W4V27 - Oil Logistics2 - Handout

Oil & Gas From exploration to distribution Week 4 – V27 – Oil logistics: transporting hydrocarbons hydr ocarbons Ludivine Pidol

W4V27 - Oil logistics2 – p. 1 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

Transporting crude oil and petroleum products This lesson will focus on the transport of hydrocarbons. Production areas are often far removed from the areas where the oil is needed. This is why large quantities of crude oil have been transported all over the world for decades. Usually, crude oil is mainly transported via pipelines or in tankers by sea to the refineries or storage facilities. The use of railways and roads for crude oil is much less common.

To transport petroleum products from the refineries to depots, all modes of transport can be used: pipelines, rail tankers, inland barges, ships or trucks. For the final delivery to the customer, trucks are commonly used. Now, let’s focus on the different modes of transport. We will start by the waterways, with tankers.

Transport by waterways Tankers are widely used for the transport of crude oil. The most frequented routes for crude oil start from the Middle East. They pass through the Bab el-Mandeb Strait or the Strait of Hormuz, the world's main oil shipping lane. After this, they travel to America via the Cape of Good Hope. They travel to Asia via the Malacca Strait between Sumatra and Malaysia. This route leads to Japan and China, where oil demand has grown significantly since 2000. And they go to Europe via the Suez Canal. Larger tankers cannot take this route because the Suez canal is too narrow. So, in this area, a pipeline is also used, this is the SUMED pipeline.

W4V27 - Oil logistics2 – p. 2 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

Tankers are defined by their size, as presented on the picture below.

For example, the Suez-max tankers are the largest ships able to navigate along the Suez Canal; and the Ultra Large Crude Carriers (ULCC) are ships larger than four hundred meters. For historical reasons, most tankers operating today do not belong to oil companies. Oil companies only own the cargo, that means the freight or the products transported in the tanker. Instead, they outsource maritime shipping to specialized ship owners. The ship must meet very strict safety and security standards. Every oil company sets its own quality, safety and security criteria for maritime shipping. These criteria include: the tanker's construction specifications and features, the maintenance; the recruitment, training, and management of the crew and the planning of the routes and the journey itself. Ship owners are responsible for ensuring that their ships meet these criteria. Each ship is registered in a country and sails under the flag of that country. The country in question is responsible for checking the ship's condition and on-board practices before issuing its registration.

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Transport by pipelines Generally, the oil industry prefers to ship oil by sea because this mode of transport is more flexible. Unlike a pipeline, a ship does not have to follow the same route, which can therefore be adapted to meet demand. However, sometimes oil has to travel over land, for example to landlocked countries.  In this case, it can be easier and less costly to use a pipeline than to transport the oil by road or train. Indeed, in countries with a huge land mass such as Russia, pipelines are useful to deliver oil to ports for exporting by ship. Western Europe has pipeline networks that transport crude from ports to refineries located further inland. These are also used to send the finished product, fuel for example, from refineries to large consumer centers. This mode of transport is the most widespread in these countries. The longest pipeline in the world is the Druzhba pipeline (over 5,000 km), which passes through eight countries. This pipeline transports the Russian oil to the West.

Another famous pipeline is the SUMED pipeline which alleviates the restrictions of the Suez canal. The Very Large Crude Carrier tanks are partially unloaded at Ain Sukhna. In this way, they can pass the Suez canal and they reload the oil at Sidi Kerir. This pipeline is a joint venture of Egyptian, Arabian, Kuwaiti and Qatari companies.

W4V27 - Oil logistics2 – p. 4 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

Pipelines can also transport petroleum products.  A pipeline that carries a number of different products is known as a multi-product pipeline. The product batches propel one another in a predefined sequence, called pumping program. This sequence is determined in line with the compatibility and specifications of the products carried. For example: diesel is followed by home heating oil, regular gasoline by premium gasoline, etc... Products are in direct contact. Consequently, a fraction of these two products is a mix. This gives rise to two cases: The first case: The “contaminated” interface material, is compatible with one of the two products; in this case, the mix is injected into the compatible product, generally the less “noble” one. For example, the mix resulting from the contamination of regular gasoline with premium gasoline is re-classified as regular gasoline. The second case: the interface material is incompatible with the other two products, in which case the “contaminated” material is channeled to special storage units and returned to the refinery to be re-processed.

Pipelines offer a number of advantages, such as large-volume transportation, a reduced workforce,  and they work 24/7. But big investments are needed  to construct them. The order of magnitude for 1km of pipeline is about 1 million dollars. Finally, building new pipelines involves intense negotiations because of the high geopolitical and economic stakes in the regions through which these networks pass. Whether transported by sea or by pipeline, the safety and security of operations is key.  If a pipeline is damaged by accident or sabotage, any leaks can be quickly detected because the sudden drop in pressure in the pipeline is registered. When the origin of the leak is located, the oil flow is stopped, as soon as possible, at the pumping stations and any pollution is contained. However, leaks due to pipe corrosion can be major. To prevent such accidents, pipelines must be regularly inspected and replaced.

W4V27 - Oil logistics2 – p. 5 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

Transport by road Now, let’s focus on road tankers. These trucks can hold 10 to 30 tons of liquid. Each large storage depot has several loading bays where petroleum products are loaded onto the trucks. Tanker trucks bring fuel from regional storage facilities to the local service station, where the fuel is delivered into the appropriate underground storage tank. Tanker trucks have segmented compartments, so that different types of fuels can be delivered in a single trip, saving on transportation costs.

Likewise, the safety of the distribution network is ensured in various ways. For instance, delivery truck drivers must have a special license to transport hydrocarbons; and, trucks and equipment are regularly inspected. Oil companies also check that security conditions are met at delivery points, even if they do not own them.

Transport by rail As for road tankers, the rail tankers have limited capacity. This mode of transport allows frequent rotations and a minimum storage capacity is needed. Its running costs are lower than the running costs of trucks but it requires large infrastructures such as railway lines and large loading bays. In many countries, such as the United States or France, it represents only a few percent of the total oil or petroleum products transportation.

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How to choose So, how can we choose the best mode of transport? It will depend on the available infrastructures, the volumes, the distances, and finally it will depend on the costs. For example, in terms of volume, 24 hours of running a pipeline amounts to 1 large ship. It is also equal to 2 trains with twenty two tank-wagons of eighty cubic meters. It is the same as one hundred trucks of thirty five cubic meters.

Depending on the breakdown between fixed and variable costs, all transport tools have a "cost advantage area“. Indeed, rail and road tankers are quite expensive. These modes of transport are used more for short distances and refined petroleum products. On the other side, tankers and pipelines are more widely used for longer distances and can transport crude oil or petroleum products.

Let’s take the example of France. For the wholesale market, from refineries to the storage depots, pipelines are the main mode of transport, representing 55% of the flow. Trucks come next with 20%, ships 15% and rail 5%. For the retail market, that means the transport from the storage depots to the final customer, trucks dominate at 85%.

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