CONSTRUCTION OF AN OIL

PIPELINE
CASE STUDY

MADE BY:
MAHRO AIMAN CE-56/2014-15
AAKEFA QAISER CE-57/2014-15

INTRODUCTION
The Proposed Project consists of the construction of a sixteen-inch pipeline

from the location of a refinery to a consuming center about 525 miles away.
16 inch

Refinery

525 miles

Consuming
Center

The pipeline would carry white oil products-primarily kerosene, motor

spirit, and aviation fuel.

The present distribution is by railway.
Trucks however, carry almost all of the traffic within a radius of 150 miles

of the refinery and some traffic to even more distant consumption centers
since the railway is not always able to provide sufficient tank-wagons.

CAPITAL COSTS
The capital costs of the project are estimated at Rs900 million.
It consist primarily:
The pipeline (Rs300 million)
The transportation and laying of the pipeline (Rs300 million)
Pumps, including adequate standby capacity (Rs90 million)
Terminal tankage and railway facilities (Rs 105 million)

Construction of the project is estimated to take two years.

The life of the pipeline is estimated at thirty years and that of the pumps at fifteen

years.

To calculate the economic costs, two adjustments are needed.

First duties and other taxes amounting to Rs75 million must be deducted.
Second, the foreign exchange component is estimated at about Rs4l2

million.
At a shadow rate for foreign exchange of 1.75 times the official rate, these

costs amount to Rs721 million, or Rs309 million more than the financial
costs.
The total economic costs are thus Rsl,134 million (Rs900 million - Rs75

million + Rs309 million).

The salvage value at the end of the project's life of the pumps installed in

year 26 is estimated at Rs30 million

OPERATING COSTS
The annual operating costs of the pipeline (excluding depreciation) are estimated

at Rs27 million in the first year of operation.

Rising gradually with the growth of traffic and reaching Rs40.8 million after

additional pumps are added and full capacity is reached.

The economic costs, adjusted for taxes and foreign exchange costs, are estimated

to be 10 percent higher.

VALUE OF SURPLUS ROLLING STOCK

If the pipeline is built, about 2,500 tank-wagons and thirty-three diesel locomotives

becomes surplus.
The economic value of the thirty-three locomotives is estimated at Rs138.6 million.
The railway estimates that the best alternative is to dispose of 1,000 tank-wagons for

about Rs60,000each, bringing total revenues of Rs60 million.

To meet the increased requirements it is estimated to rise gradually from 30 tank-wagons

per year with the disposition of an additional 140 wagons in year 10, the total surplus
would be absorbed.
Taking into account their age, condition, and replacement costs, the value of these tank-

wagons is estimated at Rs75,000 each.

An amount of Rs300,000 annually has been deducted for storage costs .

NUMBER AND VALUE OF SURPLUS

LOCOMOTIVES
AND TANK-WAGONS

TRAFFIC
The area served by the pipeline has been divided into four separate zones of

consumption.
Since zone 1 is within a radius of 150 miles of the refinery, however, petroleum is

distributed in the zone by truck; this is expected to continue even after the
construction of the pipeline since trucks can provide direct distribution to many
points.
The pipeline traffic has been projected to reach 1.65 million tons, or about 730

million ton-miles, in the opening year of the pipeline (year 3).

It is expected to grow at an annual rate of 10 percent .

ESTIMATE OF TRAFFIC AND OF TANK-WAGON

AND LOCOMOTIVE REQUIREMENTS

ECONOMIC JUSTIFICATION
CAPITAL COSTS
TANK-WAGON:
Although most of the railway's tank-wagons have a capacity of 18 tons, others have a capacity

of 40 tons; the estimates are therefore presented in terms of 18-ton wagon equivalents.
Under present operations, the turnaround time per tank-wagon for the average return trip of

almost 900 miles is about ten days, thus permitting thirty-six trips a year.
The annual capacity of a tank-wagon is therefore 650 tons. To carry the estimated 1.65 million

tons in the opening year of the pipeline thus requires about 2,500 tank-wagons, plus a 10
percent allowance for repair time, for a total of 2,800 wagons.
Traffic is expected to grow between years 3 and 4 from 1.65 to 1.8 million tons, an increase of

150,000 tons; this requires about 250 new wagons.

The financial cost of a new tank-wagon is estimated at Rs96,000. After deducting Rs25,500 for

duties and taxes and shadow pricing the foreign exchange component of Rs70,500 by 1.75
times the official exchange rate, the economic cost of a wagon amounts to about Rs123,000.
For the 300 additional wagons required in year 3, this is an investment of Rs36.9 million

 LOCOMOTIVES:
One locomotive is required to haul about seventy-five tank-wagons. The annual

haulage capacity of a locomotive for thirty-six trips is thus 50,000 tons.

The value of the thirty-three locomotives existing at the beginning of year 3, taking

into account their age and replacement costs, is estimated at Rs4.2 million each, or a
total of Rs138.6 million.
The capital cost of a new locomotive is estimated at Rs5.58 million. Deducting

Rsl.37 million for duties and taxes and shadow pricing the foreign exchange
component of Rs3.63 million make the economic costs Rs6.93 million.
YARD FACILITIES & LINE CAPACITY:
The yard and line capacity of the railway requires expansion if the railway is to carry

the additional petroleum traffic.

The railway estimates that the economic costs of the expansion are Rsl9.2 million in

year 3 and a further RsI9.2 million in year 9.

COMPARISON OF TRANSPORT COSTS

VIA OIL PIPELINE AND RAILWAY

OPERATING COSTS
TANK-WAGONS
The direct operating costs of a tank-wagon, especially repair and maintenance,

amount to Rs2,400 annually.

With an allowance for taxes and duties and for the foreign exchange component,
the economic costs are about Rs2,555.
For the 2,800 tank-wagons in year 3, the operating costs are thus Rs7.2 million.
LOCOMOTIVES
The direct operating costs of a diesel locomotive, including primarily fuel and

maintenance, amount to Rs1.35 million annually.

With adjustments for taxes and foreign exchange costs, the economic costs
amount to Rsl.7 million.
For the thirty-six locomotives required in year 3, the operating costs are thus
Rs42.1 million.

OTHER COSTS
the railway incurs other costs such as the maintenance of track, the operation
of signaling and communication equipment, and administrative expenses.
The railway estimates these costs at Rs0.027 a ton-mile.
The railway estimates that the marginal costs-that is, the amount that could be

saved-are 55 percent of the average cost or Rs0.015 a ton-mile.

For the 730 million ton-miles carried in year 3 this means a cost of Rs11.0

million

COMPARISON OF PIPELINE & RAIL COSTS

The net present costs of carrying the petroleum traffic by railway for the next

thirty years amount to about Rsl,537.7 million compared with pipeline costs of
only Rs1,173.1 million, with both costs discounted at 12 percent; the net present
worth of the pipeline is Rs364.6 million.
Transport by railway is thus about 30 percent more expensive than by pipeline,

and the pipeline project seems well justified.

At an 8 percent discount rate, the net present worth of the pipeline is even greater,

at Rs852.3 million. The internal rate of return is then about 17 percent.

If the turnaround time of tank-wagons could be reduced from ten days to seven

and one-half days, the number of wagons and locomotives required would be
reduced by 25 percent, though the reduction in operating costs would be less.

 Since the average round trip is almost 900 miles, this implies a daily movement of

about 165 miles

Such an improvement in efficiency reduces net present railway operating costs from

Rsl,538 million to about 1,260 million.

At the same time it increases the net costs of the pipeline since the size of the surplus

rolling stock, the value of which has been credited to the pipeline, is also reduced by 25
percent; the amount involved (discounted) is about Rs5l million.
The pipeline costs thus go up to about Rsl,224 million, compared with Rsl,260 million

for the railway, and the advantage of the pipeline is sharply reduced, although it is still
justified because pipeline cost is less than railway cost.
The capital costs of the pipeline account for more than 90 percent of total discounted

pipeline costs.

CONCLUSION
The level of traffic affects railway costs almost proportionally while

pipeline costs are largely fixed and have little relation to traffic.
The case for a pipeline thus becomes stronger the greater the traffic. In view

of the large net present worth of the pipeline, construction of the pipeline is
justified even at a lower traffic level.
It seems likely that the pipeline can provide more reliable service than the

railway and thus reduce the need for storage capacity.

The pipeline is less flexible, however, and therefore involves a greater risk.

But a pipeline provides an alternative transport mode if the railway is

incapacitated.

THANK YOU!