LOGISTICS MANAGEMENT ASPECTS OF PLANNING,

Corporate Ownership & Control / Volume 8, Issue 1, Fall 2010, Continued - 4LOGISTICS MANAGEMENT ASPECTS OF PLANNING,IMPLEMENTING AND CONTROLLING COMMERCIALPETROLEUM PIPELINE OPERATIONSWJ Pienaar*AbstractThe purpose of the article is to identify, assess and describe the logistics aspects of the commercial operationof petroleum pipelines. A synthesis is provided of the nature of 11 logistics activities of petroleum pipelineoperations. The relative modal service performance of pipeline transport, based on six measures ofeffectiveness, is also provided. The article identifies the segments in the petroleum-products supply chainwhere pipelines can play an efficient and effective role.Keywords: effectiveness, efficiency, logistics, petroleum, pipeline, supply chain*Stellenbosch University, Department of Logistics, Private Bag X1, Matieland 7602, South AfricaTel: 27 21 808 2251, Fax: 27 21 808 3406e-mail: wpienaar@sun.ac.zaIntroductionWith a mounting supply crisis resulting from capacityconstraints of existing rail transport operators,petroleum pipelines and refineries, petroleummarketers in several countries are compelled to importpetroleum products and transport them by road to theirmarkets. This is more expensive than pipelinetransport, places pressure on road infrastructurecapacity and increases the danger of carryingpetroleum products by road.Against the background of, firstly, the volatilityin the international price of crude oil, secondly, theapparent inability to stabilise the political andeconomic climate in some of the largest oil-producingregions and, thirdly, the growing demand forpetroleum products in large emerging industrialcountries (for example, China and India) and in largedeveloped industrial countries (for example, theUnited States and Japan), it is imperative that thelogistics-management aspects of petroleum-productsupply chains be arranged as safely, efficiently andeffectively as possible.The Council of Supply Chain ManagementProfessionals (CSCMP) defines logistics managementas that part of supply-chain management that plans,implements and controls the efficient, effectiveforward and reverse flow and storage of goods,services and related information between the point oforigin and the point consumption in order to meetcustomers‘ requirements (Council of Supply ChainManagement Professionals, 2010).The content of the article follows the order of thisdefinition. The scope of supply chain management interms of how it relates to petroleum pipelineoperations is addressed in the following section of thisarticle (‗Petroleum-product supply chains‘). Thelogistics activities in the supply chain of petroleumproducts involving pipeline operations, which need tobe planned, implemented and controlled, arediscussed in the third section (‗Logistics activities‘).The fourth section addresses the relative modalefficiency of pipeline transport (‗Relative efficiency ofpipeline operations‘). The fifth section is devoted tothe service effectiveness needed to meet customers‟requirements (‗Logistics service effectiveness‘). Theconclusions of the work are contained in the sixthsection.The research approach combines a literaturesurvey, an analysis of the cost structure of largecommercial petroleum pipeline operators, andinterviews conducted with specialists in the petroleumrefining and pipeline transport industries. The authorhad access to confidential cost details and forecasts ofthe operations of existing and envisaged commercialpetroleum pipelines. In this article the results of thesecost analyses are described qualitatively.Petroleum-Product Supply ChainsOverviewThe point of origin of the supply chain of a product iswhere no primary suppliers exist. All suppliers to thepoint-of-origin members are solely supportingmembers. The point of consumption is where nofurther value is added to a product and it is consumedor used without serving as an input to another supplychain (Porter, 1984). An organisational or institutionalarrangement o s are used to sidetrackand consolidate crude oil in transit temporarily forbatching, measuring, rerouting or holding duringpipeline repairs. At the pipeline terminal, the variouscrude-oil shipments are again segregated into tanksfor delivery to other pipelines, refineries or seaports.In petroleum-importing countries large oilterminals are located at selected seaports of entry.Ocean-faring ships do not observe strict schedules,and irregular arrivals occur for a variety of reasons.Some days, no ships will arrive, whereas on othersseveral crude-oil-carrying ships may arrive together.Refineries kilometres away may be working at asteady pace. The pipelines themselves vary in size.Pipes with a large diameter are used to unload shipsrapidly and transport the crude oil to the tank farms atthe seaports. On the exit side of the tank farms,450

Corporate Ownership & Control / Volume 8, Issue 1, Fall 2010, Continued - 4smaller-capacity pipes distribute the crude oil in asteady stream to the refineries. Supplies for therefineries must be available even at times when shipsdo not come in or reception otherwise does not takeplace. Conversely, when several ships arrivesimultaneously the terminal must have sufficientbuffer storage capacity to unload the ships and turnthem around.Inventory managementInventory management is a critical issue. The needs ofboth the manufacturing and marketing functions haveto be met continuously. However, large volumes ofinventory occupy capital-intensive warehouse space;furthermore, possession of the inventory itself drainsfinancial resources. The cost of warehouse space andthe value of the inventory both have an opportunitycost. Consequently, an optimal trade-off must bereached between this opportunity cost and the harmfuleffects that would result from a stockout situation.Sophisticated computer monitoring of facilitiescombined with insignificant environmental influencemean minimal loss and damage to inventory (forinstance, leaks can be quickly detected) and veryreliable delivery schedules. The only negativecharacteristic is the slow service, which, ironically,has positive implications: the high accuracy andreliability of forecasted delivery times diminish theneed for safety stock at the receiving end; and, inessence, pipelines offer free storage for as long as theorder is on the way to delivery (Papacostas &Prevedouros, 2001).Order processingOrder processing encompasses the activitiesassociated with filling customers‘ orders. Theseinclude: transmitting order details to the sales section; verifying consumers‘ creditworthiness; transmitting the consignment‘s requiredpackaging details to inventory-control stafffor delivery to the dispatch section; preparation of the shipment documentation;and communicating the order status, method ofpayment and delivery details to customers.The key to efficient pipeline operations isscheduling. This requires programming each shipmentfrom origin to destination within the trunk pipeline sothat the entire stream moves smoothly and at a desiredrate all the time. For this purpose, schedulers canvassall potential shippers for their supplies, sales,purchases and requirements. They then develop themonthly pipeline pumping rates, and apportioncapacity among shippers if more crude is tenderedthan the pipeline can carry (Trench & Miesner, 2006).Logistics communicationSuccessful logistics usually requires the effectivemanagement of information and communicationssystems. Effective communication must take placebetween (a) the firm and its customers, (b) the firmand its suppliers, (c) the major functional componentsof the firm — for example, marketing, manufacturingand logistics, (d) the various logistics activities, suchas procurement, warehousing, order processing,inventory control and transport, and (e) the variouscomponents of each logistics activity. Accurate andtimely communication is the cornerstone ofsuccessfully integrated and coordinated logisticsmanagement.In addition to the physical features - pipe, pumps,and tanks - the pipeline's basic design includes controlcentres utilising modern computer systems,communications equipment, and other electroniccontrol mechanisms. Linking the system cation, these controls maintain a high degreeof automation, cost and time savings, and built-insafeguards. Collectively these technologies permit afew people in a central location to continuously keepthe entire system operating safely, efficiently andeffectively. These technologies also permit rapid andaccurate pipeline patchers) using computers remotely control thepumps and other aspects of pipeline operations.Pipeline control rooms utilise Supervisory Controland Data Acquisition (SCADA) systems that returnreal-time information about the rate of flow, thepressure, the speed, and also other information that isimportant to product quality maintenance, forexample, the specific gravity, the flash point, thetemperature and the density of the commodity beingpumped. Operations control staff, utilising diagnosticcomputer aids, monitor and evaluate the informationcontinuously throughout a year to ensure anuninterrupted and desired commodity flow rate(Allegro Energy Group, 2001).TransportIn its simplest form, pipeline transport takes place bypumping a commodity through a pipe from an originwhere the commodity is in surplus to a destinationwhere it is needed.A consignment of crude oil through a pipeline inan oil-producing area usually follows this process: itis pumped out of an oil well or bore-hole intoseparator tanks, where natural gas is diverted toanother system. The crude oil then flows into heattreaters, where water and sediments are removed, andthen into ‗lease tanks‘, where it is held until therequired volume is ready for delivery to the pipelinegathering system (Leonard, 1982).When a shipper‘s crude oil enters the trunk line,it joins other shippers‘ crude oil. The various crudeoil volumes are batched according to grade. Thepipeline operator delivers approximately the samequantity of comparable oil to the destination asreceived from the producer. Equal grades of crude oil451

Corporate Ownership & Control / Volume 8, Issue 1, Fall 2010, Continued - 4are ‗fungible‘, which means that a given volume forone shipment may be substituted for the same volumefrom any other shipment.Even when different grades of oil are to bebatched, a continuous flow is maintained with verylittle mixing. Depending on the material, the intermixoil at the interface is put in a tank of the lower-valuedgrade. State-of-the-art pipeline pigs, which areequipped with remote sensing devices, can be used,firstly, to help separate consecutive batches withunusual qualities that cannot be mixed (therebyreducing commodity intermixing and dilution);secondly, to clean a pipe‘s wall (thereby keeping theentire volume of the pipe available to accommodatepayload and keeping the wall smooth, which enhancescommodity flow); and, thirdly, to detect at an earlystage the formation of flaws and wear (therebyavoiding potential costly repairs and loss of incomethrough downtime). Lately, there has been atechnological development in processing the intermixthat develops between consecutive batches. Pipelineoperators can now install refractionators at majorpump stations to re-refine the intermixed fuel backinto its constituent products (e.g. petrol of a certaingrade and diesel), which obviates the need to blendthe mixture into a following batch (NERSA, 2007).Dispatchers control the operations of the entiretrunk pipeline system from a single control room.They can start, accelerate, decelerate and stop pumpactivity at stations hundreds of kilometres away, andmonitor pressures, flow rates and density. Dispatchersare able to switch streams from one delivery point toanother.Reverse logisticsThe handling of return goods is an integral part of thelogistics process. Cust

logistics-management aspects of petroleum-product supply chains be arranged as safely, efficiently and effectively as possible. The Council of Supply Chain Management Professionals (CSCMP) defines logistics management as that part of supply-chain management tha