Running a Natural Gas (NG) pipeline is a time-intensive and expensive undertaking. Before starting any project, care must be taken to determine whether or not the project will be profitable. Large projects are calculated on a cost-per-mile basis, and this data is submitted to the Federal Energy Regulatory Committee, otherwise known as FERC.
So what does natural gas pipeline construction cost per mile? The Oil and Gas Journal compiled the data submitted to FERC and found that the cost of running a mile of onshore pipeline between 2015 and 2016 was $7.65 million per mile. This data can be found at https://www.ogj.com/articles/print/volume-114/issue-9/special-report-pipeline-economics/natural-gas-pipeline-profits-construction-both-up.html
How Is the Cost per Mile Determined?
To determine the cost per mile of an NG pipeline, a calculation of inches per mile must be done first. This is accomplished by multiplying the distance of the pipe by the diameter of the pipe. For instance, a pipeline with a diameter of 30-inches will cost less than one with a diameter of 36-inches.
According to NaturalGas.org, the average diameter of an interstate pipeline is between 24 inches and 36 inches, or an average of 30 inches. If you divide the $7.65 million per mile by the 30-inch average diameter, you’ll find that this puts the average cost per mile of NG pipeline construction at $255,000 per inch of diameter.
The Dictating Cost Factors
There are many factors that dictate the cost of installing a natural gas pipeline. Material and labor typically account for only 60% – 70% of the total costs. However, depending on legal factors, materials and labor might even account for less than half of the total cost of running a mile of NG pipeline.
Here are the factors that dictate the cost of constructing a mile of natural gas pipeline:
- Materials and Labor
- Rights of Way
- Professional Services
- Nature’s Challenges
Let’s take a closer look at each of these factors:
Cost of Materials and Labor
The American Petroleum Institute sets standards for interstate pipeline construction materials. To meet these standards, interstate pipelines are created from a strong carbon steel material. Carbon steel works great for pipeline projects because it can be heat-treated to increase its durability, tensile strength, and impact resistance.
Labor costs consist of any costs associated with physically placing the pipeline in place. This can include excavation costs, inspections, and any risk mitigation work that must be done. It also includes the costs associated with making sure the environment is well taken care of.
These costs can often vary by state and locality. For instance, it may cost more to hire an excavation crew in Boston, Massachusetts than it would cost to hire one in Portland, Maine.
Cost for Attaining Rights-Of-Way
Another element that plays a role in the final cost of running a pipeline is right of way, otherwise known as ROW. ROW is the legal right to run the pipeline through property that is owned by someone else.
A pipeline may run through state, local, or federal land as well as land owned by private citizens and businesses. The company running the pipeline will need to get legal permission to run through these lands before any pipeline project can even be approved. Frequently the company running the pipeline will need to pay a fee to the landowner in exchange for using their property.
Costs of Professional Services
To accomplish all of this, a lot of planning and preparation must be done. Teams of lawyers, accountants, surveyors, and engineers will be employed at various stages of the project.
Costs Affected by Nature’s Challenges
Nature can also play a significant role in how much it costs to run a mile of pipeline. For example, it requires more money to operate in areas that are hard to access. Materials and equipment may need to be flown into the construction site, roads may have to be built, and harsh environments may need to be navigated.
The weather can also be a cost factor. Hurricanes, tropical storms, and blizzards can all slow projects down and cause cost overruns. When projecting costs, estimators and project cost controllers must factor in these variable circumstances.
Costs Associated with Environmental Protection
Additionally, steps must be taken to protect the natural environment. The installation of the pipeline may cause changes to the surrounding landscapes.
For example, the flow of water in the area may change, and engineers will have to create plans to ensure the flow of water is returned to its natural state or they may need to establish a new route for water flow and ensure this does not cause any adverse effects. They may do this by restoring the natural terrain consulting with geo-engineers, by installing drainage ditches, living walls, and other devices to slow, stop, restore or change the flow of water.
Another example would be slip or landslide mitigation. Landslides and other natural disasters can destroy pipelines, and it’s always best to take measures to prevent them before this happens. Cut slopes, fill slopes, and retaining walls can all be employed to take care of the natural grades surrounding the newly installed pipeline.
Profitability of a Natural Gas Pipeline
Once costs are projected, it stands to reason that the company will want to know what the profitability of the pipeline will be. This will be important to the company’s stakeholders as well as to the government agencies that will need to approve the pipeline project.
It is obvious why stakeholders have an interest in the profitability of the project. However, the reason for the government wanting to know if the project will be profitable may not be so apparent.
A government’s interest in the profitability of the project comes from its need to ensure that the pipeline project will ultimately be maintained. Governments want to know that the company will have the resources to protect and maintain the pipeline for the rest of its lifespan.
The Three Main Factors in Pipeline Profitability
Basically, profitability can be calculated by finding the projected “delivery” price of the gas and subtracting the “supply” price as well as the “transportation” cost.
The “delivery” price is the price that the utility company will charge the end-user for the Natural Gas. In most cases, this will be dictated by the market, but some governments may also play a role in pricing.
The “supply” price is the cost of procuring natural gas. This includes the extracting and processing of the NG, along with the general expenses of operating the supply chain. The “transportation” cost is the cost of pumping the product through the line from the source to the end-user. The cost of maintaining the pipeline is included with the transportation cost. The pipeline after it has been created.
Once the pipelines are established, transportation costs may remain relatively stable. This is because regular maintenance costs can be projected without too many outside influences.
The delivery price, however, can vary greatly. The market’s demand for gas can change dramatically based on the season as well as the cost of other energy sources. For instance, lower oil prices can reduce the demand for NG. Lower demand will cause the delivery price of NG to fall.
Calculating Profitability of a PipelineThe U.S. Energy Information Administration, otherwise known as the EIA, has collected monthly U.S. NG pricing data for well over thirty years. You can find this information in an easy-to-read table at https://www.eia.gov/dnav/ng/hist/n3010us3m.htm.
According to this data, the average delivery price of NG throughout the United States in 2017 was $10.91 per thousand cubic feet.
To make a profit, a company would need to have spent less than this number. For example, if the supply price was $4.00 and the transportation cost was $3.00, the total cost would have been $7.00 for every thousand cubic feet of NG. This would have given the company a profit of $3.91 for every thousand cubic feet of NG delivered to the customer.
However, this number does not take into account the cost of building the actual pipeline. If the company installed 100 miles of pipeline, it would have cost them an average of $765 million. To actually make a profit, the company will need to recoup this cost as well as any other costs associated with procuring this money.
For instance, if a loan were taken out to finance the cost of the project, the company would also need to take into account any interest applied to the financing of the loan.
Taxes, tariffs, and regulatory fees will also play a role in profitability. The cost of these three factors can vary from state to state, and they often change.
The average cost per mile of NG pipeline is determined by a wide variety of factors. These factors include a vast array of both internal and external elements.
Before undertaking any pipeline project, there is a need to determine the cost projections as well as profitability projections. These projections can be difficult to make but are a crucial part of deciding whether or not a pipeline should be built.
As an experienced pipeline construction company, we at Hanging H have decades of experience installing and maintaining all diameters of pipelines in all types of terrain. For more information on our pipeline construction services, we invite you to visit https://hanginghco.com/pipeline-construction-services/.