Economic aspects of pipeline transport: a South African perspective
Authors: Pienaar Wessel 
Published: August 2012

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 trafﬁc. The initial cost of installation is high and justiﬁed 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 justiﬁable 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 trafﬁc 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 reﬁnery should be located at the beginning of the line (upstream, close to the oil ﬁeld or the port of entry) or at the end of the line (downstream, close to the market). The ﬁfth 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, ﬁnancially viable and economically justiﬁed, 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 reﬁneries 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 fulﬁl entire market demands are pure natural monopolies. Where the distance between supply points (such as geographically separated oil ﬁelds 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 efﬁciently fulﬁlled 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; andthe consignment delivery would not have taken place at a price covering full costs.