IBP1271_07

BENCHMARKING OIL AND NATURAL GAS PIPELINE

OPERATIONS
Hank Brolick1, Jose I. Verdin2

Copyright 2007, Instituto Brasileiro de Petróleo e Gás - IBP

This Technical Paper was prepared for presentation at the Rio Pipeline Conference & Exposition 2007, held between 2 and 4
October 2007, in Rio de Janeiro. This Technical Paper was selected for presentation by the Technical Committee of the event
according to the information contained in the abstract submitted by the author(s). The contents of the Technical Paper, as presented,
were not reviewed by IBP. The organizers are not supposed to translate or correct the submitted papers. The material as it is
presented, does not necessarily represent Instituto Brasileiro de Petróleo e Gás’ opinion, or that of its Members or Representatives.
Authors consent to the publication of this Technical Paper in the Rio Pipeline Conference& Exposition 2007 Annals.

Abstract
HSB Solomon Associates LLC (Solomon) began conducting Fuels Refinery Performance Analyses (Fuels
Studies) more than 25 years ago and is now acknowledged as the industry leader in that field. Over time, Solomon has
expanded its comparative performance analysis (CPA) service to include petrochemicals, power generation, pipeline,
and terminal facilities worldwide. Applying the principles of CPA, Solomon developed a patented divisor—Equivalent
Pipeline Complexity™ (EPC™) – (U.S. Pat. No. 7,233,910)—that enables operating cost comparisons between
pipeline systems of varying scales and complexities. By carefully defining the envelope of each pipeline system,
providing rigorous data input instructions, and applying the EPC divisor methodology, Solomon is able to provide this
reliable basis for data comparison. Substantiating this improved method of comparison is a Coefficient of
Determination (r²) exceeding 90%. The study population supporting this effort and findings comprises more than 100
liquid hydrocarbon and natural gas pipeline systems throughout North/South America and Europe.

1. Introduction
Solomon began conducting its Fuels Studies more than 25 years ago and is now acknowledged as the leader in
that field. What the industry calls operating cost benchmarking for performance improvement, we call comparative
performance analysis (CPA). Throughout the years, Solomon has expanded its CPA service to include petrochemicals,
power generation, pipeline, and terminal facilities worldwide. This presentation outlines how the principles of CPA
have been applied to develop our patented EPC divisor, which enables operating cost comparisons between pipeline
systems of varying scales and complexities. Solomon performed the first Liquid Pipeline and Terminal Performance
Analysis (LP&T Study) for European pipelines using operating year 2000 data and has since been conducting biennial
Worldwide LP&T Studies. Participation has been the strongest in Europe, and North and South America. The most
recent study, using 2006 operating data, comprised more than 73 separate pipeline system participants. Solomon
conducted its first Natural Gas Transmission System Performance Analysis (NGTS Study) using 2004 operating data
for North American pipeline systems. Twenty-two North American pipeline systems participated, with five additional
systems joining from Latin America.

2. Defining the Envelope

CPA studies are designed to evaluate individual pipeline system business unit performance. For example, if
you roll up the performance of several pipeline systems into company performance, you are simply averaging good and
poor system performance, thereby having no reliable basis for performance improvement. Further, our studies have
shown that an economy-of-scale performance benefit does exist for a contiguous pipeline system. However, if you
combine the performance of two geographically separated pipeline systems, false economies of scale are indicated, and
performance expectations for the separate systems would be in error.

______________________________
1
Vice President Pipelines – HSB Solomon Associates LLC
2
Director Latin America Operations – HSB Solomon Associates LLC
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Defining the envelope of each pipeline system is necessary to provide a reliable basis for data comparison. For
example, Solomon’s LP&T Study excludes gathering systems, off-shore pipelines, and end-point terminals, but includes
breakout (intermediate storage) and excludes system expansion costs. The excluded facilities have different cost drivers
and regulations, suggesting they should be evaluated in separate CPA studies. Solomon already conducts terminal CPA
studies separate from pipelines. As such, gathering data on a consistent basis and providing line-by-line instructions,
data input training, and rigorous data validation are mainstream to Solomon CPA studies.

3. Finding the Operating Cost Divisor

As one would expect, pipeline systems vary greatly in size and complexity. To make matters more complex,
size can be measured in numerous ways. For instance, delivery capacity can be measured in volume (m³) or volume-
length (m³-km), diameter-length (diameter inch-km), or possibly even operating megawatts (MW). To date, there has
been no single operating cost divisor that provides a reliable metric for comparing pipelines of widely diverse scales
and complexity. Accordingly, Solomon developed EPC—a divisor that represents a substantial improvement over
traditional alternatives used in the pipeline industry. A standard method for measuring the robustness of a divisor is to
compute the Coefficient of Determination (r²), where r is the Pearson Correlation Coefficient, between the actual and
predicted expenditures. Table 1 shows r² values based on Solomon 2004 study data using EPC and other divisors.

Table 1. Coefficient of Determination (r²) Values

Oil Pipelines Natural Gas

Pipelines
Utilized Capacity, volume-distance 0.62 0.41
Pipeline Length 0.62 0.64
Replacement Value 0.63 0.70
Diameter inch-km 0.67 0.75
EPC >0.90 >0.90

These Pearson coefficients for EPC were developed for the diverse data set of more than 70 pipelines in the
2004 LP&T Study, as shown in Table 2.

Table 2. System Diversity

|---------------------- Range ----------------------|

Minimum Average Maximum
Number of Main Pumps 0 23 129
Number of I/O Stations 2 10 160
ROW, mi 21 320 1,836
Total Length, mi 21 609 3,081
Total Installed Cap, bbl-mi 0.90 147 240
ROW HCA, mi* 0 210 1,221
Pipeline Length HCA, mi 0 317 2,142
Diameter inch-mi 547 13,417 81,740
UtilCap, bbl-mi 0.6 94 164
Throughput, Mbbl 5.8 82.8 263
Total Batch Count 2 3,485 30,707

* HCA = high-consequence area

If you were to focus only on pipelines that were very similar in nature, the database for comparison would be
severely limited. Since reliable comparisons require large samples of representative industry data, diversity is
unavoidable, and EPC has been proven to provide reliable comparisons.

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The EPC process is performed by selecting cost drivers—primary characteristics that define your system—and
comparing them to the controllable fixed operating costs that we call Manageable Non-Volume Related Expenditures
(MNVE).1 These drivers/characteristics are summarized as follows:

• Physical assets and size

o Pipeline, pump stations, tanks, etc.
o Input/output stations
o Number of mainline pumps, etc.
o High-consequence area (HCA) effects
o Line diameters and length
o Installed and operating power
• Activities (normally peer groups)
o Average haul
o Number of transactions
o Number of shippers
o Throughput
o Utilized capacity (volume-distance)

Non-volume expenditures under management control (MNVE) are summarized as follows:

• Salaries and benefits, maintenance, surveillance, vehicles, equipment rentals, other contract services
• Operations, maintenance, general and administration
• Excludes ROW fees, property taxes, insurance, environmental fees
• Excludes energy and other volume-related costs

The correlation of potential primary characteristics to adjusted MNVE resulted in the following equation for
EPC calculation using 2004 study data:

EPC = x1(a) + x2(b) + x3(c) + x4(d) + x5(e) + x6(f)

where: (a) Maximum operating power
(b) Number of input/output stations
(c) ROW length
(d) Breakout storage capacity
(e) Number of breakout tanks
(f) Percent Natural Gas Liquids
and: “x1” to “x6” are constants for each variable and “a” through “f” are the numbers of each variable for
a specific pipeline system

It should be noted that in some cases the variables have an exponent other than one. The cost drivers selected
to determine EPC for natural gas transmission systems are similar. An EPC value is then calculated for each pipeline,
and performance is compared using US dollars per EPC (US $/EPC).

At the time of this writing, the correlation was not complete for the 2006 LP&T Study; however, it is expected
that the equation will be similar to 2004 subject to advancements made in data collection and the EPC methodology.

1
For EPC determination, MNVE is adjusted for unusual high-cost items (UHCI) and annualized pipeline
integrity program work.

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4. Using EPC in CPA

Both expenditures and work hour requirements per unit EPC can be calculated, with the outcomes for each
pipeline system compared with those of peer groups comprising better performing peers (i.e., first quartile or better
half). It is important to recognize that the methodology employed is for performance improvement activities to improve
the efficiency of your operations given the system size and complexity constraints. The typical industry metric of
performance measures system competitiveness based on the cost of throughput, which can be measured in cost per m³
(US $/m³) or cost per volume–distance (US $/m³-km). Figure 1 illustrates study costs of US dollars MNVE per million
m³-km.

US $ per Gigajoule-km
US $ per M m3-km

Liquid Pipeline

Natural Gas Pipeline

0 25 50 75 100
Total Pipeline, M m3-km, %
PLWP07-01

Figure 1. US $ MNVE/EPC

In the curves shown in Figure 1, large pipeline systems, which benefit from economies of scale, populate the
low-cost, left end of the curves while small pipelines, which incur higher costs and consequently are unable to compete
on a throughput basis, populate the right half of the curves. Note the range of performance is 5 to 1 for natural gas and
10 to 1 for liquids. This metric does not provide a reliable basis for performance improvement programs. The y-axis
scale units have been removed to protect client confidentiality rights.

Figure 2 depicts a typical industry curve using the EPC complexity divisor. Both large and small pipeline
systems are represented in all quartiles of the performance curve.

2,000
Liquid Pipeline
1,600
US $ MNVE/kEPC

1,200

800
Natural Gas Pipeline

400

0
0 25 50 75 100
Total Pipeline kEPC, %
PLWP07-02

Figure 2. US $ MNVE/Volume-Distance

As expected, 10–15% of the study population at each end of the curve exhibit larger variations from the
average. The reasons for these anomalies are many, such as incorrect cost reporting, system recently acquired or sold,
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abnormal year, or possibly just good or poor performance. The mainstream performance is exhibited by 70–90% of the
study population with gradual increases in cost per EPC for the study group. The range between the higher- and lower-
cost performance in terms of cost per EPC is only 1.5 to 1 and 2 to 1 for most of the natural gas and liquid pipelines,
respectively. The range represents opportunity gaps that can be quickly converted to potential savings by multiplying
the cost per EPC gap by EPC for the specific pipeline system.

5. Does Age Matter?

One of the most frequently asked questions is “Does the data indicate a correlation between pipeline age and
cost?” Figure 3 and Figure 4 on a maintenance cost per diameter inch-km and cost per EPC clearly show no direct
correlation between cost and age for the 42 pipelines shown. Again, some scales are deleted to protect client
confidentiality rights.
US $ per Diameter Inch-km

0 20 40 60 80
Pipeline Age, years
PLWP07-03

Figure 3. Pipeline Average vs US $ per Diameter Inch-Mile

2.0
1.8
1.6
1.4
US $ per kEPC

1.2
1.0
0.8
0.6
0.4
0.2
0.0
0 20 40 60 80
Pipeline Age, years
PLWP07-04

Figure 4. Pipeline Average vs Maintenance US $ per EPC

The same holds true for our NGTS Study and in general for our other CPA studies. The message may be that a
well-maintained system can sustain efficient operations for the long term. Of course, catch up in maintenance for poorly
maintained systems will always be an expensive proposition.

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6. Reliability
Low-cost performance without consideration for reliability of equipment operations, supply to customers, and
meeting environmental requirements is only part of the picture. Collecting reliability data for pipelines can prove to be
a challenge because the industry has made limited use of these metrics except for environmental performance. Solomon
has found it very useful to identify what reliability factors might best serve an industry and, of course, there is some
commonality across the energy industry. The following have been identified as useful and seem to be gaining
acceptance by pipeline study participants:

• Unplanned delivery interruptions, hours, volumes, and number of events

• Leak and spill quantities, and number of events
• Safety, numbers of lost time accidents, and frequency rates
• Major equipment unplanned downtime

An example of major equipment planned and unplanned downtime is shown in Figure 5 for natural gas
pipeline compressor units. Overall better performers are expected to achieve a high degree of reliability and good cost
performance.

35

30

25

20

15

10

0
X
Pipeline System Performance
Planned Unplanned
PLWP07-05

Figure 5. Pipeline Age vs Maintenance US $ per EPC

7. Study Improvements
Solomon’s 2006 LP&T Study will be completed by fourth quarter 2007. The next NGTS Study will follow in
2008. Each study has improvements in data collection and methodology. For instance, we are now collecting the length
of pipeline and right of way for different types of terrain. There are clear indications that terrain will impact some costs
more than others. Pipeline access and maintenance work can be time consuming and costly in rugged mountains;
however, the same holds true for pipelines with a high percentage within city streets, which involves a completely
different set of maintenance and operations challenges.

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8. Summary
Performance improvement for many companies is an ongoing effort. A reliable comparative performance
analysis of pipeline system cost data is an essential baseline to identify improvement opportunities. A complexity
divisor such as EPC has been proven in practice to identify improvement areas more reliably than divisors focusing on
competitiveness. Solomon conducts its pipeline industry studies every 2 to 3 years. Concurrent study participation
provides the ability to compare trends to industry performance, providing another dimension to the quest for low cost,
reliable performance.