Management of Transportation Chapter 6 Water Carriers and Pipelines

Introduction Domestic water and pipeline carriers Chapter includes Both account for substantial shares of intercity freight volume For some commodities, one or both are the dominant modes Most freight carried tends to be high volume, low value, and of limited variety Chapter includes Types of carriers, market structure, competition Operating and service characteristics, equipment and cost structure Current issues

Brief History: Water Transport First principal form of long distance freight and people transport Important contributor to early U.S. economic and social development Linked initial population/industrial concentrations along coast and rivers Waterways are natural ways Public expenditure for improvements occasionally necessary

Water Transport Industry Overview Significance of Water Transport A primary transporter of dry bulk commodities bulk petroleum, petroleum products and chemicals 13% of intercity freight ton-miles in 2005 Market share decline since 1980s due to Economy changing from manufacturing to service-based Supply chain orientation emphasizes faster modes

Water Transport Industry Overview Types of Carriers Classification by legal form of carriage Private 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

Water Transport Industry Overview Types of Carriers For-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

Water Transport Industry Overview Types of Carriers Classification by waterway used Internal 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

Water Transport Industry Overview Types of Carriers 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 Coast Intercoastal carriers Operate ocean going ships and barges between coasts Moves large quantities of oil from Gulf to Atlantic ports

Water Transport Industry Overview Number and Categories of Carriers Relatively small number of small firms Approx. 680 domestic for-hire carriers in 2006 Number of carriers rapidly declining since 2000 Inland carriers earn highest share of revenues Inland carrier revenues flat over last decade Coastal carriers earn next highest share Great Lakes carrier revenues are growing due to increase in higher valued freight

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

Water Transport Industry Overview Operating and Service Characteristics Principal competitive advantages Low 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 efficient

Water Transport Industry Overview Operating and Service Characteristics Principal competitive disadvantages Speed of service Slowest mode for dry cargoes Weather-related service disruptions Vulnerable to ice, flood, and drought conditions Accessibility limitations Packaging requirements for high-value goods Service disadvantages may add cost for user and create tradeoffs with low rate advantage

Water Transport Industry Overview Operating and Service Characteristics Commodities hauled Water 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%

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

Water Transport Industry Overview Terminals Functions Facilitate intermodal transfers Provide temporary storage in port area Require significant capital investment Facilities include ship loading/unloading equipment, land for storage, road and rail access Most are publicly provided and operated Some are owned by large bulk commodity shippers Recent improvements focus on mechanization

Water Transport Industry Overview Cost Structure Relatively high variable, low fixed costs Fixed costs: about 15% of total operating costs Nature provides ways Governments provide for improvements to rivers, canals, channels, locks, dams, terminals and ports Variable 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

Water Transport Industry Overview Current Issues Drug and alcohol abuse Random and pre-certification testing Port development challenges Economic vs. environmental tradeoffs Appropriation of port revenues Inter-port competition Impact of “mega-ship” emergence

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

Pipelines Industry Overview Significance 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 revenues Reflects efficiency of pipeline transport and low value per ton of products transported About 160,000 miles in oil pipeline network 1,478,000 in natural gas pipeline network

Pipelines Industry Overview Types of Carriers and Ownership 90% of carriers operate as common carriers Individual, 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 ownership Railroads Independent oil companies Other types of industrial companies

Pipelines Industry Overview Number 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.

Pipeline Operating and Service Characteristics Commodities carried – 4 principal products Oil and oil products Natural gas Coal 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)

Pipeline Operating and Service Characteristics Relative advantages Low rates Low loss and damage rates Warehousing function (3-5 mph) High delivery dependability Relative disadvantages Slow speed limits responsiveness Limited geographic flexibility Limited variety of products carried

Pipeline Competitive Conditions Very little intramodal competition Small number of carriers High capital costs and scale economies Procedural requirements for entry Ownership by large oil companies Limited intermodal competition Difficult for other modes to match rates Water carriers are principal competitors

Pipeline Equipment Oil Pipeline Network Includes system of Gathering lines and stations Crude oil and product trunk lines Pumping stations, refineries, and terminals Gathering lines Move oil from wells to gathering stations Relatively short distance movement Small diameter, laid on ground surface

Pipeline Equipment Oil Pipeline Network Crude oil trunk lines Move crude oil from gathering stations to refineries Long distance movement Shipments average 800 miles, may move 1,000s of miles Large diameter lines laid underground Pumping stations provide power Capacity determined by line diameter and pumping station power

Pipeline Equipment Oil Pipeline Network Finished product trunk lines Move product from refineries to market area terminals Long distance movement Shipments average 400 miles, may move 1,000s of miles Large diameter lines laid underground 15 grades of finished product, including kerosene, jet fuel and gasoline Final delivery to customer usually by truck

Pipeline Cost Structure High % of fixed costs Pipeline owners provide right-of-way Capital invested in Rights-of-way, pumping stations, terminal facilities Significant economies of scale Helps explain joint ownership Very low labor costs Pipeline industry employs 8,000 Motor carriers employ 10 million to move comparable ton-miles

Pipeline Cost Structure Rates 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 products Rates quoted on a per barrel basis Typically point-to-point or zone-to-zone Minimum shipment sizes (tenders) required