# Presentation: 057631

## Association of Oil Pipe Lines

- Federal Energy Regulatory Commission
- Washington, D.C.
- April, 2004

**Notes:**
  On behalf of AOPL, express appreciation for the opportunity to discuss the oil pipeline industry with the Commissioners and their staff
  Introductions:  AOPL:  Ben, Michele; Mike Tudor – XOM.
  Energy infrastructure has received a lot of attention in recent years from a number of vantage points – supply, safety, security
  Our member companies understand the role that they play in ensuring that our country has a safe, reliable and efficient petroleum transportation system
  We take that responsibility seriously and I believe that with few exceptions, we’ve been more than up to the challenge

## Pipeline Infrastructure Critical to Balance Energy Supply and Demand

- Crude oil and petroleum products  are supplied to major demand centers in the United States by over 200,000 miles of pipelines representing a $31 billion investment
- Pipelines transport over 38 million barrels of crude oil, feedstocks and petroleum products each day
- 17% of the nation’s freight is transported via pipelines for only 2% of the nation’s freight bill

**Notes:**
  As you know, pipelines are not very visible so people often have no idea about the breadth and scope of our industry 
  We’ve listed some statistics on this slide to provide some perspective about the liquid pipeline industry
  We operate more than 200,000 miles of pipeline, ranging  in size from 2” to  48” in diameter   
  We transport more than 38 million barrels of crude oil, feedstocks and products each day
  We have more than $31 billion invested in our facilities
  Pipelines are the lowest cost, most efficient, and safest mode of transportation for liquid petroleum and we’re very proud of that
  We transport 17% of the freight in the United States at just 2% of the cost

## Oil Pipeline Infrastructure

- Crude oil
- Transport crude oils from major producing basins and ports to various refining centers and/or supply hubs
- Refined products
- Transport refined petroleum products, including gasoline, diesel, jet fuel and LPGs, from refineries and ports to end user markets
- Other liquids
- Energy related petrochemical feedstocks transported between supply chain points

**Notes:**
  For purposes of our discussion today, I’ll be focusing on the two major components of the oil pipeline industry, crude and products pipelines
  Crude oil pipelines:  Transport crude from major producing basins and major ports to various refining centers and/or supply hubs
  Refined products pipelines:  Transports refined petroleum products—gasoline, diesel, jet fuel, propane – to end user markets from refineries and major ports
  We also transport a number of other products including natural gas liquids and refinery blendstocks between various points

## Key Industry Challenges

- Changes in supply and distribution patterns challenge existing industry infrastructure
- Substantial investment required to meet logistics and safety requirements
- Increased competition from alternate logistics providers
- Need regulatory environment that continues to attract investment capital

**Notes:**
  Our industry faces a number of challenges and I’ve listed some key ones here that we’ll cover through my presentation
  Our assets are pretty much fixed in place, yet we are serving an industry that has seen dramatic changes in its logistics requirements – for example, we’ve experienced changes in the directional flow, in the number and types of products we move;  we have capacity constraints in some places and decreasing volumes in others
  In addition, our assets are aging while the bar has been raised on pipeline safety – the combination of these two forces has required our industry to dedicate substantial resources to ensure compliance with the new DOT integrity management regulations, while continuing to satisfy the various stakeholders that we serve
  All of this is occurring in an economic environment in which most of our companies face competition, either  from competing pipelines, from other modes of transportation and sources of supply, or both.  This breadth of  competition sets us apart from the natural gas industry.
  These various challenges increase the importance of maintaining flexibility in the Commission’s regulatory approach to oil pipelines
  This approach has been generally successful in recent years and it is critical that we remain an industry that can attract investment capital 

## Industry Organization

- Major integrated oil companies
- Primarily focused on assets that support their proprietary operations
- Have recently divested significant number of “non-strategic” assets
- Independent refiners and producers
- Primarily invest in infrastructure directly upstream and downstream of their operations
- Joint ventures
- Most are formed to share investment costs of major construction initiatives
- Independent pipelines
- Proliferation of master limited partnerships reflects the need for new sources of capital
- Regardless of organizational structure, most pipelines are governed under the Interstate Commerce Act

**Notes:**
  Our industry has had various forms of organizational structure during its history
  The major integrated oil companies have been involved in pipelines from the industry’s inception; however, in recent years we’ve seen a definite shift towards divestiture of pipeline assets that have been deemed “non strategic”
  Independent refiners and producers have traditionally focused their ownership in assets that are clearly strategic to their other businesses
  Joint ventures have taken various forms over the years depending on their owners’ needs:  partnerships, undivided joint interest, stand-alone companies
  Independent pipelines are purely in the transportation business --  this sector has grown dramatically in recent years with the creation of the master limited partnership structure
  Although we may be organized in various forms, most interstate oil pipelines are governed under the regulatory umbrella of the Interstate Commerce Act

## Independent Pipeline Ownership

- Pipelines traditionally owned by large integrated companies
- Congress provided tax incentives in mid-1980’s to stimulate energy infrastructure investment
- Formation of MLPs has provided new sources of capital for energy infrastructure development
- MLPs primarily owned by individual investors
- MLPs solely focused on increasing throughput and capacity
- Benefits consumers by increasing transportation options and supply to regional markets

**Notes:**
  By far the most noteworthy change in organizational form during recent years has been the creation of the Master Limited Partnership
  The tax incentives that led to the MLP structure were created by Congress to promote energy infrastructure development, and based on the number of pipeline MLP’s formed since then, it looks like these incentives have worked
  The growth of the MLP sector has had a positive impact on the industry from several vantage points:  
  The creation of companies that are solely focused on increasing throughput and capacity for the overall market, as MLP activity is generally focused on providing transportation and storage
  Equally important is the fact that the MLPs have provided new sources of capital to an industry that very much needs capital
  In all likelihood, it appears that this sector will continue to grow, as many of the integrated companies divest pipelines that they deem non-strategic or to redeploy capital in more strategic businesses

## Supply and Demand Regions

**Anacortes**

**Billings**

**Casper**

**Salt**
**Lake**
**City**

**Portland**

**Houston**

**Beaumont**

**LOOP**

**Patoka**

**Chicago**

**Wood**
**River**

**Minneapolis**

**Cushing**

**Notes:**
  Since we’re talking about supply and distribution, I thought it would be helpful to review how the industry looks at supply from a regional standpoint
  You’ll notice that this map is divided into five distinct regions – these regions are referred to as PADD’s, which stands for Petroleum Administration Defense District
  These PADD’s were established during World War II and the industry has continued to utilize this nomenclature when referring to different supply regions
  I’ll now review some key supply and demand characteristics for each of these regions

## East Coast (PADD 1)

- Highest petroleum consumption rates in the United States
- Highly dependent on imports for both crude oil and refined products supply
- ~100% crude oil
- 24% of refined products
- Largest recipient of supplies from other regions
- South Atlantic region experiencing higher population growth rates than the slower growth New England region
- Largest concentration of oil-heated homes

**Notes:**
  PADD 1, the East Coast region, has the highest level of consumption in the U.S.
  It’s totally dependent on transportation for its all of its crude supply and a significant proportion of its refined products demand
  Of course, this region has a great deal of transportation flexibility, with excellent access to waterborne supplies and  some rail alternatives in addition to the pipelines serving the region 
  As noted on the slide, the consumption growth rates are distinctly different within this region, with much higher levels in the growing Southeast markets versus New England

## Midwest (PADD 2)

- Dependent on crude oil imports (mostly Canadian) and refined products supplies from other regions
- 2nd highest crude oil demand region in the U.S.
- Chronically short market due to combination of demand growth and refinery closures

**Notes:**
  PADD 2, comprised of the Midwest and Mid-Continent regions, is highly dependent on pipelines for both crude oil and refined products 
  This has been a very interesting region from a crude supply perspective
  There is an extensive network of pipelines providing access to crude oil from virtually anywhere in the world:  Canada, Texas/Oklahoma, OCS, foreign
  On the products side, the chronic Midwest supply shortage has attracted a lot of attention as this region has experienced some retail price spikes from time-to-time
  Two significant projects have recently been completed that will provide much needed additional capacity from the Gulf Coast:  Start-up of Centennial Pipeline and expansion of the Explorer Pipeline

## Gulf Coast (PADD 3)

- PADD 3 is the origin of 90% of crude oil and 80% of the refined products shipped between U.S. regions
- Largest crude oil and refined products supply region in the U.S.
- Only two OPEC nations (Saudi Arabia and Iran) have higher crude oil production than PADD 3
- No foreign nation has higher refined product output than PADD 3
- Pipeline and terminal capacity in the Houston refining center constrained

**Notes:**
  PADD 3 is obviously the focal point for both crude oil and refined products supply in the U.S. 
  Gulf Coast has access to the major domestic sources of crude oil as well as any foreign sources
  Largest refinery complex in the world
  PADD 3’s importance as a source of supply will likely grow, as the large refineries in this region have the economies of scale to support additional investment in processing capability and there is ready access to crude supplies
  Growing dependence on PADD supply has put a real strain on the distribution infrastructure, requiring significant capital investment to keep up with demand

## Rocky Mountains (PADD 4)

- PADD II and III have historically supplied market to augment local production
- Small, but growing market
- Minimal demand for specialty products
- Infrastructure not well developed due to long distances, limited markets and high costs

**Notes:**
  PADD 4, the Rocky Mountain region, is an interesting area, experiencing a great deal of change with the influx of Canadian crude
  Line reversals, shifting supply patterns
  Crude flows both into and out of region
  Difficult area to operate because the distances are long and the volumes are relatively small
  Don’t have economies of scale like other regions
  Region has pipeline access to PADD’s 2 and 3 to augment local refined products production

## West Coast (PADD 5)

- West Coast traditionally isolated from other U.S. supply regions
- Growing population continues to increase demand for products
- Alaska North Slope crude oil an important source of supply for West Coast refineries
- CARB rules isolate market, limiting supply options

**Notes:**
  PADD 5 has traditionally had its own fully integrated oil industry 
  Self-sufficient/long on crude, with specialized refining industry able to process local, low quality  crudes
  Geographically isolated, sparse population along PADD 3/PADD 4 border
  Excellent water-borne access to crude and refined products supply
  Refined products supply balance challenged by growing population, limited distribution infrastructure and unique fuel specifications
  Lack of market liquidity reflected in high retail prices

## Supply and Demand Overview

- Over 50% of all U.S. crude oil  demand exists in the Gulf Coast region
- Production from the Gulf Coast region supplies the majority of Midwest and East Coast refined products deficit
- New England region becoming increasingly dependent on foreign imports as South Atlantic region continues to grow
- Midwest deficit expected to grow as regional refineries struggle to keep up with demand
- West Coast and Rockies regions fairly well balanced between regional refined products supply and demand

**Notes:**
  This slide summarizes the relative supply and demand balance for each of the PADD’s
  Pipelines play a key role in balancing the supply needs of each of these regions, providing a critical link between the regions that have surplus supplies to those in need
  As supply sources change and demand for finished products increases, it’s important that we have sufficient infrastructure to ensure a steady flow of product, avoiding supply disruptions and the resultant market reaction

## Major Crude Oil Trunklines

**Vancouver**

**Anacortes**

**Billings**

**Casper**

**Salt**
**Lake**
**City**

**Montreal**

**Portland**

**Cushing**

**Houston**

**Beaumont**

**LOOP**

**State shading shows Petroleum Administration **
**for Defense Districts (PADDs)**

**For Canadian Crude**

**For Other Imports**

**From a Domestic Origin**

**Minneapolis**

**Sarnia**

**Chicago**

**Wood**
**River**

**Patoka**

**Patoka**

**Notes:**
  Now turning to our pipeline system and its challenges.
  You can see from the map that we have a pretty extensive network of crude oil pipelines
  Lines from major producing regions to refining/supply centers
  Lines from Texas/Oklahoma/Louisiana/OCS to Gulf Coast, Cushing, Midwest
  Seaway, ExxonMobil, Capline, West Texas Gulf, Ozark, Osage, BP
  Lines transporting Canadian crude to Rockies and Midwest
  Enbridge, Express, Rangeland/Rocky Mountain, Frontier
  Lines to Bay Area and Los Angeles refining grids
  Plains AA, Pacific, Shell
  TAPS – undivided joint interest, 25% of US demand at peak, but declining

## Crude Oil Supply Challenges

- Declining production of domestic on-shore crude oil
- Increased production from U.S. OCS, Canada, and other foreign countries
- Changing refinery crude slates and some refinery closures
- Adaptation of infrastructure to accommodate supply changes

**Notes:**
  Declining domestic crude production, with very little on-shore drilling activity
  Increased dependence on Canadian, OCS and foreign crude
  Changing refinery crude slates and some closures (amplify crude slates – different crudes run by different refineries, changes where they get supply)
  Industry efforts to adapt infrastructure to changing supply patterns
  Canadian crude to Rocky Mountain and Midwest refineries
  Changing Gulf Coast and Mid-Continent infrastructure to match supply of crude grades to refinery demand
  Improvements to Gulf Coast infrastructure to accommodate new OCS sources
  Conversion of crude lines due to declining production 
  Longhorn, Rancho

## Major Refined Product Pipelines

**Notes:**
 Similar to crude, we have an extensive network of products pipelines linking major supply centers with end-user markets
  East Coast: Colonial/Plantation; Buckeye, Sun
  Midwest:  Explorer, TEPPCO, Magellan, Centennial, Kaneb, Buckeye, MAPL, CITGO, numerous JV’s
  Mid-Continent/Rockies:  Valero, Shell, ConocoPhillips, Yellowstone, Cenex, Sinclair
  West Coast:  SFPP, Olympic, Chevron-Texaco

## Product Supply Challenges

- Demand growth resulting in “tight” pipeline capacity in the Midwest and Gulf Coast markets
- Proliferation of fuel grades straining pipeline and terminal infrastructure
- Lack of capacity tempers market liquidity resulting in fuel shortages and retail price spikes

**Notes:**
  Consumption growth resulting in “tight” supply (Midwest, West Coast)
  Proliferation of fuel grades straining pipeline and terminal infrastructure
  Lack of capacity results in less market liquidity, which results in tight supply, which results in shortages/retail price spikes 
  Chronic Midwest supply shortage
  Short-term supply outages caused by spikes in demand and operational disruptions 
 Phoenix
 Mid-continent propane

## Pipeline Industry Economic Challenges

- Aging and limited logistics infrastructure
- Challenging environment for permitting
- Soaring expenditures for pipeline integrity programs
- Competition from non-regulated entities
- Refiners
- Barges, trucks, and rail cars

**Notes:**
  The challenges that our industry faces are not limited to adapting to changes in supply and distribution patterns – we also face a number of physical and economic challenges
  Our asset base is aging and there are definite limitations on how much it can handle
  Assuming that there is an economic case for investment, it is often difficult to obtain the necessary land and permits to allow for timely construction of expansion projects  
  Another challenge that we’re facing is the escalating pipeline integrity expenditures
  Understand our responsibility to provide a safe and reliable pipeline system
  Supported efforts to create a reasonable regulatory environment for pipeline integrity
  That said, many of us are experiencing rehab costs that are far in excess of what we anticipated

  Adding to these challenges is the fact that most pipelines fact competition from non-regulated businesses
  Refiners, barges, trucks, pipelines
  Competition from alternate suppliers is particularly difficult, as refiners work with substantial margin ($$/bbl) vs. relatively small tariff (cents/bbl) for pipelines

## Summary

- The oil pipeline industry has responded well to supply and distribution challenges and integrity management issues
- Future challenges will require significant investment in pipeline infrastructure
- Continued rate flexibility will be paramount to attracting the capital necessary to successfully meet these challenges

**Notes:**
  In summary, we’ve covered a lot of material this morning but if I could leave you with three thoughts, they are as follows:
  Our industry has been challenged by structural changes to the markets we serve and by higher standards for pipeline safety, and we’ve responded by improved operational flexibility, investments to meet the demands of the marketplace and a strong focus on pipeline safety
  The combination of an aging asset basis and changes in supply patterns will likely require continuing high levels of infrastructure investment to provide the level of transportation services that our nation requires
  Continuation of the Commission’s approach to simplified, flexible ratemaking is a key factor in attracting the capital required to meet these challenges