Economic aspects of pipeline transport: A South African perspective
Date
2009-06
Authors
Pienaar, W. J.
Journal Title
Journal ISSN
Volume Title
Publisher
AOSIS OpenJournals
Abstract
Pipeline transport is unique among modes of transport in that the pipe, which facilitates freight
movement, is both the way and the vehicle, and it is permanently connected to terminals, which
facilitate freight storage. This feature makes it the only mode of transport that does not require
any materials or goods handling. In view of the facts that pipeline infrastructure is extremely
capital intensive and that it has an unprecedented longevity, pipeline transport enjoys the highest level of economies of scale of all modes of transport. This economy is subject to steady and
enduring high levels of demand. It is also the only mode of freight transport of which the operations
do not require a return journey, whereby joint cost due to empty running is avoided.
The commercial transport of crude oil and petroleum products by pipeline and the envisaged
new investment in this mode of transport are receiving increased attention in South Africa.
Transnet Pipelines recently obtained permission from the National Energy Regulator of South
Africa (Nersa) to construct and operate a new 60-cm petroleum products pipeline 704 kilometres
in length from Durban to Gauteng. In addition, the newly-formed Petroline consortium recently
obtained permission to construct and operate a 30 cm petroleum products pipeline 199 kilometres
in length from Maputo to Nelspruit, with an extension of 249 kilometres in length eventually to
Kendal, where it can be linked up with the present Transnet pipeline network.
The disadvantages of pipeline transport lie mainly in its extreme functional speciali sation
and dependence upon sustained high-volume traffi c. The initial cost of installation is high and
justifi ed only when both the demand and supply are guaranteed to continue for an indefi nite
period. Despite the fact that tank ships run empty during return trips, pipeline transport can only
compete with sea transport between the same origin and destination if the pipeline route is
considerably shorter than the sea route, or where sea transport is subject to exceptional charges,
such as heavy canal dues.
The economic assessment of a pipeline necessitates the investigation of several alternatives
in order to determine whether the project is justifi able in terms of the economic resources its
commercial existence will require. Firstly, alternative locations of the pipeline may have to be
compared. A second consideration is the size of the pipeline, since one with a larger diameter,
and capable of handling a greater traffi c volume, involves higher initial investment cost but lower
costs for pumps and energy to propel the pumps. A third decision concerns the choice of pump
technology. Most pumps are driven by electric motors, although diesel engines or gas turbines
can also be used. A fourth important consideration is whether the refi nery should be located at
the beginning of the line (upstream, close to the oil fi eld or the port of entry) or at the end of the
line (downstream, close to the market). The fi fth step in the economic evaluation is to compare
the pipeline cost with the cost of the next best transport alternative, which is usually rail transport.
If these investigations indicate that a pipeline promises to be technically feasible, fi nancially
viable and economically justifi ed, detailed design of the pipeline may commence.
In terms of market participants the supply of pipeline transport is the most highly concentrated
of all freight transport modes. With a few exceptions, there is but one crude oil, one products and
one natural gas pipeline connecting producing areas or refi neries and areas of consumption.
This high degree of monopoly results from declining unit costs with increases in capacity, so that
the lowest costs are achieved by a concentration of output in a single pipeline. Therefore, pipeline
operations that can fulfi l entire market demands are pure natural monopolies. Where the distance
between supply points (such as geographically separated oil fi elds or ports of entry) is far in
relation to the delivery distance to the market area, such an area’s fuel demand can often be most
effi ciently fulfi lled by two or more different pipeline operations.
The clients of a common carrier are direct competitors in the wholesale fuel market, therefore
they should bear full cost responsibility for the service rendered by the pipeline. Service below
total cost to a client implies that it is subsidized by its competitors. The only instance when
delivery can take place below total cost is when:
• the necessary spare capacity exists to accommodate the consignment (i.e. that the
opportunity for another consignment to be delivered at full cost is not jeopardized); • all the avoidable (i.e. short-run) costs are covered and some contribution to unavoidable
(i.e. fi xed or long-run) costs is made; and
• the consignment delivery would not have taken place at a price covering full costs.
Description
The original publication is available at http://www.satnt.ac.za/
Keywords
Average variable cost, Cost structure, Economic evaluation, Economies of scope, Economies of density, Economies of scale, Envelope curve, Long-run average cost, Long-run marginal cost, Marginal cost pricing, Natural monopoly, Short-run marginal cost, Unit cost
Citation
Pienaar, W.J. 2009. Economic aspects of pipeline transport: a South African perspective