ibp1031 05 pipeline cost reduction through effective

IBP1031_05 Pipeline Cost Reduction Through Effective

Project Management and Applied Technology A Jenkins1, T. Babuk 2, M. Mohitpour3,.M.A.Murray4

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1 P Eng TransCanada Pipeline s Limited 2 P Eng Empress international Inc. 3 Ph D P Eng Tempsys Pipelien Solutions inc. 4 Ph D P Eng National Energy Board of Canada

Copyright 2005, Instituto Brasileiro de Petróleo e Gás - IBP This Technical Paper was prepared for presentation at the Rio Pipeline Conference & Exposition 2005, held between 17 and 19 October 2005, in Rio de Janeiro. This Technical Paper was selected for presentation by the Technical Committee of the event according to the information contained in the abstract submitted by the author(s). The contents of the Technical Paper, as presented, were not reviewed by IBP. The organizers are not supposed to translate or correct the submitted papers. The material as it is presented, does not necessarily represent Instituto Brasileiro de Petróleo e Gás’ opinion, nor that of its Members or Representatives. Authors consent to the publication of this Technical Paper in the Rio Pipeline Conference& Exposition 2005 Annals. Abstract Pipelines are regarded by many as passive structures with the technology involved in their construction and operation being viewed as relatively simple and stable. If such is the case how can there be much room for cost improvement? In reality, there have been many technological and regulatory innovations required within the pipeline industry to meet the challenges posed by ever increasing consumer demand for hydrocarbons, the effects of aging infrastructure and a need to control operating and maintenance expenditures. The importance of technology management, as a subset of overall project management, is a key element of life cycle cost control. Assurance of public safety and the integrity of the system are other key elements in ensuring a successful pipeline project. The essentials of best practise project management from an owner/ operator’s perspective are set out in the paper. Particular attention is paid to the appropriate introduction of new technology, strategic procurement practice and material selection, indicating that capital cost savings of up to 15% are achievable without harming life cycle cost. The value of partnering leading to technical innovation, cost savings and improved profitability for all the participants is described. Partnering also helps avoid duplicated effort through the use of common tools for design, planning schedule tracking and reporting. Investing in appropriate technology development has been a major source of cost reduction in recent years and the impact of a number of these recently introduced technologies in the areas of materials, construction processes and operation and maintenance are discussed in the paper. Introduction

Large offshore and onshore pipeline projects are highly capital intensive and their success is commonly measured

in project management terms as being completed “on time and within budget”. In this paper we take a broader view of what constitutes success by considering other elements such as partnering, stakeholder /community acceptance, and the development and implementation of appropriate technology to ensure safe, reliable and profitable operation over the life time of the project.

Project Management encompasses how a project is planned, executed, scheduled, monitored, budgeted and controlled. It involves the application of knowledge, skills, tools and techniques to a broad range of activities in order to meet the requirements of the particular project.

Overall, managing projects can be broken down into five processes: initiating, planning, executing, controlling and closing out. In addition there are nine widely accepted knowledge areas that form an integral part of these processes so as to ensure a successful, cost effective project. These are:

• project integration; • scope control;

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• time management; • cost control; • quality management; • human resource management; • communications; • risk management; and • procurement.

Jenkins et al (2004) have added two further components to the above list namely, managing harmony with the

broad community, and safety and reliability. This creates a balance between the proponents, the other stake holders and the environment, requiring adequate consultation and thus facilitating regulatory approval with the potential to shorten the project construction timeline.

Not all project management processes are discrete one-time events, rather some may overlap and occur at varying levels of intensity within each phase of the project as shown in Figure 1 (Muller (2004)). In this figure, repetitive operational events are superimposed upon one time activities, such as design and construction, to depict the entire project life cycle. Operational events include normal maintenance activities and the governance associated with environmental and safety issues, community and other stakeholder considerations. It is important to consider the interaction of all of these activities when optimising life cycle costs.

Figure 1. Project management process cycle and intensity (after Muller 2004) Project Success

Cost control is a crucial aspect of project management and owes its origins to Luca Pacioli, a Venetian of the 13th

Century who is regarded as the father of bookkeeping and cost accounting (Vangermeerach (1986)). Many of the principles he proposed are used today in project cost management which, in turn, drives project profitability. It is unfortunate though, that cost is generally considered as the main factor against which success is measured. An alternative, and it is suggested, more meaningful measure of a project’s outcome is to consider a broader performance system which uses a Balanced Scorecard approach to determine project life cycle success (Kaplan and Norton (1996)). The full cost control process encompasses budgetary estimates, capital costs and operating costs and must be well managed to achieve optimum bottom-line performance for the company and its shareholders.

To a pipeline owner-operator, the process of developing, implementing and operating a project is successful when the following factors are addressed and the accompanying, highlighted, performance levels achieved (Jenkins et al (2004)):

• cost effective and timely installation; • lowest life cycle cost (unit costs of the facility are best-in-class); • reliable operation (operating reliability approaches 100%);

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• safety (safety record approaches zero incidents); and • stakeholder / community acceptance (the project has well managed environmental oversight, is

accepted by the broad surrounding community and is seen as contributing to that community).

The latter two considerations are also extremely important from a regulator’s viewpoint, who have also to decide whether the broad public interest will be served by the project while keeping the regulatory burden on the proponent to an acceptable minimum.

It should be noted that a pipeline facility having poor records of safety performance, environmental stewardship or community image will eventually drag down the financial performance of the project and also receive closer regulatory scrutiny.

In summary, while it is important for the project proponent to stay focused on costs and their control, they must recognize that many diverse elements contribute to a project’s value and ultimate success. Influence of Regulations and Standards on Pipeline Cost Reduction

Adequate takeaway capacity and pipeline transportation costs are two critical factors in efficiently linking regions

of hydrocarbon supply and demand. Pipeline infrastructure is expensive to develop and requires the pipeline owner to be able to attract capital at reasonable cost. Fortunately, the North American pipeline industry has operated in a generally stable financial environment and, where regulatory oversight has been required, has enjoyed reasonable rates of return. Invariably the rate of return is calculated using a formula based on a deemed equity component and the cost of long term (30 year) debt instruments. However, in order to encourage pipeline operators to become more efficient and improve energy pipeline transportation tariffs, the past decade in Canada has witnessed the development of incentive regulation (CAPP (2004)).

Negotiated settlements for specified lengths of time, between the shippers and the pipeline operator, approved by the Regulator, with the underlying premise that safety is uncompromised, has enabled capital and operating cost reductions to take place. The benefits are shared by both parties in accordance with an agreed-upon formula. For example, over the life of the settlement, targets are set to reduce operating costs, while absorbing any effects due to inflation and system growth. As successive annual operating and maintenance costs are determined, the baseline is adjusted accordingly. Similarly, targets are set for capital expenditures and system expansion.

In general the operating companies have responded with a number of continuous improvement initiatives to meet or exceed their targets. At a high level these include:

• taking advantage of lower interest rates to finance pipeline operations and assuming a slightly higher risk • reducing facility costs through improved contracting and procurement practises; • increasing system utilization by the use of transient hydraulic models; • leveraging use of proven technology; and • adopting a longer term planning approach to operating their pipeline system more efficiently.

In the absence of incentive regulation, pipeline companies regularly apply for tariff adjustments and in addition

make use of alternative arrangements to reduce costs while maintaining profitability. The alternative arrangements could include multi-use ROW corridors for utilities and pipelines, standardization of fuels specification to reduce the number of product types being transported, and the shipment of products at night when low energy costs apply to running pumps and other electrically affected facilities. Additionally, alternative designs, construction and operational techniques are employed to reduce costs.

Another important Canadian regulatory initiative, applying only to federally regulated pipelines, that is those which cross inter-provincial or international boundaries, is the adoption of goal oriented regulation (Paulson (2004)). Regulation can be thought of as a spectrum ranging from the fully prescriptive to entirely performance based. Goal oriented regulation, as it is used in the Canadian pipeline context, refers to regulations which contain a mix of prescriptive and goal based requirements. The Canadian National Energy Board (NEB) believes that effective management of pipeline safety and environmental matters results from the implementation of a comprehensive management system on the part of the operating


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company. The assumption is that the company, not the Regulator, is in a better position to know the operating vagaries of its system, and can manage its maintenance strategy apportioning the timely use of its resources and technology accordingly. Compliance with the regulations is achieved by the NEB through management system audits, facility inspections and company reporting requirements. A fuller description of requirements may be found in the NEB Onshore Pipeline regulations and its associated set of guidelines (NEB (1999), NEB (2003)).

The use of national and international pipeline Standards provide another means of reducing costs since they provide a common basis for performance. In Canada, for example, all fittings below NPS 16 are obtained to a common standard. Companies may, and often do, go beyond a standard and apply additional requirements on material purchases, justifying these through the use of value engineering, life cycle cost studies. Some pipeline companies have developed common platforms (standard designs) for such elements as meter stations, valve assemblies and compressor / pumping stations thus reducing front end costs and minimizing inventory holding costs. Advances in Pipeline Technology

Pipeline operators may improve their business performance by investing in technology and putting it into service

once it has been proven. In this way, cost benefits that are driven from the technology advance can be utilized in the project or elsewhere to maximize gain for the organization and hence a better return for the project. An example of one such advance is the development and use of higher strength steels (Figures 2 and 3) with the accompanying need for suitable welding techniques. The benefits which accrue from the use of higher strength steels include reduced material quantities, lower construction and transportation costs, and in the case of gas pipelines, reduced overall compression requirements. In total, for a sizeable onshore project in a remote area such as the Alaskan Gas pipeline to the lower 48 states, the total cost savings could amount to 15% (Corbett et al (2004)). Provided adequate fracture control is in place, the higher operating pressures also enable dense phase transmission of richer gas streams with a corresponding decrease in overall pipe cost and hence better economic performance (Mohitpour et al (2001), Jantzen and Horner (1998)).

Figure 2. Cost comparison using Grade API X 70 and NPS 42 diameter pipe as the base value for different pipe yield strengths at different operating pressures (Glover 2002)

Semi and fully automatic welding techniques coupled with the use of automatic ultrasonic welding inspection have been developed to improve construction productivity and reduce repair rates. Joint venture studies (Blackman et al (2004)) have resulted in the successful deployment of a dual tandem torch welding technique (Figure 4), which holds out considerable promise for even further gains in welding repeatability and productivity.

Most recently, TransCanada PipeLines have demonstrated the use of an alternative integrity validation approach in lieu of hydrotesting and will present their findings at this conference (Glover et al (2005)). Such an approach could prove very beneficial in remote areas not only from an environmental viewpoint but also one of potential cost reduction.

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In some locations, composite reinforced line pipe may have promise for cost reduction. Such pipe maximizes the benefits of both its components – the steel liner to provide axial strength and the glass composite for pressure resistance and fracture toughness. The composite pipe is lighter than conventional pipe of the same size and operating condition since the steel liner is noticeably thinner. This could translate into lower transportation and handling costs than with conventional steel pipe. The pipe is installed and bent like conventional steel pipe while welding takes place on the exposed steel ends of each pipe joint. The exposed joint areas are then wrapped with a fibre reinforced plastic composite after welding.

Figure 3. Trend in pipeline operating pressure and diameter (Mohitpour et al 2004)

Figure 4. Dual tandem welding

The first field trials of composite reinforced line pipe took place in 1991 when Enron, through a collaborative

effort with the Gas Research Institute, installed a short section in their system. The pipe was excavated 8 years later and showed no signs of degradation. TransCanada introduced the technology into Canada in 1998 when they replaced a 100 m section of NPS 20 pipe near Kingston. This was followed by two projects in 2001 when 100 m and 2 km stretches of new NPS 24 pipe were installed. Each project was used to examine such factors as cold weather bending and joining and long-term corrosion resistance and performance. Recent full scale fracture toughness tests conducted on high strength pipe have shown that composite pipe is excellent as a crack arrest material (Figure 5).

Mohitpour et al (2000) have noted other examples of technology improvements, leading to overall life cycle cost reduction, in the following areas:

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• Design & Construction: Internet and e-based designs; limit state design; strain-based design; GIS

technology; new pipelaying techniques. • Operation & Maintenance: prediction modelling; environmental abatement; risk-based maintenance. • Records Management: online pipeline data management; use of GPS. • Inspection Techniques: high resolution magnetic flux leakage technology; crack detection tools; real-time

inspection monitoring. • Measurement/Automation: ultrasonic metering; SCADA & satellite communications.

Figure 5. A composite wrap crack arrester

Figure 6 shows another example of advanced technology used in the pipeline industry – an electro-mechanical acoustic technology tool used for crack detection. The Electro Magnetic Acoustic Transducer (EMAT) is based on the electro-mechanical conversion produced when an eddy current is applied within a static magnetic field. The resulting Lorentz forces result in an interaction between the transducer and the metal surface generating an acoustic wave within the material. The material being inspected acts as its own transducer, eliminating the need for liquid couplant

Figure 6. Technology for detection of flaws in pipelines Lowering Pipeline Cost Through Partnerships

In the past ten years, some pipeline procurement departments have sought out new ways of doing business,

influenced by a desire for greater co-operation between the buyer and seller. This approach is known as the Partnership Sourcing concept (Steele and Court (1996)) and starts with the premise that arm’s length and adversarial relationships are wasteful, preventing both parties from maximizing their benefit. It is implicit in such an arrangement that the partners commit to doing more than is normally required and that both will seize opportunities to improve performance. Coercive


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power has no place in such an arrangement, rather the high level of trust required is earned over a period of time. There must be a sound basis for the relationship and that it will continue for the foreseeable future. This permits the vendor to invest with confidence in new or improved plant and machinery and to otherwise improve his product line through sustained development. The recent development of X120 steel is a case in point where Nippon Steel and Exxon entered into the joint development in 1996. A considerable leap in both plate making and line pipe manufacturing technology had to take place in order to reach the project’s goal. Similarly, in the experience of one of the authors, a considerable and sustained cost saving has been achieved through a sourcing partnership between a pipeline operator and a coating manufacturer to create new products in a purpose built facility. In another instance, during an economic downturn, the vendor was able to sell into inventory so as to keep his facility open for business. In both cases, to achieve success, it was necessary that both parties had to discuss problems openly and constructively and that disagreement signalled not the end of the relationship but rather the beginning of its improvement. One can also point to the co-operation between select operating companies and tool vendors to develop or enhance in line inspection devices. It is clear with the high level of trust required that, it is highly unlikely for parties with no previous working relationship to successfully come together as sourcing partners. It is also apparent that their continued success is highly dependent upon maintaining good interpersonal relationships. Conclusion

Pipelines have become one of the most practical and reliable modes of transportation in the world. Consumers rely

on pipelines to move commodities across entire continents. For the industry to remain competitive with other transportation options, it must continue to mature and become ever more efficient. This will only happen when the needs of all stakeholders – not only shareholders but also customers, regulators and the general public, to name a few – are best served. An increasingly important tool available to the project manager and the owner is that of technology. With a prudent program of technology implementation, an owner-operator can optimize reliability, safety and cost-effectiveness over the full life cycle of the pipeline facility. Disclaimer The views expressed in this paper are those of the authors and do not necessarily represent those of their respective employers. References Blackman, S.A., Liratzis, T., Howard, R.D., Hudson, M.G. and Dorling, D.V., 2004, “Recent Tandem Welding Developments for Pipeline Girth Welds”, Vol. 1, pp. 335-355, Proceedings of 4th International Conference on Pipeline Technology, 9-13 May, Ostend Belgium, Universteit Gent. Canadian Association of Petroleum Producers (CAPP), 2004, “The Legal and Policy Framework for Managing Public Access to Oil and Gas Corridors on Public Lands in Alberta, Saskatchewan, and British Columbia”, Research Report, June. Corbett, K.T., Bowen, R.R. and Petersen, C.W., 2004, “High Strength Steel Economics”, International Journal of Offshore and Polar Engineering, Vol.14, No. 1, March, pp. 75-80. Glover, A., 2002, “Application of Grade 550 and Grade 690 in Arctic Climates", Proceedings of Pipe Dreamers Conference, Application and Evaluation of High Grade Linepipes in Hostile Environments, Yokohama, Japan, November. Glover, A., Purcell, J., Rudge, P., and Hudson, R., 2005, “Implementation of an Approach to Replacing the Construction Hydrostatic Test with an Alternative Integrity Validation”, Proceedings of Rio Pipeline 2005 Conference, Rio de Janeiro, Brazil, October. Janzen, T.S. and Horner, W.N., 1998, “The Alliance Pipeline – A Design Shift in Long Distance Gas Transmission”, Proceedings of ASME International Pipeline Conference (IPC), Calgary, Alberta, Canada, pp. 83-88. Jenkins, A., Babuk, T. and Mohitpour, M., 2004, “Managing Projects for Life Cycle Success: Perfecting the Process”, Proceedings of ASME International Pipeline Conference (IPC), Calgary, Alberta, Canada, October. Kaplan, R.S. and Norton, D.P., 1996, “The Balanced Scorecard”, Harvard Business School Press, Boston, MA, USA. Mohitpour, M., Dawson, J., Babuk, T. and Jenkins, A., 2000, “Concepts for Increased Natural Gas Supply – A Pipeline Perspective”, Presented at Forum 11, 16th World Petroleum Congress, June 11-15, Calgary, AB, Canada. Mohitpour, M., Glover, A. and Trefanenko, W., 2001, “Technology Advances Key Worldwide Gas Pipeline Developments”, Oil & Gas Journal, November 25, pp. 60-67. Mohitpour, M., Szabo, J. and Van Hardeveld, T., 2004, “Pipeline Operation & Maintenance – A Practical Approach”, ASME press, New York, November.


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Muller, P., 2004, “IP Project Management”, http://se.inf.ethz.ch/teaching/ss2004/0004/slides/23_project_management_1up.pdf National Energy Board (NEB), 1999, “Onshore Pipeline Regulations”, July SOR/99-294, Calgary, Alberta, Canada. National Energy Board (NEB), 2003, “Guidance Notes for Onshore Pipeline Regulations”, June, Calgary, Alberta, Canada. Paulson, K., 2004, “Goal Based Regulation of Pipelines in Canada”, Proceedings of 4th International Conference on Pipeline Technology, May 9-13, Ostend, Belgium, Universteit Gent, pp. 963-973. Steele, P. and Court, B., 1996, “Profitable Purchasing Strategies”, McGraw Hill, London, 235p. Vangermeerach, R., 1986, “Milestones in the History of Management Accounting”, Proceedings of Challenges of Technological Change Conference, National Association of Accountants, Montvale 77.

ibp1031 05 pipeline cost reduction through effective

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