DediCATed to Pipeliners |
August 2, 2011 |
Caterpillar Established a Unique
Distribution Model to Serve the Industry
By Bradley Kramer
The transient nature of pipeline construction requires a unique approach to meeting the demands of a unique industry. Location and timing are the tag-team essentials of convenience, and one company has masterminded a distribution system that parallels the ebb and flow of the pipeline industry.
One of the most recognizable brands in construction equipment, Caterpillar has developed an innovative distribution model that is solely focused on pipeline construction.
Through its dedicated global dealer Pipe Line Machinery International, or PLM for short, Caterpillar supplies pipeline contractors with the specialized equipment they need, when they need it and where they need it. In addition to PLM, Cat serves the pipeline industry through its Global Pipeline and Global Petroleum divisions. This three-pronged approach provides pipeliners with a dedicated partner in the completion, operation and maintenance of energy transmission projects.
Cat has been heavily involved with the pipeline industry since the 1950s, when the company acquired the Trackson Co. in 1951, according to Dan Macholan, General Manager of Caterpillar’s Global Pipeline Division. However, Trackson had been building sidebooms for Caterpillar tractors since 1936. After the acquisition, Cat introduced its first purpose-built pipelayer in 1955 with the release of the 583C.
“When you look at the pipeline industry compared to other segments of Cat’s business, it’s a very unique segment,” Macholan says. “I would say four key things that separate the pipeline business are: First, customers are extremely transient and highly mobile. They move and continue to move at rate of about 2 km a day. Second, they rely on purpose-built machinery. Third is they tend to prefer a short-term commitment for the equipment they use. Fourth, the business variability in pipelines is unlike any other sector that I have been involved with at Cat. Addressing these requirements drove us to our unique distribution model.”
The issues that keep Macholan’s customers up at night are the business variability, project mobilization and ensuring that the project meets various environmental and regulatory requirements. Because stakeholder companies have to jump through the hoops of governmental permits in order to get a pipeline approved, project start times and deadlines vary greatly. Contractors must be ready to roll at a moment’s notice.
“When a company finally decides that, yes, they are going to do a project, they tell the pipeliner, ‘We want you there to start in a few weeks,’” Macholan says. “We all know that it takes longer than that to get crews mobilized. It’s almost a gypsy-like requirement of having to roll in and out of a location. They’re basically creating a moving assembly line.”
The difficulty in serving such a mobile industry is that an equipment dealer never really knows where a contractor needs its iron until the pipeline project is announced. The traditional model of having permanent regional dealerships doesn’t suit these roving builders.
In 2005, Cat established its unique distribution approach to the pipeline industry with the creation of PLM, which was comprised of four of the largest and most experienced Caterpillar dealers involved with pipeline equipment, according to Tony Fernandez, Executive Vice President and General Manager of PLM.
“We’re the only Cat dealer that has no geographical boundaries,” Fernandez says. “All other Cat dealers have a specific region for other industries. PLM is the only dealer that has no borders. We’re responsible for the pipeline industry worldwide. PLM has a global territory and serves only one industry.”
PLM started with about nine people from each of the four dealer partners — John Fabick Tractor, Finning, Mustang Machinery Co. and Ring Power Corp. — and opened its head office in Houston. Now PLM has 55 employees with offices in Canada, The Netherlands, Australia, Singapore and China. The specialized dealer started with a rental fleet of approximately 250 machines, which has grown to more than 1,100 machines today, including traditional and purpose-built machines.
The way that Cat’s international pipeline dealer operates is by working closely with regional Caterpillar dealerships worldwide to put together project-based solutions that are specific to each situation, providing equipment and project support.
“This model is unique to other Cat distribution solutions,” Macholan says. “I don’t think it would work with other industries. Most other segments requiring construction machinery don’t move. A mine doesn’t move, a forest doesn’t move and nor does a housing project. PLM is a case of developing a model to meet specific customer needs.
Our traditional regional distribution model wasn’t meeting the needs of our pipeline contractors.”
Caterpillar doesn’t just serve the needs of the contractors involved with building pipelines. Cat also works with stakeholder companies like El Paso, Kinder Morgan, Spectra Pipeline Group, Dominion Pipeline Group and others through its Global Petroleum Division, which provides engines for compressors used in transporting petroleum products through a pipeline.
Working hand-in-hand with project engineers, Cat’s Global Petroleum group helps companies determine what size engine will be needed, based on horsepower, emissions level requirements and the application, according to Wayne Longer, Senior Accounts Manager for the division.
“We work with the pipeline companies to understand their needs and help spec the correct engines for their application,” Longer says. “When the customer is ready to buy, we refer them to our very capable group of packagers who package the engine and compressor into a complete functional unit.”
These gas engines are primarily used in North America to transport natural gas, but Cat provides engines for use in crude oil pipelines overseas as well.
Caterpillar has found success through this multifaceted approach to serving the pipeline industry, from its Global Pipeline Division, which manufactures the purpose-built equipment used in pipeline construction, to PLM, which distributes the equipment to contractors where and when they need it all across the globe, and to the Global Petroleum Division, which supplies stakeholder companies with the engines needed in transporting their product to the marketplace.
The Goods
Caterpillar manufactures a wide range of equipment used in pipeline construction, maintenance and operation. Dedicated pipeline construction machines include track type tractors, hydraulic excavators and pipelayers.
Among Cat’s track type tractors are the D6T, D7E/D7R and D8T, which feature reliable diesel engines with large displacement and a high torque rise. The cabs are ergonomically designed for maximum productivity and comfort.
The controls are intuitive, low-effort and easy to reach, and the viewing area is excellent, with instrument panels that are easy to read and informative. These machines are typically used for clearing and creating the right of way, backfilling the trench, grading and clean-up on pipeline projects.
Excavators include the 320D, 324E, 329E, 336E and 349E, designed with exclusive upper frame swing bearings that are designed for more surface contact for longer life, improved stability and reduction of machine pitching.
Hydraulic excavators are equipped with Product Link, which allows the customer to monitor the machine from a remote location by keeping track of hours of use, location, security and machine health.
Cat’s pipelayer offerings include the PL61, 572R Series 2, 583T and 587T, which feature excellent stability and load-carrying capacity necessary for tough jobs. The hydrostatic drawworks provide precision control for laying pipe in the ground. Lifting capacities range from 20 to 90 tons.
Cat also offers a 953D welding track loader for pipeline welding applications. This machine features a single engine to move the machine, produce electricity, power the air compressor and lifting device. This versatile machine is fast, safe and easy to operate, has large storage compartments for manual and automatic welding and has lifting device options up to 10 metric tons.
These machines are offered through PLM, which is also the exclusive distributor for Vanguard welding modules, wet deck conversion kits, combination tractor kits, as well as the Cranesmart Pipelayer System, which is the first wireless load monitoring indicator (LMI) for pipelayers. These LMI systems are mandatory for all pipelayers sold or rented in Europe and Australia, Fernandez says. PLM also distributes the DeckHand Pipe Handling System by LaValley Industries. The system mounts on a hydraulic excavator and provides precise handling and placement of pipe on the jobsite. PLM has also developed a VP72 40-ton pipelayer for less regulated markets, built from the D7G Series II Caterpillar base model.
Aside from supplying equipment, PLM also provides operator training through ek pass, a customized program tailored toward individual fleets, including classroom and hands-on training. PLM also certifies operators for the DeckHand system as well.
From the Global Petroleum Division, Cat offers large reciprocating gas engines for use in pipeline operations. In North America, the primary use for these engines is to drive compressors for natural gas pipelines large and small.
These engines range from 160 to 8,200 hp and burn natural gas for fuel, according to Longer.
The Demands
The clientele for Caterpillar’s pipeline equipment, developed through its Global Pipeline Division and distributed through PLM, is very specific. The vast majority are mainline pipeline contractors around the globe, Fernandez says, with approximately 60 percent based in North America. Distribution pipeliners also make up a significant portion of the company’s core customers.
These pipeline contractors are very demanding, Macholan says. They want a supplier that knows what they need and when. Caterpillar employs what it calls “voice of the customer” to gather information about industry demands and implements those ideas into new products.
“The average Cat dealer doesn’t see a pipelayer except maybe once every seven years,” Macholan says. “That’s where PLM comes in and provides the expertise and bridges the information gap that a local dealer would not have due to the critical mass of other contractor customer needs.”
Macholan is a 34-year veteran with Caterpillar, working exclusively in the pipeline industry since 2003. In his duties with the Global Pipeline Division, he represents the company with various trade associations.
“My division is charged with the task of translating the voice of the customer requirements into machine capabilities, solutions and supply needs,” he says. “We are the eyes and ears of what our customers need and when.”
As such, Macholan sees three key areas that are becoming increasingly important to pipeline contractors: environmental impact, safety and fleet management.
Contractors are increasingly aware of environmental sustainability, the impact of pipeline construction on land, wildlife and water resources, as well as carbon footprints and reduced emissions, Macholan says. There is increased pressure from various entities for more stringent emissions regulations, which will continue to impact pipeline construction timetables.
“With the issue of environmental sustainability, and this is true of other manufacturers, we have all made significant investments on R&D to meet Tier 4 emissions standards,” Macholan says. “Our customers want to meet those standards and be good stewards of the environment, but it takes time to develop.
“On the other side, how do you use machines? Caterpillar developed its Eco Operator Training, which won IPLOCA’s environmental award last year, where we show operators how to improve fuel efficiency on the job. The results are up to 20 percent fuel savings. There is a direct correlation to 20 percent reduction in CO2 emissions,” Macholan continues. “Just like in your car, you can jackrabbit start or you can ease into it. It’s the same in equipment. We train operators to improve their technique. In one test, we measured a reduction in operator productivity by 5 percent, but there was also reduced fuel consumption by 25 percent. We see our job as helping to provide the lowest operating costs and best efficiency on the jobsite.”
The construction industry in general is entering a new realm, creating a safety culture that requires zero incidences.
“I hear a lot of debate about if zero incidences is even possible,” Macholan says. “My view is whether it’s possible or not, it has to be our goal. Everyone deserves to go home safe.”
Along with environmental concerns and operator safety, efficiency and productivity remain an important factor for contractors. Adapting technology to improve equipment management is vital, Macholan says. Newer technologies can improve accuracy, productivity and cost-efficiency. For example, Cat’s AccuGrade system, which uses GPS to improve accuracy on grading projects, helps reduce costs associated with land surveying and improves worksite safety by programming digging parameters and eliminating the need to have a crewmember in the ditch and in harm’s way.
“Using technology like AccuGrade on our machines can also improve employee satisfaction and retention by reducing stress,” Macholan says. “With the in-cab display, the operator can see his work envelope and the progress he’s making. It also increases equipment versatility. The system gives a record of what’s been done and how the job is going. Fleet managers can see the machine, when it’s working, when it’s not and then redistribute machines as necessary. This technology differs in how it could be adapted for a pipeline contractor because of their mobility, but we’re working to overcome those obstacles and provide a product that improves efficiency and reduces costs.”
These same concerns are driving the improvements Cat’s Global Petroleum Division has made in the development of new reciprocating engines.
“What we have been driven by in large part is customer needs, but also emissions standards,” Longer says. “The U.S. government has provided a timeline and requirements for how low emissions levels must be to sell to the marketplace. Ultimately, to meet the market needs, we must design and build the most durable engines with the lowest possible emissions. In doing this, we will satisfy the customers’ requirements for up-time and durability.”
In the process of introducing new products, Longer says the company searches out customer and environmental needs to develop the technology that goes into a new engine. Once a new engine is designed and built, the Global Petroleum group performs what is called a “field follow,” where the company works with specific customers to operate the new engines so they can monitor and gather performance information in the field. This information is then used to make any necessary changes to further develop the product to be released to the whole industry.
The Delivery
Manufacturing equipment that meets the demands of the pipeline industry means nothing if you can’t get the machines onto a contractor’s jobsite. PLM is Caterpillar’s medium for delivering its iron to end-users around the world.
PLM is a Cat dealer, but it operates without being tied down to a specific region like traditional equipment dealerships. But why have such an industry-specific distribution channel?
“It was primarily to strengthen Cat’s organizational and distribution channel to mainline pipeline customers by focusing our efforts 100 percent to this sector,” Fernandez explains. “Pipeliners are transient and highly mobile. For the most part, they rely on key suppliers that follow them from project to project. These contractors rely on high-quality products and demand single-point accountability from suppliers. The sporadic nature and volume of pipeline construction prohibited a single dealer from dedicating itself to this industry successfully.
Being a dealership, you’re constrained to a geographic area, where PLM is not. Nobody was totally focused on the pipeline industry before.”
If a customer is awarded a pipeline project in Nebraska, for example, PLM contacts the local Cat dealer in the region and works with them to supply all the equipment to the contractor, providing the necessary machinery and product support.
Currently, Fernandez says contractors tend to rent equipment as opposed to purchasing, but that wasn’t always the case.
“It’s changing right now,” he says. “The project backlog that customers were experiencing from 2006 to 2009, the tendency was to buy equipment through various lease options offered by Cat Financial. Contractors had a large backlog of projects, and that’s not typical for the industry, so at the time it made more financial sense to purchase the equipment. Currently, the tendency is to rent equipment month-to-month with a purchase option. They’re getting back to normal, but they don’t know what they’re doing for next three months.”
Having the correct fleet of pipeline equipment is essential to serving mainline contractors.
“Most of this equipment you don’t find on other Cat dealer lots,” Fernandez says. “Our equipment is specific to the pipeline industry, which sets us apart from our competition and the local Cat dealers. One of most important things to these guys is product support. Down time is crucial. It’s very important to have the right parts to get a machine back up and running. Time is money in this industry.”
The Partner
Participation in trade associations is an essential piece of Caterpillar’s business. Through these associations, the company gains insight into its pipeline customers’ mutual interests and needs, providing a forum for sharing ideas, engaging the industry and its stakeholders, facilitating business opportunities and promoting the highest standards in the pipeline industry.
Caterpillar is involved with many trade organizations, such as the International Pipeline & Offshore Contractors Association (IPLOCA), the Interstate Natural Gas Association of America (INGAA), the Distribution Contractors Association (DCA), the American Pipeline Contractors Association (APCA), the Pipe Line Contractors Association of Canada (PLCAC) and the Pipe Line Contractors Association (PLCA), just to name a few. It’s at these association meetings and conventions that Cat gathers its “voice of the customer” information, Longer says. The company not only shows its products and meets with customers, but it also participates on committees, helps fund industry projects and provides training.
“Participating with the trade associations is a very important aspect of our business,” Longer says. “We gain knowledge, interact with key industry personnel and share the latest advancements in Caterpillar engine technology.”
Through the associations, Caterpillar can also track industry trends to see where infrastructure demands might lead their customers.
“The pipeline industry is back on a little bit of a growth spurt,” Macholan says. “It’s not at the levels seen in 2008, when it peaked, but the market is steadying in 2011 and 2012. We’re seeing rapid growth in the development of shale plays, which has affected some longer term outlooks and resulted in some of the slowdown on some of the larger projects.”
Shale activity in the United States, with the Marcellus and Eagle Ford formations, has kept PLM busy, says Fernandez, adding that he expects natural gas production from shale to double over the next five years with a 10 to 11 percent increase in consumption over the next 10 years, mostly through electric power generation.
“This year has been surprisingly very good,” Fernandez says. “Large pipelines have slowed down a bit, but overseas it’s very active, especially in Australia and Latin America.”
Although a current trend in North America shows increased small diameter work to connect to the large mainlines built over the last five years, Macholan insists there will still be some big-inch projects in the near future, such as with TransCanada’s Keystone XL project and pipelines to transport natural gas and crude oil from Alaska and Canada.
“Eventually, I think we’re going to see a pipeline built to the West Coast to take oil off to China and other countries,” he adds. “It only makes sense.”
Shale continues to be a hot topic in the pipeline industry, as Macholan says natural gas is seen as a bridging fuel.
“We’ll see steady growth in the need for clean burning, abundant natural gas,” he says. “It makes too much sense to leverage our own resources [in the United States], whether for electricity, as the majority of the generators built in the last few years have been natural gas burning. It’s becoming harder and harder to get approval for a coal fired plant, and even nuclear energy projects, with the recent incidents in Japan, are having a harder time getting approved. That bodes well for natural gas. There will be a need to build infrastructure to get natural gas supplies to new markets.”
Internationally, Macholan sees opportunities for pipeline contractors in Asia and northern Europe. Countries like Russia, China, India and Indonesia are driving the market for energy infrastructure. Additionally, Fernandez says Australia and Latin America have been strong sources of business in recent years, forecasting 14,000 km of pipeline projects in Latin America over the next four years.
Although the pipeline industry faces a number of challenges, such as meeting emissions requirements and navigating possible restrictions to production processes like hydraulic fracturing to extract natural gas from shale formations, pipeline construction continues to provide a viable market.
“Pipelines remain the most efficient means for the transportation of energy,” Macholan says. “They are the most economic and most environmentally responsible means. That, as well as the need to replace aging infrastructure, will continue to drive the pipeline market cycle for the foreseeable future.”
Bradley Kramer is Associate Editor of North American Oil & Gas Pipelines. Contact him at bkramer@benjaminmedia.com.