5-Design Elements (1.1)

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Pipeline Engineering:

Design Elements and

Economic Analysis

Mike Yoon, Ph.D.



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• Codes and Standards

• Design Elements

• Economic Analysis

Key Topics



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• The primary responsibility of an engineer issafety. Therefore, the prime consideration in thedesign, construction and operation of a pipeline

system is SAFETY.• Pipeline Standards have been developed to help

engineers attain safety consistently in their design,construction and operation.

Engineer’s Responsibility



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• Administered by the organization of an industry such asASME, a code represents a category within the standardswith a numerical code that is standardized for clarifyingindustrial activity.

• Due to the inherent risk of high pressure fluid transmission,national and international codes and standards weredeveloped to minimize the risk.

• C&S are guidelines for design and construction of pipelinesystems, but not intended to be substitutes for good

engineering practices for safe designs.• Government has the authority to issue regulations defining

minimum requirements. These regulations are legally binding for the design, construction and operation of pipeline systems.

Codes and Standards (C&S)



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• CSA Z662 in Canada

• ASME B31.4 Code – Pipeline Transportation Systemsfor Liquid Hydrocarbons and Other Liquids, applied to

liquid pipelines in US and many parts of the world • ASME B31.8 applied to gas pipelines in US and many

parts of the world

• ISO 3183 – Petroleum and natural gas industries – steel

pipe for pipelines – Technical delivery conditions

C&S Examples



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• 49 CFR 195 – Transportation of Hazardous Liquids by

Pipeline, U.S. Code of Federal Regulations

• API STD 1104 – Welding of Pipelines and Related

Facilities• API 5L – Specifications for Line Pipe

• API 6D – Pipeline Valves (Gate, Plug, Ball, and Check

Valves)

• ASME B16.5 – Pipe Flanges and Flanged Fittings

• ASME B16.34 – Valves – flanged, threaded, and

welding end

Other Codes and Standards



7


• Design Elements

– System parameters

– Pipe parameters

– Fluid parameters

– Pumping parameters

– Heat transfer parameters

– Economic parameters


Key Topics



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• Many factors have to be considered in the engineering,

design and operation of pipeline systems, particularly

long distance pipelines, including the properties and

volume of fluid to be transported, the length of pipeline, and types of terrain traversed, environmental

constraints, etc.

• Complex engineering and economic studies are

necessary to decide on the pipeline diameter, material, pumping/compression requirements, and locations of

facilities to find optimum results for any particular

pipeline transmission system.

Elements Influencing Pipeline Design



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• Major factors influencing pipeline system design are: – Design conditions – fluid properties, ground and ambient

conditions, and pipe properties

– Design parameters – pressure and temperature limitations

– Supply/demand locations and demand build-up – Codes and standards

– Route, topography and access

– Environmental impact

– Economics

– Material and construction – pipe material/grade influencesthe material and construction cost and technique

– Operation

– Protection

Major Factors for Pipeline Design



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• A parameter is a physical property whose valueaffects the behaviour or characteristic of a relatedsystem.

• Criteria are a set of condition, rules, guidelines or policies upon which a decision or judgment can bemade. Codes and standards are considered to becriteria.

• A design is the plan created under a set of given parameters and criteria.

Parameter, Criteria & Design



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• Identify the need of a pipeline system

• Balance supply and demand

– Assessing proven reserves

– Market options and pricing

• Perform hydraulic analysis

• Determine project feasibility

• Expand the capacity of the pipeline – New supply locations

– New market locations

– New pumping stations

Pipeline System Development



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• Supply and demand

• Pipeline route and topology

• Environmental factors• Operating pressure

• Delivery pressure

• Operating temperature

Design Parameters



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• The supply and demand change over time. The projected supply/demand determines the optimum pipesize, facilities, location and timing requirements.

• The locations of supply and delivery points determine

the pipeline route and the locations of facilities andcontrol points.

• Supply and demand build-up influence thedetermination of economically optimum size of pipeline and facilities, such as pumping and metering

facilities, required for the entire range of flow rates.• In general, the demand profile drives the pipeline

capacity for importing countries, while the supply profile drives the pipeline capacity for producing areas.

Supply/Demand Scenario



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• The demand is forecasted on the basis of average

annual flows over the forecast period.

• Seasonal variations in the demand need to be taken

into account in design.

• In addition, the storage capacities around the

consuming areas are also important not only to offset

some of the peaking requirements but also to avoid

over design.

Demand Forecast



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• The supply information includes the reserves and

production capacities (refinery capacities) or gas

deliverability estimated at a given time as well as the

locations where these volumes will grow or shrinkover time.

• Transportation facilities are designed and built to

accommodate these volumes.

• Increasing the accuracy of the supply forecast reducesthe risk of over or under design of the system.

Supply Forecast



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Example: Supply Profile

T h r o u g h p u t

Year 2011 2014 2020 2030 2040



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Pipeline Route and Topology - 1

• Pipeline right of way – Affecting construction and land acquisition costs

– Complying with environmental regulation

• Elevation profile – Affecting hydraulics and pumping requirements

– Affecting construction cost

• Depth of cover or burial

– Buried beyond 1 m and less than 2 m – Affecting hydraulics due to heat conduction

– Affecting the integrity of pipe



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Pipeline Route and Topology - 2

• Ground or soil conductivity – heat conduction

• Soil types – clay, sand, rocky soil, etc. – Affecting construction cost

– Affecting heat conduction

• Water crossing including rivers – Affecting construction cost and requiring extra valves

– Potentially affecting water quality and other environmental

restrictions• Geological stability – slope stability, earthquake, permafrost, muskeg, etc.



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Environmental Factors

• The following environmental sensitivities and valuesmay occur along a pipeline route: – Soil resources

– Protected areas

– Areas of potential archaeological value

– Wildlife, endangered species, etc.

• Environmental assessments help pipeline operatorsdevelop construction and operational guidelines for the

pipeline. They are intended to protect and evenenhance environmental values.



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Operating Pressure

• The operating pressure of a pipeline must bemaintained within the minimum and maximum pressures. The pressure limits are critical for safe andefficient operation.

• The maximum operating pressure is constrained bythe yield strength of the pipe material, pipe diameterand wall thickness, and the location of pipe.

• The minimum pressures are determined by vapour pressures of the liquids along the pipeline and contract

pressure for a gas pipeline.• The elevation affects the operating pressure due tohigh static head for liquid pipelines, but doesn’t affectthe operating pressure significantly for gas pipelines.



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• The delivery pressure is defined in the contract betweenthe pipeline company and the shippers.

• The delivery pressure is determined by the fluid vapour

pressure, pressure rating of the equipment at thedelivery site, and pressure requirement imposed by thedelivery facilities such as tank or connecting pipeline.

• The delivery pressure requirement dictates the operating pressure for a given flow rate.

Delivery Pressure



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• Temperature affects viscosity, density and specific heat

in liquid lines. A temperature rise is beneficial in liquid

pipelines as it lowers the viscosity and density, thereby

lowering the pressure drop.

• Pipeline temperature can impact the environment,

causing crop damage in farmland.

• The temperature along the pipeline is least controllable

due to unknown ground conductivity and ambienttemperature.

Operating Temperature



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• The cooling effect on non-newtonian or viscous fluids

can be significant, because their viscosity can increase

significantly and subsequently pressure drop can be

very high.• To reduce the effect of temperature cooling, the

pipeline can be insulated and/or operated in high

temperature. The viscous fluids can be blended with

light hydrocarbon liquids such as condensate.

Cooling Effect



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Min/Max Temperature

• The maximum temperature limit is determined by acombination of the following three factors: – Conditions of the ground

– Stress level the pipe material can withstand without buckling

– Economics of pipeline flow (the liquid flows most efficientlyat high temperature)

• The minimum temperature limit is normally determined by the metallurgical properties of the pipe material or bythe conditions of the ground.



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• Steel pipes are structurally strong and ductile; they donot fracture easily. However, they can be corroded badly, unless they are coated or protected by othermeans.

• Pipe grade, diameter, and wall thickness are thelargest factors affecting hydraulics and economics: – Pipe size – the larger the inside diameter of the pipeline, the

more fluid can be moved through and the smaller the pressure drop.

– Pipe wall thickness – determine the steel cost and operating pressure

– Pipe grade – determine the steel strength and the operating pressure affecting pipe and operating costs

Pipe Parameters



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• Pipe roughness – affect pressure drop and pigging runfrequency

• Pipeline drag factor – affect pressure drop

• Pipe coating – protect against corrosion and otherdamage by inhibiting the flow of electric current fromthe pipe to the surrounding soil.

• API Spec 5LX applies to high pressure seamless andlongitudinally welded steel pipe in Grades X42

through X120.

Pipe Parameters - Continued



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• Pipe size is one of the most important parameter in thedesign and operation of pipeline system to meet a setof projected flow conditions.

• Pipe sizes are standardized in nominal pipe sizes(NPS), which indicate the outside diameter of a pipe.It is intended to standardize facilities and minimizeinventory requirements.

• The internal diameter of the pipe defines the cross-sectional area available for the flow of fluids. It isobtained by subtracting two times of the pipe wallthickness from the outside diameter.

• For short lengths, the minimum size can be selected based on the maximum input pressure and theminimum output pressure for the throughput required.

Pipe Sizes



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• For longer systems, the pipe size has to be optimizedtogether with other factors including compressorfacilities.

• As a rule of thumb, the pressure drop along a gas

pipeline should be within a range of 15 – 25 kPa/kmfor an efficient pipeline system. – Below this range, the capital expenditure is excessive

because the pipe is underutilized.

– Above this range, the fuel consumption is excessive because

of high frictional losses. – Note that the range will vary depending on costs in specific

projects.

Pipe Sizes – Cont’d



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Pipe Designation

• Pipes are designated in pipe size, pipe wall thickness,and weight.

• A common designation of pipe size is the nominal pipe

size (NPS). In North America, the nominal pipe sizefor outside diameter is expressed in inches.

• Several pipe wall thicknesses are available to onenominal pipe size.

• The weight is determined by the actual pipe size andwall thickness.



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Pipe Sizes

0.4024848”

0.3544242”

0.3233636”

0.2873030”

0.2522424”

0.2202020”

0.2201818”

0.2201616”

0.2091414”

0.18912.75212”

0.18910.75210”

0.1578.6258”

0.1266.6256”Min. Wall Thickness (in)Pipe OD (Inches) Nominal Pipe Size (NPS)



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Nominal Pipe Size (NPS)

NPS

(Inch)

O.D

(Inch)

STD WT

(Inch)

STD Wt.

(kg/m)

XS WT

(Inch)

XS Wt.

(kg/m)

4 4.500 0.237 16.08 0.337 22.32

5 5.563 0.258 21.78 0.375 30.96

6 6.625 0.280 28.27 0.432 42.57

8 8.625 0.322 42.54 0.500 64.65

10 10.75 0.365 60.32 0.500 81.56

12 12.75 0.375 73.84 0.500 97.48

14 14.00 0.375 81.31 0.500 107.41



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Nominal Pipe Size (NPS>14”)

NPS

(Inch)

O.D

(Inch)

STD WT

(Inch)

STD Wt.

(kg/m)

XS WT

(Inch)

XS Wt.

(kg/m)

18 18.00 0.375 105.18 0.500 139.24

20 20.00 0.375 117.11 0.500 155.15

24 24.00 0.375 140.98 0.500 186.98

32 32.00 0.375 188.72 0.500 250.63

36 36.00 0.375 212.59 0.500 282.4642 42.00 0.375 248.40 0.500 330.20

48 48.00 0.375 284.20 0.500 377.94



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• For a given pipe diameter, several different wallthicknesses are available to satisfy different levels ofthe maximum design pressure.

• For a specified pipe design pressure, the pipe wall

thickness varies with the pipe grade and its location.• The weight of pipe in metric tons per kilometer can be

estimated as follows:

Weight = nominal diameter * wall thickness / one

sixteenth inchExample: the weight of 20” diameter pipe with 0.25”wall thickness = 20 * 0.25/1/16 = 80 tons/km

Pipe Wall Thickness and Weight



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Pipe Roughness

• Pipe roughness influences the friction factor of the fluidflow. The larger the pipe roughness, the higher thefrictional resistance.

• Internally coated pipe has smaller pipe roughness andthus lower frictional resistance.

• Effective roughness includes pressure loss terms suchas bends, welds, fittings, etc.

• Pipeline pigging is necessary to clean the pipe andreduce pipe roughness that increases with the increasedtime of operation.



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Values of Pipe Roughness

0.0018 – 0.0020

0.0002 – 0.0003

0.0003 – 0.0005

0.0005 – 0.0008

Roughness

(inch)

0.0051 – 0.0076Internally Coated Pipe

0.0445 – 0.0508

0.0076 – 0.0127

0.0127 – 0.0200

Roughness

(mm)

Pipe after two years of

atmospheric exposure

Scraper Burnished

Pipe

New Clean Bare Pipe

Pipe

Conditions



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Drag Factor

• The drag factor indicates pipeline efficiency,accounting for non-ideal conditions in flowdue to bends, welds, fittings, and entrained

matter, but not the pipe roughness.• Drag factors typically range from 0.92 to 0.98,

depending on the severity of the drag inducingfactors.

• The drag factor may be applied to a partiallyturbulent flow regime.



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• Density or specific gravity – the higher the fluiddensity, the higher the pressure drop. The pressure dropdue to friction is directly proportional to the fluiddensity.

• Compressibility is not important for liquid pipelinecapacity calculation, but important for controlling pressure surges and determining line pack changes.

• Viscosity is important in calculating line size,hydraulics, and pumping requirements for liquid

pipelines.• Vapour pressure determines the minimum pressure inthe pipeline that must be high enough to maintain thefluid in a liquid state. It is used to avoid cavitation at a pump.

Fluid Parameters - 1



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• Pour point is the lowest temperature at which an oil canflow.

• Specific heat affects heat transfer rate throughconvection and conduction processes.

• Gas compositions allow to determine other fluid andthermodynamic parameters such as compressibilityfactor and viscosity. If gas composition is not available,gas specific gravity should be known.

Fluid Parameters - 2



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• Pump/compressor Capacity

• Performance curves

• Operating ranges (flow, pressure and temperature)

• Compression ratio• Z-factor and isentropic exponent (k value)

• Efficiency

• Cooler/heater requirement parameters

• Station auxiliary equipment requirements

• Energy/Power requirements

• Driver requirements

Pumping Parameters



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• Receipt temperature – determine the temperature

profile along the pipeline

• Soil temperature

• Thermal conductivity

• Depth of cover

• Thermal insulation

• Ambient temperature – has a direct impact on soiltemperature and turbine performance

Heat Transfer Parameters



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• The effect of soil thermal conductivity on the fluiddepends on the differential temperature between thefluid and the surrounding soil.

• If the soil temperature is colder than the fluidtemperature, the fluid temperature drops. It results inhigher viscosity and higher pressure drop. If the soiltemperature is hotter than the fluid temperature, theopposite results occur.

• The greater the depth of burial, the lower the rate ofheat transfer.

Soil Thermal Conductivity



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Values of Soil Thermal Conductivity

0.01Fiber insulation

0.30Concrete

1.20River water

0.45Clay soil, wet

0.15Clay soil, dry0.70Sandy soil, wet

0.20Sandy soil, dry

Conductivity (W/m/oC)Substance



43

Economic Parameters

• Capital cost with capital cost allowance

• Rate of return and taxes

• Interest on borrowed money

• Equipment depreciation

• Operating and maintenance costs including fuel and

power costs

• Tariff and other transportation service charge• Other economic parameters



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• Design Parameters


– Major cost factors

– Measures of profitability

– Sensitivity analysis

Key Topics



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Economic Study

• An economic study provides a measure of economic benefits to shippers and pipeline companies.

– New pipeline systems are needed to supply new market

– One or more existing systems are replaced, because some of

the older systems cannot be upgraded to accomplish thesafety, efficiency and economies.

– An economic study is required for the conversion of existingsystem to other uses or its disposal.

• The study begins with the answers to major transportationquestions.

• The study needs to address potential consequences for thestakeholders of the pipeline system.



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Transportation Questions

• What will be the required flow profiles that the

pipeline will transport and what will the revenue be?

• What will it cost to construct and operate?

• How profitable will it be?

• What is the impact on the environment?

• What is the impact on economic development?

• How will other transportation modes respond to the presence of the pipeline?

• How much government funding is needed?



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Stakeholders

• Users of the pipeline system and users of othertransportation modes

• Transportation system companies that own and

operate the system, including the pipeline and othermodes

• Non-users of the system that impacts on the socio-economic and natural environment

• Federal and provincial governments



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Evaluation Process

• The process begins with viable alternatives, and then isto evaluate the consequences of each alternative. Basedon the consequences, the best alternative is selected.

• The set of alternatives may include an alternative plannot involving a pipeline. Other alternatives involving pipelines may have different network or othercharacteristics and serve different markets.

• Since each alternative has different consequences andimpacts on different stakeholders, multiple decisioncriteria are required to evaluate the alternatives.



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Economic Analysis - 1

• An economic analysis is performed to assess the project feasibility, financing requirements, and systemdesign and operation for minimum overall costs.

• If the pipeline is of strategic importance for a countryor a certain region, the assessment of the projectfeasibility may not be critical. However, the need for anew pipeline or a major expansion of an existingsystem can be justified through an economic analysis.

• The financing requirements may include the amountsand their required timeframe. A project life of 30 or 40years is reasonable.



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Economic Analysis - 2

• An economic analysis includes all direct costs and indirectcosts, and compares the capital costs with the operatingcosts.

• An economic analysis is used to determine an optimum pipe size and pumping requirements over the economiclife of the pipeline.

• Timing considerations shall be optimized and tariff may be included in the analysis.

• The economic analysis progresses in conjunction with thedetailed hydraulic, mechanical and operational design.



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Result of Economic Analysis

• Pipeline Route

• Pipe

– Material or grade

– Pipe size and wall thickness• Operational equipment or facilities

– Pump station location and pump units

– Meter stations

– Valve stations – Storage tanks and manifold piping

• Engineering and construction costs



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Key Topics



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Pipeline Economics

• Pipeline economics involves achieving a balance between pipe cost including construction and lifeexpectancy, with consideration given to pressurerequirements and safety factors suitable for the

conditions.• For a long life, replacement cost of pipes should be

taken into account in evaluating economics.

• One common economic decision is whether to construct

a large line initially, or put in a smaller line first and parallel it or add pumps at a later time.



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Pipeline Capacity

• A pipeline is usually designed for a capacity to be requiredat some future date, so that during the initial years a smallerquantity is transported through the pipeline.

• The following three options are available to determine the

pipeline capacity: – Transport the flow on the maximum day of the year

– Transport the average flow for the year

– Transport the average flow for the peak season

• The design flow rate for the system should be determined asclosely as possible to select an economically optimum pipesize. In addition, maximum, minimum, and forecast futurethroughputs are needed.



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Load Factor

• The design throughput may vary by year and is usuallyexpressed as the average daily flow rate.

• The actual flow rate that a system must be capable ofattaining to compensate for lost capacity frominterruptions in service is the flow rate per operatingday, which is greater than the flow rate per calendarday. The ratio of flow rate per calendar to operating dayis the load factor.

• In the design procedure, a load factor of 92 to 95% is

used for a well-operated pipeline, while 85 to 90% formore complex systems or pipelines operated withexpected flow variations.



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• The main purpose for looking at storage is to reducethe pipeline facilities. The combined capital andoperating costs of the storage facilities must be lessthan the capital and operating costs of the additional

pipeline facilities.• The greater the storage capacity, the fewer the pipeline

facilities. However, there is no linear relationship between storage costs and other pipeline facility costs.

• Various storage types are available depending onlocations: salt cavern, CNG, LNG, undergroundcaverns or abandoned reservoirs, etc.

Storage



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Increased Capacity

• Additional capacity is needed in an existing system

with increased demands of the transportation service.

• To meet the increased demands beyond the capacity of

the existing system, a parallel line is constructed or

intermediate pumping stations are added.



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Major Cost Factors

• Capacity factors

– Operating pressure

– Station spacing

• Mechanical factors – Pipe grade, pipe size or diameter, and wall thickness

– Pipeline route

– Depth of cover

• Reliability and safety factors – Valve spacing

– Regulator station



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Capital Costs

• Pipe

• Pump stations

• Valves, fittings, etc.

• Meter stations• Tanks and manifold piping

• SCADA including telecommunication equipment

• Right of way (ROW) acquisition cost

• Engineering and construction• Regulatory permitting costs

• Other project costs such as legal and contingency costs



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Operating & Maintenance Costs

• Pump station power and energy cost

• SCADA and telecommunication costs

• Utility costs

• Lease costs such as ROW, office buildings, etc.

• General and administration costs such as payroll

• Maintenance costs – Pump station equipment

– Meter station

– Pipeline, valve, etc. – Tank farm



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Operating Pressure

• Choice of operating pressures directly affects pipelinesafety and operating requirements. The requirementsinclude shipping capacity and volume demands, locationand method of installation, and type of pipe materialselected.

• As a result, pressure selection influences most on systemcost and the other design variables.

• Since operating pressures are based on maximum allowableoperating stress levels of pipeline grade and class locationfactors, a range of design pressures is available.

• Use of higher pressures reduces required pipe size orincreases length between pumping stations, thus loweringmaterial costs.



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Station Spacing

• Station spacing is determined by the factors such as pipe size, flow profiles, hydraulics and elevation profile, and capital and operating costs.

• For a given flow profile, the larger the pipe size, the

longer the station spacing.• The longer the station spacing, the lower the

construction and operating costs.



63

Pipe Grade, Size & Wall Thickness

• In the hydraulic design, line size is initially based on a preliminary choice of pipe grade, diameter and wallthickness from experience.

• Further calculations are needed to finalize the system

design based on the code requirements, project cost andmaterial availability.

• The pipe cost is based on the grade, diameter, and wallthickness. For most pipeline systems, the pipe cost isthe highest material cost. In addition, these three havedirect effect on the cost of installation.

• It is critical to optimize the pipe grade, diameter, andwall thickness to minimize the project cost.



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Pipe Grade

• Pipeline economics begins with the selection of the pipematerial. Since pipe material for transmission line is steel, it

boils down to the selection of pipe grade.

• The higher the pipe grade, the higher the maximum

allowable operating pressure and thus the range of operating pressures, and the lower the steel cost.

• As thinner walls translate into lower steel weight for theentire pipeline system, the cost can be reduced significantlyeven though grades of pipe cost more per ton.

• Cost savings can also result from reduced time required toweld the thinner wall sections.



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Pipe Size

• Once the need for a pipeline system is recognized,

determine the maximum pipe size that can be

economically justified.

• The construction costs increase approximately linearly as

the size is increased, while the pipeline capacity increasesapproximately by 5/2 power.

• The larger the pipe size, the larger the carrying capacity

and the lower unit shipping costs.

• Lower unit shipping costs permit the setting of lowertariffs and result in reduced transportation costs to

shippers.



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Construction Cost Data(as of 2007 and 2008, OGJ)

12 – 15%Misc: engineering, surveying, admin,

regulatory filing, freight, taxes, etc.

5 – 10%Right of way (ROW)

38 – 40%Labour and construction

31 – 38%Material: pipe, fitting, pump, coating, etc.

PercentageCost Items



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Pumping Cost

• The pumping costs can be estimated based on a unitcost of power that depends only on the total quantityused.

• Normally, electric power rates include a “demand

charge” based on the maximum power demand rateover a given period of time. This rate is usuallyindependent of the unit cost of power used.

• Electric power rates are lower during off-peak hours.

• The introduction of the demand charge and off-peakhour rate tends to increase the advantage of the largersized pipes by reducing power costs.



68

Storage

• Sometimes, it is economical to provide storage to meet peak rates of demand in order to reduce the pipe size.

• The deciding factor for installing storage for the purpose of meeting peak rates is the distance between

the lifting point and the proposed storage location.• The provision of storage is economical when distance

exceeds a certain critical length.

• When storage is provided, smaller pumping facilities

can be installed at lower costs and lower operating cost.



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Pipe Size vs. Pumping Cost

• The most economical pipe diameter is selected by

choosing the lowest overall costs including annualized

capital and operating costs.

• In actual practice, it is determined by balancing pumping costs for various pipe sizes.

• In an environment of high energy cost or rapid increase

in flow, the option with a larger pipe size is preferred,

even though its capital cost is higher than that of asmaller size.



70

Pipe Wall Thickness

• The maximum allowable operating pressure (MAOP)

is directly proportional to pipe wall thickness for the

same grade and size. The larger the wall thickness for

a given pipe size, the higher the MAOP.• The larger the wall thickness, the higher the pipe cost

and the construction cost.



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Pipeline Route

• A straight line is least costly, the following factors

cause deviations from straight line route:

– Terrain features such as mountains where high construction

costs and high energy costs for pumping could make a

longer route around them more economical.

– High costs and difficulty of obtaining rights-of-way could

prefer a longer alternative route.

– The requirements to route the pipeline to or near

intermediate supply or delivery locations. – Ecological considerations influence on the design of and

rights-of-way selection.



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Pipeline Construction



73

Facility Location

• The location factors include population density, road,

railway, river, lake, etc.

• They should be evaluated in terms of the safety,

environmental issues, accessibility, extra materialrequirements, etc.

• The locations of facilities directly influence on

construction cost. Components affected are

labour/equipment costs incurred in installation.



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Depth of Cover

• The minimum depth of cover is specified in the

applicable codes and standards.

• Effect of the depth on the installation and labour cost

component is largely dependent upon the soilconditions and location.

• Extra labour, material and/or equipment costs are

incurred for rocky ground, soft soil, river bed,

roadbed, railway crossing, etc.



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Valve Spacing

• Placement of valves provides for effective control of

flow; sectionalizing the system in case of emergency,

isolation of components of the system, etc.

• The minimum valve spacing and operationrequirements are specified in the applicable codes and

standards.

• Valve location is determined by such factors as system

layout, product, population, proximity to rivercrossing, etc.



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Valve Costing Factors

• Installation of valves increases overall cost and creates

future maintenance expenditures significantly.

• Valve type and material selection affect valve

placement design and cost.

E i C id ti f



77

Economic Considerations of

Compressor/Pump

• When selecting new pumping equipment, decisionshould be based on economics with consideration

given to installation and operating limitations.

• The following economic factors to be considered are:

– Estimated capital cost

– Estimated annual operation and maintenance costs

– Fuel efficiency

– Projected escalation in operation and maintenance costs over

the equipment life

– Projected escalation in fuel costs over the project life

– Specific requirements or limitations of each application



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Operating and Maintenance Costs

• General and administrative (G&A) costs – payroll, rentalcost, etc.

• Pump station fuel or power cost

• Pump station equipment maintenance cost• Pipeline maintenance cost including pipe replacements,

aerial patrol, etc.

• SCADA and telecommunication costs

• Tank farm operation and maintenance• Utility costs

• Right-of-way lease cost



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Cost of Service

• O&M expenses are a major part of the cost ofservice. There are two components of O&M costs;administrative/general expenses and actual O&Mexpenses.

• Economic considerations make primary use of thecost of service in the evaluation of projects.

• The cost of service analysis includes an annual fuelcost, capital costs escalated to the in-service-date,annual operating costs, taxes, return on investment,

and depreciation.



80







Key Topics



81

Investments and Revenue

• Equity owners and financial institutions that lend the

capital for the project require minimum hurdle (cut-

off) rate and rate of return (ROR).

• The operating revenue is generated in the form of pipeline tariffs collected from shippers for

transportation services.

• The government regulator imposes the maximum

revenue that may be collected.



82

Time-Value of Money

• A money invested today will be worth more in the

future; money has a time value.

• Discounting, or the calculation of present value, is

used to evaluate future cash flow associated withcapital budgeting projects.

• Compounding is inversely related to discounting. A

dollar in hand today is worth more than a dollar to be

received in the future because of the interest it couldearn and compounding interest means that interest

earns interest.



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Present Value

• Present value is the present worth of future sums ofmoney.

• The process of calculating present values, ordiscounting, is the opposite of finding the compoundedfuture value.

P = Fn / (1 + i)n

where P = present value

Fn = amount of money at the end of year n

i = annual interest rate or discount rate



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Example: Present Value Calculation

• You have an investment to receive $10,000 six yearsfrom now. If you can earn 10% on your investment,what is the most you should pay for this opportunity?



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Answer: Present Value Calculation

• You need to calculate the present value of $10,000 to be received 6 years from now at 10% rate of discount.F6 is $10,000, i = 10%, and n is 6 years. Therefore, the present value P is

P = $10,000 / (1 + i)6 = $5,650

This means that you can earn 10% on your investment,and you would be indifferent to receiving $5,650 now

or $10,000 six years from today, since the amounts aretime equivalent.



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Present Value of Mixed Streams

• The present value of a series of mixed payments orreceipts is the sum of the present value of eachindividual payment.

• The present value of each individual payment is the payment times the appropriate discount factor.

• Example: Your annual projected cash flows are$10,000 for the first year, $20,000 for the second, and$5,000 for the third. What is the present value of this

cash flow stream?



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Solution of Mixed Streams

• The present value of this series of mixed streams of cash flowsis calculated as follows:

$29,370$3,7600.751$5,0003

$16,5200.826$20,0002

$9,0900.909$10,0001

Present

Value

Discount

Factor

Cash FlowYear



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Capital Budgeting

• Capital budgeting is the process of making long-term

planning decisions for investments.

• Long-term investments have three important features:

– Typically involve a large amount of initial cash outlays,which need to be justified on a cost-benefit basis

– Cash flows (increased revenues, savings in operating

expenses, etc.) over the life of the investment project, which

require you to consider the time value of money

– Take income tax factors into account in every budgeting

decision



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Measures of Profitability

• Payback period, internal rate of return (IRR), and net

present value (NPV), cost/benefit ratio (profitability

index) are frequently used to measure profitability.

• These evaluation methods are often used not inisolation but in a combination of these measures.

• The NPV and IRR methods are called discounted

cash flow (DCF) methods.



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Payback Period

• The payback period of a project is the length of timerequired for the investment to generate an amount ofcash equal to its original cost.

• The payback period is calculated by dividing theoriginal investment by a constant annual cashgeneration. The annual cash generation can be definedas profits after taxes plus depreciation.

• The decision rule is to choose the project with the

shorter payback period, because the shorter the payback period, the less risky the project and thegreater the liquidity.



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Payback Period Example

• Consider the two projects whose after-tax cash flows are given

below. Assume that each project costs $1,000.

6006

50051004004

3003003

4002002

5001001

B ($)A ($)Year



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Example Solution

• When cash flows are uneven, the payback period hasto be found by trial and error.

• The payback period of A is ($1,000 = $100 + $200 +

$300 + $400) 4 years.

• The payback period of B is ($1,000 = $500 + $400 +

$100) computed as follows:

2 years + $100/$300 = 21/3 years

• Project B has the shorter payback period, and is the project of choice



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Advantages/Disadvantages

• The advantages of using the payback period are:

– Simple to compute

– Easy to understand

– Handle investment risk effectively• The disadvantages are:

– Doesn’t recognize the time value of money

– Ignore the impact of cash flows received after the payback

period; cash flows after the payback period determine profitability of an investment.



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Net Present Value

• Net present value (NPV) is the excess of the present value (PV)

of cash flows generated by the project over the amount of the

initial investment (I):

NPV = PV – I

where PV = A * (1/i)[1 – 1/(1 + i)n] and A annual cash flow

• The present value of future cash flows is computed using the

cost of capital (minimum required rate of return) as the discount

rate.

• The decision rule: If NPV is positive, accept the project; if not,

reject it.



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NPV Example

12%Cost of capital

$3,000Annual cash flows

10Estimated life (years)

$12,950Initial investment

Present value of the cash flows is calculated as follows:

PV = $3,000 *(1/0.12) [1- 1/(1 + 0.12)10] = $16,950

Initial investment (I) $12,950 NPV $4,000

Since the NPV is positive, the investment is accepted.



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Annual Cost Calculation

• To compare two or more alternatives, the annual cost method isoften used. A general expression of calculating annual cost is:

Annual Cost = (P – L) * i/((1+i)n – 1) + P*i + OC

Where: P = initial investment

L = salvage value of equipment after n years

n = life of asset in years

i = discount rate in fraction

OC = annual operating costs (maintenance, operation, spare

parts)• When n is large, the salvage value can be negligibly small and

the expression i/((1+i)n – 1) is also very small.



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Internal Rate of Return

• Internal rate of return (IRR) is defined as the rate of

interest that equates the initial investment with the

present value (PV) of future cash flows.

• It takes into account the rate at which future cashgeneration is discounted in order to equate the present

value of the cash generation to the capital investment.

• Therefore, I = PV and NPV = 0 at IRR.

• Decision rule: Accept the project if the IRR exceedsthe cost of capital.



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IRR Example

• Use the present value example, and set the equality

I = PV:

PV = $3,000 *(1/IRR) [1- 1/(1 + IRR)10] = $12,950

or *(1/IRR) [1- 1/(1 + IRR)10] = $12,950/$3,000 =

4.317

• Solving the above equation for IRR, we have IRR =

0.192. Since the IRR is greater than the cost of capital

(12%), we accept the project.



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Advantage/Disadvantages of IRR

• Advantage

– Recognize the time value of money

• Disadvantages

– Time-consuming to manually calculate IRR – Fails to recognize the varying sizes of investment in

calculating projects and their respective profitability.



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Profitability Index

• The profitability index is the ratio of the total PV of

future cash flows to the initial investment: PV/I.

• The index is used as a means of ranking projects in

descending order of attractiveness.• Decision Rule: If the profitability index is greater than

1, then accept the project



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Profitability Index Example

• Using the present value example, the profitability

index is

PV/I = $16,950 / $12,950 = 1.31

• Since this project generates $1.31 for each dollar

invested (i.e., its profitability index is greater than 1),

accept the project.

• The profitability index has the advantage of puttingall projects on the same relative basis regardless of

size.



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Key Topics



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Sensitivity Analysis

• After an economic analysis is done for a base case, asensitivity analysis is performed on several parametersrelated to pipeline design and economic analysis .

• Key design parameters are flow profile, lifeexpectancy, operating pressure, pipe size and wallthickness, station spacing, etc.

• Economic parameters include estimated cost of capital,cost of building the system, operating expenses, andrevenue streams.

E l f S iti it



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Example of Sensitivity

• The capital investment is assumed to be 10% higherthan estimated.

• The operation and maintenance costs are 10% higheror lower than estimated.

• The fuel costs are 10% higher than projected.• The project life is 20 years instead of 25 years.

• The DCF rate of return desired is reduced to 10%.

• The station load is assumed to vary from 95% to 75%

on a yearly cycle.• The station is at 1,000m elevation with a seasonal

temperature variation of 0oC to 30oC.

i l



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• A crude oil pipeline from A to B is 200 kilometer longand is 20” in nominal diameter, with a 0.250” wallthickness. It is constructed of 5LX-70 grade steel pipe.

• At the inject point A, crude oil of 32 API gravity at

15o

C enters the pipeline at an initial flow rate of 18,000m3/d.

• Density: 865.4kg/m3

• Ambient design or operating temperature: 4oC

• Viscosities at 15o

C and 35o

C: 23 cSt and 9.5 cSt• Load factor: 0.9

• Determine the design flow rate.

Base Design Example

S l i B D i E l



• Density at 4oC = 873.2kg/m3

• Viscosity at 4oC = 43.5 cSt

• Temperature adjusted flow rate = 17,839.4 m3/d

• By applying the load factor of 0.9, the average designflow rate = 17,839.4/0.9 = 19,822 m3/d. Use arounded-up valve 20,000m3/d for an average designflow rate.

Solution: Base Design Example

5-Design Elements (1.1)

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