The Money Rolls In
By Bob Rackleff

Are we ever in the wrong business! We oughta be in pipelines!

They earned a 45 percent profit on revenues - that's the average of what all interstate oil pipeline companies earned in 2003 (the latest data). They earned a net income of $3,469,996,000 on revenues of $7,703,998,000, as reported to the Federal Energy Regulatory Commission and published in the Oil & Gas Journal's annual "Pipeline Economics" report.

Some of the notably profitable that year included: BP Pipelines (Alaska), $424,002,000; ExxonMobil Pipeline, $392,526,000; Kinder Morgan, $249,194,000; Shell Pipeline, $218,108,000; and Colonial Pipeline, $174,617,000.

The latter, Colonial, did just fine despite its many troubles with massive spills, defective and corroded equipment, and crackdowns by regulators in the past decade. While below average for the industry, its rate of return was 25.5 percent in 2003. (You can find the complete listing of companies in the August 23, 2004 issue of OGJ.)

Natural gas pipelines did just fine, too. All interstate natural gas pipeline companies earned an average profit of 20.9 percent in 2003.

Both left their Fortune 500 counterparts in the dust. These earned a 4.6 percent median rate of return on sales in 2003.

The breathtaking profitability of oil pipelines has been gradually building since 1981, when total profits first surpassed the $2 billion level, for an average rate of return of 30.4 percent. The industry first blew past the $3 billion level in 2001.

This is because the oil pipeline infrastructure is aging since its peak decades of new construction, the 1950s and 1960s, with little new investment needed, and most depreciation claimed years ago. Only 1,255 miles of new crude and product pipelines are planned for 2005, less than one percent of total mileage.

More important, the profits have come at the expense of maintenance and safety, as investors demand increasing returns and owners squeeze earnings growth by cutting safety, maintenance and staffing budgets. These earnings belie the usual statements by pipeline executives that costs of new safety requirements would be unreasonably high.

As several observers have noted, the U.S. pipeline industry today resembles the U.S. railroad industry in the 1950s, when it neglected investments in service and safety, instead choosing to maximize current earnings for its owners. We are familiar with the long-term results in both industries - a deteriorating infrastructure and increasing safety risks.