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Larger than the flow lines and typically forming a network similar to the roots of a tree, the gathering lines connect adjacent fields or parts of fields with field storage tanks, larger than the lease tanks.
The field storage tanks accumulate field production until it can be put into a feeder line for transmission to the main trunk pipelines. Specific grades of crude oil, having particular gravity or sulfur content may be accumulated in the field storage tanks until a sufficient quantity is available to permit pipeline shipment in a separate batch. Usually, however, crude pipelines contract to carry "common stream crude." In such cases, contents of individual field storage tanks are pumped through the feeder line to join the common stream in the crude trunkline. Similarly, deliveries to the shipper are composed of specified quantities drawn from the common stream.
In the new fields and fields of marginal or uncertain production, gathering operations may be perfornied by tanktrucks, and, in the case of offshore production, by barge. Such smaller scale gathering operations are often conducted by independent firms who own the oil as it passes through their systems and, over time, may increase their scale of operations, substituting pipeline for increasing volume truck or barge operations.
In most instances the sale of oil from a nonintegrated producer to a nonintegrated transporter refers, for its price terms, to the posting of some major company or groups of majors (averaged if there happen to be any differences among the various companies). When an independent transporter is involved in a sale of crude there may be some negotiation about the amount which will be paid for the transportation of the crude, but the posted price is nonetheless used as the base price with the transportation charge typically deducted from what the producer is paid by the transporter for the crude. When gathering is done by truck these charges may be relatively high, but the bulk of crude is gathered by pipeline rather than truck and pipeline charges are uniformly lower than truck charges for equivalent distances.
Through the gathering system the transporter moves the crude oil from the field to a trunk pipeline connection. Less frequently, the crude oil may be delivered by the gathering system directly to a refinery or to a port of lading for transportation by tanker to a refinery. If an independent has conducted the gathering, the independent gatherer passes title to the crude oil upon delivery out of his gathering system, selling it to a refining company which is usually part of a major integrated firm. Where the integrated firm has itself effected the gathering, transfer of the crude from its gathering system to its refinery is merely as internal transaction.
Lacking its own trunk pipeline or refinery, the independent gatherer depends upon the integrated refiner both for the purchase and the trunkline transportation of its crude oil. The gatherer has a limited choice of trunk pipelines in its area, and since the trunk line discourages shipments by other than its refinery affiliate, the independent gatherer faces only one purchaser.
Benefits accrue, however, to major integrated firms through the growing role of independent gatherers. Marginal gathering operations can be conducted by small specialized independents who aggregate the crude oil for purchase by refiners. Meanwhile, the major firm
avoids the risks attendant to local gathering operations, passing these to the local independent. Further, the integrated firm is released from state ratable take requirements and the problems associated with purchaser prorationing.
In addition to resales by independent gatherers to refiners, much of the crude oil gathered from leases is transferred among refiners before it reaches the refinery. These transactions consist of trades, exchanges, so-called "accommodation sales" and other reciprocal purchase-sale arrangements. The Department of Energy does not consider transactions to be sales. The primary purpose of these transactions is to perfect the participants' vertical integration by correcting for temporary imbalances between crude oil needs and resources and adjust for the lack of actual physical connection between an integrated company's crude production facilities or field gathering systems and its refineries.
The extensive use of these transactions by integrated majors compounds the control over crude oil supplies these majors obtain through their crude oil trunkline and gathering lines and further constricts the size of the open crude oil market. If one oil company purchases oil from a seller for delivery through available transportation facilities to its refineries, it will commonly be obligated to sell a like amount of crude purchases in a distant field to that seller for delivery to a different and more convenient market which the seller desires to serve. Such transactions are not always bilateral, however, but may involve several intermediary purchasers and sellers. Similarly, the transfers may continue for extended periods before accounts are settled.
The widespread use of exchanges and other reciprocal transactions in the petroleum industry in lieu of open market purchases and sales has restricted the ability of nonintegrated firms to compete in the industry. Thus,
... if major firms will only barter oil, independent refiners and marketers, who do not have oil elsewhere to trade, may find it more difficult to obtain the excess supply than do other major oil companies. The net result may be to make it more difficult for independents to obtain the supply necessary to compete in price. Trunklines, through which nearly all crude oil refined domestically at some time flows, are almost entirely owned by major integrated companies.
Over 70 percent of the crude oil requirements of United States refineries are received by pipeline. Moreover, in 1974, 87 percent of refinery receipts of domestic crude oil were delivered by pipeline, contrasted to 11 percent via tankers and barges and a mere 2 percent by truck or rail. The initial development and subsequent technological
Hearings pursuant to S. Res. 45, Market Performance and Competition in the Petroleum Industry, before the Senate Comm. on Interior and Insular Affairs, 93d Cong., 1st sess.. ser. 93-24, Parts I-V, 1973. See, part 1 at 446 [Hereinafter cited as "Market Performance."]
42 Fed. Reg. 64856, 64861 (Dec. 29, 1977).
Hearings pursuant to S. Res. 50, Government Intervention in the Market Mechanism, before the Subcomm. on Antitrust and Monopoly of the Senate Comm. on the Judiciary, 91st Cong., 1st sess., The Petroleum Industry, parts 1-3, 1969 at 1254. [Hereinafter cited as "Government Intervention".]
7 Market Performance, Part 1 at 446.
$ 1974 Bureau of Mines Minerals Yearbook at 951.
PICA at 11.
improvements in pipelines, which have led to their preferred status for transporting crude, have been a result of the compatibility with the unique characteristics of fluid raw materials in the petroleum industry. Crude oil is low in value relative to its weight, and, therefore, realization of economies in crude oil conveyance necessitate rapid transportation of large quantities. Refinery operations are also of such a nature that a more or less constant flow of crude is required for efficient and economical operation.
Small producers can not afford to provide their own transportation systems because of the small quantities of oil each has to sell relative to the scale dictated by pipeline efficiency. Also, segregation of small quantities of crude oil flowing through a pipeline, by the very nature of pipeline operations, is difficult and costly. Moreover, accumulation of large tenders for shipment is dependent upon the utilization of large storage facilities. Such facilities are very costly to the small producer since he can utilize their full capacity only intermittently. Yet, technical economies of scale can readily be exploited by major integrated firms through mass buying in the field and large scale movement to refineries. This places major integrated firms in an ideal position to control supplies of independent crude oil production.
2. PRODUCT PIPELINES
Product pipelines carry refined petroleum products from refineries to product terminals. Ordinarily these terminals are privately owned and operated by an owner of the products pipeline serving the terminal. Such terminals may transfer products into smaller diameter spur lines serving marketing areas of the individual pipeline owners. Petroleum products are also carried from refineries to product port terminals via tankers and barges. The completion of the Colonial pipeline in 1963, however, has displaced much of these historical waterborne movements. From the product terminals, petroleum products are carried via smaller diameter pipelines, barges, trucks or rail tank cars to bulk stations for further distribution.
While lease automatic custody transfer systems have automated field input record keeping for crude pipeline systems, automation of handling and recording of product pipeline movements has centered around the product terminals. Batch separation and quality control are more critical in the operations of products pipelines than crude oil pipelines. Product pipelines therefore maintain elaborate automated procedures and equipment for monitoring the movement of batches and switching flows of batches of petroleum products at terminals. Such automated monitoring of pipeline operations has centralized the operations and record keeping of both crude oil and product pipelines.
As in the case of crude oil, extensive use of exchanges and reciprocal buy-sell arrangements for petroleum products is made to link up individual companies' refining operations with their petroleum product
marketing areas. 10 While this holds down the need for physical transportation, it does not allow for a competitive open market for petroleum products. Sales and exchanges of petroleum products take place at the refinery racks, in the product pipelines, and in product terminals. Title to products entering the transportation system may change hands one or more times before delivery at the destination. Similarly, products may be held in storage at terminals awaiting sale or exchange to another petroleum company.
While shipments of refined petroleum products may be made by refiners, dealers or marketers, access to product pipelines is dependent upon a shipper's ability to arrange privately for terminaling. Use of a product pipeline may also require providing the pipeline company with a projection of shipments for 10 or more years into the future. The requirement of such projections and commitments to ship as well as the absence of common carrier terminals along the pipeline, limits the product pipelines to use by established shippers. Consequently, the exchange and buy-sell market has become the primary avenue for effecting movement of petroleum products from the point where it is refined or obtained by an independent refiner to the point where it or its wholesale customer can market it. Thus, the refiner who does not own an interest in product pipelines and does not own his own terminals relies upon negotiating exchanges or buy-sell agreements with companies who already have pipeline and terminal ownership and access.
3. TECHNICAL OPERATION OF PIPELINES
Pipelines are comprised of four main elements: pipe, pumping stations, tankage, and control. Each element enables the pipeline to accomplish its principal function, continuous movement of liquid." Unlike other forms of transportation, the prime mover of the thing to be transported, in this instance crude oil or products, is stationary. The liquid is moved and not the pipeline. The liquid is moved by building
10 The prevalence of exchanges is not open to doubt; however, the true extent is unknown. A recent attempt to quantify the degree of exchanges came up with only two companies submitting information. This the study concluded:
If these two companies are representative of all of the 20 largest petroleum firms, and if trade is equally prevalent among smaller firms, then something less than onehalf of the petroleum products refined in the United States in 1973 were sold to the final consumer by companies other than those which refined the products. [Staff of Special Subcomm. on Integrated Oil Operations of the Senate Comm. on Interior and Insular Affairs, The Structure of the U.S. Petroleum Industry: A Summary of Survey Data, 94th Cong., 2d sess. (comm. print, 1976) at 59] [Hereinafter cited as "Survey Data".]
The two companies responding indicated they marketed 50 percent of their own U.S. refinery output and sold, exchanged, or otherwise trade 50 percent of their refined gasoline to other companies. They reported trading 43 percent and 58 percent of their U.S. residual output, 41 percent and 55 percent of their No. 2 and diesel oil, and 18 percent and 17 percent of their jet fuel. Exchanged output for both companies exceeded output sold to other companies for each product (except residual oil for the larger company). 11 Hearings pursuant to S. Res. 334, Marketing Practices in the Gasoline Industry, before the Subcomm. on Antitrust and Monopoly of the Senate Comm. on the Judiciary, 91st Cong., 2d sess., Parts 1-3, 1971-72, Part 2 at 631 [Hereinafter cited as "Marketing Practices"].
up pressure against the liquid within the pipe by pump is located in the pumping stations. The liquid moves at the slow pace of 3 to 5 m.p.h.12 In order for the liquid to move continuously, the pipe is always full (known as linefill) with liquid entering or leaving the system.13 A pipeline consists of lengths of seamed or seamless steel pipe welded together to form a continuous pipe from the origin point to the destination point. Diameters (the outer diameter is usually indicated) of the pipe can range from 2"-3" for smaller gathering lines up to 48" for the recently opened Trans Alaska Pipeline System and over 50" for the lines to be used in the proposed deepwater ports.15 Pumping stations are located along the pipeline at well spaced intervals and contain the pumps to push the crude oil or products along in a continuous movement. Early pump stations required the liquid to be emptied into a tank and then reinserted back into the pipeline, causing delay, increased expense and greater hazard. Modern technology now permits the liquid to flow continuously through the pump station without having to be emptied into tanks. Many pump stations are fully automated, requiring no continuous personnel except for maintenance or the correction of problems.16 The pumps in the pump stations usually are centrifugal pumps driven by electric motors or gas turbines.17
Tankage, cylindrical steel tanks with floating or fixed roofs of 35,000 to 500,000 barrel capacity,18 consists of two types: working tankage owned and operated by the pipeline and tankage located at input and delivery points, usually owned by the shipper. Input and delivery terminals (pipeline terminals) are similar to railroad freight depots in that the movement of the liquid ends and the liquid is stored until delivered either by truck, rail, water, or pipeline.'
Working tankage is used to segregate crude or products by grade. When the diameter of the pipe changes to either a larger or smaller size, the liquid must be taken out of the pipe, put into working storage and reinjected into the larger or smaller pipe. Because the rate of flow and pressure varies according to the size of the pipe and continuous movement through varying size pipes will cause serious technical problems for the pipeline, working tankage, or breakout tankage is required.20
The last element is the control mechanism. The entire pipeline operation is controlled through a central computer and a communication system running the entire length of the line. The computer can control the level of liquid in the tanks (both breakout and input and delivery tankage), meter readings, line pressures, temperatures, pumping unit operation, valve settings and other technical matters.21 The central control center translates each shipper's information into a continuous operation.
12 Id., Part 2 at 630.
13 Id., Part 2 at 632.
14 Marketing Practices, Part 2 at 630.
15 DOT, The Secretary's Decision on the Deepwater Port License Application of Scadock, Inc., filed Dec. 17, 1976 at 2.