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Proactive Asset Owners Ensure Long-Term ROI

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TA15-15,-OPEX-vs-CAPEXAs far as long-term, stable financial investments go, it’s hard to beat a pipeline.

While the value of product flowing through it will fluctuate from month to month, the pipeline itself will endure as a high-earning investment for as long as it continues to operate. Considering that the average pipeline operates for 50-plus years, it’s no wonder that investors — often infrastructure investment companies — are jumping at the opportunity for a stable return.

In the United States, these infrastructure investment companies are known as master limited partnerships (MLPs). Some MLPs, like Enterprise Products, specialize in pipeline investments, while others, like BlackRock, purchase pipelines as one investment of many in their portfolio.

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No matter how they fit into a company’s portfolio, pipelines are always purchased with the same intent: Generating income for as long as possible. But since many infrastructure investment companies don’t typically have engineers on the payroll, they purchase pipelines as intact operations — relying on the expertise of existing employees, contractors and service companies.

Although the pipeline’s engineers and other operators usually remain the same when an infrastructure investment company purchases a pipeline, key management decisions tend to focus on protecting the asset — an opportunity for experts to aid in pipeline integrity.

Fee-based Decisions

To understand some of the operational decisions behind infrastructure investment company owned pipelines, it’s important to understand the revenue stream of their assets.

By definition, infrastructure investment is in the asset itself — the pipeline — rather than the product flowing through it. As the most efficient form of product transport, a pipeline is an attractive proposition to companies who wish to get their product to market. These product owners therefore pay fees to the pipeline operators (shippers) for the provision of safe, efficient transport of their resources. Beyond the asset value itself, fees are the revenue stream for infrastructure investment company owned pipelines.

In many areas, market liberalization is managed by ensuring that access to these fee-based pipelines is provided for multiple product owners, often encouraged by financial regulation. However, due to the scale of investment required to build the pipelines themselves, it is more difficult to provide a choice of pipeline providers to product owners. As some consider this scenario to be monopolistic, there is a desire to ensure that the operators of fee-based pipelines feel the need to continuously improve the effectiveness and efficiency of their organization and provide best-value to their customers. To encourage this, fees are often regulated.

In assessing fees, regulators will seek to ensure a fair price is paid by both shippers and by final consumers, while providing opportunity for the most progressive pipeline owners. Pipeline performance can impact fee-based decisions, including the manner in which operating expenditures (OPEX) are reduced, even if that necessitates additional upfront capital investment (CAPEX). At the other end of the scale, fees may be set at a level that forces a less efficient operator to drive cost out of its business, if it is to remain viable.

Long-term Investment Means Above-and-Beyond Maintenance

Service companies, in particular, help infrastructure investment companies qualify and quantify risk to their pipeline assets through inline inspections and non-destructive evaluation. In fact, they often establish partnerships to complement an infrastructure investment company’s long-term investment strategy.

One example of this risk-based approach is Nord Stream AG, a consortium of five shareholders that owns two offshore gas pipelines that operate through the Baltic Sea from Russia to Germany.

“Nord Stream’s operating life is 50 years,” says Jean-François Plaziat, the company’s deputy technical director of operational maintenance and engineering. “To achieve that amount of time, our company has developed a long-term pipeline integrity management strategy. Regular pipeline inspections and maintenance works are essential parts of the plan, including annual maintenance of mechanical components and testing of the automation system.”

Inspections and testing allow the company to quantify the risk — and consequences — of potential damage and accidents. And if the potential consequences are too high, then they will spend the requisite funds to prevent them. For example, at Nord Stream, “the main risk of damage is related to third-party impact such as sinking ships,” says Plaziat. Therefore, “the pipeline is continuously monitored by a leak detection system,” ensuring quick emergency response if needed.

An Investment in Improvement

Perhaps the most important difference of operating a pipeline as a long-term investment is that the managing company is likely to pursue integrity assessments and make improvements beyond those required by safety inspectors. Infrastructure investment companies need to completely understand the condition of their pipeline through testing and inspections, and they need trusted partners to help them identify improvements that can enhance the versatility, safety and efficiency of their investment for years to come.

Mike Kirkwood is director of market development related to transmission for T.D. Williamson.

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