Chapter 6
Water Carriers and
Pipelines
1
Introduction
 Domestic water and pipeline carriers
 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
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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 development
 Linked 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
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 servicebased
 Supply chain orientation emphasizes faster modes
4
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
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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
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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
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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 Coast
 Intercoastal carriers

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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 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
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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 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
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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
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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)

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


Coal and coke
Petroleum
Crude materials
Food and farm products
Chemicals
Mfg. goods and equipment
29.3%
26.5%
17.6%
12.5%
8.2%
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
 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
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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
16
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
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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 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
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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
22
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 rightsof-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 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)
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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
25
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
26
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
27
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
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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
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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
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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
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