Chapter 6Water Carriers
and Pipelines
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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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Water Transport Industry Overview Types of Carriers
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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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 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
Water Transport Industry Overview Operating and Service Characteristics
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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Water Transport Industry Overview Operating and Service Characteristics
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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Pipeline EquipmentOil Pipeline Network
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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Pipeline EquipmentOil Pipeline Network
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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