OIL & GAS LOGISTICS

Pipelines, tankers, trucks and trains; oil & gas companies, tanker operators, retail outlets, endconsumers, 3PLs, automation solutions providers; international organizations, national governments and policymakers. The logistics network in the oil and gas sector is a complex one, with the entities influencing and being influenced by each other.

Figure 1 depicts the principal flows of crude oil and natural gas. (Note: the numbers pertain to trade volumes in 2003, and these have increased during the last five years). Crude oil flows originate largely in the Middle East and move northwards to Japan, China, Europe and the US. A sizeable chunk of the natural gas flows originates close to the Arctic Circle and wends its way southwards to the consumers in the developed countries of the northern temperate region.

Crude oil and refined products (not depicted in the figure) move internationally in oil tankers (big ones for long trans-oceanic journeys to optimize the expenses, and smaller ones for shorter journeys), or even via overland pipelines.

Natural gas exports wend their way either via pipelines (subsea or overland) or via methane tankers subsequent to liquefaction in LNG plants. Prominent examples of subsea pipelines are those linking the Norwegian off shore gas fields in the North Sea to the European terminals (shown by the thick redwhite arrow), or linking North Africa to Italy.

There are intra-national flows as well. Gas pipelines, emanating from the gasifi cation plants which receive LNG from methane tankers, or from a country’s off shore or onshore gas fields, convey natural gas directly to industrial, commercial and domestic end-users within the country.

And oil pipelines convey crude oil from the unloading terminals at ports and from oilfields in the country to refineries. Crude oil and refined products would move in tankers along rivers and coastlines and across lakes, and also by rail and road to replenish the retail outlets within the country (or, in the case of crude oil, to provide raw feed to the refineries in the same country).

Likewise, there are flows from within the country – its oilfields, gas fields or refineries – destined for export. Here, we differentiate between the multimodal ones terminating at loading bays or liquefaction plants at/near portsites (and take the maritime route thereafter), and the ones along international pipelines or rivers which cross national borders.

Figure 2 presents a simplified schematic sketch of logistics in the oil and gas sector of a hypothetical country (indicated with pink background), which is bounded by country B to its south-west and on all other sides by an ocean. Thus, it has the benefits of availing of maritime trade via its five ports. A river flows across the boundary between the two countries, and thus facilitates inland water transport (exports) of refined products.

The end-use market – industry, households and transportation – is linked to the refineries and gasification plant by a mix of road and rail transport and overland pipelines. The country finds it economical to liquefy all its natural gas (taken into the liquefaction plant by a subsea pipeline) and export the same by methane tankers. The domestic natural gas needs are supplied by imports. Once again, the country perhaps finds it economical to export some of its crude oil. The refineries source their inputs from both the domestic production and imports.

Logistics costs (all modes taken together) accounted for something between 5 percent and 10 percent of the total value of the oil in 2005 (it is around two US cents per gallon handled). However, with oil prices shooting up, the percentage share of logistics cost in the total production cost has declined.

PIPELINES FLOWS

It is highly economical to convey crude oil and refined petroleum products (gasoline, kerosene, diesel, aviation fuel, ethanol, etc) via terrestrial pipelines owing to the lower cost and the higher carrying capacity thereof. However, road and rail transport of oil and refi ned petroproducts also exists.

It is not exactly known where the first oil pipeline in the world became operational and in a manner typical of the cold war era (which seems to be starting again, with natural gas a trigger, incidentally), the Americans and the Russians stake claim to this “honor”. However, it is widely agreed that it was Dmitri Mendeleev of the Periodic Table fame who first suggested in the 1860s that petroleum could and should be transported via pipelines.

From the 1860s, the world has come a long way, and pipeline transportation has become commonplace. A total of 265,440 km of oil and natural gas pipelines (as at the end of June 2008) exists in 37 Asian countries, of which roughly 45 percent carry oil/refi ned products/condensate. Natural gas flows through 144,741 km of these pipelines.

Crude oil pipelines are generally made of steel or plastics, while natural gas pipelines are made exclusively of carbon steel. A complete network, in general, would have few long and large transportation pipelines between many shorter and smaller gathering pipelines (originating from the sources) on the upstream and distribution pipelines (leading to tanks, storage facilities, and endusers) on the downstream.

It need not be overemphasized that in the oil and gas sector, while the processing sites and the loading and unloading terminals are certainly key nodes of the process chain, the arteries which keep the system functioning ship-shape are the pipelines. While corrosion is an enemy to be combated, pipelines are also targeted by vandals and terrorists; it happened in Nigeria recently when rebels burst oil pipelines to disrupt the operations of the foreign oil and gas companies in the country.

Examples of pipeline automation systems are numerous. In Indonesia, for instance, Siemens set up SCADA/ MIS systems to remotely monitor a 540-kilometre pipeline carrying natural gas, and from a control centre personnel can be forewarned of pipeline failures.

MARINE OIL TANKERS

Long-distance conveyance of crude oil, refined products and LNG which cannot be accomplished via pipelines, takes place by marine tankers. Maritime transport of crude oil and refined products accounts for over 60 percent of the total supply. Exporters avail of the services of tanker operators – Teekay Corporation, Frontline, Overseas Shipholding Group being among the leading names in the business. However, some oil and gas majors would also prefer to own and operate their own tankers.

Marine tankers can be classified on the basis of purpose into crude oil tankers and (refined) product tankers, and on the basis of size (capacity) into six classes – General Purpose, Medium Range, Large Range I, Large Range II, Very Large Crude Carriers, Ultra Large Crude Carriers (ULCC).

The tankers among themselves, transported about 1.85 billion tonnes of crude oil and 0.66 billion tonnes of refined products in 2005, averaging a distance of about 8000 km per tonne transported. Compared to 1970, this reflects a 70 percent rise in the cargo and an 80 percent growth in the tonnagekilometers clocked by the oil tankers. Competition among tank owners has resulted in a decrease in the costs incurred by the exporters in shipping crude oil and refined products.

Tankers have always raised the eyebrows of environmentalists. However, over the last few years, as a report from the United Nations Environment Project states, 63 percent less oil is entering the global marine environment than in the mid- 1980s, primarily due to a drastic drop in tanker accidents over the last two decades.

All is not hunky dory in Asia, however, with many countries turning a blind eye to environmental concerns. Coastal pollution and its adverse fallouts in some pockets of the Indian Ocean are alarming indeed.

TRUCKS & TRAINS

Crude oil and refined products are also moved from source to destination by trucks and trains. Tanker trucks carry gasoline, diesel, aviation fuel as supplies to the transportation sector, or LPG for use in households (supplies to the domestic sector), or fuel and furnace oils to the industrial sector. They may range in capacity from 3800 liters (used to carry pressurised LPG) to over 40,000 liters (other petroleum products). Likewise, there are tank cars or tank wagons which ply on rails.

There are either third-party logistics service providers – with or without their own fleet of vehicles – which undertake these operations for companies in the oil and gas sector. Of course, some or most of the companies in the sector do not totally outsource their logistics operations and maintain their own fleet of vehicles as well.

Accidents associated with road tankers were commonplace in the past – owing to a combination of technical and non-technical reasons – and have not been eliminated totally. Regulations on safety have become more stringent with time, and design specifications have ensured that safety is not left to chance.

Trucks and trains will continue to be an integral part of the oil and gas sector logistics networks, serving to move materials especially on the last lap of the journey. Tanker age and thereby engine efficiency are critical parameters when one needs to ensure fuel efficiency and safety. Of course, one needs to ensure that the transportation infrastructure – roads and railways – supports safe and effi cient movement of crude oil and refi ned products within countries.

MAZE OF MOVEMENTS

Every global oil and gas major would be availing of and managing a complex and diverse logistics network around the world. When Logistics Insight Asia quizzed BP about the company’s logistics operations around the world, the response was: “It depends on where we are. In the US we have huge oil and gas production, refinery networks, logistics chains and retail networks, so our pipelines and transport systems are very different from, for example, China. In China we have several petrochemicals plants which are fed by pipeline and some products leave by pipeline, but some are trucked out, or shipped. We also supply LPG and LNG, aviation fuels, and manage retail networks there.”

GAC is one player in oil and gas logistics that has diversified far and wide in Asia and Africa, from its base in Kuwait. Table 1 indicates the range of services which a 3PL like GAC can provide for its clients. Oil and gas companies can benefit financially by contracting logistics operations – in part or wholly – to 3PLs. It is often a strategic business decision which enables the company to focus on its core operations, while the 3PL handles the logistics efficiently and economically – and often much better than how the company would have done it.

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‘OUR OPERATIONS EXTEND TO ALMOST ALL COUNTRIES IN ASIA PACIFIC’

SAM ANG, Senior Vice President (Southeast Asia), DHL Global Forwarding, responds to queries from Logistics Insight Asia on the company's activities in the oil and gas sector.

Q: Of DHL’s logistics business in Asia, how much does the oil and gas sector account for?

A: The Asian oil and gas sector contributes to about five percent of our business. The bulk of the revenue that accrues to DHL Global Forwarding comes from ocean freight and hub management activities.

Q: What is this proportion if only Southeast Asia is considered?

A: For Southeast Asia, that will be about 15 percent, and it is gradually rising. Our oil and gas team was formed in Singapore in 2006 and now, our operations extend to almost all countries in Asia Pacific. The company is active, quite obviously, in Malaysia and Indonesia both of which have witnessed a boom in the oil and gas industry.

Q: Could you outline the logistics services DHL provides for the oil and gas sector?

A: DHL offers total logistics services, air-freight, oceanfreight and regional hub management services to its oil and gas customers. The company transports oil rig equipments, spare parts, pipes, trailers, cabins and chemicals.

Q: Some key projects or contracts in this sector in Asia?

A: We are currently managing the regional hubs of two of the world’s leading oil-field equipment suppliers (names withheld). For downstream customers, we have secured a five-year contract with one of the world’s leading petrochemical companies.

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‘UPSTREAM IS OUR MAIN FOCUS’

GAC, which started operations in Kuwait in the 1950s, provides shipping and logistics services to the oil and gas sector. ISMAYIL MANZIL, Energy Logistics Manager, GAC, talks to Logistics Insight Asia.

Q: How extensive is GAC’s business in the oil and gas sector?

A: Upstream, which is our main focus, GAC provides logistics assistance for onshore/off shore installations, including bringing in supply requirements as well as returning used materials and equipment.

Downstream, GAC has been supporting hydrocarbon transporters through its shipping services. The company’s marine craft are engaged in berthing and unberthing operations in selected areas as well as providing supply chain management services for lubricant manufacturers.

Q: And in which Asian countries is GAC active?

A: In Asia, GAC has operational offices that serve the oil and gas sectors in Malaysia, China, Singapore, Indonesia and Thailand. As far as the other countries in the continent are concerned, the company works with its partners by providing GAC focal points of contacts where necessary. We are currently gearing up to start operations in Australia, India, Sri Lanka, and the Red Sea region.

Q: What size of fleet does GAC deploy for the sector?

A: GAC Marine provides support to the offshore energy industry with a fleet of anchor handling tugs, utility boats, landing craft, tugs and barges. Currently, the fleet is comprised of nearly 50 marine craft, primarily operating in the Arabian Gulf, the West coast of India, the Caspian Sea and West Africa.

Q: Any initiatives to mitigate the negative environmental effects of transportation?

A: GAC has always been very ethical with regard to environmental issues. We do have a very detailed Environment Policy which is communicated strongly across the board and implemented religiously by our employees. We stress on more stringent transportation and process planning to avoid the occurrence of futile trips. The company will also continue to invest in fuel-efficient vehicles.

Table 1

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