 15% of total operating costs

Nature provides ways Governments provide for improvements to rivers,

canals, channels, locks, dams, terminals and portsVariable costs: about 85% of total

Water transport is not labor intensive In 1997, 2.72 million ton-miles per water carrier

employee (note – rail and pipelines are even less labor intensive)

Carriers pay user charges for portion of publicly provided improvements

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Water Transport Industry Overview Current Issues

Drug and alcohol abuseRandom and pre-certification testing

Port development challengesEconomic vs. environmental tradeoffsAppropriation of port revenuesInter-port competitionImpact of “mega-ship” emergence

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Brief History of Pipelines (Focus on Oil Pipelines)

Highly specialized mode, hauling small variety of products

Initial role, late 1800’s – move crude oil from wells to other modes

Early 1900s – pipelines owned, operated by large oil companies

After WWII – Chaplin Oil Case: pipelines ordered to operate as common carriers

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Pipelines Industry OverviewSignificance of Pipelines

Carry 20% of intercity ton-miles (2005)Crude oil and petroleum products represent

66% of ton-miles, natural gas 33%Earn 4% of total intercity transportation

revenuesReflects efficiency of pipeline transport and

low value per ton of products transportedAbout 160,000 miles in oil pipeline network

1,478,000 in natural gas pipeline network

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Pipelines Industry OverviewTypes of Carriers and Ownership

90% of carriers operate as common carriersIndividual, vertically integrated oil

companies own and operate most oil pipelines

Some lines are joint ventures of two or more oil pipeline companies

Other types of ownershipRailroadsIndependent oil companiesOther types of industrial companies

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Pipelines Industry OverviewNumber of Carriers (Market Structure)

Small number of large carriers: 2,297 (2006)Industry tends toward oligopoly

20 integrated oil companies control 66% of crude oil mileage

Entry costs are high: capital intensity, obtaining rights-of-way

Significant economies of scale in investment and operation Capacity rises more than proportionally with increase

in line diameter. Thus, investment cost per ton-mile and operating cost per barrel both decline as size increases.

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Pipeline Operating and Service Characteristics

Commodities carried – 4 principal productsOil and oil productsNatural gasCoal and coal products

Moves in pulverized form as slurry Requires large quantities of water – very few such

lines Chemicals

Primarily anhydrous ammonia (used in fertilizer) Propylene (used to manufacturer detergents) Ethylene (used to make antifreeze)

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Pipeline Operating and Service CharacteristicsRelative advantages

Low ratesLow loss and damage ratesWarehousing function (3-5 mph)High delivery dependability

Relative disadvantagesSlow speed limits responsivenessLimited geographic flexibilityLimited variety of products carried

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Pipeline Competitive Conditions

Very little intramodal competitionSmall number of carriersHigh capital costs and scale economiesProcedural requirements for entryOwnership by large oil companies

Limited intermodal competition Difficult for other modes to match ratesWater carriers are principal competitors

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Pipeline EquipmentOil Pipeline Network

Includes system ofGathering lines and stationsCrude oil and product trunk linesPumping stations, refineries, and

terminalsGathering lines

Move oil from wells to gathering stationsRelatively short distance movementSmall diameter, laid on ground surface

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Crude oil trunk linesMove crude oil from gathering stations to

refineriesLong distance movement

Shipments average 800 miles, may move 1,000s of miles

Large diameter lines laid undergroundPumping stations provide powerCapacity determined by line diameter and

pumping station power

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Finished product trunk linesMove product from refineries to market

area terminalsLong distance movement

Shipments average 400 miles, may move 1,000s of miles

Large diameter lines laid underground15 grades of finished product, including

kerosene, jet fuel and gasolineFinal delivery to customer usually by truck

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Pipeline Cost StructureHigh % of fixed costs

Pipeline owners provide right-of-wayCapital invested in

Rights-of-way, pumping stations, terminal facilities

Significant economies of scale Helps explain joint ownership

Very low labor costsPipeline industry employs 8,000 Motor carriers employ 10 million to move

comparable ton-miles 30

Pipeline Cost StructureRates

Freight classification is not necessary due to small number of products

Conditions are not conducive to differential pricing One-way movement, limited geographic

coverage, limited variety of productsRates quoted on a per barrel basis

Typically point-to-point or zone-to-zone Minimum shipment sizes (tenders) required

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Documents

Chapter 6 Water Carriers and Pipelines 1. Introduction Domestic water and pipeline carriers Both account for substantial shares of intercity freight volume