Crude Oil Transport System - Essay Example

Crude Oil Transport System Characteristics Introduction If trade is the lifeblood of a globalised economy, the ships that transport goods and raw materials from where they are produced to where they are wanted are the red corpuscles (Economist, 2005). The freight shipping market – firms that own, charter, or manage the ships that transport the goods (Clarkson, 2004) – established three all-time records (volume, value, and profits) in 2004: world seaborne trade carried 6.76 billion tons of merchandise exports worth $8.9 trillion, and earning total profits of $80 billion (UNCTAD, 2005; Economist, 2005). Almost all (98.1 percent) the world’s shipping fleet (UNCTAD, 2005) are vessels that carry bulk cargo, which Stopford defines (1997) in two ways: physically, as a commodity whose characteristics allow it to be handled and transported in bulk; and in its economics, as “any cargo… transported by sea in large consignments … to reduce the unit cost.” Size is not everything, so the physical character of bulk goods is not the only factor that controls how it is transported. Whilst both definitions describe identical goods and commodities (crude oil, grain, iron ore, coal, automobiles), the first focuses on how these are handled and transported, and the second highlights the economic goal of bringing down costs with properly designed systems that transport the goods from the source to its destination. Crude Oil’s Transport System Bulk goods can be reclassified (Stopford, 1997) according to their physical state, liquid (crude oil) or dry (major bulks like iron ore, minor bulks like forest products), or how they are handled (liquid, homogeneous, unit load, wheeled, and refrigerated). This definition closely associates bulk goods with the type of ship used to transport them. The second definition (economics) considers sea transport and handling of bulk goods as only one part of the transport system supply chain that extends from the extraction of the raw materials, their storage before, during, and after sea transport, and delivery to a location for processing (as in a crude oil refinery) or sale (to other buyers of crude oil). This paper focuses on the Crude Oil Transport System for three reasons the author finds interesting: first, amongst all the bulk goods, international trade in crude oil is the largest in terms of volume, value, and shipping capacity; second, the global transport system is entirely dependent on the crude oil transport system (Greene, 2005); and third, crude oil has unique economic, social, and political factors worth discussing. In 2004, 1.774 billion of the total world crude oil consumption of 1.855 billion tons (BP, 2005) was transported by sea, accounting for 26.2 percent of world seaborne trade by weight (UNCTAD, 2005, Table 4), and the single biggest share at 32.2 percent of all seaborne trade in billions of ton-miles (other dry cargoes and the five major bulks accounted for 30 percent and 29.1 percent, respectively) (UNCTAD, 2005, Table 5). Crude oil tankers accounted for 37.5 percent of the world shipping fleet’s deadweight tonnage (UNCTAD, 2005, Table 6). The volume, value, and shipping capacity of crude oil are important economic measures, not only for the shipping industry but also for the global economy. The volume of crude oil shipments indicates whether markets are over or under supplied, and whether there are enough infrastructure to accommodate the required flow of crude oil. The value allows governments and economists to assess patterns of international trade, the balance of trade, and the balance of payments. Shipping capacity allows the shipping industry to assess how many tankers are required and on which routes (EIA, 2006). Transport Systems Characteristics A transport system has two critical components: transportation and storage. They do not just physically link oil importers and exporters and, therefore, producers and refiners, refiners and marketers, and marketers and consumers; their associated costs are a primary factor in determining the pattern of world trade. Where crude oil transportation and storage prices go, freight prices and the rest of the world economy follows. The transport system’s efficiency is greater if the costs added to the goods as they go through the system are minimal. There are four ways of doing this. Increase Volume: move greater amounts through the system and minimise the need for moving goods in the system, i.e., the number of times goods are transferred between, e.g., tanker to storage, and within, e.g., large tanker to barge, the two components; Cut down waste and poor handling/storage; Increase Speed: move goods faster, i.e., minimise handling time; and, Minimise Inventory: have just the right amount of bulk goods, because these entail high inventory costs. The transport system for crude oil begins after the oil is extracted from the ground and ends with its delivery to the refinery where it is processed into oil products. Basic Infrastructure Extraction. Crude oil is a liquid hydrocarbon mixture extracted from underground using a drilling rig or platform built on land (as in the deserts of Saudi Arabia) or anchored on the seabed (as in the North Sea) (Energy Institute, 2006). Since oil is trapped in deep underground rock formations, it is extracted using diamond-tipped drills attached to small diameter pipes through which oil flows slowly to the surface. Terminal and Handling Requirements Bulk collecting stations and terminal storage tanks. Crude oil has to be collected in sufficient volumes before it can be shipped. The oil flows through a network of small diameter pipes from different drilling rigs and into bulk collecting stations, and from there it is pumped through large-diameter pipes to terminal storage tanks that hold hundreds of thousands of barrels.1 In Alaska (Fig. 1), oil is pumped through an 800-mile pipeline from crude balance tanks close to the oil fields to a “farm” of storage tanks in the marine terminal (Fig. 2) close to the seaport from where it is loaded on tankers (TAPS, 2005). The design of collecting stations and storage tanks must consider the size of the field and the flow rate of oil, its location, and how deep the oil is located. These factors affect the transport system costs (extraction, transport, and storage) and influence an oil firm’s decision whether to construct more rigs or storage tanks. The difference between oil market prices and the transport system costs will show if profits will justify their investment decision. In the Middle East, oil is produced from vast, easily accessible fields, and extraction costs can be as low as $1.50 per barrel. In North America, these costs are around $5 per barrel; for the new producers around the Caspian Sea, $7 per barrel; and in Russia (which has poorly maintained extraction facilities), as much as $10 per barrel. The deep offshore, which accounts for much of West Africa’s production, has even higher costs (UNCTAD, 2004). Pipes, barges, lorries, and rail. The oil field and crude oil market locations determine how oil is transported from the large terminal storage tanks. Pipelines, barges, and ships now make up the majority of the transport leg of the crude oil transport system where, in the past, lorries and rail tank cars were used. The main reasons for this are technology (more powerful pumps), better ship designs (larger tankers), and the construction of more ports for terminal storage along coastlines and waterways have resulted in faster transport and economies of scale. Pipelines perform two functions: transport and storage. Aside from moving crude oil over a 1,000-kilometre distance, the Alaska pipeline in itself has the capacity (linefill) to contain 9.06 million barrels of oil when it is full (APSC, 2005). In Nigeria, large pipes bring the oil from the fields in the north to the ports in the southwest of the country, making it more vulnerable to terrorist disruptions, as happened recently, causing a reduction in the country’s oil production by 20 percent (Economist, 2006). In the UK, three-fourths of North Sea oil is now transported by pipeline, causing a drop in sea transport volumes that was reduced further with lower oil production starting 2000 (DfT, 2006). Some, however, are loaded straight from storage tanks close to the rig using advanced loading and handling systems (Fig. 3.a and 3.b) that have improved efficiency and lowered costs. Handling terminals oil must accommodate the large tankers that load and discharge the crude oil and include strong fendering systems that can absorb the tanker’s berthing impact. Terminals have several storage tanks linked by pipes to berthing piers. Tankers are equipped with cargo pumps that can discharge at the rate of 6,500 cubic metres for an Aframax and 18,000 cubic metres for VLCCs (see Footnote 2). Terminal and port designs have to consider the production capacity of the oil field (loading), refinery (discharge), the draughts of the ships that can be accommodated and the load (as much as 350,000 tons of crude oil) they can load or discharge (Stopford, 1997). Ships. Oil tankers come in four major sizes2 and characteristics that influence transport system costs. Large carriers like ULCCs and VLCCs carry more oil and cheaper to operate, and achieve greater economies of scale, but their 21-23 metre draughts do not allow navigation through shallow waterways like the Suez Canal or the Straits of Malacca. Tankers from the Middle East en route to China and Japan have to pass through the Lombok Strait, adding 1,100 miles to the voyage. Large crude carriers also find it difficult to navigate through the Straits of Dover and the Bosporus (Oceans Atlas, 2004). A VLCC costs over $100 million, takes an average of 18 months to build, must earn at least $28,000 a day to break even, but are being let out at $50,000 a day. Daily VLCC rates reached a record of $250,000 in October 2004 due to high OPEC oil outputs. In April 2005, transporting oil in VLCCs from the Persian Gulf to Japan was priced at Worldscale3 98.5, equivalent to an additional cost to the oil price of $1.75 per barrel (Bloomberg, 2005). Two smaller carrier types, called the Suezmax and Aframax, are ideal for short haul, lower-volume routes that can take advantage of volatility in spot prices and the geographic characteristics of the sea routes to their destinations (UNCTAD, 2005). To improve transport efficiency, some tankers are washed and cleaned after discharging their oil cargo and are loaded with a different commodity for delivery to the next destination. Supply and Demand: Crude Oil and Tankers That crude oil is the single biggest bulk commodity transported by sea is a major reason why the petroleum and shipping industries work closely to control similar factors. In principle, crude oil moves to the market that gives the supplier the highest value or net revenue, what the oil market calls the highest netback (EIA, 2006). The latest projections from the U.S. Energy Information Agency on the world crude oil spare production capacity (Fig. 4), world demand growth (Fig. 5), and world supply growth (Fig. 6) show a tight situation in the next two years and beyond, which is the time it takes to build a new tanker, and much less than the time to build a ship terminal or pipeline (the Alaska pipeline took eight years to finish). Although the U.S. is the biggest importer of crude oil, the demand in China, Europe, and Japan is also growing, affecting crude oil’s transport system costs. The flow map of crude oil (Fig. 7) gives us an idea of the global movement of crude oil and the tankers that ship them. Depending on the crude oil supply and demand of different countries and the sea routes to be traversed, the shipping industry will decide the number and sizes of ships to build. In 2004, Stopford made his projections of the supply and demand situation for tankers (Fig. 8), showing equally tight conditions with surplus projected at a little over 7 million dwt, despite new deliveries of 24 million dwt as of 2005. Both markets depend on economic projections of trends in world trade growth, political developments, and the basic economics. Challenges and Issues World trade growth has been powered in recent years by the booming economies of China and India, which use crude oil for energy generation, and the United States, which use them mainly for transport but also for power generation (Yergin, 2005). As world trade is projected to continue growing for the next two years, expect oil tanker firms to continue spending for newbuilding. Political factors, however, are part of the equation. The United States, for example, prohibits the importation of crude oil from Iran, and until recently, Libya and Iraq. To compensate for closing these sources, the U.S. imports most of its crude from neighbours across the Atlantic and to the south (Mexico and Venezuela). And since the U.S. is the biggest consumer, its decisions where to source and sell its own crude would affect world oil prices. China and India, however, have no such restrictions, so their rising demand may affect oil prices based on the rates that oil tanker owners charge to ship crude oil from the farthest locations. Tanker rates will depend ultimately on demand, and if prices are not balanced, either because tanker owners or oil producers become too greedy, these growing economies may decide to find ways to cut down their use of oil and bring down oil prices. Oil quality and country regulations will affect crude oil’s global flow. It may be better for China to import low-sulphur oil from Nigeria than use its own high sulphur oil, which it sells to India, to meet emission standards without refinery upgrades (EIA, 2006). As Stopford (2004) showed, one important challenge is balancing the supply and demand of oil tankers as old crude oil tankers are phased out and replaced by new ones, but at a rate not in keeping with the demand for new capacity (COWI, 2004; UNCTAD, 2005). Conclusions As recent developments in the global economy challenge both oil producers and transporters, the shipping industry is pressured to improve the efficiency of its portion within the crude oil transport system. For transporters, the main challenges are to know how much shipping capacity to add without creating a glut that brings down freight prices and profits and make investment recovery difficult, nor causing shortages that raise freight prices, discourage trade, or increase prices of consumer goods; and second, knowing how to make the transport system more efficient with even larger ships, better equipment, or improved systems. Oil producers are challenged to discover new sources of crude oil and the search for alternative fuels. If these alternatives prove viable, the oil tanker sector may be affected unless it finds new cargo for its ships (Peakoil, 2006; Greene, 2005; NRC, 2003). Uncertainties in crude oil markets affect crude oil’s transport system, of which the freight shipping markets are an important part. The shipping industry will be among the first to feel the immediate effects of these disruptions, and how well it manages its economics will determine whether the world will suffer, or enjoy, the consequences. Bibliography APL (Advanced Production and Loading Company) (2006) Website. [online] Available from: [Accessed 8 March 2006]. APSC (Alyeska Pipeline Services Company) (2005) Pipeline Engineering Design) (2005) Website. [online] Available from: [Accessed 8 March 2006]. ASPO (Association for the Study of Peak Oil & Gas) (2006) Peak oil website. [online] Available from: [Accessed 5 March 2006]. Bloomberg (2005) World-Wide’s Sohmen says tanker rates may have peaked (update 1). Bloomberg.com [online] 24 April. Available from: [Accessed 8 March 2006]. BP (2005) Putting energy in the spotlight. Statistical Review of World Energy. June 2005. [online] Available from: [Accessed 4 March 2006]. Clarkson Research Studies. (2004) The Tramp Shipping Market. London: Clarkson Research. COWI A/S. (2004). Study on Oil Tanker Phase Out and the Ship Scrapping Industry. [online] Available from: [Accessed 5 March 2006]. DfT (Department for Transport) (2006) Focus on Ports. 2006 ed. Basingstoke: Palgrave Macmillan. Economist, The (2006) A spectre of turmoil and conflict. The Economist, 25 February-3 March. Economist, The. (2005) Boom and bust at sea. The Economist, 19-25 August. Economist, The. (1997) Delivering the goods. The Economist, 14-20 November. EIA (Energy Information Administration) (2006). U.S. Department of Energy. [online] Official Energy Statistics for the U.S. Government. 24 February 2006. Available from: . [Accessed 5 March 2006]. Energy Institute. (2006) Glossary. [online] Available from: [Accessed 5 March 2006]. Greene, D. L. (2005) Issues in the peaking of global oil production debate. Summary of paper delivered at the Workshop on trends in oil supply and demand, the potential for peaking of conventional oil production, and possible mitigation options held 20-21 October 2005. J. Zucchetto (ed.) Washington, DC: The National Academies Press. NRC (National Research Council) (2003) Energy and transportation: challenges for the chemical sciences in the 21st century. Washington, DC: The National Academies Press. Oceans Atlas (2004). Oil tankers. [online] Available from: [Accessed 8 March 2006]. Stopford, M. (1997) Maritime Economics. 2nd ed. London: Routledge. Stopford, M. (2004) Oil Market Outlook. Presentation during the Intertanko Dubai Event held 28-31 March 2004 in Dubai, United Arab Emirates. Stratfor (2003) Downed pumping station should have limited impact on exports. [online] Stratfor Premium, 19 June. Available from: [Accessed 5 March 2006]. TAPS (Trans-Alaskan Pipeline System) (2005). TAPS Guide. [online] Available from: [Accessed 8 March 2006]. UNCTAD (2004) Commodity Atlas. New York and Geneva: United Nations. UNCTAD (2005) Review of Maritime Transport 2005. New York and Geneva: United Nations. Worldscale Association (2005) Preamble: introduction to world freight schedules. Worldscale. [online] Available from: [Accessed 5 March 2006]. Yergin, D. (2005) Questions of oil. The World in 2006. London: Economist, p. 127-128. Figure Captions Figure 1. Trans-Alaskan Pipeline Pumping Station 1.a. Diagram of Pumping Station No. 1. 1.b Photograph of Pumping Station No. 7. Figure 2. Illustration of Crude Oil Marine Terminal in Alaska. Figure 3. Advanced loading systems used for North Sea oil. 3.a Diagram of Advanced Production and Loading from the sea floor 3.b Diagram and photograph showing relative size of loading platform Figure 4. World Oil Spare Production Capacity, 1991-2007. Figure 5. World Oil Demand Growth, 2006-2007. Figure 6. World Oil Supply Growth, 2005-2007. Figure 7. World trade of oil. Figure 8. Dynamics of the Crude Oil Tanker Market 8.a Tanker Demand and Supply Forecast. 8.b Tankers: Orders, Demolitions, and Deliveries. Figure 9. Earnings Forecast for Crude Oil Tanker Firms Figure 1.a Pump Station 1 receives and meters oil from the producers [Source: Trans-Alaskan Pipeline, 2006] Figure 1.b. Pump Station 7 is about 1.3 miles southeast of the Tatalina River in a wooded area. PS 7 is similar to PS 2 with two mainline pumps instead of three. [Source: Trans-Alaskan Pipeline, 2006] Figure 2. At the marine terminal, crude oil is loaded onto tankers for shipment to markets. [Source: Trans-Alaskan Pipeline, 2006] Figure 3.a SAL is a loading system, consisting of an anchor point on the seabed where both loading risers and mooring lines are terminated into interconnected swivel systems, currently installed at South Arne and Siri at the Danish continental shelf, Banff in the U.K. sector, and Hanze in the Dutch sector. [Source: APL, 2006] Figure 3.b [Source: Energy Institute, 2006] Figure 4. [Source: EIA, 2006] Figure 5. [Source: EIA, 2006] Figure 6. [Source: EIA, 2006] Figure 7. [Source: BP, 2005, p. 19] Figure 8.a [Source: Stopford, 2004, 34] Figure 8.b [Source: Stopford, 2004, 32] Figure 9. [Source: Stopford, 2004] Read More