The Transportation of Petroleum

and Derived Products in the

American Market

Transpetro Company
16 de Agosto. 2007
Thomas L. Freese
Freese & Associates, Inc.
 Instructor
His experience spans the product line spectrum from hydraulic
components and bulk chemicals, fresh poultry and frozen foods to
consumer goods. His projects encompass work with manufacturers,
wholesalers, government, retailers and e-tailers and have been conducted
throughout North America, Europe (both Western and Eastern) and Asia.

Tom serves on the editorial review board of the Journal of Business

Logistic and the CSCMP Technology Review Committee, is the 1st Vice
President of the NE Ohio WERCouncil and a member of the WERC
Knowledge Committee. A well recognized expert in supply chain
management and logistics he has written numerous articles and delivered
over 200 professional presentations in China, Dubai, Europe, Korea,
Malaysia, Russia, Brazil, and the United States.
 Instructor
Tom is an active member in the Association of Transportation Law,
Logistics and Policy (ATLLP), Council of Supply Chain Management
Professionals (CSCMP), International Customer Service Association
(ICSA), and Warehousing Education and Research Council (WERC).

Education
„ M.B.A., with a depth of field in Business Logistics, The Ohio State

University
„ B.S.B.A., with a major in Marketing, The Ohio State University
 Instructor
Mr. Thomas L. Freese in his roles at UNOCAL (Union Oil Company of
California) held numerous line and staff petroleum distribution
positions overseeing company operated light oil and lubricant mixing
terminals, bulk storage facilities, pipeline terminals, tank farms and
truck transportation fleets. His responsibilities included:
• Managing the region's forecasting inventory control and product
supply operation
• All transportation functions (private fleet, contract and common
carrier dry and bulk commodities, truck, rail, water and pipeline
operations) for the region
His experience spans pipeline, barge, ocean, rail and truck
transportation, terminal and lube blending operations.
 Agenda
„ Introduction
„ US Petroleum Network
„ Forecasting
„ Transportation
„ Liquefied Natural Gas
„ Ethanol and Bio diesel
„ Competition and Integration
„ Management Issues
„ Summary & Conclusion
Petroleum Logistics

Petroleum logistics is at its

base is merely the physical
supply and transportation of
crude reserves to a point of
processing, and the storage
and distribution of finished
product to its end users.
 The Transportation of Petroleum and
Derived Products in the American Market

This session is an
examination of how that
process operates in the
American Market and
what is different as well as
what can be learned that
is applicable to the
Brazilian Market.
Key topics that will be addressed:

„ Forecasting
„ Transportation
„ Integration
„ Management Issues
„ Competition
„ Ethanol & Bio diesel
„ Liquefied Natural Gas
This session will examine;

„ competitive influence on the US

petroleum industry,
„ governmental influence on the US
petroleum industry,
„ the various types of transportation,
„ the impacts and influence of
alternative fuels,
„ integration of various energy
organizations,
„ the future and how it will change
today's infrastructure.
 Specifics to be covered:
1) What is the forecasting regarding the balance between supply and
demand of petroleum products for next ten years?
2) What is the transportation infrastructure for the movement of
petroleum and derived products?
3) What are the major modes of transportation for petroleum and
derived products as well as ethanol and bio diesel? What are the
major advantage and disadvantage of each mode? What are the costs
of transportation for each mode?
4) Who are the top companies that offer this service? Are the producers
also responsible for the transportation or there are specifics
companies focused in the movement of petroleum and derived
product?
5) How is the integration among the pipeline mode of transportation and
the others modes. Particularly between pipeline and railroad; pipeline
and river boats; pipeline and maritime transportation.
 Specifics to be covered:
6) How structured are the commercial relationships among the several
players involved in the process of transportation of petroleum and
derived product? For instance, the relationship among producers,
logistics providers and distributors
7) What are the principle management issues faced by a transportation
company in the movement of petroleum and derived product?
8) What is the competition among the companies in the market of
transportation of petroleum and derived products?
9) What is the American government planning in terms of adding
ethanol and bio diesel to the portfolio of fuels available to the final
consumer? What are the targets for the next ten years?
10) What are the plans for adding ethanol to gasoline and offering the
blend to the final consumer? What is the size of this market, taking
into consideration the amount already being produced by the
domestic producers?
 Specifics to be covered:

11) How is Liquefied Natural Gas transported? How many companies

are in this business? What are the requirements for the
transportation? What are the cost of transportation of this
product?
12) What is the bio fuel energy policy in America?
13) What are the incentives to the production and use of bio fuel,
specially bio diesel and bio ethanol storage?
14) How is bio fuel transported and distributed of in America?
US Petroleum Network
US Supply Chain Infrastructure
US Petroleum Supply Chain
Selected Physical Statistics
 The Complexity of the Supply Chain

Source: Aspen Technologies

US Petroleum Supply Chain
Petroleum Enters & Leaves US
Supply Chain at Many Points
US Petroleum Supply Chain
US Petroleum Supply Chain
US Petroleum Supply Chain
US Petroleum Supply Chain
US Population Density
 Key Concepts
• The US petroleum network is quite complex.

• Product is often sold, traded or exchanged instead

of physical movement / transport.

• Multiple parties are involved in the supply chain

some of who may be competitors.

• Physical movement may be along owned channels,

competitors channels and/or third party's.
US Petroleum Network’s
Challenges
 Logistics Infrastructure
Challenges
ƒ The US logistics infrastructure supporting petroleum
imports is already near capacity and permitting and
funding these types of facilities, such as wharf’s
terminals, pipelines, etc.) will take a minimum of
several years.
ƒ Future import growth does not necessarily match up
to where spare capacity exists in the system.
ƒ The future need to import more refined products and
rude oil into the U.S. West Coast is causing the
petroleum industry and the government to scramble
to find supply-chain solutions that will alleviate the
upcoming bottlenecks of the current infrastructure.
 U.S. Refineries
ƒ In 1981 there were over 300 refineries in the U.S.
while today there are less than 150.
ƒ Refineries have kept pace with demand during the
last 20 years by expanding capacity and running at
higher utilization. In the future refineries cannot
look towards improved utilization as a means to
satisfy increasing demand.
ƒ In 2004 refineries operated at around 95%
utilization, which experts believe to be the
maximum
ƒ A series of costly upgrades have been imposed on
the refining industry in order to produce cleaner
burning fuels as mandated by the federal
government.
 U.S. Refining Capacity
U.S. refining capacity, as measured by daily processing
capacity of crude oil, has appeared relatively stable in recent
years, at about 16 million barrels per day of operable capacity.
While the level is a reduction from the capacity of twenty years
ago, the refineries that were shut down as demand fell in the
early 1980's were those that were limited to simple distillation,
small facilities were not economically viable.
When Federal price control system subsidies ended in 1981,
additional refineries were shut down. At the same time, refiners
improved the efficiency of the crude oil distillation units that
remained by improving the flow and matching capacity among
units and turning more to computer control of the processing.
 U.S. Refining Utilization
Following government mandates for environmentally more benign products
as well as commercial economics, refiners enhanced their upgrading
(downstream processing) capacity. As a result, the capacity of the
downstream units ceased to be the constraining factor on the amount of
crude oil processed (or "run") through the crude oil distillation system. Thus
crude oil inputs to refineries ("runs") have continued to rise, and along with
them -- given the stability of crude oil distillation capacity -- capacity
"utilization" rose throughout much of the 1990's. Utilization -- the share of
capacity filled with crude oil -- reached truly record levels in the last half of
the decade, nominally exceeding 100 percent for brief periods.
As with most aspects of the U.S. oil industry, the Gulf Coast is by far the
leader in refinery capacity, with more than twice the crude oil distillation
capacity as any other United States region. (The difference is even greater
for downstream processing capacity, because the Gulf Coast has the highest
concentration of sophisticated facilities in the world.)
Refinery Capacity & Utilization
 Domestic Petroleum Industry

„ The domestic petroleum is having difficulty meeting

consumer demands for refined products like
gasoline, diesel and jet fuel.
„ With the economic recovery that has taken place in
the U.S. since 2003, demand for energy and
particularly petroleum products has resumed the
growth that had been temporarily stalled since
9/11/2001.
 Domestic Petroleum Industry
„ August year over year demand growth of
approximately 2% for gasoline, 10% for diesel
and 14% for jet fuel is exceeding the historical
growth rates for these products.
„ The West Coast anticipates that for the next 5
years gasoline demand will continue to grow at
2.2% per year while diesel fuel will grow at 2.6%
and jet fuel will grow at 1.7% per year. This
continued growth will add stress to a refining
system that is already running at maximum
output.
 Domestic vs. Foreign Refining
„ While cleaner burning fuels are being supported,
the upgrades required to produce them are
consuming resources that a refining company may
have used to expand capacity.
„ There will not be enough refinery expansion to
address growth in demand and focus resources on
upgrading plants to produce cleaner burning fuels.
„ Refiners on the U.S. West Coast market will have
to rely more on foreign imports of refined products
like gasoline, diesel and jet fuel in order to meet
future demand for these products.
 Domestic vs. Foreign Refining
„ Based upon supply and demand growth
projections we assume that by 2008 the West
Coast petroleum industry will have to more than
triple its current levels of refined product imports
from approximately 160,000 barrels per day to
approximately 480,000 bpd in 2008 in order to
meet consumer demands in PADD V.
„ Imports primarily come on tanker ships through
the three major West Coast storage and
distribution hubs of Los Angeles, San Francisco,
and Portland.
 Key Concepts
• US logistics infrastructure for petroleum imports is at capacity

• Since 1981 refineries in the U.S. have declined from 300

to less than 150.

• Refinery capacity has actually increased

• The West Coast is projected to triple its imports by 2008

• The US is having difficulty meeting current demands for

refined products
Forecasting
U.S. Energy Consumption by Fuel
(1980-2030)
Peak Oil Sources
U.S. Petroleum Supply, Consumption
& Imports, 1970-2025
Supply Chain Costs to Sell Gas
Distribution as a % of Sale Price
 Weekly U.S. Retail Gasoline Prices, Regular Grade

Source: EIA
Variable Pricing of Gasoline
 Key Concepts
• Energy consumption particularly petroleum is projected
to continue its rise for the foreseeable future

• Distribution and marketing costs represent 8-14%

averaging <10% with a < 50/50 split

• Prices will continue to increase based upon this supply

and demand

• Pricing is seriously impacted by regionalization of

supply formulas
Transportation

Pipeline
Rail
Barge
Marine
Truck
Today's Petroleum Transportation
 Pipelines

More than 65% of the oil and petroleum products used in

the U.S. each year moves by pipeline
Major U.S. Natural Gas Transportation Corridors

The EIA has determined that the informational map displays here do not raise security concerns, based on the application of the Federal
Geographic Data Committee’s Guidelines for Providing Appropriate Access to Geospatial Data in Response to Security Concerns.
Natural Gas Pipelines
U.S. Crude Oil and Product Pipeline Systems

Over 200,000 miles of petroleum pipelines

Pipelines in US
Pipelines in US
 Grades in Pipeline

Source: Colonial Pipeline Company

Largest U.S. Interstate Pipeline Companies
Rank by
2005 Mileage Company Mileage

1 Magellan Pipeline Co. LLC 8,525

2 ConocoPhillips Pipe Line Co. 8,067

3 Plains All-
All-American Pipeline LP 7,976

4 Mid-
Mid-American Pipeline 7,117

5 BP Pipelines North America 6,948

6 Colonial Pipeline Co. 5,588

7 ExxonMobil Pipeline Company 4,725

8 Chevron Pipeline Co. 3,825

9 Enbridge Energy LP 3,340

10 Marathon Pipeline LLC 3,177

Ranked in order of 2005 mileage as reported in "SPECIAL REPORT: US gas carriers’ 2005 net incomes climb;
construction costs plummet", Oil & Gas Journal, September 11, 2006.
 Transport by Mode
Crude petroleum and petroleum products carried in
domestic transportation by the various modes of
transport in 1976 are tabulated showing a total of
1,945,234,800 net tons, of which
„ 48.02 percent was transported by pipelines,

„ 21.86 percent by water carriers,

„ 28.75 percent by motor carriers, and

„ 1.37 percent by railroads.

The comparative figure for 1975 was 1,831,515,800 net

tons, of which
„ 48.02 percent was carried by pipelines,

„ 22.06 percent by water carriers,

„ 28.42 percent by motor carriers, and

„ 1.50 percent by railroads.

Crude vs. Finished Transportation
In the movement in 1976 of crude petroleum only the
pipelines carried 75.33 percent of the total 608,630,800 tons
transported.
„ This compares with 74.34 percent of the total net tons
transported in 1975.
„ In the movement in 1976 of petroleum products the pipelines,
which carry only the light products (gasoline, heating and fuel
oils, liquid petroleum gas, kerosene, and jet fuel), carried 35.58
percent of the total 1,336,604,000 net tons transported.
„ This compares with 34.82 percent of the total net tons
transported in 1975.
„ The increase in 1976 over 1975 in the tonnage of crude
petroleum and petroleum products carried by the pipelines was
6.2 percent, compared with an increase of 6.2 percent in total
demand.
„ Included is a comparison of the ton-miles of crude petroleum
and petroleum products carried in domestic transportation by
the various modes of transport.
Publisher Association of Oil Pipe Lines,Washington, DC
 Key Concepts
• The US has a well defined pipeline network

• Crude pipelines distribute Gulf Coast crude to Midwestern

refineries

• Finished goods pipelines distribute refined product to

Midwest and East Coast markets

• Natural gas pipelines distribute Gulf Coast & Canadian gas

to demand markets
 Railroads

Less than 3% of the total barrel miles of petroleum

product transportation used in the U.S. each year is rail
Railroad Companies

• Burlington Northern-Santa Fe
• Conrail
• CSX Transportation
• IC&E Railroad
• Illinois Central
• Kansas City Southern
• Montana Rail Link
• Norfolk Southern
• Pacific Harbor Line
• Union Pacific
• Wisconsin Central
BNSF Intermodal Network
Union Pacific Network
Major Railroads by Revenue
2006 Class I Tons Carried
2006 Class I Railroad Tons Originated
 Key Concepts

• US freight railroads are dominated by four carriers

• Petroleum products are a small segment of total rail tonnage

• Railroads represent less than 3% of the total barrel miles of

petroleum transportation
 Barge

More than 30% of the oil and petroleum products used in

the U.S. each year moves by barge
Petroleum Moved by Barge
 Key Concepts

• More than 30% of the oil and petroleum products used

in the U.S. each year moves by barge

• Barge transportation is more expensive than pipeline

but cheaper then rail

• Barge transport is limited in the Midwest upper Mississippi

due to frozen conditions during winter months
 Highway Transportation

While the last link in the transportation chain is often by

truck less than 4% of the total barrel miles of petroleum
transportation in the U.S. each year is by truck.
National Defense & Highway System

US DOT/FHA
 Key Concepts
• The US has an extensive highway network

• Truck transport is most commonly the final delivery mode

• Truck transport is the most costly mode

• Truck transport represents less than 4% of the total

barrel miles of petroleum transportation in the US
Transportation by Mode
Pipelines accounted for two-thirds of the domestic movement of petroleum and
petroleum products in 2004.

Table 1.14
Ton-Miles of Petroleum and Petroleum Products in the U.S. by Mode, 1975–2004

a b
Pipelines Water carriers Motor carriers Railroads Total
Year (percent) (billion ton-miles)
1975 59.9% 35.2% 3.3% 1.7% 846.7
1976 59.4% 35.4% 3.8% 1.5% 867.7
1977 59.1% 36.1% 3.2% 1.6% 923.4
1978 50.5% 45.7% 2.7% 1.1% 1160.2
1979 51.8% 44.5% 2.6% 1.2% 1174.8
1980 47.2% 49.6% 2.2% 1.0% 1245.3
1981 46.3% 50.7% 2.0% 1.0% 1218.4
1982 46.4% 50.6% 1.9% 1.1% 1218.2
1983 45.5% 51.5% 2.1% 1.0% 1223.5
1984 48.1% 48.4% 2.5% 1.0% 1180.2
1985 47.2% 49.4% 2.4% 1.0% 1195.5
1986 48.7% 47.8% 2.5% 1.0% 1187.8
1987 49.1% 47.4% 2.5% 1.0% 1195.8
1988 50.6% 45.8% 2.6% 1.1% 1188.1
1989 53.4% 42.6% 2.8% 1.2% 1094.2
1990 54.2% 41.7% 2.8% 1.3% 1076.8
1991 53.3% 42.8% 2.7% 1.3% 1086.1
1992 53.9% 42.1% 2.6% 1.4% 1091.7
1993 57.3% 38.8% 2.4% 1.5% 1034.6
1994 56.5% 39.3% 2.7% 1.5% 1046.7
1995 57.5% 38.4% 2.5% 1.6% 1044.9
1996 60.6% 34.9% 2.9% 1.6% 1022.2
1997 64.5% 30.9% 2.9% 1.8% 956.5
1998 66.7% 28.5% 3.0% 1.8% 929.8
1999 67.7% 27.1% 3.2% 2.1% 912.9
2000 66.1% 28.0% 3.6% 2.3% 873.3
2001 66.2% 28.1% 3.5% 2.2% 869.8
2002 67.8% 26.3% 3.5% 2.3% 864.6
2003 66.8% 27.2% 3.8% 2.2% 883.3
2004 66.4% 27.4% 3.8% 2.4% 902.5
Average annual percentage change
1975–2004 0.2%
1994–2004 -1.5%

Source:
Association of Oil Pipelines, Shifts in Petroleum Transportation , Washington, DC,
June 2006, Table 1. (Additional resources: www.aopl.org)

a
The amounts carried by pipeline are based on ton-miles of crude and petroleum
products for Federally regulated pipelines (84 percent) plus an estimated breakdown of
crude and petroleum products of the ton-miles for pipelines not Federally regulated
(16 percent).
b
The amounts carried by motor carriers are estimated.
 Key Concepts
• US petroleum transportation is dominated by pipelines

• Water inland waterway barges are the second mode

• While rail and truck are minor carriers they are the
primary final deliver mode

• While not indicated as a mode of transportation exchanges

are a primary means to of repositioning product
Management Issues

Government
Regulations

Environmental
Requirements
 US Petroleum Administration for
Defense Districts

Source:www.eia.doe.gov
Required Ozone Fuel Blending
 Key Concepts

• The PADD system splits the US into 5 districts

• These districts along with the smog emission controls disrupts

the normal flow of supply and demand

• This disruption artificially impacts supply creating shortages

and influencing pump prices
Competition & Integration
Largest U.S. Interstate Pipeline Companies
Rank by
2005 Mileage Company Mileage

1 Magellan Pipeline Co. LLC 8,525

2 ConocoPhillips Pipe Line Co. 8,067

3 Plains All-
All-American Pipeline LP 7,976

4 Mid-
Mid-American Pipeline 7,117

5 BP Pipelines North America 6,948

6 Colonial Pipeline Co. 5,588

7 ExxonMobil Pipeline Company 4,725

8 Chevron Pipeline Co. 3,825

9 Enbridge Energy LP 3,340

10 Marathon Pipeline LLC 3,177

Ranked in order of 2005 mileage as reported in "SPECIAL REPORT: US gas carriers’ 2005 net incomes climb;
construction costs plummet", Oil & Gas Journal, September 11, 2006.
1994 vs. 2002 Pipeline Operators
Largest U.S. Interstate Natural Gas Pipeline Systems
(2005 Ranked by system capacity, million cubic feet per day (MMcf/d))
Pipeline Name Market Primary Supply States in Which Pipeline Operates Transported System System
Regions Regions (billion cubic Capacity Mileage
Served dekatherms)
dekatherms) (MMcf/d)
MMcf/d)
1

Columbia Gas Northeast Southwest, DE, PA, MD, KY, NC, NJ, NY, OH, VA, WV 3,431 8,700 10,354
Transmission Co. Appalachia

Transcontinental Gas Northeast, Southwest AL, GA, LA, MD, MS, NC, NY, SC, TX, 3,338 8,161 10,469
Pipeline Co. Southeast VA, GM

Northern Natural Gas Central, Southwest IA, IL, KS, NE, NM, OK, SD, TX, WI, GM 1,195 7,923 15,854
Co. Midwest

ANR Pipeline Co. Midwest Southwest AR, IA, IL, IN, KS, KY, LA, MI, MO, MS, 2,815 6,844 9,616
NE, OH, OK, WI, GM

Tennessee Gas Pipeline Northeast, Southwest, AR, KY, LA, MA, NY, OH, PA, TN, TX, 1,920 6,686 13,302
Co. Midwest Canada WV, GM

Texas Eastern Northeast Southwest AL, AR, IL, IN, KS, KY, LA, MI, MO, MS, 1,364 6,523 9,179
Transmission Corp. NJ, NY, OH, OK, PA, TX, WV, GM

El Paso Natural Gas Co. Western, Southwest AZ, CO, NM, TX 4,864 6,152 10,661
Southwest

Dominion Transmission Northeast Southwest, PA, MD, NY, OH, VA, WV 1,344 5,734 3,142
Co. Appalachia

Northwest Pipeline Western Canada, CO, ID, OR, UT, WA, WY 700 4,500 4,046
Corp. Central

Natural Gas Pipeline Co. Midwest Southwest AR, IA, IL, KS, LA, MO, NE, OK, TX, GM 2,69 4,485 9,111
of America

Southern Natural Gas Southeast Southwest AL, GA, LA, MS, SC, TN, TX, GM 937 3,365 7,671
Co.

Centerpoint Gas Southwest Southwest AR, KS, LA, OK, TX 928 3,339 6,182
Transmission Co.

Gulf South Pipeline Co. Southeast, Southwest AL, FL, LA, MS, TX, GM 1,015 3,038 6,580
Southwest

Colorado Interstate Gas Central Central, CO, KS, OK, TX, WY 939 3,000 3,996
Co. Southwest

Texas Gas Transmission Midwest Southwest AR, IN, KY, LA, MS, OH, TN 2,178 2,979 5,643
Corp.

Great Lakes Gas Midwest Canada MI, MN, WI 958 2,859 2,115
Transmission Co.
Largest U.S. Interstate Natural Gas Pipeline Systems
(2006 Ranked by system capacity, million cubic feet per day (MMcf/d))
Pipeline Name Market Primary States in Which Transported (billion System System
Regions Supply Pipeline Operates cubic dekatherms)
dekatherms) Capacity Mileage
Served Regions (MMcf/d)
MMcf/d) 1
Panhandle Eastern Pipeline Midwest Southwest IL, IN, KS, MI, MO, OH, 709 2,840 6,445
Co. OK, TX

Gas Transmission Western Canada ID, OR, WA 767 2,636 1,356

Northwest Corp.

Northern Border Pipeline Midwest, Canada IA, IL, IN, MN, MT, ND, 898 2,496 1,399
Co. Central SD

Southern Star Central Central Central CO, KS, MO, NE, OK, 354 2,451 5,788
Pipeline Co. TX, WY

National Fuel Gas Supply Northeast Canada, NY, PA 417 2,312 1,504
Co. Appalachia

Questar Pipeline Co. Central Central CO, UT, WY 379 2,192 1,745

Florida Gas Transmission Southeast Southwest AL, FL, LA, MS, TX, GM 757 2,190 4,867
Co.

Algonquin Gas Northeast Southwest CT, MA, NJ, NY, RI 346 2,174 1,103
Transmission Co.

Columbia Gulf Southeast, Southwest KY, LA, MS, TN, GM 2,041 2,156 4,105
Transmission Co. Northeast

Alliance Pipeline Co. (US) Midwest Canada ND, MN, IA, IL 652 2,053 888

Wyoming Interstate Gas Central Central CO, WY 594 1,997 585

Co.

Kern River Gas Western Central CA, NV, UT, WY 718 1,833 1,680
Transmission Co.

High Island Offshore Southwest Gulf of Mexico LA, GM 234 1,800 212
System

Trunkline Gas Co. Midwest Southwest AR, IL, IN, KY, LA, MS, 606 1,680 3,558
OH, TN, TX

Sub-
Sub-total 37,398 115,098 163,156

Other Interstate Systems --

-- -- 10,242 33,235 49,531
(79)

Total
1 Capacity levels are reported to FERC 47,640
in Btu, dekatherms, or volumetric units. For this presentation, reported capacity figures are presented as volumetric (MMcf/d 148,333
= million cubic feet per day) assuming 212,687
a conversion factor of 1 MMcf/d = 1 MDth/d
(thousand dekatherms per day) = 1 Bbtu/d (billion btus per day).

Note: GM = Gulf of Mexico.

Source: Federal Energy Regulatory Commission (FERC), Mileage & Transport: FERC Form 2 & 2A "Major and Non-major Natural Gas Pipeline Annual Report," Capacity: FERC Annual Peak Day Capacity Report Section 284.13(d).
KM Delivery Market Access
Major US Crude & Gas Produces
 Key Concepts
• Major oil companies and partnerships of major
oil companies dominate the pipeline industry

• Barge transportation companies are independent from

oil company ownership

• Railroads and truck lines are independent of

oil company ownership

• There does not appear to be any trend towards multimode

ownership to control petroleum transportation in the US
Ethanol and Bio diesel
U.S. Ethanol Refinery Locations
 Ethanol Plants by Type

Source: University of Minnesota

 Ethanol Facts
What is ethanol?
Ethanol is ethyl alcohol, essentially 200-proof grain alcohol.
An ethanol production facility, a "plant" or "biorefinery,"
produces pure fuel-grade ethanol, and then that ethanol is
blended in a percentage with gasoline to create a finished
motor fuel. A small amount of gasoline is blended into the
ethanol at the plant to denature it, or make it unfit for human
consumption.
What kinds of ethanol-blended fuels are available?
Ethanol can be blended into varying percentages in gasoline,
the two most common blends being 10% and 85%.

Source American Coalition for Ethanol

 Ethanol Facts
E10 - 10% ethanol and 90% unleaded gasoline - is the
most common way ethanol is available to motorists. All
automakers approve ethanol blends up to this 10% level
by warranty, no matter the make or model of the vehicle.
About 99% of America's ethanol is retailed as E10.

E85 - 85% ethanol and 15% unleaded gasoline - is an

alternative fuel for use in Flexible Fuel Vehicles (FFVs).
FFVs can use unleaded gasoline or any blend of ethanol
up to this 85% level.

Some areas of the country use ethanol blends in other

percentages; for example, gasoline in California contains
5.7% of ethanol instead of the more common 10% blend.

Source American Coalition for Ethanol

U.S. Ethanol Production Capacity by State
U.S. Fuel Ethanol Production
2004 Ethanol-Blended Fuel Use by State
2006 World Ethanol Production
 Ethanol Industry Overview
In 2006, 110 ethanol plants in 21 states produced a record
5.2 billion gallons of ethanol—nearly double the amount
produced in 2000.

In 2006, the U.S. produced about 5.2 billion gallons of

ethanol. The nations' annual consumption of gasoline is
approximately 140 billion gallons.

In 2005, 14 percent of the U.S. corn crop went for ethanol

production, and for the '06 crop that figure is expected to
rise to 20 percent.

Source: ethanolfacts.com; ethanol.org

 Ethanol Projections
The US Congress passed a bill requiring that by 2012
5.1 billion gallons (BGY) of ethanol will be available as
useable fuels in the US.

U S ethanol is produced from corn that is transported to

Ethanol plants by truck not rail.

Pipeline and truck shipments are not considered to be an

economically means of transport due to special handling
regulations.

Source: ethanolfacts.com; ethanol.org

 Demand and Planning
The majority of the logistic obstacles to ethanol
distributions can be overcome given adequate planning
and sufficient capital investments. The question becomes
one of the potential of return on such an investment.

One of the major demand areas is California that has been

mandated to replace MTBE (an imported product exempt
from the Jones Act) with ethanol.

Significant investments are required in that the source of the

input materials corn are predominantly in the Midwest while
the demand markets are on the east and west coasts .

Source: ethanolfacts.com; ethanol.org

 Water Transport
Ocean water transport to California via the Panama Canal is
subject to reliability issues transit requiring a month with
delays ranging 5 to 10 days.

Inland water transport is limited due to three issues;

• Marine Vessels that compile with The Jones Act
• Various water control acts
• That the upper Mississippi river in the Midwest tend to be frozen
during a key portion of the demand period
• The increase of 5.1 (BGY) represents a 0.58% increase at a time
that other traffic is anticipated to rise at a rate of 1.3% annually.

Source: eia Energy Information Administration

 Rail Transport
Rail transport is most economical and results in optimal
transit times if moved as unit trains.

A typical car holds 30,000 gallons of which there are

currently 41,000 nearly all non-railroad owned.

Rail transport limitations would be yard space, switching

capacity at terminals and unloading capacity. Most
terminals equipped to unload ethanol are limited to spotting
3-5 cars even larger terminals cannot routinely spot more
then 15-20 cars at a time. Consequently a unit train of 100
cars would need to be broken into segments.
Source: eia Energy Information Administration
AAR Association of American Railroads
 Rail Transport
Rail transport comparisons single car movements to unit
train movements Illinois to Phoenix, AZ:
Single Car Activity Unit Train
10 days Outbound 7 days
2 days in yard < 1 day
3 days switching < 1 day
10 days return 7 days
25 days Totals 15-16 days

Source: eia Energy Information Administration

 Ethanol Transportation Costs
Expanding the US ethanol production to 5 billion gallons per
year will result in an estimated average cost of $.08US per
gallon for ethanol transportation.
PADD Cost/ Gallon
1 $0.111
2 $0.043
3 $0.066
4 $0.047
5 $0.127
Average $0.077
Source: eia Energy Information Administration
 Terminals
There has been a significant increase in competition in
the “for-hire” segment of the independent liquid terminal
industry. Many terminals have responded to rising
ethanol demand by escalating their marketing of ethanol
storage services. A number of master limited
partnerships have been rapidly acquiring additional
terminals and aggressively marketing the increased
storage capacity. At the same time, several oil
companies have brought new storage capacity to the for-
hire market as they have converted some of their own
storage tanks and loading racks to “profit centers.”

Source National Petroleum News

 Key Concepts
• US ethanol is produced from corn as a base stock

• Corn is a Midwest crop

• The bulk of all ethanol plants are in the Midwest

• Rail is the most economical mode of transport for

ethanol in the US
Liquefied Natural Gas
 LNG Import Terminals

Today, there are only five U.S. facilities (and one facility in Puerto Rico) capable
of importing LNG – not nearly enough to handle the amount of LNG needed.
There is also a export facility in Kenai, Alaska. Natural gas is exported here
because without a pipeline or an LNG import terminal on the West Coast, it is
impossible to bring the Alaskan natural gas to the lower 48 states for domestic
consumption.
Source: Federal Energy Regulatory Commission January 17, 2007
Center for LNG
U.S. LNG Import Terminals
Monthly Gas Imports
 Liquefied Natural Gas
Natural gas cannot be efficiently transported very long
distances (e.g. across oceans) in its gaseous state.

LNG is shipped on secure and specially designed ships with

more than six feet of space between the outer hull and inner
hulls.
Upon arrival at its destination, LNG is generally transferred
to specially designed and secured storage tanks and then
warmed to its gaseous state – a process called
regasification. It is transported via pipelines to consumers,
industries and power generators who rely on natural gas.
Once LNG returns to its gaseous state, it is distributed as
natural gas through pipelines to consumers.
 LNG Industry Costs Declining
LNG projects are among the most expensive energy projects.

According to an independent LNG consultant, there are four

main price components of an LNG project, from the gas field
to the receiving terminal:

— Gas production: from the reservoir to the LNG plant,

including gas processing and associated pipelines (15 to 20
percent of costs);
— LNG plant: gas treating, liquefaction, LPG and condensate
recovery, LNG loading and storage (30 to 45 percent
of costs);
— LNG shipping (10 to 30 percent of costs); and Receiving
terminal: unloading, storage, regasification and distribution
(15 to 25 percent of costs).
Source: EIA/DOE
Major LHG Movements
 Key Concepts

• There are currently only five LNG import terminals in the US

• Natural gas consumption is projected to continue to rise

• LNG is not widely distributed in the US rather it is converted

back to gas and is transported along the natural
gas pipeline network
Summary
Worldwide Direction of Trends
„ Consumption is
projected to increase
at the rate of 1.4
million barrels per day
(US .2 & China .5)
„ Non OPEC supply is
projected to rise at a
rate of .6 million
barrels per day
„ OPEC supply is
projected to remain flat
Domestic US Trends
„ Consumption is estimated
to grow at the rate of 1.4 %
to an average of 20.9
million barrels per day
„ Crude oil production is
estimated to increase at a
rate of .6% to an average
of 5.2 million barrels per
day
„ Inventories are projected
to decrease by 8 million
barrels to 205 million or
below a 10 day supply
based upon the past 5
year history
Direction of Prices

„ Continued increases in
the cost of crude RAC
2006 2007 2008
60.23 62.35 63.95
„ Natural gas spot market
prices will also increases
on a cost mcf base
2006 2007 2008
6.93 7.91 8.39

Source: eia Energy Information Administration

 Key Concepts
• Significant infrastructure investments are needed to the
current petroleum network

• Strong competition for imported crude oil are anticipated

from China and India

• The US’s rising oil and gas consumption and needed

infrastructure investments will continue price increases
Conclusion
 US vs. Brazil
„ The US’s petroleum networks
infrastructure is more highly developed
„ The US demand markets are more evenly
distributed
„ The US petroleum S&D system
encourages product swaps, transfers and
in transit sales
„ The competitive petroleum transportation
network is not dominated by any single
player
 Key Take Always
• The Transpetro network is marine and pipeline

• The US transportation network is heavily pipeline orientated

• The US network is dependent upon trades, transfers and

exchanges
• US ethanol transportation is primarily rail and truck based

•
Freese & Associates, Inc. www.FreeseInc.com