Downstream Refined Product Movements

This downstream oil and gas overview discusses what we talk about in our popular ‘What is Downstream’ course which also covers the Refined Product Movements.

learn more about Oil & Gas Refined Product Movements With Oil 101

learn more about our Online Oil and Gas Training Courses

We’re going to cover refined products and terminals. Again, from an operations standpoint.

All right, like crude, there’s hundreds of thousands of miles of product pipelines in the U.S.

Remembering PADD 3 as being the world’s largest refining center.

Here’s PADD 1, which is one of the largest consuming locations. Gasoline especially. Heating oil in the winter time because a lot of the homes in the Northeast are not natural gas like we’re here. They use a lot of heating oil.

The Colonial Pipeline and the Plantation Pipeline run up to PADD 1. Texas Eastern and Explorer run up to PADD 2. One small pipeline over to Arizona from PADD 3. One small pipeline called Yellowstone over to Washington from Montana.

Now this refined product pipeline system hasn’t changed much. As much as the crude pipeline system because we just got four million barrels of crude.

Read about What is Refining?

Now they’re expanding and they’re handling new products but the change in the product pipeline system is nothing like what’s going on with crude.

Laurel and Buckeye, you notice go from Ohio to the East Coast are two of the oldest pipelines. The original standard oil refinery was in beautiful downtown Cleveland, Ohio. That’s where a lot the refined products were made and then moved by pipeline and rail to the East Coast – to the Bayonne location outside of New York City, which was a big terminal and then the built the Bayway Refinery.

The other thing about a refinery by the way is once you build it, it lasts seemingly forever. I was at the Bayway Refinery in the late 70’s and they had equipment at Bayway that was built before the war that they had just taken down and exported to Venezuela to build a very low class refinery in Venezuela. A refinery kind of never dies.

One of the interesting thing about products pipelines is they do a thing called batching.

A pipeline is controlled by the FERC. It’s open to anyone. They have open access. One pipeline company can handle many shippers and various products. Batching is a very important concept.

A lot of the pipelines in the U.S. used to be part of oil companies. It was very hard to find out information about them. Well they did some deregulation and then you saw these independents started to acquire all that stuff.

The oil companies had a regulated business so they were guaranteed like a five to seven percent return on their business and pipelines. Where the other E&P stuff had very high returns.

They spun them off into what are called master limited partnerships. Used to be very difficult to find out information on pipelines. Now there’s tons of information from likes of Kinder Morgan or Magellan.

This is a Hart publication on midstream that covers the industry quite extensively.

What’s interesting is they batch the products.

The Colonial Pipeline running from Houston up to Baltimore would use a high valued product over a low valued product not a low valued product over a high valued product.

We’re first going to move unleaded gasoline.

In mid-grade there’s higher value that unleaded. I can put mid-grade right behind the unleaded gasoline.

They use to put a thing in the middle called a pig. Which is a round ball that squealed. That’s why it was called a pig. Now the technology on the systems are so high, the systems and valving can detect the difference in gravity between the two grades.

Here I am. I’m up in Baltimore and here, I’m in Houston. I ship my unleaded. Then I ship my mid-grade. When it gets to the terminal, automatically goes to the right tank. All unmanned. Then I’m going to use super behind the mid-grade.

If I get a little bit of super in my mid-grade, so what. If I get a little bit of mid-grade in my regular, so what.

It’s so good that very little of this interface gets downgraded.

This is called, I quote “compatible interface”.

However, I want to then move diesel or heating oil for the wintertime. Gasoline and diesel are not compatible. In fact, I learned the hard way by putting diesel in a chainsaw. That I can’t just run diesel in my car. I can’t run gasoline in my Mercedes.

This is called an incompatible interface.

This is monitored very carefully because it will deteriorate your gasoline. They call this transmix. This is also picked up by the control system and goes into a transmix tank.

This transmix got it’s whole market of it’s own where it’s gathered and taken back to refining. Various refining processes to get the diesel and the gasoline separated.

Then I’ve got kerosene with jet fuel which are higher valued then my diesel fuel.

Then I’m going to run unleaded gasoline again, so I’m going to have transmix on this end.

This happens all day everyday.

Multiple fuel shippers. This could be Valero. This could be Exxon. This could be Shell on the pipeline.

The other thing we have in the U.S., is a twenty-five thousand mile inland waterway system. The Ohio Missouri Mississippi River, the inter-coastal, and the coast moves that are along the West Coast of the U.S.

A lot of product is moved by barge.

I was just in New York and my wife’s from there. We go up as often as we can. Hess is very strong in the New York Harbor area. You often see barges of product moving around the New York Harbor and there’s terminals all over the place in New York.

As I mentioned, the industry was moving crude from Buffalo down the Hudson River and around the New York area and there was just legislation passed to allow bigger crude ships to dock along the Hudson River.

Of course the environmentalist are ballistic because we now have crude oil in the Hudson River. They had no idea what it was before, but your commercial people are looking in the U.S. at barge moves to move the product around as well.

What you’re trying to figure out is the cheapest way to get from your refinery to a service station.

I’m going to take gasoline from the U.S. Gulf Coast to a Boston service station. The first thing I’m going to do is go the Colonial Pipeline from Houston to the New York Harbor. That’s fifteen hundred miles.

Only cost me two point three cents a gallon. Point zero zero one five cents per mile per gallon.

That’s the A.

This is the transportation cost in cents per gallon. Here’s my two point three cents. Where am I? I’m in New York Harbor. Now I’m going to load it on a barge. It’s only two hundred fifty miles.

One point two cents a gallon sounds pretty cheap but it’s three times as expensive as the pipeline. On a cents per mile per gallon.

Here I am. I’m not in Boston Harbor at point C and that’s the barge route.

The last is the truck that you see on the highway all the time. I’m going to truck it to a service station only forty miles. One and half cents a gallon, but again, twenty-five times the pipeline cost for that last forty miles.

We finally get it to the service station.

You see the curve gets steeper and steeper. A lot of the oil companies have tremendous optimization programs to handle this last move. They use the same optimization programs that UPS and FedEx do to get stuff to your house.

In fact, I think it was UPS who first discovered that if they minimized the number of left turns where you’re crossing traffic, it’s better to go out of your way to do all right turns.

Funny story, the UPS truck in front of my house used to come this way. Now it always comes this way. I mean, they’re that close in measuring their fleet optimization.

A lot of the folks who do this trucking to service stations are independents. The oil company sign maybe on the side of the truck because that company is dedicated to that company.

Most of them are independent operators.

Really, really sharp operators to be able to try to optimize that last mile. Any question on pipeline moves? Batching? There’s lots of it. In the U.S. system, it’s one of the most efficient systems in the world.

Okay, last part of this is terminals.

Terminal operation. Again, this is a product terminal. Not a crude terminal but similar things happen in a crude terminal. Let me just cover this as a product terminal.

You’re constantly testing and measuring the products that are coming into your terminal.

Here I am, a product terminal and I keep using Baltimore. I can be serviced by pipeline, small marine vessels, a tank car, or a truck.

The first thing I do before I receive the material is pull a sample and test the quality of the sample. I start loading it in my storage tank in the terminal and I record in what they call terminal automation system (TAMS). Here’s my receipt.

I’m adding new product onto old product. I let the product settle in the tank to make sure it’s got the same quality throughout the tank. I then test the tank again to make sure I’ve got the right quality.

The tank is released for use. It’s available for use.

From the accounting standpoint they measure the inventory whether it be first in, first out FIFO. Last in first out, or what I call the stuff from my desk “This is Fish”, first in still here. My desk is always totally piled up.

You finally get everything ready to go in the terminal.

A terminal can move out the same way it came in. Some terminals, coastal terminals, can go into another pipeline. I can move it onto a smaller ship. Big ships to small ships. You’re trying to keep it in pipelines or ship as long as possible. Move it into a tank or a truck.

Again, the individual shipment is measured. It’s tested again before it’s recorded in the system to relieve the inventory.

Constant concern about quality on any change in ownership and that’s true for crude.

Any custody transfer, the guy on the receiving end checks with the guy on the sending end has sent it. To make sure there is no problems.

Custody Transfer

The term that ‘custody transfer’ is usually when money changes owners. There’s other testing that you mentioned that the refinery might do production testing to see that it’s all inspect. But when money’s been a changed hands, then it’s a different deal.

The product is measured in a number of different ways.

There’s the gross product volume. How many barrels, gallons did I get in?

I also record the temperature because all the crude and all the products expand and contract with temperature changes just like water.

Everything is changing depending on pressure.

If we’re up in the mountains we get a little different reading.

Everything is corrected to standard temperature sixty degrees Fahrenheit and standard pressure which is atmospheric pressure.

They do it with either a meter, pipelines, marines, meters, or old-fashioned tank dipping is still done. I was with PricewaterhouseCoopers for thirteen years and when a new auditor comes in they always get a assigned to do the tank dips on New Year’s Eve at Bayway Refinery when it’s twelve below zero.

They literally climb up on top of the tanks. They drop something down and they pull it up. If they survive that, they’re a keeper.

They’re still using tank dippings but a lot more is going to automatic gauging.

Key concepts on refined products:

Product pipelines over a hundred thousand miles.
The inland waterways are over twenty-five thousand.
We batch different grades in every product pipeline.
Metering and measuring graph terminal accuracy.
Finally, cost per mile increases as the size and the distance decreases. The last mile is the most expensive.