Proper Pipeline Valuation Requires Specialized Appraisal

Article featured in the May, 2010 issue

By David Howell, Senior Right-Of-Way Agent, International Right-Of-Way Association, Managing Partner, Pipeline Equities

The appraisal of pipelines is a niche industry, requiring specialized methods to properly determine valuation. These methods combine both a pipe liner's view of the pipe and the right-of-way in which it rests as well as traditional appraisal or asset valuation methodology.

Most appraisals, even regarding pipelines, are real estate appraisals. Trained easement or real estate appraisers essentially measure the value of a pipeline according to the value of the right-of-way. This value in turn is based on the value of neighboring land. Though important, however, this is a small part of the overall picture when appraising a pipeline.

Appraisals known as asset valuations establish value for a piece of property, inventory, or business and are more easily adjusted to accurately reflect the needs of the petroleum pipeline industry. The need for pipeline-specific appraisals emerged following discovery of the overvaluation of pipelines by local taxing authorities as well as overvaluation and undervaluation of pipelines in mergers, acquisitions, and estate settlements.

Valuation reports concerning active or inactive petroleum pipelines may be needed for pipeline purchases or sales, estate settlements, termination of partnerships and division of assets, determining salvage value, readjusting local jurisdictional taxes, and establishing value for general accounting purposes. The general methods of appraisal for pipelines have some real estate methods in common such as comparative sales analysis, cash flow, and replacement cost, but others unique to the pipeline industry.

Case Study
A customer had a contract to supply jet fuel via pipeline to a municipal airport being supplied by tanker. It planned to lay a 6-mile pipeline from a refinery source of jet fuel to an airport to replace daily trucking. The new line was to go to a new fuel tank terminal built at the airport (Fig. 1). From the storage facility, trucks would transport fuel directly to planes for refueling (Fig. 2).

Fig. 1 - A new 6-mile pipeline supplies jet fuel to the new fuel tank terminal at a municipal airport in the appraisal described in this article.

The customer's bank agent said construction would be ready to start shortly and the bank needed an appraisal to satisfy their requirements for a pipeline construction loan. The appraisal was to be made based on the plans of the yet-to-be-built pipeline. All parties agreed, settled on a fee, and signed a letter of engagement. The letter explained that the appraisal company would be working for the bank, and the bank, rather than the pipeline company client, would be responsible for payment and expenses.

The appraisal company collected plans for the pipeline along with other documents regarding financial information for the project. It also obtained blueprints for building the pipeline, right-of-way contract documents, a contract to buy the product (in this case jet fuel from a refinery), and a contract to sell the product, in this case at a municipal airport.

A meeting with the principal of the pipeline company client who had put the deal together followed review of these documents. Over the course of a meeting lasting a few hours, the appraiser requested any data about the project as well as personal information about the principal. The principal provided a comprehensive resume of his experience in the pipeline industry, later verified through others who had worked with him and knew his management style and abilities.

The meeting then moved to the contracts section. The appraiser was interested in the demand side and how revenue would flow. The purchase contracts showed a 10-year agreement with the airport to supply jet fuel from the pipeline company with an escalation clause and renewal opportunity at the end of term. The bank loan would be repaid in 3 years under the existing cash flow proposal. The airport and its municipal owner would save 32% vs. trucking rates.

A survey trip to the site allowed photographs of the source, the right-of- way, and the terminal area where the city had built fuel storage tanks in anticipation of the pipeline construction at the airport terminal. Aerial photographs of the route and driving the easement in a four-wheeler prOVided additional perspectives. The contractor had produced alignment sheets showing the exact path of the pipeline. The client had mapped the right-of-way away from heavily congested areas like schools and subdivisions to avoid the sort of controversy that can kill or delay projects indefinitely.

Regular shipments of 30-40 tanker trucks per day were supplying jet fuel to the airport, and the client had seen economics existed to build a profitable pipeline and provide a reliable source of transportation while saving a considerable amount of money for the city's airport. Two refineries side-by-side and only 6 miles away from the market assured the source of supply. The pipeline company had secured contracts to buy jet fuel in equal quantities from both suppliers. On the demand side, airport traffic was growing, and the surrounding area had a good base of growing customers from tourism as well as government and private industry. The client had secured a 10-year contract to supply the airport with needed jet fuel.

Fig. 2 - From the on site storage facility the jet fuel is transported by truck directly to the aircraft. Trucks used to transport the fuel between the refinery and the airport as well.

Demographics looked good as the airport and the area it served had a history of sustained growth. The management team in the front office and the field looked good. The operations plan was unique in the way it was outsourced for the sake of economics and simply because a large company-based staff was not necessary. The pipeline company principal was interested in building the pipeline as economically as possible to payoff the loan quickly.

This pipeline client had found a niche market in an under-served segment larger pipeline companies had not chosen to pursue due to its scale. But this pipeliner could own a pipeline free-and-clear and his bank could get its money back in a 3-year period. Completing the appraisal and delivering several hard copies to the bank and the client preceded quick loan approval. The pipeline is now complete and operational.

Appraisal Methods
The primary method of appraisal was the construction cost, new or replacement cost approach. This method is based on the cost (amount spent to construct or improve) of building a new or similar pipeline using the same materials and the same methods and amounts for payment of easements, damages and construction, etc. This approach can also work back to depreciate new replacement cost on an annual basis projected to the life of the pipeline to determine the value of a vintage pipeline in today's market. Depreciation or devaluing of this pipeline was not necessary, the current value as a new entity instead being sought. The total amount calculated for the cost of new construction accounted for about 50% of the pipeline's determined value.

The appraiser also applied a variation of the real estate income capitalization, approach by which the annual income stream based on gross revenue net of operating expense is multiplied by factors of 5' to 12 depending on potential for revenue increases through tariff or volume additions. This method also works in valuing oil and gas royalties or mineral interests.

Many correlations exist between the value of a pipeline in the ground and mineral interests. Pipelines have an indefinite life and seemingly new applications are being introduced for their use just as technology continues to expand and enhance the value of mineral interests.

If revenue produced is $100,000 1 year after operating expense, this appraisal approach would calculate 5 to 12 times this number and weigh it in as 50% of the overall value. The degree of multiplier depends on the value of the factors used and their weight.

The comparison sales approach, which realtors use by comparing houses in a subdivision based on number of bedrooms and size of lot and number sold in the last 12 months, could not be used. Nor could real estate acreage sales. The real estate factor in easements is generally not more than 5-7% of the overall cost of laying the pipeline.

Book value of the asset by the seller is only important to the seller. It is not a viable approach or method to determine or assign value. Even though a potential purchaser would care less at what value the seller carried the asset on his book, the book value could have a bearing on the seller and his willingness to sell.

Highest and best use is a principle with its roots in real estate and wants to state simply that a parking lot might be best used for a strip shopping center instead. The best use for a pipeline might be a variation of pipeline usage by converting it to electric cable conduit, water or sewage transportation, or reversing Dow as an oil, product, or gas transmission line, or increasing it's size and utility via replacement. It, however, remains a pipeline.

Value Factors
The pipeline appraisal industry uses more than 40 different factors for determining value in a pipeline beyond the basic appraisal approach methods. These subdivisions of appraisal range from pipe WT and the date of its installation to the types of chemicals being transported. Factors used in calculating the value of the jet fuel pipeline included:

• Availability of supply and multiple suppliers. With two refineries side-by-side the pipeline company could take equal amounts from each or increase from one or the other in times of higher demand or in case of unforeseen occurrences, a factor in appraising the pipeline's value. The proximity of supply was also important, the refineries being only 6 miles away.
• Contracts on the purchase side for 10 years and on the sales side for the same period locked in value.
• Management in the front office and field office showed experience, flexibility, and economy in their approach to problem solving.
• Demand. Steady growth had occurred historically, and demographics showed the promise of continued and steady future growth in the areas of industrial, governmental and tourist driven demand.
• The terrain, geography, and weather in the construction area added to the value, the climate being mild and mostly sunny with low rainfall. The pipeline was to be constructed along existing highway and railroad corridors at minimal right-of-way acquisition costs.
• Product volume transported is also an appraisal method (income) bearing consideration.
• Financing methods and terms stood as positive factors in this case.
• The uniqueness of the product transported (jet fuel) discouraged competition.
• High-strength but compact 6.625-in. OD pipe was economical while at the same time accommodating long-term growth in volumes. The appraisal company spent 2 days on site and 67 hrs interviewing participants, reading contracts, interpreting notes. studying photographs and maps, reviewing demographic information, and writing the report.

For more information contact davidhowell@pipelineequities.com.

What Is The Value Of Your Pipeline? Pipeline & Gas Journal

Article featured in the May 2010 issue

By David Howell, Senior Right-Of-Way Agent, International Right-Of-Way Association, Managing Partner, Pipeline Equities

Placing a value on a pipeline is a specialized process. The combination of methods used to determine the value of a pipeline or gathering system is unlike any other type of appraisal. Furthermore, no two pipelines are precisely the same. The unique methods described here are based on several years of observing the way a pipeline owner looks at a pipeline and the right-of-way in which it rests.

When placing a value on a proposed or existing pipeline system, several factors are considered by the author beyond the "across-the-fence" (ATF) method. The ATF method - used by many to assign a value to a pipeline right-of-way (ROW) - assumes that the ROW is worth whatever the surrounding land is worth. The ROW is tIle real estate where the pipeline lays. It is one of the factors in appraisal of the entire system.

The author saw the need to find or devise appraisal methods that are suited specifically to the pipeline industry when he was asked to put a value on pipeline salvage jobs. Among owners, the need for a fair pipeline appraisal methodology arose when it was discovered that pipelines were being overvalued by local taxing authorities and were being overvalued or undervalued during mergers, acquisitions and estate settlements. A valuation report concerning an active or inactive oil, gas, or product pipeline may be needed for one or more of the following reasons:

• Preparing for a sale or divestiture.
• Readjusting state, local, ad-valorem taxes/tax assessments.
• Estate settlement.
• Partnership termination.
• Preparing for a purchase or acquisition.
• Determining salvage value.
• Preparing for pipeline use conversion.
• Establishing value for accurate accounting.

Appraisal Methods
The author's company uses a combination of methods to determine the value of a pipeline. We have found that value is a quantification of the interaction of demand for the property, utility of the property, the scarcity or supply of the property and the ease of transferability of ownership rights to the property.

Market Analysis.
The method utilizes sales histories of comparable entities. This works well for valuing land and ho using, but each pipeline is so different that a method of comparable sales is not so useful. Because land and housing are plentiful, making commodities of land or houses is much easier than making commodities of pipelines. However, this method is still useful to get an overview of pipeline value by looking at sales histories of comparable pipelines ill varying circumstances and locales. One may make broad comparisons such as urban vs. rural , California vs. Mississippi, gas vs. crude, or regulated vs. non-regulated pipelines.

Highest and Best Use.
This is mostly a real estate valuation term; however, on the occasion when a pipeline is being valued for usage change, this method can be useful to establish the value of the existing pipe line and the cost of converting it for another use. Pipelines can be converted from a crude product pipeline to fiber optic conduit or a conduit for electric power lines extending from a wind farm's electric grid center. For the most part, pipelines are best used for the intent constructed. It is best to combine this highest-and-best valuation with some of the 40 pipeline valuation factors such as size of line, geography, terrain or ROW values. For example, the highest and best use for a 6-inch gas line might be to change it out for a 10-inch crude line using toe same ROW, if the contract permits such replacement. Ultimately, the highest and best use is that which is most likely to bring the highest net return over time.

Seller Determined Need Or Book Value.
This method is used if the seller wants to record financial gain or loss from a sale using book value. Ir is not much use to a purchaser since it has no relevance to current worth. The book value might be generated by the accounting of the seller/owner of the property, in whatever means the company accounting might use to determine the book value. It might be based 0 11 a valuation method such as construction cost- new and discounted, for example, but generally this book value designation by the seller has no relevance to the value of the pipeline as far as the purchaser is concerned.

Income Base Or Cash Flow.
This method is a popular means of establishing value for pipelines if they are generating or will generate a predictable cash flow. This method takes into account forecast income based on throughput volumes and transportation rates of the commodity transported. Expenses based on the historical or projected income stream are discounted. Another variation of this method uses multiples of current cash flow where the average annual cash flow is multiplied by a factor of five to 12. This can be done on annual or monthly basis much like values of oil and gas royalties are determined. Many like to correlate pipeline values to oil and gas mineral interests regarding value. Both can have an indefinite life and both can be reborn as new drilling or new discoveries are made in an area served by the line. These additional income streams can be discounted to find a present day value or in some cases when using future mUltiples of income. For example, the future income after operating expenses of a gas pipeline might be $200,000 per year. A reasonable value might be five times that amount or $1,000,000. A buyer might determine that the net present value in dollars paid today might be 20% less than the $1,000.000 or $800,000 in today's dollars. Present value is the term used when discounting future income to a present value or the value of a future income to a present rate.

Construction Cost-New.
This is the cost of rebuilding the same pipeline in the same size, same manner and in the same (or comparable) easement. This is an important factor in placing value on a pipeline to be considered by a purchaser. This approach also can be discounted. For example, a pipe line that has been operating for 10 years after it was initially installed might have an expected life of 40 years. It could be discounted 2.5% per year of life or a total of 25% off the cost of new construction in today's market. This discussion is based on straight line depreciation which is common and prevalent in the industry.

Value Determination Factors
In addition to the appraisal methods, several factors must be considered when assigning value to a pipeline. The author's firm uses as many as 40 factors to make value determinations regarding pipelines. These factors cover the more technical aspects of business, physical, property and commodity value. Some of these might include:

• Business Value
  1. Throughput value transportation (income)
  2. Supply (other pipeline availability in arealscarcity)
  3. Demand (potential buyers and users)
  4. Potential for additional uses or more customers for product transported
  5. Sales contracts or purchase guarantees (terms and length)
  6. Management (front office and field)
• Physical Pipeline Attributes
  1. Date of installation (vintage)
  2. Type of installation
  3. Appearance of pipe
  4. Method of construction
  5. Salvage value after termination of usage
  6. Type of system (oil, gas product, jet fuel)
  7. Size of pipe in pipeline (specifications)
  8. Interconnects (with other pipelines or supply sources)
  9. Amount of cover on pipeline
  10. Pipe protection (coatings)
  11. Cathodic protection
  12. Type of system (trunk, gathering)
  13. Records availability (a lignment sheets, maintenance records)
• Property Value
  1. Right-of-way-agreements (basic contracts)
  2. Geography/terrain
  3. Maintenance records
  4. Appearance
  5. Surface inventory (including appurtenances)
  6. Condition of equipment (scrubbers, compressors)
  7. Congestion (urban or rural locale)
• Commodity Value
  1. Market price of commodity transported
  2. Product source (well depths, reservoirs)
  3. Chemical content of product transported (gas liquids, corrosives)
  4. Proximity to markets
  5. Diversity of suppliers
  6. Diversity of markets
• Other factors depend on whether product in the pipe is purchased at the wellhead and resold; whether and to what extent the product is compressed enhanced, treated, cleaned. or processed; and by what procedures is it compressed, enhanced, treated, cleaned or processed.

Recent Appraisal Projects
The author's firm has had several recent opportunities to appraise pipelines for. a variety of purposes.

Pipeline Rehabilitation Appraisal.
A vintage crude pipeline in a mature field on the West Coast recently was appraised. The line had been active in the past and later idled. The operator had intentions of rehabilitation and reactivation of the line and needed a fresh appraisal to help determine transport fees or tariffs as a common carrier. It was necessary to estimate the new construction price as well as depreciation and account for rehabilitation costs. We found the appreciation of the right-of-way costs in the heavily congested area more than made up for any deficiency in depreciated new construction costs.

Construction Financing Appraisal.
A bank contacted Pipeline Equities to obtain an appraised value for a pipeline to be built that would transport jet fuel to an airport. The bank wanted to know the value of the proposed pipeline before financing the construction cost. In place were the contract (long term), a firm bid for construction (construction cost new), and competent experienced management.

Pipeline Divestiture Appraisal.
A hedge fund decided to exit the pipeline business and sought Pipeline Equities for an appraisal of hundreds of miles of their active and inactive gathering and transmission pipelines. They needed to determine the value of the pipeline network in order to divide interests among investors. Pipeline Equities was able to use multiple methods including salvage to arrived at an equitable value to which all parties agreed. Many of the gathering lines had no discernible easement by which a ROW only method like the across-the-fence method could be used.

Appraisal For Taxing Authorities.
The company has seen many instances where a pipeline or gathering system was built for a new field with flush production and the field now is nearing depletion. Nevertheless, the operators still must pay regular taxes where applicable according to earlier throughput or initial values which were generally not depreciated. Local and state taxing authorities want up-to-date appraisals if they are to lower rates. Many local tax appraisers use only construction cost-new method (the cost of replicating the pipeline today) with no regard for throughput generally via abbreviated Marshal find Swift formulas. Ultimately, the appraiser can only offer an opinion based on data available and market conditions. When it is all completed. the value is based on what the seller will take and what the buyer will give for a property. For a complimentary copy of the Pipeline Recovery Manual, contact the author. P&GJ

The appraisal of pipeline is a niche industry – overshadowed by those who are appraisers of right of way for the purpose of paying damages to landowner or acquiring new right of way. Many in the business are appraising for acquisition puroposes and many times for government entities such as highways. The methods are different. One is the way a land appraiser looks at land the other is the way a pipe liner looks at a pipeline and the right of way it rests in.

For more information contact davidhowell@pipelineequities.com.

Factors and Methods for Determining Pipeline Value

By David Howell, Senior Right-Of-Way Agent, International Right-Of-Way Association, Managing Partner, Pipeline Equities

Most appraisers use basic real estate methods for finding the worth of an easement of any kind. They value right of way based on acquisition or relocation methods. Many of these methods are based on values of real estate next door or "across the fence" also known as ATF method. Very few appraise the value of a pipeline or anything else within that right of way. Sometimes they value land up and down around the easement which might affect surrounding values. In other words, easements can affect surrounding land values, but surrounding land values don’t affect pipeline right of way values. This is my opinion.

Pipeline Equities saw the need to find a method of appraisal to value pipelines in addition to the right of way and produced a methodology to remedy the lack of knowledge within the industry.

Why Appraise a Pipeline?
These are some of the basic reasons for a valuation report on an active or inactive pipeline:

1. Preparation for a sale or divestiture
2. Readjustment of state, local, school, or ad-valorem taxes/tax assessments
3. To settle an estate because of a death, divorce, etc.
4. Establish values to settle or dissolve a partnership
5. To determine value of an asset within any entity
6. To determine salvage value
7. Preparation for purchase or acquisition
8. Determine a basis for establishing tariffs or transport cost

Methods of Appraisal
To come to a value, Pipeline Equities uses the methods of market analysis or comparison of sales with other like products, income approach based on revenue, and asset based or cost basis. These are the big three in the real estate world. But also in the pipeline world, we use a method variation called reconstruction cost new or depreciated reconstruction new. We have found that in the pipeline industry, the methods are expanded somewhat to reflect the nature and peculiarities of the industry. In addition the pipeline appraisers or those determining value for a pipeline use a method called the multiple approach which uses a multiple of the current year's cash flow. This can be projected based on anticipated volumes to determine values. Sometimes a highest and best use can be determined by an alternate usage for the pipeline or right of way. In addition, book values can be calculated by the sellers to determine cost bases. Each can be employed if the occasion calls or a combination of all can be used. In the case of local distribution companies, an addition means is used for calculating value that is based on the value for each customer and what it costs to obtain and keep this customer.

DUST: the factors that create value
We have found that value occurs with the interaction of D) demand for product, U) utility of product, S) scarcity or supply, and T) transferability of ownership rights.

To have value, these factors must exist or there is no value attached. There must be someone who wants it, there must be a use for it, there must be a finite or limited supply and there must exist some way to transfer the ownership of the product or entity. Value occurs with the interaction of these factors.

Factors for Determining Value
In the methods for determining value, we discussed the various approaches used by real estate appraisers as well as right of way appraisers. I included exceptions that are used exclusively by the oil, gas and product pipeline industry.

Other exceptions and inclusions are the more than forty factors use to determine value in the pipeline business to make determinations of value. These factors deal with more technical aspects pertaining to those broader areas of demand, utility, scarcity, and transferability.

They include:

• Throughput value ( transportation)
  This method can be used to value based on revenue and can be incorporated into a multiple approach, net revenue approach, or forms of discounted cash flow (income).
• Depth of coverage of pipe
  Depth of pipe or coverage is often associated with age. Often age and condition can be somewhat ascertained when depth is known and date of installation is not
• Right of Way agreements
  Right of way agreements tell much about value. It is basically the legal instrument that determines the conditions by which a pipeline can be laid, width of right of way, maintenance conditions, repair conditions, term of contract, disposition of assets on termination of usage or term in contract, etc, etc..
• Replacement Value (asset)
  The replacement or cost basis is determined by the cost of replacing this same pipeline either on today's cost basis or on a depreciated basis.
• Salvage Value
  Salvage is determined by what material can be sold as in another venue; taken out of the ground and sold for the steel tubes or scrap value. In this way the pipe is treated as a commodity or secondary tubular steel.
• Supply (other pipelines in area/scarcity)
  Supply is where the product comes from to feed the pipeline. Are there other pipelines to take the product. Are there other sources of supply. What is the life expectancy of the source for the supplier
• Demand (potential buyers?)
  Is there sufficient demand to maintain or lay a pipeline? Is the demand stable and reliable? Is there room for future expansion with the demand group of buyers or transporters?
• Surface Inventory (including appurtenances)
  Generally pipelines are bought and sold including appurtenances which are all valves, risers, meters, and anything else connected to the pipeline that is part of it and contributes to its operation. This can include tanks storage facilities and terminals.
• Sales Contracts / Length
  If the pipeline depends on a certain customer, or group, then it is important to know the term of the sales contract.
• Potential for replacement volume (new wells, tie ins)
  The potential for new customers is worth noting. It there is room for growth and the potential or possibility of new growth then it could affect the premium or discount values.
• Type of System, oil & gas, product, etc.
  The type of system is significant for various reasons whether it be gathering, trunk, transmission, liquid, product, gas, or whatever.
• Size of pipe
  Size of pipe helps determine salvage as well as whether or not the pipe must be removed on termination of usage, etc. Mainly, size determines volume that can be transported and thus revenue potential.
• Specification of pipe
  Pipe specifications are important when determining value regarding salvage as well as dictates type of product and pressures that can be operating while the line is in service.
• Management (front and field office)
  Management can make or break any business, pipelines included.
• Date of Installation
  Installation dates are key as they determine and reveal vintage of the pipe, coating, type of construction, and environmental considerations as of date of installation.
• Maintenance of property
  Care and maintenance reveal the type and attitudes of management and the company as well as general conditions. Most pipelines are buried and the appurtenances above ground reveal much of the overall care to a property.
• Interconnects
  The interconnects are different as they are considered a separate asset and not an attachment or appurtenance to the pipeline even though it is or has become part of the system. We consider it separately and value accordingly varying from one to another.
• Cathodic protection
  This corrosion protection of last resort is significant and the degree to which it is maintained is important. Conditions change and can affect the efficiency of any system especially in rapid growing and transitional areas.
• Pipe coatings (vintage)
  Pipe coatings reveal age and sometimes the type of construction and vintage of pipe. Knowledge of pipe coatings is important because this is the first line of defense against corrosion. Often older pipelines present environmental concerns as they have asbestos fiber embedded.
• Environmental concerns
  This becomes a maintenance issue as much as anything as concerns center mostly around releases (spill, leaks) and what the oil, or any other kind of product might be transported.
• Demographics- urban or rural?
  Pipelines in and out of cities and in the path of rapidly expanding areas of the country pose different sets of problems and generally require more maintenance than pure rural and thus can add significantly to overhead and upkeep as well as create higher tax rates by some appraisers.
• Appurtenances other than surface inventory
  Often there is forgotten the fee land that is acquired with a pipeline. In many situations real estate of value is part of a system but not recognized for its value as an entity by itself. Others might include loading docks at terminal especially docks on important water transportation corridor (Intercoastal Canal, Mississippi River).
• Appearance
  Curb appeal is importance in buying or selling a pipeline as it is in buying and selling any kind of property. The appeal of any property is always enhanced by well maintained and clean properties.
• Reservoir studies
  Reservoir studies are important when any system is dependent of a particular field or reservoir that feeds the pipeline system. It is important to know the life of the pool that is being depleted.
• Market price of commodity
  The price of the commodity determines the activity. Current high prices encourage much activity. When prices were lower, pipelines did not change hand very often for lack of motivated buyers.
• Type of system: trunk, gathering, distribution, etc.
  The type of pipeline system is significant because each has its own set of peculiarities. Gas distribution companies deal with retail customers, Oil pipelines generally require more operations personnel than gas transmission, etc.
• Chemical content of transported product (H2S, CO2)
  Aside from the obvious such as the mention H2S and CO2 there are the myriad other chemicals, residues, and contaminants that are part of the process of eliminating cleaning and disposing of to some degree or another for safety as well as environmental reasons.
• Market diversity
  Does the transporter have any diversity or opportunity to sell to more than one designated buyer?
• Proximity to markets
  How far is the distance from the source to the market? Is there room for competition? Could another line be built economically to compete?
• Geography
  Geographical considerations can determine construction costs and when factoring in terrain, drainage, rivers, streams, and elevations, etc.
• River crossings
  One or more river crossings on right of way can add asset base and value to a pipeline.
• Diversity of suppliers
  Is there another supplier on the horizon in case the current source changes in any way. What is the stability of the current supply?
• Regulatory oversight or governmental factors
  What kind of oversight. Is this a state regulated pipeline, FERC. To what agency does management report?
• Social factors
  These can relate broadly to demographic characteristics of the area of the pipelines: age and gender composition, population, and social attitudes
• Economic factors
  This can relate to employment cost of money, inflation, rent levels, possible new development, and construction costs in an area.
• Transportation
  Is area accessible for new construction, maintenance, repair?

Other factors depending on whether product is purchased at the wellhead and resold , whether and to what extent product is compressed, enhanced, treated, cleaned or processed and in what way. Tariffs if common carrier.

Various Uses:
Over the years, Pipeline Equities has had a diverse list of clients who sought pipeline valuations for reasons such as:

1. Settle a family estate or as in a closely held corporation.
2. Reestablish value for county, school, and other local taxing authorities for a gathering system which had lesser throughput than when taxes had been originally assessed.
3. Value of a pipeline for purpose of establishing value for accounting purposes (client sought to expand the line with loan and bank sought appraisal.)
4. A city seeking a valuation of an abandoned line to convert it to waste water transport (city charter requires an appraisal.)
5. Still another requires appraisal of an existing line in order to grant a new loan for expansion.

The appraisal of pipeline is a niche industry – overshadowed by those who are appraisers of right of way for the purpose of paying damages to landowner or acquiring new right of way. Many in the business are appraising for acquisition puroposes and many times for government entities such as highways. The methods are different. One is the way a land appraiser looks at land the other is the way a pipe liner looks at a pipeline and the right of way it rests in.

Pipeline Equities uses a combination of appraisal methods, but centers on those that particularly lend themselves most readily to the oil and gas pipeline industry. We always take into account the perspective of the pipeline operator, whether trunk, transmission, gatherer, or local distribution company retailing to residential and commercial customers. For more information contact davidhowell@pipelineequities.com.

The Underground World of Pipeline Appraisal

Article featured in the Week of May/June, 2010 issue

By David Howell, Senior Right-Of-Way Agent, International Right-Of-Way Association, Houston, TX

The appraisal of pipelines has evolved into a highly-specialized profession. The primary reason is that, while standard appraisal methodologies are used to determine the land value, there are a host of unique factors to consider where pipelines are involved.

In working with pipeline appraisal projects for many years, I have found that pipelines are frequently valued incorrectly. Pipelines involved in mergers, acquisitions, and estate settlements are frequently valued incorrectly due to inexperience and lack of knowledge. Local taxing authorities will almost always over-value a pipeline property.

My company, Pipeline Equities, utilizes numerous methods of appraisal that are specifically suited to the pipeline industry. Our methods are based on the way a pipeline owner views a pipeline as well as the right of way in which it rests. The methods for determining value can be quite different from other types of appraisals and extend well beyond the land value to include demand for the property, utility of the property, scarcity or supply of the property and ready transferability of ownership rights.

A typical appraisal might use any number of standardized methodologies, such as highest and best use, across-the-fence or comparable sales to assign value to a particular right of way. However, in appraising pipelines, determining what the surrounding land is worth is only part of the equation. The value of what lays under the right of way will inevitably add another element.

Unique Factors to Consider
While pipelines are best suited for the original intent, there are occasions when pipelines are being valued for a usage change. Pipelines can be converted from crude to fiber optic conduits or conduits for electric power line cables from wind farm electric grid centers. In these cases, valuation considerations will need to include the cost to convert the pipeline into another use. Other factors depend on whether the product transported in the pipeline is purchased at the wellhead and resold. If the pipeline requires specific procedures, such as the cost to compress, enhance, treat, clean or process, this will add another factor into the mix.

Situations frequently arise where a valuation report is needed for an active or inactive oil, gas, or product pipeline. The report might be required for a sale or divestiture, readjusting tax assessments, estate settlement, partnership termination, determining salvage value or preparing for a pipeline use conversion. Regardless of the purpose for the appraisal, there is always one objective – establishing an accurate value.

To underscore the need for specialized pipeline appraisal methodology, let’s take a look at some recent appraisals.

Pipeline Rehabilitation
My company recently appraised a vintage crude pipeline in a mature field on the west coast. The line had been active in the past and later became idled. The operator was planning to rehabilitate and reactivate the line, and needed a new appraisal to help determine the level of common carrier transport fees and tariffs once the line was put back into service.

At the time, there was a great deal of new activity and production in the area as a result of higher prices. New wells were being drilled, and the area seemed to have a booming economy. Most of the right of way went through major thoroughfares, and 90% of the easements existed in heavily congested urban areas. Since the right of way was underneath city streets, any potential access needed for rehabilitation or for laying new pipe would require cutting through the asphalt and concrete. We determined that, in order to renovate the old pipeline and get it up to current specifications, there would be many permits required, as well as oversight from municipal and state authorities. Realizing this would be costly, we created an estimate based on new construction costs, as well as depreciation, in order to account for rehabilitation costs. We soon recognized that the appreciation of the right of way in terms of costs in the heavily congested areas more than made up for any deficiency in depreciated new construction costs. In essence, the right of way would have been prohibitively expensive to purchase outright in today’s market. This is not to mention the bureaucratic nightmare in securing new permits.

As it turned out, the new estimated throughput–in terms of barrels to be moved–was so much greater as a result of the new production that the appraised value far overshadowed the right of way estimates, new construction cost estimates and salvage combined. Rehabilitation was the only viable alternative, as new construction and obtaining fresh permits for right of way and construction would have been totally cost prohibitive. As a result, the company was able to activate and renovate two other pipelines in the area as well.

Appraisal for Construction Financing
When a lone entrepreneur with a good idea has the good fortune to find a banker who shares their vision, together they can accomplish great things. This case personifies the American success story.

A bank officer contacted me about a customer who had obtained a contract to supply jet fuel via pipeline to a municipal airport. The airport had been receiving their jet fuel from 30 to 40 trucks a day, and the entrepreneur projected that a pipeline would be a more efficient and reliable source of transport. The client had already secured contracts from two refineries and had planned to purchase the jet fuel in equal quantities from both suppliers. This plan projected a considerable amount of savings for the city’s airport.

The job would be ready to start within four to six months, and the bank needed an appraisal to satisfy their loan requirements. They turned over plans for the pipeline, along with other documents regarding financial information and estimated costs for the project. Blueprints for building the pipeline were also provided, along with the right of way contract documents, their contract to buy jet fuel from the two refineries and a contract to sell the fuel to the municipal airport. Since the loan amount would range between one to two million dollars, our appraisal was a critical component to getting loan approval.

Research showed that the airport and surrounding area had a history of sustained growth. On the demand side, the airport traffic was growing, and the adjacent area was showing an expanding base of customers from tourism, as well as government and private industry. The need was there, and money could be saved through a reliable alternative.

Our primary method of appraisal included the cost for new construction and the projected revenue stream. Other factors that were taken into consideration included front office management, contracts, and the source of supply and demand. Additionally, the pipeline company's financial projects demonstrated that they could get their money back in a three-year payout. The loan was quickly approved and the pipeline is now being built. For the sake of economics, the operations plan was outsourced, and the pipeline company is now focused on building the pipeline as expediently and economically as possible in order to pay off the loan on time.

The entrepreneur had found a niche market in an underserved segment where larger pipeline companies had shown little interest. There are many more situations like this where fuel is being trucked in at a cost that is significantly higher than simply building a pipeline to a refinery or a fuel source. The bank is on the lookout for more deals like this one, and we see enormous opportunity for others who are willing to take on this type of project.

Appraisal for Pipeline Divestiture
In 2009, a pipeline company contacted us about their plans to split from their private equity investor group. A few years earlier, the investor group had backed their company in the purchase of almost 2,000 miles of transmission, trunk and mostly gathering systems. In this case, the original seller had divested itself from what they deemed to be an obsolete pipeline and gathering system, caused by depleting oil and gas fields throughout the country.

When the deal lagged behind the projections established by the pipeline company, the investor group grew impatient and wanted out. They would need to divide the property, so value was needed to form the basis for settlement between the two parties.

None of the forty systems were currently operating, but they seemed to have potential because they were in active areas. In many cases, a good marketer can sometimes raise the pipeline value significantly simply by finding someone who is willing to explore different uses. An entrepreneurial company might envision converting these same junk pipelines to serve as fiber optic cable conduit, CO2 lines for revitalizing an oil field, irrigation lines or other appropriate uses.

Unfortunately, all efforts to find other uses and buyers for the vast majority of systems had failed. We realized that our only option was appraising the pipelines using the salvage method. If the right specifications were present, we knew that a pipeline salvage or recovery operator could complete the recycling process and return the pipe to the mill as scrap or to the structural market as steel for other uses.

As these were primarily gathering systems, there was no discernible right of way. We proceeded to determine a salvage value for each of the forty systems based on demand the current demand for the various diameters of pipe. We gave each a net value after take-up costs and landowner damages were taken into account. This enabled us to assign an appropriate value, and the parties involved were able to split up the assets accordingly.

Appraisal for Tax Authorities
Every oil and gas producing state has a field where initial production was flush and new gathering lines were laid to transport new production to market. As time goes by, and the field nears depletion, the pipeline throughput in the gathering and transmission and trunk lines can be operating at as little as 10 to 20 percent of the initial production. In these cases, the operators still must pay regular taxes accordingly to earlier throughout or initial values, which were generally not depreciated accordingly.

Appraisal districts can be tenacious and resistant when it comes to giving up potential tax revenues and lowering tax rates. They require hard evidence in the form of substantiated asset valuations or appraisals before considering any kind of change that might result in lowering tax rates.

Many local tax appraisers use a method based on the cost of new construction depreciated over the estimate life of the pipeline, with no regard for diminished throughput. This can result in an unrealistic value, as it is based on new or replacement cost with no regard to the current value of the pipeline or the other ways it might be used. My company takes a slightly different approach by determining value based on current volumes of throughput, if any exists. If there are no significant or measurable volumes, then we might submit a salvage value.

Appraising for tax authorities is more basic and routine than any other type of pipeline appraisal, as there are just not that many ways to approach the problems. This is primarily because tax districts are accustomed to dealing with real estate, but not with the different types of inventory that may exist on the property.

Conclusion
Given some of the unique factors associated with pipelines, the appraisal of pipelines has evolved into a highly-specialized and niche industry. The methods for determining value are different from any other type of appraisal practice due to the uniqueness of the product being appraised.

The best way to appraise a pipeline is to gain a better understanding of its potential uses in today's marketplace in conjunction with the property on which it resides. With pipelines, value can be assigned through a combination of demand for the property, utility of the property, scarcity or supply of the property and ready transferability of ownership rights.

Ultimately, the appraiser can only offer an opinion based on data available and market conditions. When it is all said and done, a property's value is what the seller will take and what the buyer will give.

Pipeline operators underusing potential pipeline rehabilitation

Article featured in the Week of January 11, 2010 issue

By David Howell, Senior Right-Of-Way Agent, International Right-Of-Way Association, Houston, TX

By selling recovered line pipe into the structural market instead of rehabilitating it for its own use, the pipeline industry is underusing a potentially valuable asset.

The cost of new 8.625-in. OD steel pipe runs as high as $25/ft. The same size and grade can be excavated for less than one-third the cost. This article examines the factors affecting potential recovery and rehabilitation of retired line pipe.

Background
An 8.625-in OD pipeline was laid in 1920 near Tulsa to transport crude oil from a new field to a tank farm 40 miles away. The field depleted within a few years, but in the late 1920s, the pipeline was recovered from Oklahoma and transported to the Permian basin in Texas to transport new crude oil to a tank farm.

Originally, pipelayers spread the line out in 20-ft sections kicked off of wagons pulled by teams of mules into a man-made ditch. Five-ft chain tongs and 48-in. pipe wrenches sufficiently tightened joints, individually screwed together at 20-ft intervals, to hold back up. This practice led to a pipe collar visible on the outside of the pipe showing a connection every 20 ft. The pipe often disconnected during attempts to recover it from the ditch in Oklahoma.

Oxyacetylene welds were strong enough by the late 1920s to keep the needed pressure on the pipeline for low-pressure crude transportation, though they were not as strong as the pipe wall. Such weld strength eliminated the need for two or three men with large pipe wrenches and chain tongs. Removal of the old collars and threads and beveling the surfaces facilitated the new oxyacetylene-weld jointing technique when the pipeline moved in 1928 from Oklahoma to Crane, Ward, and Winkler counties in Texas.

This pipeline went through three owners over time and was purchased for salvage in 2007. The fields and wells the pipe was intended to service had been depleted, and it was no longer viable as a pipeline where it was. A pipeline-recovery team removed the line and the operating company's marketing department found, despite a little wear, the pipeline retained the qualities of good Grade B steel. WT was intact and had little corrosion, making it suitable for transport of slurry from a copper mine in northern Mexico to the disposal site nearby. The owner plans to use it for as long as the mine is in operation.

An additional 30-mile section was shipped to Vietnam as a water transportation pipeline near what is now Ho Chi Minh City. It will probably be in use there for another 40 years.

Reuse rewards
Pipeline Equities in 2008 took up a 6.625-in. OD line in Central Louisiana in gas service for 9 years. The field was depleted and the landowner, using the land for timber, wanted the pipeline removed so he could use the right of way to plant more trees. PE took up the line and transported it to Certified Pipe Service Inc.'s Houston yard where workers cleaned out paraffin from the interior, straightened the joints where needed, and removed the fusion-bonded epoxy coating from their exteriors.

PE then beveled the ends and sent the pipe to a recoating yard. It is now in service as a gas transmission line in Oklahoma, saving the customers 30% off the cost of new pipe.

An 8.625-in. OD pipeline relaid in the 1950s near Amarillo, Tex., used one of the first electric-weld constructions. In service until 5 years ago, the pipe's coating remained well bonded and the pipe itself in excellent condition. A customer wants the pipe taken up with minimal or no damage to the coating. PE estimates 15% damage to coating, an amount economically replaceable in the field with patches, taking up the pipe in 60-ft sections to decrease the number of welds and limit trucking expenses. The customer plans to relay the line for low-pressure natural gas service in the Permian basin.

Another Texas gas producer and pipeline company has a policy in place to purchase idled or abandoned lines for takeup and removal to its own system. On four occasions in the past 3 years, the company has excavated, 8, 6, and 12-in. OD line pipe from dormant systems, rehabilitated the pipe, and relaid it.

Cost savings
A compelling reason to rehabilitate a pipeline is to get rid of the costs of keeping it in the ground. Miles of permanently idled pipeline are regularly patrolled by employees dedicated to the task. Other companies contract agents at even greater sums to answer "One Calls" or DOT calls flagging lines for construction or other identification purposes.

If the company maintains rights-of-way via mowing and general signage upkeep, the costs can be extraordinary. Judicial districts in many states assign ad valorem taxes, school taxes, county taxes, and state taxes to these properties. Theses taxes often go unquestioned and are paid accordingly. Incidental pipeline relocation expenses due to highway and subdivision expansion also seem to be simply passed off as a necessary cost of doing business.

Regulatory incentives
Pipeline operators have long abandoned retired equipment in place, seeking to reduce maintenance and care, taxes, and upkeep while maintaining ownership of idled pipelines. Federal and state lawmakers and regulators, however, wish to end this practice and clearly define requirements for abandoning or idling out-of-use pipelines. Idled pipelines pose potential hazards to landowners and land users. New real estate developments in congested areas often face pipeline relocation and identification issues, and landowners might be unaware of rights-of-way.

Pipeline companies will be required to remove pipelines if they are termed abandoned or if they are idled with demonstrated "intent to abandon" by lack of maintenance, removal of signage, failure to pay taxes due, etc. Regulators will require companies at least to identify dormant pipeline inventory and obtain permission from landowners before abandonment procedures of any sort.

Federal regulation remains pending, but at least one Texas legislator from Houston and another from the Fort Worth (Barnett shale) area will introduce a bill in an upcoming session of the state legislature requiring pipeline operators to notify landowners before abandonment and obtain permission from affected landowners.

Removal procedures
Reusing pipelines relies on good maintenance of the line while in the ground and care during removal. Excavation should be performed by competent and experienced pipeline-recovery personnel.

Taking up a pipeline uses many of the same procedures as laying it. A specially equipped track hoe with a custom half-moon shoe attached excavates the pipe (Fig. 1). The shoe generally fits the diameter of the pipe without sharp edges that could damage the exterior of the pipe. A good hoe operator with the right shoe can unearth good pipe, while a poor or inexperienced pipeline excavator can turn the pipe into junk.

A side boom can occasionally lift the pipe out of the ditch, but more often the pipe is cut in 100 to 200 ft sections and dragged out of the ditch by a bulldozer. Dragging out too long a length will cause the pipe to bow or bend. After removal, a bulldozer backfills the excavation ditch and dresses the right-of-way.

A cutter cuts the pipe at connections in 20, 30, 40, or 60 ft intervals, depending on where the welds lie (Fig. 2). Most truck trailers can carry 40-45 ft pipe sections . Either torch or saw can cut the pipe, depending on preferences of the supervisor and potential fire hazards.

A front-end loader can load the pipe on trucks for transport. A track hoe with special forks can also perform this task. Tracks work better on the right-of-way than tires. Two or three pieces of equipment per crew, proper supervision, and competent personnel can remove most pipelines.

Pipe rehabilitation
Most pipelines have some sort of coating. Removing it can occur either on site or at a cleaning yard. Responsible recovery crews have environmental certification and are educated to handle potentially hazardous coating waste. Checking the pipe for bends, bows, dents, and dings follows coating removal, as does confirmation of roundness and straightness.

Pipe separation separates the better pipe for shipment to customers or reuse from pipe that might need additional attention. Damages will occur no matter how competent an operator. The track hoe forks or shoe cant dent of ding the pipe during the removal process.

Intentionally bowed pipe needs to be straightened (Fig. 3). Customers want round, straight pipe, that is also more economical to load and transport. Reusing the pipe as line pipe requires beveling each end where the pipe was cut during removal (Fig. 4). Recovery crews may be able to rehabilitate excavated pipelines at the removal site with portable dedenters, pipe straighteners, and beveling machines.

Performing pipe rehabilitation on site reduces the expense of pipe handling to a minimum. If necessary, however, pipe service yards in various parts of the country have the expertise and equipment to handle most jobs. If pipe coating has not been damaged beyond repair, pipe can go directly to a coating facility or threading facility, depending on its intended use.

Landowner relations
Care and handling of the landowner whose property will be crossed while retrieving the pipe is even more important than care and handling of the pipe itself. A landowner can either help greatly or impede recovery. Most right-of-way contracts grant the pipeline owner rights of removal, repair, ingress, egress, and so forth. But no landowner actually wants you on his or her property, raising the importance of having a skilled, experienced right-of-way agent on the job.

The best method when the operator owns the easement is to return the right-of-way to the landowner at the operator's expense. The landowner would like to have clear unencumbered title to his property; granting him that will help move the process along. Once the exchange of dollars comes into the picture, it becomes the basis for everything, and it is only a question of how much the operator is going to pay.

Marketing
Tubular steel has many uses. Hundreds of thousands of tons/year enter the piling markets to shore up anything needing to be strengthened. Anything needing additional support along shorelines, piers for buildings, and bridge supports all use tubular steel derived from rehabilitated pipeline. Millions of tons went to China in the 1980-90s for use in the foundations of its extensive highway network.

More than 150 companies resell secondary and rehabilitated line pipe, each specializing in a particular area. One group of companies sells 25,000 ft/month of 16, 18, or 20-in. OD pipe as casing to oil and gas drilling contractors. Another 150,000 ft/month of 8.625 and 10.75-in. OD line enters the surface casing market for oil and gas operators.

Companies sell product to piling contractors and for use as culvert for roads and bridges. Still more retired pipe enters farm and ranch operations for use in corrals and cattle guards at gates.

Other users need center posts and columns for fences, barns, and other buildings. Flag poles, bridge, and guardrail applications consume thousands of tons/year (Fig. 5). But unless scrap prices rise dramatically, this market should be the last resort for pipeline-recovery applications.

David Howell is principal of Pipeline Equities, conducting pipeline salvage and recovery as well as brokering and appraising pipelines. Howell is a designated senior right-of-way agent through the International Right of Way Association, holding environmental and acquisition-negotiation certifications. He earned a BA in political science at Texas A&M-Kingsville.

How to Recycle a Pipeline

In 1920, an 8 5/8" diameter pipeline was laid near Tulsa, Oklahoma for the transportation of crude oil from a new discovery field to a tank farm 40 miles away. The field had flush production or large amounts of crude initially, but was depleted within a few years. In the late 1920's, new fields were being discovered on a regular basis in the Permian Basin of Texas. This same pipeline was recovered from Oklahoma and transported to Texas to transport the new crude oil from the new wells to a tank farm.

When the pipeline was originally laid in Oklahoma, it was spread out in 20 foot sections kicked off of wagons pulled by teams of mules into a pre-made ditch. These individual joints were screwed together at these 20 foot intervals and tightened with chain tongs to hold "back up" and 48" pipe wrenches with a "cheater" or 3 foot extension of 2 1/2" outside diameter pipe on the end of the wrench. This would allow more than one person to tighten joints. The result was a pipe collar showing on the outside of the pipe indicating a connection every twenty feet of pipeline. When the pipeline was recovered in Oklahoma, the pipe often disconnected during attempts to pick up the pipe from the ditch.

Around the late 1920's, a stronger and simpler jointing method was introduced into pipeline industry. Acetylene welds were strong enough to keep the needed pressure on the pipeline for low-pressure crude transportation, though they were not as strong as the wall of the pipe itself. Acetylene welds eliminated the need for two or three men manhandling large pipe wrenches and chain tongs. When the pipeline was sent from Oklahoma to the Permian Basin of Texas to be re installed, the old collars and threads were cut off and beveled in order to facilitate the new acetylene weld jointing technique. The line was then re-laid in 1928 in Crane, Ward, and Winkler Counties in Texas. This pipeline later went through a succession of three owners for various reasons over time and was purchased for salvage purposes in 2007. The fields and wells this pipe was intended to service had been depleted, and the line was no longer viable as a pipeline in that particular location. The salvage or pipeline recovery team proceeded to remove the pipeline and the company's marketing department shortly found an application for the pipeline. It was found that despite a little wear, the pipeline had the qualities of good Grade B steel. The thickness of the wall of the pipe was intact and had very little corrosion. It was found to be suitable for transport of slurry from a copper mine to the disposal site nearby, but away from the mine. The Mexican company that owns the mine expects to use the slurry line for as long as the mine is in operation.

An additional 30-mile section of this line was recovered and shipped to Vietnam to be used as a water transportation pipeline near what is now Ho Chi Minh City. It will probably be used there for another forty years.

This steel pipeline that was manufactured at least 89 years ago has been through 4 incarnations. Eventually when the copper mine is depleted, this pipe will be recycled once again until one day it will end up as scrap to be molded into plate, sheet, and coils for another round of uses.

The pipe is simply steel in tubular form.

Rewards for Reuse
If these applications are noteworthy then the pipeline industry might think in terms of rehabilitation of this steel for their own use. The pipeline recovery industry resells into the structural market for the most part, but I believe this is under using a valuable asset.

In this era of high commodity costs, it seems imprudent and wasteful to not rehabilitate pipeline through recovery and recycling. The cost of new 8 5/8" diameter steel pipe to go into a pipeline can cost up to $25 per foot. That same size and grade can be excavated for less than a third of that cost. Why would a company not remove a pipeline that has outlasted its usefulness in one location and move it to another? Probably ignorance of the opportunity and inexperienced personnel is the reason. It doesn’t take a Ph.D. engineer to buy off the shelf or according to what the tubular salesman advises.

In 2008, our company took up a 6 5/8" diameter line in Central Louisiana that had been in gas service for nine years. The field depleted and the landowner who was using the land for timber wanted the pipeline removed so as to use the right of way to plant more trees. We took up the line, transported it to the CPS yard in Houston where workers cleaned the paraffin out of the interior of the pipe, straighten where needed and removed the fusion bond epoxy coating off of the exterior. We then beveled the ends and sent the pipe on to a recoating yard and it is now in service as a gas transmission line in Oklahoma. Even with all of these steps, the customer saved thirty per cent off of new pipe prices.

An 8 5/8" diameter pipeline was re laid in during the 1950's in the Panhandle of Texas near Amarillo. The pipe was of A.O. Smith manufacture and used one of the first electric weld type construction before today's ERW type construction. We don't know where the pipe came from originally, but it was in service until five years ago in its second life. The coating is well bonded, and the pipe is in excellent condition. It has been maintained in an ideal manner. A customer has contacted us regarding taking up the pipe in such a way that we do not damage the coating or at least only minimal damage. We estimate fifteen per cent damage to coating, and it is determined that that amount can be economically replaced in the field with patches. We will take up the pipe in sixty foot sections to decrease the number of welds and cut back on the trucking expense. The customer plans to relay the line for low pressure natural gas service in the Permian Basin area of Texas.

Still another Texas gas producer and pipeline company has made it a company policy to purchase idled or abandoned lines from others for the purpose of take up and removal to another location in their own system. On four occasions in the past three years, the company has excavated, 8", 6" and 12" line pipe from dormant systems, rehabilitated the pipe, and re laid the pipe in a more economically advantageous area.

Cost Savings Incentives
A most compelling reason for rehabilitation of a pipeline is to get rid of the costs of keeping it in the ground. Few companies are aware of the real costs associated with maintaining an idled pipeline. There are miles of pipeline that are idle and will never be used again, but are regularly patrolled by personnel kept on the payroll and dedicated to that specific task. Others companies pay contract agents even greater sums to answer "One Calls" or DOT calls for the purpose of flagging lines for construction or other identification purposes.

If the company still maintains these rights of way via mowing and general signage upkeep, the costs can be extraordinary. In many states there are judicial districts that assign ad valorem taxes, school taxes, county taxes, and state taxes to these properties. In most operations, people are not aware of these costs, as it does not fall into their job description. The many taxes involved go unquestioned and are paid accordingly. In addition, the incidental pipeline relocation expenses due to highway and subdivision expansion seem to be passed off as necessary costs of doing business.

Regulatory Incentives
A long standing practice of pipeline companies has been "in place abandonment". It is simply a way of reducing responsibility for maintenance and care, taxes, and upkeep while still maintaining ownership of idled pipelines. While this is a positive practice for pipeline operators, federal and state lawmakers and regulators are seeking to end the practice and clearly define the requirements for abandoning or idling these out of use pipelines. Idled pipelines pose potential hazards to landowners and land users. New developments in congested areas often face relocation and identification issues. An even bigger issue is the awareness of rights by landowners who own property where lines are located.

In the future, pipeline companies will be required to remove pipelines if they are termed "abandoned" or if they are idled and show "intent to abandon" due to cessation of usage, lack of maintenance, removal of signage, failure to pay or reducing taxes due to lack of use, etc. At the very least, companies will be required to identify dormant pipeline inventory and obtain permission from landowners prior to abandonment procedures of any sort.

It is not known when new regulations will be instituted on the federal level, however, at least one Texas legislator from Houston and another from the Fort Worth (Barnett Shale) area will introduce a bill in the next session of the legislature requiring pipeline operators to notify landowners prior to abandonment and obtain permission from the affected landowners.

Procedures for Removal
Reuse of pipelines relies on good maintenance of the line while in the ground and good care during removal. There is an art to the excavation process or at the very least; the work should be performed by competent and experienced pipeline recovery personnel.

Taking up a pipeline uses much the same procedures as laying it. A specially equipped track hoe is used with a custom shoe attached instead of forks on the hoe to excavate the pipe. Generally, this "shoe" is fashioned to fit the diameter of the pipe without sharp edges on the inside in order to keep from dinging or damaging the exterior of the pipe. This is probably the key part of the entire process. A good hoe operator with the right shoe can unearth good pipe while a poor or inexperienced pipeline excavator can turn the pipe into total junk.

Occasionally a side boom can be used to lift the pipe out of the ditch, but more often the pipe is cut in 100 to 200 foot sections and dragged out of the ditch by a dozer. Dragging out too long a length will cause the pipe to bow or bend. After the pipe is removed, a dozer is used to backfill the excavation ditch and dress up the right of way. A cutter cuts the pipe at the connections in 20, 30, 40, or 60 foot intervals depending on where the welds exist. The best way is to cut the pipe in 40 to 45 foot sections as most truck trailers can carry these lengths. The cutting can be done by torch or by saw depending on the preferences of the supervisor as well as the fire hazards that might be involved. A front-end loader can be utilized to load the pipe on trucks for transport. Alternatively, special forks can be mounted on the track hoe to load the trucks instead of having to engage a front-end loader on location. Sometimes the loader is not efficient due to its rubber tires. Tracks work best on the right of way. Most pipelines can be removed with two or three pieces of equipment per crew with proper supervision and competent personnel.

Pipe Rehabilitation
Most pipelines have some sort of coating. If proper procedures are undertaken, the coatings can be removed on location or the removed pipeline can be transported to a cleaning yard. Responsible recovery crews are environmentally certified and educated to handle coating waste in case the coating turns out to be hazardous.

After the coating is removed, the pipe is checked for bends, bows, dents, and dings. Roundness and straightness is also to be ascertained. Pipe should be separated at this stage to determine the better pipe that might be ready to ship to a customer or that might need additional attention. No matter how competent an operator might be, damages will occur, and externally the pipe can be dented or dinged with the track hoe forks or shoe during the removal process.

Sometimes the pipe could be bowed intentionally when laying and need to be straightened. Customers want round and straight pipe, and it is much more economical to load and transport straight pipe. Beveling of each end where the pipe was cut during removal is necessary if the pipe is to be re used as line pipe. Some pipeline recovery crews may be able to rehabilitate excavated pipelines at the removal site by using portable de-denters, pipe straighteners, beveling machines. It is best to reduce the trucking and handling of the pipe as much as possible and perform pipe rehabilitation on-site. Otherwise, there are pipe service yards in various parts of the country that have the expertise and equipment to handle most jobs. If the pipe coating has not been severely damaged beyond repair, the pipe will go directly to a coating facility or threading facilities depending on the intended use for the excavated pipe.

Landowner Relations and Right of Way Agents
Perhaps the most significant part of the process is the care and handling of the landowner on whose property you are going across while retrieving the pipe. A landowner is in a position to help greatly or deal a lot of misery. By the terms of most right of way contracts, the pipeline owner has the right to remove, repair, ingress, egress, and so forth; however, no landowner wants you on their property in any way for any reason. It is important that a skilled, experienced right of way agent be on the job. Today's farmers, ranchers, and landowners are sophisticated and smart, and a good negotiator can save a lot of heartache. These are not the same people who sold the right of way fifty years ago for a dollar a rod. They have Blackberries and can Google an answer as fast as your teenager.

The best method when you own the easement is to return the right of way back to the landowner at your expense. This is music to the property owners' ears, and in return, they will probably bring coffee to the job site and open the gates for you while you pass through. Seriously, I have found this to be the best method for dealing with landowners. They would like to have clear unencumbered title to their property and to "clear the title at the courthouse" will generally provide smiles. The gift of a joint or two of pipe along the way for culvert use to a farmer or rancher always promotes good relations. Try to avoid the use of money to get the job done. When the exchange of dollars comes into the picture, then it becomes the basis for everything, and it is only a question of how much you are going to pay. Again, that is why a good right of way agent is important.

Marketing the Product
The uses for tubular forms of steel are many. Hundreds of thousands of tons annually go to the piling markets to shore up anything that needs to be strengthened. For example, anything that needs additional support along shorelines, piers for buildings, and bridge supports all utilize tubular steel derived from rehabilitated pipeline. Millions of tons went to China in the Eighties and Nineties for use in the foundations of their extensive highway network.

There are more than 150 companies that resell secondary and rehabilitated line pipe to the ultimate customer. Each of these entities specializes in their local market or in the area of specialization they have chosen. There is a group of companies that only sell 16", 18", or 20" pipe for casing oil and gas well drilling contractors setting pipe in "mouse holes" or "rat holes". This application alone consumes more than 25,000 feet per month of these sizes in the U. S.

Another 150,000 feet per month of 8 5/8" and 10 3/4" line pipe are used each month in surface casing applications for oil and gas operators. Surface casing protects shallow water sands in initial drilling operations onshore. There are companies that sell product to piling contractors and others that sell pipe for culvert for roads and bridges. Still more is used in farm and ranch operations for corrals and cattle guards at gates. Other users need center posts and columns for fences, barns and other buildings. Flag poles, bridge, and guardrail applications consume thousands of tons annually. Our company recently shipped 4800 linear feet of 80 year old pipe to a zoo to be used as a retaining wall to protect elephants in their habitat. Hundreds of other uses exist for steel in tubular form. Unless prices get exceedingly high, scrap is the last resort for pipeline recovery applications.

Conclusion
Much more could be written regarding the salvage or recovery of pipelines. The process for recovery, the coping with EPA and OSHA, different weights, grades and diameters of pipe could be covered in much more detail. In addition, there are methods and procedures for rehabilitation of pipe in service yards as well as on site or portable operations and which is best. Pipelines can be recovered by companies on a contract or custom basis or they can be sold "as is where is" to recovery operators.

For additional information on this subject visit the author's website at www.pipelineequities.com or email a request for a complimentary copy of the Pipeline Recovery Manual to davidhowell@pipelineequities.com.

Who Owns Abandoned Pipelines?

Article featured in October 2009 Vol. 236 No. 10 issue

By David Howell, Senior Right-Of-Way Agent, International Right-Of-Way Association, Houston, TX

Salvaging Steel

I recently received a call from a landowner on whose land a pipeline was buried. On this particular tract of land in Central Texas, the pipeline in question was only 300 feet in length. The right-of-way, or easement, was no longer mowed or otherwise maintained. Signs along the right-of-way were down or in disarray.

The landowner had done some detective work and found through the Texas Railroad Commission (TRRC) Pipeline Safety Office that the line had in fact been abandoned and in the past had been used as part of a 60-mile and longer crude line for a major pipeline company. He persisted and made contact with someone at the pipeline company who acknowledged ownership of the line even though it was deemed abandoned by state regulatory authorities. The landowner explained that he wanted to ascertain the idleness or abandonment of the pipeline because he had plans to build on that parcel, and the pipeline presence would interfere somewhat with, or at least complicate, the building process. The pipeline company indicated they would look into the matter. An environmental subcontractor then called the landowner with the pipeline company's solution. The subcontractor had been instructed by the pipeline company to remove the pipeline if the landowner was willing to pay for the $51,000 expense of removal. The landowner then asked me what I would charge to do the same job and I told him $1,000 to $1,500 as it looked to be about a day's worth of work.

Unfortunately, the landowner was not able to hire our company because the abandoned pipeline was still the property of the pipeline company. The issue was ownership. The pipeline company claimed ownership, but did not assume responsibility for maintenance or removal of the pipeline. For some reason, the pipeline company determined that the landowner ought to be responsible for removal expenses and that a qualified environmental company of their choosing ought to be used for the removal. Why was this? Was there an unknown environmental hazard?

A dictionary definition for abandonment means to "give up entirely." Defined in terms of federal regulations, abandonment means "permanently removed from service." In federal pipeline safety jargon, an abandoned pipeline is a pipeline that is "physically separated from its source of gas and is no longer maintained," or in another federal agency glossary, "no longer connected to the system and is no longer maintained. The pipeline can be abandoned in place, by removal, or sold." In still another set of federal guidelines, abandoned property means "a property that, because of its general disrepair or lack of activity, a reasonable person could believe that there is intent on the part of the current owners to surrender their rights to the property." All of these definitions apply to gas and hazardous liquid pipelines that are interstate and fall under federal jurisdiction.

However, there are no guidelines for abandoned crude oil pipelines that fall under the jurisdiction of the Interstate Commerce Commission, and, presumably, the agencies that have succeeded to that federal agency's role since it was abolished in 1995, as common carriers.

At the state level, there are no abandonment guidelines or definitions for intrastate gas, liquids, or oil pipelines, and there are no abandonment guidelines or definitions for intrastate oil or gas gathering systems. Any mention of abandonment of pipeline procedures follows federal guidelines of disconnecting from active gas service and purging of any hazardous substance.

Individual state guidelines generally follow federal guidelines if they have any guidelines at all. (Texas is one of the few that addresses the issue whatsoever.) However, the federal government has no guidelines, criteria, or regulations to determine ownership of abandoned pipelines.

The pipeline in Central Texas was an oil pipeline, so if it were abandoned responsibly, it would have been purged of any hazardous substance as suggested, but not necessarily mandated, by Texas guidelines. Again, why would an environmental company need to be involved in the take up process? Are there other issues that the pipeline owner did not disclose?

On further investigation, the landowner in Texas found other areas where the same line had been cut and removed, and the pipeline company continued to own the easement, but obviously did not feel a responsibility to maintain the right-of-way or to "give up entirely" the right-of-way easement to the landowner. The Texas landowner now has a pipeline to nowhere.

Searching For Abandoned Pipelines
Out of use, uneconomic and abandoned pipelines are not on the priority list of any business development or asset manager. They simply don't provide substantial profit outlook, and they are generally identified as liabilities. That said, most gatekeepers of this sector in a pipeline company simply sweep the issue aside and do not address it. The reasons for this include:

* Possible environmental problems,
* Possible opportunity for future use,
* No company policy regarding this kind of property,
* Ignorance of potential profits, and
* Ignorance of potential liabilities.

The search for abandoned pipelines often begins when a landowner or other interested party notes that a pipeline easement is not being maintained and starts asking questions. Very few states keep track of abandoned pipelines. The Federal Energy Regulatory Commission (FERC) publishes and approves guidelines for abandoning pipelines, but does not continue oversight after the pipeline has been abandoned and abandonment criteria have been met.

In searching for abandoned pipelines to purchase or otherwise obtain, the firm, Pipeline Equities, will check its own database and old pipeline maps from the archives of defunct pipeline companies as well as any geologic and land owner maps showing oil and gas wells and leases.

It is necessary to know as much information as possible about an abandoned pipeline because most pipeline companies will say any out of use line is only temporarily idled, even if has been out of use for 20 years. I have asked about the presence or availability of abandoned lines at several companies, and the answer is almost always, "No, we don't have any." Even when I have evidence of a company owning 3,000 miles of abandoned lines, I have received the same response. There seems to be a reluctance to talk about abandoned pipelines, even if you can find someone with any knowledge about them. I have found that in major companies that utilize pipelines, there are just not that many policies for dealing with these issues.

One company I was dealing with was prompted to actually order an inventory to determine what pipelines they really had. When I made an offer to buy the abandoned and out of use pipelines, the company replied that they did not have a policy regarding the disposition of these properties. They did hire interns and produced an inventory of the idled or abandoned lines. Once they found out what their inventory consisted of, they had to determine what their policy for these idled pipelines would be. The policy determination, in this case, was the same as it had always been and is with most companies - leave them alone, and do nothing. This is the existing policy for many major pipeline companies.

Why? There are no advocates within the structure of most companies. Business development officers don't want to bother with what might be determined to be liabilities. Operations does not have the time or the inclination. Environmental does not have the authority, and--by now--right-of-way departments are outsourced. No one really cares. Abandoned or idled pipelines are out of sight and out of mind.

Fixtures
An interesting aspect of this and other cases is the "fixture" nature of the pipeline. According to attorneys, if the pipeline company has given up the easement via formal recording back to the landowner, then the pipeline company would also be "giving up entirely" the ownership of the pipeline which has become a fixture to the easement. Attorneys say legal opinions have stated that pipelines and appurtenances to pipelines are part of the package of, or fixtures to, the easements they are on. Somewhat like a toilet, sink, and bathtub belong to a bathroom. The fixtures stay, and if the easement reverts to a landowner, then the pipeline reverts as well.

More often than not, this transfer is never done on a formal basis and the ownership remains in the name of the original grantor (the pipeline company) until someone takes the initiative to clear it up. It would probably take a court order in each (county) jurisdiction.

Right-Of-Way Agreements
Ultimately, ownership is determined, first, by contract. That is to say that the original right-of-way agreement or contract is the law. Attorneys say other legal developments have determined that abandonment by giving up entirely can be accomplished if it can be determined that "intent to abandon" is present or "cessation of usage" is evident. Presence of either of these conditions may change ownership of the pipeline and easement despite the language of the original contract. Again, this change in ownership might require a court order in each jurisdiction.

These agreements or contracts between grantor (landowner) and grantee (pipeline owner) generally have the following four parts, but agreements over 50 years old only contain the first three part:

1. Amount of compensation.
2. Description of the right-of-way or the description of the land the pipeline traverses. An example of a description from an agreement written in Texas in 1927 states, "...through the following described lands situate in Crane County and State of Texas, to-wit: across Sections 7-8-13-12-11 & 20 in Block B-21 Public School Lands and across Sections 19-20-28 & 29 in Block B-26 Public School Lands."
3. Rights of the grantee. In this same 1927 Texas agreement, the boilerplate language that was used (and which is still the mainstay language of right-of-way agreements today) would state that the landowner hereby grants the pipeline company "... the right-of-way to lay, maintain, operate and remove a pipe line for the transportation of oil and gas, and to erect, maintain, operate and remove a telegraph or telephone line, together with the right of ingress and egress, on, over and through the following described lands situate..."
4. Term of the contract. This is a more recent addition to right-of-way agreements and is usually "ten years," "upon cessation of usage," or "within twenty four months after cessation of usage." In the case of the 1927 Texas agreement, the absence of a specified term gives the grantee/pipeline owner the rights to the easement and pipe line in perpetuity. Many old right-of-way agreements were unintentionally written in perpetuity without a termination date.

A pipeline right-of-way is really no different than any other kind of easement, and therein lies some interesting comparisons and--in some cases precedent--for extinguishing or canceling agreements, even ones that were written to have a perpetual term.

Abandoning Pipelines

Why the language of abandonment in the regulations? The simple explanation: the pipeline company is no longer responsible for taking care of the pipeline according to regulations as if it were an active viable pipeline. That means pipeline companies no longer have to worry about regulatory fly bys to verify if the right-of-way can be seen from the air.

The Texas Railroad Commission is responsible for fly-bys in Texas and ceases fly-by activity when a pipeline is designated as abandoned. Once a pipeline is designated as abandoned, pipeline owners and operators no longer incur the expense of maintaining easements with expensive mowing and caretaking. And, they no longer have to paint posts and put up new signs to mark the pipeline. All of these responsibilities are expensive and time consuming.

Another huge bonus for abandoning a pipeline is reduction of taxes or total elimination of ad valorem, school, county and other jurisdictional levies. Generally speaking, taxes are almost non existent for abandoned pipelines. But still, if a landowner wants to claim the pipeline on his or her property, the pipeline company will likely claim it is their property and explain that the pipeline is only "idled" as opposed to a "given up entirely" type of abandonment.

In the case of our friend in Central Texas, he can have the easement returned, but not the pipeline fixture. He must pay the price of a pipeline company approved contractor with environmental supervision standing by in order to make his own land usable. This was not the way it was supposed to be. So, abandonment of pipelines can mean many things to many people.

During the course of allowing an idled, abandoned, or out of service pipeline to deteriorate, other changes occur as a result of the lack of care and maintenance. Easements are allowed to grow up and out. Trees sprout and grass grows. Neighbors and landowners begin encroachment activity and the problems are compounded. When it is evident that a pipeline right-of-way is not being maintained, the signal goes out that no one cares, and encroachment begins. Structures are built, and seemingly squatters' rights are the rule of the day on ill-maintained rights of way.

The business of some salvage companies is the removal and recycling of out of use pipelines. For the most part, pipeline companies are not interested in the business of recycling as they have determined that there are too many environmental risks to allow shallow pocket pipeline recovery companies the run of a right-of-way. The safest bet is to let it lie rather than take a chance that a pipeline recovery company might uncover some surprises that no one wants to deal with.

The call our company received from the Texas landowner is only one example. We field an average of three calls per week from property owners seeking a way to get rid of a piece of pipeline that is interfering with a construction or excavation project. Other calls involve inquiries about restoring easements that are clouding title.

Court Determination

The following are a number of factors a court or jurisdiction might consider in determining whether an easement or right-of-way (including the buried pipeline) has been canceled, extinguished and thus effectually reverted to the landowner:

1. Whether the line is merely idle or is completely abandoned.
2. The length of time the line has been idled or abandoned.
3. Whether the grantee company continues to maintain, test and /or patrol the line.
4. Whether the company continues to show the line and/or the easement as an asset in its records and/or continues to pay taxes on the line and/or the easement.
5. Whether there are other lines in the same easement which have not been idle or abandoned.
6. Whether the company has constructed or acquired new lines on other routes which make the idle or abandoned line and the easement in which it runs unnecessary.
7. Whether the company has idled or abandoned the facilities at either end of the line thereby making it unlikely that the line would be returned to service.
8. Whether it is cost prohibitive to return the line to service.
9. Whether the company has released or abandoned other segments of the easement thereby making it impossible to use the line or a replacement line at some future time.
10. The company plans for future use of the line or replacement line in the same easement or corridor.

Conclusion
The grantee company's obligation to release an easement containing an idle pipeline upon the request from a landowner will first depend on the specific provisions of the contract or instrument granting the easement. This instrument is almost always the right-of-way agreement. If that contract or instrument does not specify a term or condition for reversion of the easement, then it will depend on whether the landowner can establish that the purpose for which the easement was granted has ceased or that the grantee company can no longer use the easement for its intended purpose.

The reality is that most landowners are not going to go to the expense and time to prove this. The pipeline companies know this and quietly deal with incidents one at a time with special attention given to larger parcel owners along the right-of-way. The idea that a landowner with a quarter-mile section of pipeline on his property is going to file suit against a major pipeline company is unlikely. However, if the landowner is desperate to sell that property or needs to build on the land, he or she will seek a remedy somewhere.

Be warned, pipeline operators: there are too many hungry plaintiff's lawyers and tree huggers out there. In addition there are many landowners that are weary of warehousing obsolete pipelines for pipeline companies. I should note here that this new Congress and new administration in Washington really do not like us very much. And that is on a federal level. On the state level in Texas, a bill will be introduced in the coming legislative session that will require pipeline companies to get permission from each landowner before abandoning a pipeline on their property. In addition, the companies will have to account for all dormant pipelines that have previously been idled or abandoned. This type of legislation might signal the end to the practice of "in place" abandonment of pipelines.

If we really don't like federal and state regulations, why not be proactive and clean up our mess before we get called in?

The central Texas rancher continued in his attempts to have the pipeline company remove the 330 foot pipeline segment from his property. He did get a concession of a price reduction from $51,000 to $37,000 for the take up by the environmental company approved by the pipeline operator. At this point he went to a lawyer who did some research and found that most pipelines of that vintage were coated with a material that contained asbestos. The lawyer found a case regarding an abandoned jet fuel pipeline with asbestos coating near a townsite in Maine. A local court determined that the line did cause contamination under the townsite and possibly was a problem for the local water supply and the health of future generations. The attorney for the Texas rancher noted that the pipeline in question was located over the Edwards Aquifer in Central Texas for a 40-mile stretch. In place abandonment of pipelines is no longer an option.

For case law, Code of Federal Regulation, and other references for this article, send an email request to davidhowell@pipelineequities.com.