An Economic Analysis of Pipeline Transport in Flanders

UNIVERSITEIT GENT

FACULTEIT ECONOMIE EN BEDRIJFSKUNDE

ACADEMIEJAAR 2009 – 2010

An economic analysis of pipeline transport in Flanders

Masterproef voorgedragen tot het bekomen van de graad van

Master in de Toegepaste Economische Wetenschappen

Thomas Capiau Onder leiding van Prof. dr. Eddy Van de Voorde

UNIVERSITEIT GENT

FACULTEIT ECONOMIE EN BEDRIJFSKUNDE

ACADEMIEJAAR 2009 – 2010

An economic analysis of pipeline transport in Flanders

Masterproef voorgedragen tot het bekomen van de graad van

Master in de Toegepaste Economische Wetenschappen

Thomas Capiau Onder leiding van Prof. dr. Eddy Van de Voorde

PERMISSION

Ondergetekende verklaart dat de inhoud van deze masterproef mag geraadpleegd en/of gereproduceerd worden, mits bronvermelding.

Thomas Capiau

Woord vooraf

Het voorbije jaar heb ik me met volle overgave gestort in de wereld van pijpleidingtransport. Het resultaat is een economische analyse van pijpleidingtransport in Vlaanderen. Bij aanvang zou ik een aantal mensen willen bedanken die mij geholpen hebben bij het tot stand brengen van mijn masterproef. Deze masterproef zou nooit verwezenlijkt zijn zonder de hulp Prof. dr. Eddy Van de Voorde en Prof. dr. Thierry Vanelslander. Een oprechte dank voor de kritische opmerkingen en de interessante voorstellen. Evenzeer wil ik mijn familie bedanken voor de morele steun en positieve aanmoediging. In het bijzonder wil ik mijn grootvader bedanken voor de nodige contacten bij firma Denys. Tevens wil ik mijn dank betuigen aan meneer Goethals die mij geholpen heeft bij het dissecteren van Fluxys. Ik hoop dat ik met deze masterproef een bijdrage heb geleverd aan de bestaande studies.

Content

Introduction ...... 1 1. History ...... 2 2. Typology ...... 2 2.1. Energy pipelines ...... 3 2.2. Water and sewage pipelines ...... 4 2.3. Slurry pipelines ...... 4 2.4. Pneumatic pipelines ...... 5 2.5. Capsule pipelines ...... 5 2.6. Other pipelines ...... 7 3. SWOT-analysis ...... 7 3.1. Pipeline as a mode of transport ...... 8 3.1.2. Benefits ...... 10 3.1.3. Drawbacks ...... 11 3.1.4.Opportunities ...... 12 3.1.5. Hostile environments ...... 13 3.1.6. Bottlenecks ...... 14 4. Pipeline versus other modes of transport ...... 16 4.1. Pipeline transportation VS air transportation ...... 19 4.2. Pipeline transportation VS rail road transportation ...... 19 4.3. Pipeline transportation VS sea shipping ...... 20 4.4. Pipeline transportation VS road transportation ...... 20 5. Pipeline transportation...... 22 6. Pipeline systems ...... 23 6.1. Natural gas ...... 23 6.1.1. Fluxys ...... 23 6.1.2. CREG (Commissie voor de Regulering van de Elektriciteit en het Gas) ...... 35 6.2. Petroleum ...... 36 6.2.1. The Belgian Pipeline Organisation ...... 37 6.2.2. RAPL ...... 42 6.2.3. Example: Kerosene pipeline ...... 42 6.3. Water ...... 43

6.3.1. SVW (Samenwerking Vlaams Water) ...... 44 6.3.2. VMW (Vlaamse Maatschappij voor Watervoorziening) ...... 45 6.4. Technical gasses ...... 46 6.4.1. Air Liquide ...... 47 6.5. Chemicals ...... 48 7. The pipeline network in Flanders ...... 49 8. Price mechanism and governmental control ...... 49 9. Recommendations ...... 51 10. Conclusion ...... 54 Sources ...... VII Appendix 1 ...... X Appendix 2 ...... XIII

III

Abbreviations

BC Before Christ TAPS Trans Alaska Pipeline System PCP pneumatic capsule pipeline HCP hydraulic capsule pipeline CLP coal log pipeline CONCAWE CONservation of Clean Air and Water in Europe RAPL Rotterdam Antwerp PipeLine LNG liquefied natural gas BBL Balgzand Bacton Line CREG Commissie voor de Regulering van de Elektriciteit en het Gas KLIM Kabels en Leidingen Informatie Meldpunt KLIP Kabel en Leiding Informatie Portaal BPO Belgian Pipeline Organisation CEPS Central European Pipeline System CEPMO Central Europe Pipeline Management Organisation NPS North Atlantic Treaty Organisation Pipeline System PLUTO Pipeline Under The Ocean CEPMO BoD CEPMO Board of Directors CEPMA Central European Pipeline Management Agency NMDW Nationale Maatschappij der Waterleidingen VMW Vlaamse Maatschappij voor Watervoorziening SVW Samenwerking Vlaams Water IWA International Water Association ARA-area Amsterdam-Rotterdam-Antwerp area

Tables

Table 1: Different types of pipeline Table 2: SWOT-analysis Table 3: Externalities Table 4: 3 conditions Table 5: General characteristics of the pipeline network in Flanders

Figures

Figure 1: A pneumatic capsule pipeline Figure 2: A coal log Figure 3: Emission Figure 4: Emission (environmental impact calculation of transport) Figure 5: Safety ranking Figure 6: Distribution of incidents per cause of the European Gas Incident Data Group Figure 7: Fluxys at the centre of Western Europe’s gas pipeline network Figure 8: Infrastructure Figure 9: New pipelines 2008 & 2009 Figure 10: New capacity Figure 11: Fluctuation in demand Figure 12: The BBL Figure 13: A gauge pig Figure 14: Investments Figure 15: The CEPS map Figure 16: Distribution of the water companies in Flanders Figure 17: Air Liquide its gas pipeline network

Introduction

When asked about transportation in general, people usually think about road transport, railroad transport, aviation or shipping. Pipeline transport will be the last mode of transport on their mind. The 1957 Treaty of Rome was designed to liberalize the European market by promoting the free movement of products. Article 75 of the Treaty of Rome –e.g. the common transport policy- imposed common rules for international transport which tried to improve and liberalize the European market. Transport as formulated in the Treaty of Rome, however, did not embody pipeline transport. Later, when this oblivion was discovered, pipeline transport was made part of the energy department because it was too difficult to adapt the Treaty of Rome. This course of action, however, split up the responsibility which made the governing of European transport disorderly. In the Flemish governing agreement 2009 – 2014 the word pipeline appears only once 1. Moreover, the statistics of Flemish transport do not even contain pipeline transport as a mode of transport 1. The most troubling fact is that the government does not consider pipeline transport as a public utility. It leaves the discovering, planning and construction of pipelines in the hands of individuals. Meaning, the government is not inclined to invest in pipeline transport. Because the government thinks it is not their job to facilitate pipeline transport and most pipeline projects are much too big for private firms, there is little initiative for building pipeline networks. Only pipeline systems that have proven their value in the past receive attention and meddling by the government in the present. Fluxys, BPO and the water networks are one of the few pipeline systems that are controlled –one more than the other- by the government.

The Flemish Institute of Logistics a has recognized this problem of undervaluation of pipeline transport. It has made the government aware of this problem and proposed several courses of action to improve the Flemish pipeline transport.

1. History

Pipelines are an ancient technology that has served many different civilisations in different regions. They were -and still are- part of the development and progress of society. Many of the ancient applications of pipeline transportation are still being applied in a contemporary way.

The first pipelines date back to 3000 BC b in Mesopotamia, Egypt and China. They were primarily used to supply water but were all made out of different materials. In Mesopotamia pipelines were made out of clay, in Egypt out of copper and in China out of bamboo 2. The Romans c were the first to build a gigantic pipeline network that could transport water all around their city. Thanks to the overflow of water, even the poorest citizens of Rome could afford going to the bathhouse. This enabled Rome to create a relatively hygienic environment and to limit outbursts of epidemics. The Romans used many different materials such as lead, bronze, silver and wood to construct their pipelines 2. In the Middle Ages the technologies and developments discovered by the Romans were disregarded. There were no comparable water networks like in ancient Rome. Later on, in the 15 th century iron pipelines were introduced. Thanks to these iron pipelines and newly developed pumping system a decent European water network arose in the 16 th and 17 th century. Late in the 19 th century, the first pipelines were build to transport crude oil efficiently. Then with the discovery of new wells and the conversion of oil application (from oil for oil lamps to oil for automobiles), refineries and pipelines were being constructed in a haste 3. After World War 2 the oil pipeline systems received another development boost because the alternative modes of oil transport appeared to be too vulnerable to enemy attacks. Pipelines underwent some sophisticated technological changes and can nowadays transport more than just water or oil.

2. Typology

There are many different types of pipelines for transporting a variety of things. There even are pipelines for transporting beer and pipelines used as a road for automatically guided vehicles. The many different pipelines can be categorized in various groups.

A pipeline is normally used for moving a great number of different liquids, gases and slurries– e.g. fine particles suspended in liquid. Its diameter varies widely, from a very small size (2 inches) for gathering pipelines in an oil well to a very big size in sewage networks. Furthermore, a pipeline is usually laid underground instead of aboveground or offshore and is usually made of metal, though concrete, clay and plastic pipelines also do exist. Because a pipeline becomes more cost-effective with increasing length, the distances involved can be enormous.

Table 1 Different types of pipeline - Energy pipelines: - oil pipelines: - gathering lines - trunk lines - product lines - gas pipelines - Water and sewage pipelines - Slurry pipelines - Pneumatic pipelines - Capsule pipelines: - a pneumatic capsule pipeline - a hydraulic capsule pipeline - a coal log pipeline - Other pipelines: - for transporting chemical substances - for transporting biomass

2.1. Energy pipelines

Energy pipelines can be split up into oil pipelines and gas pipelines. Within the oil pipelines there can be made a distinction between gathering lines, trunk lines and product lines. Gathering lines are the lines of the gathering system that gathers the crude oil from deep within the well, as well as onshore as offshore. These gathering lines are usually small, from 2 to 8 inches d in diameter, and are connected to the trunk lines 4. The trunk lines are larger and measure from 8 to 24 inches e in diameter. They bring the crude oil, gathered by the gathering system in the producing areas, towards the refineries. The most well-known trunk line is the

Trans Alaska Pipeline System (TAPS), see appendix 2, figure 1. When the petroleum is refined it becomes gasoline, jet fuel, home heating oil and diesel fuel. These refined products are then directly transported through the (refined) product lines towards the end user such as airports and electrical power generation plants or are then transported and stored up into fuel tanks. These tanks are then emptied into trucks which make the final delivery to gas stations and homes. The gas pipeline network is usually more extensive than the oil pipeline network. Where the natural gas is commonly delivered by pipeline at home for cooking or heating your place, the gasoline or diesel is only available at the gas station. Apart from gas for cooking and heating there are also gases such as hydrogen f, oxygen g, nitrogen h, carbon oxide i and argon j that are transported via pipelines. These gasses are very important for a variety of industries.

2.2. Water and sewage pipelines

The water pipelines transport the water from the producing area’s or from a natural source towards the customers. After usage or consumption, the water is transported via the sewage pipeline network to purifying facilities or in the worst case scenario directly dumped in a river.

2.3. Slurry pipelines

Slurry pipelines are the next category of pipelines. A slurry pipeline transports slurry –e.g. the mixture of solid particles and a liquid, usually water. There are two types of slurry: when the mixture consists of small solid particles it is called fine slurry and when the mixture is made up of larger particles it is called coarse slurry 5. Slurry pipelines have two major applications. Traditionally, a slurry pipeline is used in the mining industry for transporting the mineral concentrate. The most common minerals that are transported using slurry pipelines are coal, copper, iron, lead, zinc and nickel. The concentrate of the ore is mixed with water and then pumped over a long distance –mostly- to a port where it can be shipped for further processing 6. In order to reduce the transport space and weight, the ore is –obviously- filtered from the water before being loaded into the ship. Slurry pipelines are economically more profitable and environmentally friendly than the railroad transport. These slurry pipelines are most practical when the mine is located far away from the port, road or railroad. Also, a slurry pipeline can be used for dredging k sand, gravel or soil from a waterway and for removing silt l

4 at the bottom of dams. Silt caused by natural disaster such as a tornado or a flood can also be removed using a slurry pipeline. Whether the slurry pipeline is used in the mining industry or used for dredging, it has to be stronger than a normal pipeline due to the abrasion 13 by the solids

2.4. Pneumatic pipelines

A more specialized classification is the pneumatic pipelines category. A pneumatic pipeline system transports solids suspended in air using a pressure blower or a vacuum pump. One pneumatic conveyor can handle a diversity of products such as bulk, flakes, capsules or tablets. The speed of a pneumatic transport system varies depending on the characteristics of the system. The energy needed for transporting the air and thus transporting the solids is relatively high m and energy inefficient but this is outweighed by the convenient and hygienic way of transportation. Moreover, the temperature during the transport is relatively low which makes pneumatic pipeline transportation appropriate for heat-sensitive materials such as food. Additionally, pneumatic transport is also suitable for contamination-sensitive materials such as medicines since the system is totally enclosed and, thanks to the air stream, free from most dirty particles. But pneumatic pipeline transport has a drawback; it is mostly restricted to the transportation of solids which are dry and not too large.

2.5. Capsule pipelines

Capsule pipeline transportation is a relatively new variant of pipeline transport. It transports freight in a capsule which is pushed through the pipeline by water or air. A capsule pipeline is –like most pipelines- well shielded, environmentally friendly, safe, reliable, weatherproof and secure. Maybe even more important, capsule pipelines can reduce the congestion problem caused by trucks and decrease the workload of train transport. Consequently, there will be less traffic, fewer accidents, less damage to the transport infrastructure and hence reduced congestion costs, accident costs and infrastructure maintenance costs 7. There are two types of capsule pipelines: a pneumatic capsule pipeline (PCP) and a hydraulic capsule pipeline (HCP). A capsule pipeline is called a pneumatic capsule pipeline when the capsules are wheeled and pushed through the pipeline by air –see figure 1. The most well-known pneumatic capsule pipeline system actually has very small capsules without wheels pushed

5 through the pipe by air. However, this kind of transport is out-dated and new technologies such as e-banking and fast courier services allow more effective and economical ways of transport. The pneumatic capsule pipeline that Figure 1: A pneumatic capsule pipeline uses wheeled capsules to transport the cargo through the pipe is normally much larger than the pneumatic capsule pipeline discussed above. In a pneumatic capsule pipeline system the capsule travels at a low speed. However, its average speed a day is comparable with the average speed of a truck in a rural area, and much faster than a truck in a city. Therefore, the pneumatic capsule pipeline system is best suited for underground freight transport in large cities where it has an advantage over truck transport 7. For instance, there has been a feasibility study on the use of pneumatic capsule pipeline in New York City. The hydraulic capsule pipeline on the contrary uses capsules without wheels which are transported through a pipeline filled with water. The moving force of the water makes the capsule float and pushes it through the pipe. The hydraulic capsule pipeline is slower than the pneumatic capsule pipeline. However, a hydraulic capsule pipeline uses less energy and is equipped with a longer capsule than a pneumatic capsule pipeline of the same diameter. Hence, a hydraulic capsule pipeline is able to transport a larger cargo in a more economical way than a pneumatic capsule pipeline making it more profitable when speed is not important. Therefore, a hydraulic capsule pipeline can convey materials of inferior value than the materials transported by a pneumatic capsule Figure 2: A coal log pipeline and also over a longer distance. A special type of hydraulic capsule pipeline is the coal log pipeline (CLP). The capsule in a coal log pipeline is coal pressed together in a log n which is water-resistant –see figure 2. This is a very economical capsule pipeline system since there is no extra pipeline necessary to return the capsule. Only, not every mineral or material can be compacted in such a log.

2.6. Other pipelines

Finally, there are also pipelines for transporting chemical substances such as ethylene, chlorine or propylene which are used in the chemical industry and pipelines for transporting biomass such as biofuel, biogas or coleseedoil.

Not every type of pipeline is equally important, especially in Flanders (and Belgium). On the one hand, the slurry, pneumatic and capsule pipelines are not widely represented in Flanders and will consequently not be focused on. On the other hand, the oil, gas and water pipelines are paramount in Flanders and will be thoroughly examined.

3. SWOT-analysis

This SWOT-analysis summarizes the most significant strengths, weaknesses, opportunities and threats of a normal pipeline system such as a gas, oil or water pipeline system.

Since the characteristics of pipeline transport depend very much on the substances transported, the results of the SWOT-analysis are based on generally accepted facts valid for most types of pipelines.

Table 2 Strengths Weaknesses - Environmental friendly - High initial cost price - Low visual costs - Long term (inflexible) - Little noise pollution - Limited number of substances that can be transported (inflexible) - Reliable - Different pipeline systems for different substance groups (inflexible) - No empty returns - Origin(s) and destination(s) are fixed (inflexible) - Safe - Termination costs for users - Does not need much space - Limited capacity (inflexible) - Low operating costs: low energy costs, low - Vulnerable to construction works

7 personnel costs, low maintenance costs - Limited network - Durable - Cost-efficient: low operating costs + durable - Less susceptible to theft - Little over ground occupation - On- and offshore - Shorter trajectory - Fairer price - Enormous transport capacity - Continuous flow - Weatherproof

Opportunities Threats - Ameliorate road transport efficiency - Seismic regions - Ameliorate rail road transport efficiency - Barbaric working conditions - Densely populated regions - Densely populated regions - Clustering effect - Little spatial planning - Anchor effect - Little governmental aid - Capsule pipeline systems - Uncertainty: period and throughput - Increasing demand - Bureaucracy - Sea shipping - Globalisation - International dissimilar standards: safety barriers and product composition

3.1. Pipeline as a mode of transport

Generally, pipelines provide transportation, temporary storage and logistic services but they do not own the product they transport 8. The owners -the producers and shippers- pay the pipeline companies to transport their product to the marketplace. The pipeline companies transport products from areas that have a lot of resources to areas that are in continuous demand of these resources. This function is becoming more and more important in our global market.

3.1.1. Externalities

When analyzed thoroughly, a pipeline as a mode of transport has a lot of benefits and almost no negative externalities. However, the construction work for laying a pipeline, both underground as above ground, can annoy people. Yet, this externality is temporarily and will be minimized by choosing a balanced trajectory. This makes that the trajectory has to take into account the triple bottom line –e.g. the economic, environmental and social aspects that are important to the society. As a result, the trajectory will probably go through remote areas where the construction work will not vex many people and will not cost too much due to the dense population.

Table 3 Externalities - Environmental costs of construction and operating - Little noise pollution - Mostly no visual costs - Interference in the natural habitat of animals

What are the externalities of a pipeline? A pipeline system has virtually no environmental costs, except for the little environmental costs of construction and operation. A pipeline is usually laid underground where it is out of sight and doesn’t bother anyone. So an underground pipeline has no visual costs and almost no noise pollution. However, an underground pipeline usually brings along a public easement O that prohibits building houses, laying roads and digging above the pipeline. Nevertheless, the public easement will only affect few people since the trajectory will try to avoid dense populations. Sometimes a pipeline is laid aboveground. This is the case when there will be no one affected by the poor view and the little noise. Only, some animals can be affected by an aboveground pipeline. For example, deer will have to use a special bridge to go to the other side of the pipeline. Further, a pipeline as a mode of transport emits gases such as carbon dioxide p or nitrogen oxide q because the pressure needed to transport the fluid or cargo is created by engines that emit these gases. There are only few pipeline systems that do not emit any gas

9 because they use the gravitational force instead of pressure. For example, the sewage pipeline network uses gravity to transport its sewage to its destination. A water tower also uses the gravitational force to transport its water, only the water is first pumped into the water tower using engines that emit gasses. Summarized, there are some externalities caused by pipeline transport, however these externalities are relatively small and to some extend avoidable.

3.1.2. Benefits

Pipeline transport, besides the fact that it causes little noise and air pollution and in most cases no visual cost, has even more benefits. It is also a reliable, durable, safe and weatherproof, profitable, energy friendly and cost-efficient mode of transport that does not need much room to operate. A pipeline as a mode of transport for conveying liquids, gases, slurry, goods or other substances and materials is very reliable because once the time and date of the order have been registered, it is guaranteed that the package will arrive at its destination. This can be explained by the fact that the capacity of a pipeline is known and the free capacity can be mathematically calculated, so that an order will not be accepted when there is no capacity available. Therefore, the only challenge will be choosing the right pipeline system for the actual and future market situation. Glitches in a pipeline system are the exception. The high delivery speed of a pipeline system is a huge benefit for many companies. In some cases, the substances can be even obtained immediately, for example, many households have direct access to pure water and/or natural gas. It is self-evident that a pipeline system has to be durable in order to be profitable since the cost price of a pipeline system is enormously high. Investing in a pipeline has to be well thought-out because most pipelines are amortized over 30 years or more. It is this durability of a pipeline that is at the origin of the low long-term average cost of a pipeline system which makes a pipeline as a mode of transport so appealing. Most pipelines are laid underground and the aboveground pipelines are situated in remote areas, creating a safety barrier in both situations. This makes pipeline transport a safe mode of transport with little accidents or deaths. Additionally, a pipeline is designed to withstand the extreme weather conditions that it may encounter, making it even safer. In a

10 permafrost region a pipeline is able to withstand extreme cold temperatures and nowadays most pipelines are equipped with a cathode coating to protect against corrosion. As previously mentioned, it is the average long-term profitability that is important. In the short-run, a pipeline system is considered to be too expensive due to its high investment cost. Once the fixed costs are paid for, there are only the variable energy costs and personnel cost to take into account. Since most pipeline systems are now automated, the personnel cost is relatively low. The energy costs for operating are also relatively low because energy is only needed to create pressure and -apart from capsule pipeline transport- there are no empty returns needed. This makes of pipeline transport an energy friendly mode of transport. Furthermore, a pipeline system rarely needs maintenance since the pumps and compressors are the only moving parts of the pipeline system; a well constructed and protected pipeline only needs a lot of attention when an unforeseen circumstance has occurred such as an earthquake or unauthorized digging. Many pipeline systems make it possible for the consumer to use the transported product whenever he wants. For instance, in Flanders many people at home have direct access to water and natural gas. The prerequisite is that there has to be enough capacity available to deliver to everyone and to cope with fluctuations in demand. A heat wave for example could pose a challenge for the water companies.

3.1.3. Drawbacks

A pipeline system can only convey a limited number of liquids, gasses and slurry. The most common transported substances are oil, natural gas and water. This means that the transportation possibilities of a pipeline system are rather limited, particularly in comparison with other modes of transport. Furthermore, the product that has to be transported determines the sort of pipeline system that has to be constructed. The natural gas will not be transported through the same pipeline system as the pipeline system used to transport oil. Pipeline transportation, compared to other modes of transportation, is bound to a very different set of rules. In Flanders and Belgium, almost each different market has its own set of rules. Most of the oil and jet fuel is controlled by the military, the main pipelines transporting the natural gas are supervised by the government, the water pipeline network is controlled by groups of communities, and many other pipelines are controlled by individual players. In

11 addition, the different set of rules is occasionally changing. For instance, the first pipelines of the Central European Pipeline System network were owned by private players, then the different countries have nationalized all the oil pipelines and nowadays the Belgium Pipeline Organisation is privatising again the oil pipelines. Pipelines are usually laid underground out of the way and out of sight but not fully out of harm’s way. Since the exact location of pipelines is not made public to just anyone, it happens that people who are not well informed or not informed at all accidentally damage a pipeline. Precautions and safety barriers are applied but due to the negligence and human errors accidents happen anyway. For some substances such as oil, gas and water Flanders has an extended pipeline network and for others not. This means that the usage of pipeline transportation for some substances is often not possible or very limited.

3.1.4.Opportunities

A more extended pipeline system can reduce the number of trucks on the road. This will result in less traffic congestion and will make driving more pleasant for everyone else. If, for example, the transport of cargo by 1 pipeline between Rotterdam and Antwerp were to be discontinued, there would be a need of 1.056 trucks, creating a congestion of 30 kilometres, driving back and forward continuously 9. This example shows that the current pipeline systems are indispensable for society and can reduce trucking transport. If the volume transported by pipeline were to be transported by trucks, the roads would be completely jammed. Similarly, pipeline transport can take over some of the services from rail road transport. Though, the focus should lay on the improvement of rail road transport and not simply on stealing customers. Transporting goods or persons in or through densely populated areas can be difficult, slow, expensive or even impossible. To cope with the problem of transporting persons, many big cities have constructed subways to efficiently transport people from one place to another. For transporting goods in the big cities however, there is no specially designed mode of transport. Capsule pipeline transportation can be a valuable alternative for the inefficient transport of goods in densely populated cities facing traffic problems nowadays. Pipelines enable suppliers to profitably connect to companies or customers in remote areas. More important, pipelines can make companies who are in looking for the same

12 product cluster together around the same pipeline. Thanks to the clustering effect the demand for pipeline transportation could soar as a result of which the transportation costs could decline. Lower transportation costs equals a higher profit or gives you the opportunity to sell products at a cheaper price. In either way the companies involved will be in a stronger position than without pipeline transport possibilities. Furthermore, once the companies are hooked to the lower transport costs they will not wish to move to a place where transport costs are higher. This anchor effect makes sure that companies will think twice before relocating. With more traffic year after year congestion is becoming a significant problem. Every day many people spend hours in traffic just to get to work. One way to cope with this problem is to invest in capsule pipeline systems. These systems have a lot of benefits compared to road transport, but many of these capsule pipeline systems are not yet fully optimally realized to substitute for rail road and road transport. There are however capsule pipeline projects running in London and the Netherlands to test for their potential. Globalisation has changed the way pipeline transport works. Open markets and good international relations bring forth a more intense interplay of supply and demand which means more competition and arbitrage. This entails less supplier power and also -to some degree- less buyer power and thus more equal international prices. Since some substances such as oil and gas are wanted in every part of the world, most countries have build a global pipeline network and/or have integrated a part of their pipeline systems into a global pipeline network. As a result, globally demanded products can be conveyed more efficiently and cheaply from all over the world. This is an ongoing process that hasn’t reached its end yet. Globalisation together with the fact that energy demand is rising in Belgium 10 make sure that there will be big opportunities for further pipeline development.

3.1.5. Hostile environments

In general, a pipeline system is insensitive to weather conditions; rain, frost, snow, flood or extreme heat does not have an effect on the operations of a pipeline system. Even difficult topographic regions are not a problem for the construction of a pipeline system. However, the journey a pipeline makes can hold many challenges. There are many seismic regions in the world which can be dangerous for a pipeline –see appendix 2, figure 5. Earth movements are not the major cause of accidents, but the damage to the pipeline system can be severe –see appendix 2, figure 6. Sometimes the product that needs to be transported is

13 located in arctic regions with permafrost r and ice-gouges s. In these circumstances pipeline transport is often the only possible mode of transport. There, construction workers are exposed to barbaric work conditions –see appendix 2, figure 7. A densely populated region also reduces the feasibility and limits the available trajectory options. A steep slope, a strong current and bottom irregularity are environmental conditions that can cause instability. A strong current not only can destabilize a pipeline but also can cause vibrations that weaken the pipeline. Just as the quality of an IKEA chair is tested by a machine that imitates the movements of a person sitting up and down on the chair a thousand times, the quality of a pipeline is tested by a machine that imitates the hostile environments. For instance, the strength of a pipeline and its welds can be tested at the University of Ghent where they now have an impressive machine that imitates the effect of a strong current on a pipeline. These tests are necessary to assure the safety and reliability of a pipeline, and enable researchers and buyers to compare the quality of pipelines provided by different producers.

3.1.6. Bottlenecks

Although it can be concluded that in some cases pipeline transport is a superior mode of transport, especially when it comes to conveying highly demanded liquids over long distances, it is sure that pipeline transport receives lesser attention than other modes of transport in Flanders. There are some bottlenecks to be clarified. At first sight, space should not be an issue since a pipeline does not need much of it. Moreover, for keeping down construction costs, a pipeline is usually laid in remote areas. But finding the right trajectory is not always easy. Sometimes it is even physically impossible to go through a place. Nevertheless, the main problem is that the government has not foreseen enough space for possible pipeline trajectories in the regional planning 9. Pipelines as a mode of transport are put at a financial disadvantage by the government. Where the road, railroad and port infrastructure are almost completely financed by the government, the infrastructure of a pipeline system is not widely available and the connection has to be paid for privately. For example, if a firm wants to transport its goods via a pipeline because it thinks that this mode of transport is the most economical but there is no pipeline available, the company can wait for a long time, look for another mode of transport or make the investment itself. Looking for another mode of transport is mostly the most rational

14 decision. Since the firm will simply use another mode of transport, the need and possibility for pipeline transportation can be ignored by the government and industry. Even if the government contemplates the construction of a pipeline system, it will be frightened off by the high initial cost price tag and the high pay-back period of 15 years on average 9. Besides, it takes some time before a pipeline system attracts the necessary businesses and uses its full capacity. All these facts make it more difficult for the government to decide whether or not to build a pipeline. Another drawback of pipelines as a mode of transport is that the firm has to carry the cost associated with the termination of the pipeline system. When a pipeline has to be relocated or is been shut down for economical or practical reasons, the firms that were using that pipeline will have to endure the costs related to using another mode of transport or the costs related to relocating their factory to another pipeline. The most important bottleneck is the lack of transparency and efficiency in obtaining licences as well as the lack of coherency between the responsible authorities 9. There are too many different rules and permits required before a pipeline can be legally constructed. Hence, often too much time is lost waiting for permits before the construction works can begin. An important drawback of a pipeline system is its inflexibility; all the input and exit points are fixed 11 . Therefore, trucks can come in handy for making a pipeline system more flexible. The system is also inflexible because a pipeline has a limited capacity. Transporting extra volume through the pipeline when the capacity is saturated is impossible. When on the contrary the capacity of a ship, a train or a truck is saturated, extra volume or cargo can be transported in a different ship, train or truck. Providers of pipeline transport will have to take into account the peaks and seasonal fluctuations in demand when deciding which capacity - e.g. the diameter of the pipeline- would be optimal and how to sell the capacity. To cope with this problem, some providers have installed storage tanks in their system to satisfy the high demand when necessary. There are several different international standards which make cooperation between the different countries less efficient. Neighbouring countries use the same pipeline materials but the safety barriers used are different 12 . Even more, different countries sometimes demand a different gas composition.

4. Pipeline versus other modes of transport

Figure 3: Emission

Figure 4: Emission (environmental impact calculation of transport)

There are several reasons why pipeline transport is often the preferred mode of transport, especially when a liquid or gas has to be transported over a long distance. Next to the fact that a pipeline has almost no noise pollution and is usually put out of sight –laid underground or in remote areas-, a pipeline is also the least polluting mode of transport. The carbon dioxide emission of pipeline transport is comparable with the carbon dioxide emission of train transport and sea-shipping and which is much lower than the carbon dioxide emission of other modes of transport. Moreover, the nitrogen oxide and volatile organic compounds t emission are also lower compared to other modes of transport –see figures 3 and 4. In conclusion, pipeline transport is the most environmental friendly mode of

16 transport, which is a huge benefit in a world that is becoming more and more concerned with the impact of transportation on the environment and the consequences of climate change.

Figure 5: Safety ranking

Figure 6: Distribution of incidents per cause of the European Gas Incident Data Group

Pipelines are a very safe mode of transportation and ranks, according to Sechaud and Metz, far above railroad transportation, sea shipping and road transportation –see figure 5. Essenscia even states that pipeline transport is the safest mode of transport in the whole world. This is rather surprising as most pipelines transport hazardous or flammable liquids or gasses. Even though more European companies are becoming member of the European Gas Pipeline

Incident data Group u, meaning that the magnitude of the pipeline system of the European Gas Pipeline Incident data Group increases, the number of incidents is generally decreasing –see appendix 2, figure 2. Most accidents happen by unauthorized digging and negligence –see figure 6. For example, the deadly accident in Gellingen in 2004 was due to the inexperience and inattentiveness of a young site manager. But keep in mind that this was the only deadly accident since 1970 with the transport of natural gas in Western Europe 9. Furthermore, the data from CONCAWE v show that the safety in oil pipelines in Europe has increased a lot –see appendix 2, figure 4. Obviously, a pipeline is less susceptible to theft. It is a large, heavy and anchored piece of metal that is only useful in a pipeline system –or as scrap metal after fulfilling its purpose. Rural and steep areas do not pose an insurmountable problem for the construction of a pipeline system as a result of which the pipeline route is on average 10 to 30 % shorter than any other onshore mode of transport 13 . Once the pipeline constructed, the space occupied is minimal. Inland shipping needs 100 times, road transport needs 50 times and railroad transport needs 12 times as much space as pipeline transport 9. A pipeline system nearly does not occupy any surface area which makes pipeline transportation a very convenient mode of transport, especially in densely populated areas. Furthermore, a pipeline can go almost anywhere, it can be laid as well as offshore as onshore. Shipping is bound to the sea, rivers and ports, railroad and trucking transport are limited to land and plains will always be bound to an airport. Compared to other modes of transport, pipeline transport is the most convenient and reliable. As with other modes of transport the capacity of a pipeline is limited, but once the capacity is booked it is certain that the product will rapidly reach its destination in time. Other modes of transport are less reliable. Pipeline systems governed by private institutions as well as pipeline systems governed by governmental institutions both have a “fairer” price than other modes of transport. The expenses done for constructing, operating and maintaining a pipeline are all reflected in the price for conveying a product. So, the costs for using a pipeline to transport a product are directly charged to the consumer. In contrast, trucks cause more congestion, wear out the road and cause more accidents, all externalities for which the government has to pay. These externalities are not charged to the consumer but charged to the society (or part of the society). The same goes for the noise pollution caused by aviation or the water pollution caused by shipping. Hence, the price of pipeline transport is a fairer price in the sense that the

18 costs of transportation are all paid by the consumer and not by society. Note that in this sense the fairness of a price has nothing to do with the profits earned. The enormous transport capacity of a pipeline system is one of the biggest advantages a pipeline system has over other modes of transport. For example, a 48’ pipeline can transport 80 to 90 million ton oil a year. If other modes of transport would transport this volume they would require a day: 1 mammoth tanker of 250.000 ton or 250 inland tanker ships of 1.000 ton, or 100 trains transporting 60 times 40 ton, or 10.000 trucks of 10 ton each 13 .

4.1. Pipeline transportation VS air transportation

Although pipeline transportation and air transportation are both a means of transport, they are not really competitors of one another. Where aviation mainly focuses on the transportation of bulk goods or passengers over a long distance, pipeline transport focuses principally on the conveyance of large quantities of liquids, gasses or slurry and the transportation of bulk goods over a relatively equal long distance. Only if the transportation of bulk goods by capsule pipelines will be used more widely, competition could occur. Since this is not –yet- the case, a comparison between these two modes of transport is redundant.

4.2. Pipeline transportation VS rail road transportation

Rail road transportation can be considered as a competitor of pipeline transportation since they both can transport liquids, gasses or slurry over a long distance. The solution to the question “which mode of transport is the most appropriate?” depends on the situation. There are several factors to take into account. First, rail road transport is a more expensive mode of transport in the long-term. In comparison with railroad transport, Trench states that replacing a 150.000 barrel per day 1.000-mile pipeline with a unit train of 2.000-barrel tank cars would require a 75-car train to arrive and be unloaded daily, after returning to the source empty, along separate tracks to be refilled 11 . Furthermore, as said before, pipeline transportation is a safer and greener mode of transport than rail road transportation. However, rail road transport can be a superior solution than pipeline transport in some situations. When a region only needs a limited amount of liquids, gasses or slurry or the long- term future demand is uncertain, building a pipeline system can include a huge underutilization risk. In addition, a pipeline system can normally only convey liquids, or gas

19 or slurry. In contrast, rail road transport can transport liquids, gasses or slurry at the same time or alternately. Moreover, next to liquids, gasses or slurry, a train can also convey goods or passengers. These factors imply that rail road transport is a much more flexible mode of transport than pipeline transport. Thus, if there is a situation where demand for a certain liquid, gas or slurry is too uncertain or too little and this underutilization risk cannot be overcome by supplying other needs so that the capacity can be fully utilized, rail road transport will be a better solution than pipeline transport. Besides, when the required rail road network already exists and there only has to be made a connection to the rails or the connection can be easily made by trucks, the initial investment cost will be very low. The same goes for when the required pipeline network already exists. So even when the future demand of a product is considerably uncertain, rail road and pipeline transport can be a good solution because the high initial investment cost will be avoided and only the variable transport costs will have to be paid. Hence, in a situation where demand is uncertain or little, the appropriate solution depends on whether a network already exists. However, such a situation will not emerge often since the appropriate networks are not universally available.

4.3. Pipeline transportation VS sea shipping

Only sea shipping has a comparable long-term cost curve but is limited to offshore transportation. This makes sea shipping a fierce competitor for offshore pipeline transport. Again, the big disadvantage of a pipeline system is its inflexibility. Sea shipping has a comparable long-term cost curve but can in addition ship its cargo to many different ports. So the choice of mode of transport will depend on the degree of flexibility needed.

4.4. Pipeline transportation VS road transportation

One of the benefits of a pipeline system is its energy friendliness. The energy a pipeline system uses equals 20 to 25% of that of road transport per tonnage/kilometre 9. More importantly, the cost for trucking escalates sharply with distance, making a pipeline system much more profitable than trucks for transporting liquids or gases over a long distance 11 . In other words, if the liquids or gasses have to be conveyed over a long distance, trucking will be the last mode of transport the supplier will chose. In the situation where a long distance has to

20 be covered, road transportation will only be chosen as a last resort or in case of an emergency. More, Trench assumes that if each truck holds 200 barrels w and can travel 500 miles x a day, it would take a fleet of 3000 trucks, with a truck arriving and unloading every 2 min, to replace a 150.000 barrel per day, 1.000-mile pipeline 11 . The NATO calculated that the transport carried out by the CEPS is equivalent to approximately 450 trucks 24 hours a day all year long on the roads. Especially, this pipeline transport is carried out in densely populated areas, without traffic jams, without polluting the environment and without road accidents 14 . When trucks would take over the transport service the Rotterdam Antwerp PipeLine (RAPL) provides, there would be a need, according to the RAPL, of over 1100 trucks which drive the crude oil from Rotterdam to Antwerp continuously 15 . As cited above, trucking cost rises sharply with distance and thus is limited to short haul movements. Moreover, the volume a truck can transport is relatively small in comparison with the volume that can be transported by pipeline (or ship). Despite these drawbacks, trucking remains essential to both the completeness and competitiveness of the pipeline transportation system as a whole 11 . Trucking is often used to transport the product between the terminals and the consumers, the stocking depots or the ships. On the one hand there are pipeline systems –such as the gas pipelines in Belgium- that deliver their product directly to the consumers, and on the other hand there are pipeline systems –such as the Central European Pipeline System- that deliver their product to a distribution centre, airports and industries. For the pipelines that do not deliver their product directly to the consumer, trucking still plays an important role in the transport network – evidently, the product has to be delivered to the consumer. Even when a pipeline system normally delivers solely directly to a customer, the probability that a pipeline network can deliver to every single demander is very small, thus a pipeline network will still need trucks to complete their transport service. Some locations of customers are too remote or some customers need the product only for a short time so that a pipeline connection in both situations cannot be profitable. In conclusion, road transport is indispensable for coping with the inflexibility of a pipeline system.

5. Pipeline transportation

Table 4 3 conditions - Long distance - High throughput - Long period

As written before, a pipeline system has a declining long-term average cost curve which makes a pipeline system the ideal mode of transport for conveying highly demanding liquids and gases over a long distance. The high initial costs of a pipeline system is justifiable when the distance covered is long enough, the throughput is high enough and the period the system will be used is long enough. When these conditions are fulfilled, the average long-term transportation cost of a pipeline system will be lower than any other mode of transport. According to Wilson, oil pipeline shipments account for more than 17% of the total freight moved nationally in the U.S. but less than 2% of the national freight cost 16 . The first condition states that the distance covered has to be long enough. This is evident since most pipeline systems require costly pumps, compressors and/or storage tanks. The longer the distance covered, the more these high costs can be spread over this long distance which will decline the cost of transport per unit distance. This condition is for most pipeline systems absolute (not for gravitational pipeline networks). The second or third condition, or preferably both conditions, has to be fulfilled too for the pipeline system to have an economically attractive declining long-term average cost curve. When the throughput is high enough the pipeline system can become lucrative over a shorter period, which is valuable when there is much uncertainty about the future or with other words when the third condition is not guaranteed. When the period for which the pipeline system will be used is long enough it not necessary to have a super high throughput for a pipeline system to be a good investment. The value of a pipeline system will be the highest when both the second and third condition are fulfilled. Then pipeline transportation will be the superior mode of transport. Similar to continuously working industrial processes, the costs per unit rises sharply when the pipeline system is underutilized 13 . This means that the fixed costs and the variable operating costs will have to be spread over a smaller volume when the system is underutilized. More, the transportation of small batches will be avoided because the variable

22 costs per unit would be very high in comparison with the variable costs per unit for large batches or continuously running transport of substances.

6. Pipeline systems

The different products transported by pipelines can be categorized in several groups: natural gas, oil chemicals, technical gasses, water, slurry and biomass 12 . Hereafter, the categories natural gas, oil, water and technical gasses will be examined and an example of a category pioneer will be thoroughly analyzed.

6.1. Natural gas

Natural gas is an energy product. It is transported from the natural gas fields –located onshore as well as offshore- to firms, to storage depots or straight to homes. Gas pipelines transport the gas with the aid of pressure. When natural gas has to be delivered overseas, it can also be transported by ship. Shipping natural gas can only be economical when the gas is cooled to - 160° -then it is called liquefied natural gas or LNG- so it will occupy only 1/600 th of its normal space.

Fluxys manages a 3.800 kilometres long gas pipeline system and is the independent provider of all the international transit-capacity in Belgium 10 . Since Fluxys does not make a distinction between Flanders and Wallonia in their operations and administrative work, the analysis of Fluxys will not be separated as well. Fluxys, however, does not convey the gas directly to the customers in Flanders. This task, conveying natural gas over middle and low pressure pipelines, is managed by one of 7 distribution network administrators and mainly executed by Eandis y. The low and middle pressure gas pipeline network is much more extended than the high pressure gas pipeline network, 3.800 versus 51.000 12 kilometres.

6.1.1. Fluxys

Fluxys is active in the field of gas transportation for many years. They have a clear strategy which they try to follow aggressively.

In attracting many suppliers, Fluxys ensures competition that will lead to better prices. Furthermore, this will increase the independence of the consuming countries since if a supply runs out or becomes too expensive, they can simply switch to another supplier. Fluxys finds this diversification of multiple sources paramount and tries to increase the number of sources even more by connecting the Fluxys pipeline network to other sources, but of course only if the connection is an economical good investment.

Figure 7: Fluxys at the centre of Western Europe’s gas pipeline network

The Fluxys pipeline network is at the centre of the Western Europe’s gas pipeline network – see figure 7- and plays an important part as distributor of gas in all of Europe. By investing more, Belgium can strengthen its important role as distributor of gas in Europe. The European Commission has recognized this important role and has agreed to co-invest in the Fluxys network 17 .

Figure 8: Infrastructure

Fluxys tries to improve the flexibility of its pipeline network by increasing the number of interconnection hubs z. Additionally, more interconnection hubs will make sure that the increasing number of suppliers will have the opportunity to use the Fluxys network when they want to 10 . Other aspects of the Fluxys network that improve the flexibility are the spot market in Zeebrugge, interruptible transit capacity, the possibility of the East/West pipeline to transport the natural gas in both ways and many more aspects.

Fluxys provides different services: transport, transit, storage, terminalling of the LNG, hub services and services that support the operations. Fluxys uses an extensive pipeline system – see figure 8 - to enable these services. Each service will be elaborated on.

6.1.1.1. Services that support the operations

These services enable and optimize the operations but are of lesser importance than the other services. For example, Fluxys’ subsidiary Gas Management Services Limited aa enables customers to track down their product in the transport chain.

6.1.1.2. Transport and transit

Fluxys has a pipeline network from over 3.800 kilometres which it can use to transport or transit gas 10 . When gas is transported that means that the gas will be delivered somewhere in Belgium, when on the contrary gas is transited then gas is conveyed to another country. Since the transport and transit service use the same infrastructure, these two services are examined together.

Figure 9: New pipelines 2008 & 2009

(2008)

(2009)

There have been some investments in the transport service in 2008. There is a compression station developed in Zelzate (about € 83 million). Demand for gas has risen in Aalst, Aarlen and Lier for which new pipelines have been developed between respectively Brakel en Haaltert, Messancy and Aarlen and Zandhoven and Ranst (about € 53 million) 10 –see figure 9. The demand has also risen with the industrial firms which resulted in 8 new connections making 263 connection in total instead of 255 10 . 7 new pressure reducing stations have been developed too. Summarizing, there has been invested for € 198 million in infrastructure –this includes investments in the LNG-terminal- in 2008

The conflict between Russia and Ukraine showed the value of the two-way flow direction of the East/West pipeline. Because of their dispute, Russia discontinued the gas flow to Ukraine which consequently stopped the gas flow to Germany and France. Thanks to the two-way gas

27 flow direction of the East/West pipeline, Fluxys was able to stand in for most of Germany’s and France’s gas needs.

Figure 10: New capacity

New East/West capacity

New North/South capacity

The market has shown an interest in the expansion of the capacity of the East/West pipeline. Therefore, two new pipelines are being developed to meet the needs of the market, one between Zomergem and Desteldonk and the other between Opwijk and Eynatten 10 . These pipelines should be finished and ready to use this year. This project has a price tag of € 300 million –see figure 10. In 2008, a survey revealed that there was also a demand for extra North/South capacity. A pipeline could be laid from Zeebrugge, ‘s-Gravenoever or Eynatten –North- to Blaregnies –South.

6.1.1.3. Storage

Figure 11: Fluctuation in demand

Storage is a buffer used to cope with the fluctuations in demand. In Belgium fluctuations are caused by difference in temperature during winter and summer season –see figure 11. According to Fluxys, they are even able to cope with an extreme winter season which only happens once every fifty years 10 . One way to cope with these fluctuations is to store LNG in storage depots and gasify it when needed during peaks. Because the gas market is expanding and fluctuations are expected to become more intense, it is a wise move by Fluxys to expand their storage capacity. Fluxys has a storage depot in Loenhout which it is trying to expand from 600 to 700 million cubic metres The expansion of Loenhout won’t be sufficient for the future, Fluxys wants to expand their storage capacity even more. It searched for another possible underground storage depot in the area of Poederlee but came to the conclusion that the Poederlee area was not good enough. But Fluxys has already put its mind to another possible underground storage depot in Limburg.

6.1.1.4. Terminalling of LNG

Ships transporting LNG can load and unload their LNG at a terminal. The LNG is then stocked in a storage depot and later transferred to another ship –this is only possible since

2008- or gasified before pumped in the Fluxys network. It is Fluxys’ subsidiary Fluxys LNG NV that utilizes the LNG-terminal in Zeebrugge for commercial activities. Since 2008, there is an extra fourth storage tanker and extra gasifying stations that have increased the storage capacity from 4,5 to 9 billion cubic metre. This means that the LNG-terminal at Zeebrugge can welcome 110 ships a year instead of 66 10 . In addition, the sea port of Zeebrugge has been modified so that the LNG-terminal can receive larger ships coming from Qatar, Norway and Trinidad & Tobago. It seems that the future will bring along more transport, transit and storage capacity expansion. Many players have shown interest but it is not yet certain when this second expansion will be realized.

6.1.1.5. Hub services

Another subsidiary of Fluxys is Huberator which provides a LNG spot market in Zeebrugge. According to Fluxys, Huberator is one of the most important short term markets in gas in Europe. The gas traded in Zeebrugge can be further traded or transported to the selected location.

6.1.1.6. The Balgzand Bacton Line

Figure 12: The BBL

The Balgzand Bacton Line company is a joint venture of Gasunie, Fluxys and E.ON Ruhrgas. It operates the BBL offshore pipeline between Balgzand (Netherlands) and Bacton (U.K.) –

31 see figure 12- and is the only activity of Fluxys that is located abroad 10 . The BBL pipeline is just operational since 2006 and is the second pipeline that connects the U.K. and Europe. The other one is the Interconnector pipeline between Zeebrugge and also Bacton.

6.1.1.7. Safety

Safety is of the highest priority for Fluxys. As with pipelines in general, most accidents with gas pipelines happen by unauthorized digging and negligence. In preventing these accidents, the law prescribes that every one has to report their construction works to Fluxys when these are situated in the proximity of a Fluxys pipeline. If these construction works appear to be too close to a Fluxys pipeline, than a standard safety procedure is set in motion to help the construction workers to safely do their job. Additionally, Fluxys has a team which sole responsibility is to check if there is no unauthorized work going on too close to a Fluxys pipeline. This team is continuously on the road inspecting every pipeline of Fluxys. They even have a helicopter to their disposal for inspecting the rural areas 18 . Other companies that lay pipelines underground such as Belgacom, Telenet, and Eandis are being given advice about working near a Fluxys pipeline. There are also two websites, the KLIM ab and KLIP ac , where people can post there construction plans as a warning to the owners of cables and pipelines.

6.1.1.8. Pigging

The pipelines have a cathode coating that protects them against corrosion, but that does not mean that pipelines are indestructible or cannot wear out. Pigging is an in line inspection technique that blows a pig –e.g. a pig shaped device- through the pipeline to clean and inspect the pipelines from the inside. Fluxys cleans and inspects their pipelines in three stages. Firstly, the pipelines are cleaned with a pig which is slightly larger in diameter than the pipeline so it can put pressure against the interior wall and thus cleans the pipeline. The cleaning also enhances the quality of the inspection in the third stage. Secondly, to verify that the pipeline does not have any obstacles in the pipeline, the pipeline is inspected by a gauge pig before moving on to the third stage 19 . A gauge pig has many metal spikes on the exterior –see figure 13- which will

32 bend when passing over an obstacle. The angle of the Figure 13: A gauge pig metal spikes that are bending over determines the height of the obstacle. When the obstacle is considered too high, the obstacle will be removed before pushing through the intelligent pig. In the third stage, the intelligent pig will examine the pipeline with ultrasonic waves. The time the waves need to travel to the pipeline wall and back again determines the distance and thus determines the thickness and quality of the pipeline –see appendix 2, figure 8. 18 Nowadays, a pipeline design takes into account the need for pigging so that every part of the system can be pigged. Some parts of old pipeline systems are even adapted so that they can be pigged. For the parts that are not adapted, Fluxys is searching with the Groupe Européen de Recherche Gazière for alternative measuring techniques 10 .

6.1.1.9. Trajectory

In Belgium, a company has to obey many different rules and acquire many permits before it can construct a pipeline. In addition, Belgium is a relatively densely populated country that does not have any lanes reserved for future pipelines, making it not easy to draw a trajectory. According to Fluxys, developing a relatively large pipeline project will take approximate 5 to 6 years. 10 . Waiting, however, 5 or 6 years on an expansion is a very big drawback for many firms. This timeframe is much too long and must shorten to make pipeline transport more appealing. A good relation with the agricultural industry is paramount for Fluxys because many pipelines for the most part are laid under agricultural territory. When Fluxys is constructing a pipeline on a farmer’s land, the farmer cannot use (part of) his land to make money, hence this opportunity cost is reimbursed by Fluxys. Furthermore, it is made sure that the farmer can still use the essential pathways and that there is water available for his animals. The damage done to the environment will be reimbursed and/or the area will be restored.

6.1.1.10. Environment

Fluxys has taken many different steps to mitigate their impact on the environment: it uses green energy for most of its operations; it is reducing its paper spill; it tries to be a benchmark company for energy efficiency; company buildings operate on renewable energy and are well isolated. Every project Fluxys makes is accompanied by an energy study and the most far- reaching measure is that it tries to operate the gasifying stations of the LNG-terminal at Zeebrugge by using the warmth of the ocean. 10

6.1.1.11 Investments

Fluxys scouts for future investments opportunities. It is not only concerned about the actual maintenance, operating and other service costs but also about the future position of the company. Since Fluxys is at the centre of the Western Europe’s gas pipeline network, it cannot afford to stay behind and ignore the market needs. Fluxys is a company that has to grow in order to survive and remain important. Fluxys has an investment program which looks 10 years into the future. Every year, the program is adapted to the new market signals. Both demand and supply can be expected to increase, decrease, or to become more uncertain. Market signals in the near future will weigh more than signals in the more distant future since they can be more accurately measured with a simple questionnaire. For every project Fluxys will conduct a simulation and look what the impact of that project will be on the Fluxys network. Since Fluxys is connected to many other foreign gas pipeline networks, it will sometimes have to review their project with other countries to make sure that the other countr(y)(ies) will make the necessary adjustments to their network. The budget of the investment program has risen dramatically in 2008, from € 1,7 billion to € 2,8 billion. This rise is mainly caused by the North/South project, theEast/West expansion to Zomergem, the compression installations and the price inflation of the necessary materials. The important investments Fluxys is making or is going to make are shown in figure 14.

Figure 14: Investments

6.1.2. CREG (Commissie voor de Regulering van de Elektriciteit en het Gas)

Europe is trying to become a more liberal union by, for instance, liberalizing the energy market. Making the European gas market more liberal, states could chose from 3 systems. Belgium has chosen for the ownership unbundling system 10 which means that the transport, transit, terminal and storage services have to be provided by someone who does not own gas. In order to do so, Fluxys has taken over Distrigas & C° az . This will not only make the Belgium gas market more liberal, it will also make the Belgium gas network more easy to operate since all the infrastructure will be in the hands of one firm, namely Fluxys.

Since the liberalization of the gas market any supplier can choose to make use of the pipeline network of Fluxys. The tariffs Fluxys sets are equal for every supplier so that discrimination and power play are avoided. The CREG ad is the Belgium federal regulator that determines the tariffs Fluxys can ask for its services of transport, transit and storage of gas. Only the transport, transit and storage tariffs are regulated by the CREG because these services fall under the gas legislation. Tariffs are set to reimburse the operating costs and the depreciation and amortization of the assets and to give a reasonable compensation for the invested capital of Fluxys. Because in the end the CREG decides what the tariffs will be, it has much influence on the result of Fluxys. This power is clearly demonstrated in the year 2008. As from 2008 the tariffs enforced by the CREG have to be applied for four years instead of two 10 . However, it was Fluxys that made the CREG a proposition for the tariffs in 2008 until and including 2011. But the proposition was rejected and the CREG enforced its own tariff for transit, transport and storage. Only, Fluxys was convinced that the transit tariffs were unreasonably low and took legal action against the CREG. In 2008, awaiting a final decision, the court ordered that the transit tariffs of 2007 have to be used – temporarily- instead of the new tariffs of 2008. Since Fluxys and the CREG are also in a disagreement with regards to the transport and storage tariffs, they both agreed to –temporarily- use the tariffs of 2007 until the court decides what to do. Where the court can decide that the tariffs should be higher, Fluxys booked provisions for this risk. Because the price of the service provided by Fluxys was ambiguous in 2008, the results of 2008 are ambiguous too 10 . The CREG has approved the new tariff proposition of Fluxys so that the tariffs for the remaining 2 years of the 4 years period will be 35% lower than the temporarily tariffs 20 . But not every quarrel has been resolved yet so that certain provisions still have to be set aside 10 .

6.2. Petroleum

In ancient times, petroleum or crude oil was of minor importance. In Egypt it was used for preserving mummies and in China they used oil for boiling salt 21 . At present, petroleum is one of the most or even the most important commodity there is, it makes the world go around. It is distilled in different components and used for various purposes.

6.2.1. The Belgian Pipeline Organisation

BPO stands for Belgian Pipeline Organisation and is a military organisation created by the North Atlantic Treaty Organisation ae . It is responsible for the exploitation of that part of the Central European Pipeline System –or the CEPS- that runs under Belgium and Luxemburg territory. Luxemburg has given Belgium the right to take control over their part of the CEPS 22 . Both, the pipelines of the CEPS spread over Belgium and the pipelines of the CEPS spread over Luxemburg are managed by the Belgian Pipeline Organisation and measure approximately 800 kilometres 22 . The BPO manages the commercial, administrative and legal aspects of their part of the CEPS 22 while meshing their operations with the other operations of the CEPS. The Belgian Pipeline Organisation is part of the Central Europe Pipeline Management Organisation, or the CEPMO, which is in charge of the Central European Pipeline System. The CEPMO, further, coordinates its actions with the other pipeline systems of the North Atlantic Treaty Organisation Pipeline System, or the NPS 22,23 . The BPO counterparts are DPO in the Netherlands, SNOI in France and FGB in Germany 22.

6.2.1.1. The NATO Pipeline System

One of the biggest challenges of (modern) war fare is the assurance of petrol supply 24 . The distribution of petroleum was of paramount importance during World War 2, but at that time the distribution network was far from optimal. Many pipelines had to be laid in a hurry to supply advancing troops and offshore pipelines had to be laid to replace the easy targeted tanker ships. The benefits –especially the military ones- of pipeline transportation were above all clearly demonstrated with the Pipeline Under The Ocean – also called PLUTO- project which saw to the supply of the troops. The PLUTO pipelines were hasty laid by customized ships and transported oil from England to Normandy, Belgium and the Netherlands. After being confronted with their dependence on petroleum, the NATO members brought to life the NATO Pipeline System to ensure that all the essential and strategic (military) positions could be fed with petroleum, and thus reducing their vulnerability in times of war.

However, there are dissimilarities between the pipelines back then and the pipelines of the NPS now. Back then the pipelines were laid above ground, were smaller, operated under low-pressure, had less exit points and had no storage depots 24 .

6.2.1.2. The Central European Pipeline System

The Central European Pipeline System is a high-pressure pipeline network that transports different products including jet fuel, gasoline, diesel fuel and naphtha 23 . The CEPS is spread over 5 countries: Belgium, the Netherlands, Luxemburg, France and Germany but is governed by 6 nations: the 5 host countries and one user country the United States. The CEPS is made up of 5.100 kilometres of pipeline ranging 6 to 12 inches af and links 34 NATO depots, military and civil airfields, refineries, civil depots and sea ports situated in the host nations 23 -see figure 15. The major civil airports that are supplied with jet- fuel are Frankfurt, Schiphol, Zaventem, Luxemburg and Zurich 23 .

Figure 15: The CEPS map

The CEPS provides a storage, transport and distribution service for both the public and the military. Since the BPO is a military organisation of the NATO, -theoretically- the military needs get priority over the public needs. However, since the military significance of

Belgium is rather small and the military importance of the CEPS has diminished substantially with the end of the Cold War, the application of the CEPS has shifted from military use to civil use. When the military requirements in peacetime have been satisfied, the remaining capacity may be used for commercial purposes under strict safeguards 23 . This alteration to commercial purpose enables the NATO to keep the costs down because, as pointed out before, a pipeline system is only economical when the distance involved is significant –as is the case with the CEPS- and when there is enough throughput for a long period –this is not the case when the CEPS is only used for military purposes. This cost reduction by commercializing the CEPS was necessary in order to get by with a reduced post war national defence budget. However, under all circumstances, the military priority clause included in the commercial contracts guarantees the primacy of supply to military forces 23 . This military priority clause, however, should be toned down. Major civil orders will not be interrupted by the military because fuel is needed for a simple training exercise and in time of conflict the military will get priority with or without a military priority clause. This does not mean that the military purpose of the CEPS has vanished. The CEPS was, according to the NATO, an absolute necessity for the NATO operations in Kosovo 23 .

6.2.1.3. The Central Europe Pipeline Management Organisation (CEPMO)

The Central Europe Pipeline Management Organisation, or CEPMO, is responsible for the exploitation of the Central European Pipeline System which involves providing a transport, storage and distribution service. Next to the usual service requirements of a pipeline system, the CEPMO is also responsible for the negotiation of the commercial tariffs. The CEPMO is a division of the NATO’s Production, Logistics or Service Organisations ag,23 and consists of the CEPMO Board of Directors ah and the Central European Pipeline Management Agency, or CEPMA. The CEPMA deals with the everyday operations and problems of the CEPS. This includes managing operations, marketing of the CEPS, technical developments and finance and administrative work 23 . Furthermore, they follow the orders given by the CEPMO BoD. On the one hand, the CEPMA is a centralized organisation based in Versailles but on the other hand, the day-to-day operations and maintenance are done by national dispatching centres and are thus decentralized. These national organisations are coordinated by their own government

40 but are still funded from a centralized budget coordinated and managed by CEPMA and authorized by the BoD 23 . The CEPMO BoD decides in which direction the CEPS has to evolve and determines the appropriate tactic and budget. Each country, including the United States, has a representative on the board who takes into account their national interests when using their 1 vote. As cited above, the decisions made by the board are subsequently implemented by the CEPMA.

6.2.1.4. NATO Petroleum Committee

The NATO Petroleum Committee is concerned with petroleum and all the products petroleum can be refined into such as jet fuel, gasoline, diesel fuel and naphtha which are transported by the CEPS. Thus, where the NATO Petroleum Committee ai advices the NATO over all the matters concerning petroleum, the NATO Petroleum Committee has influence over the NATO Petroleum System. The tasks of the NATO Petroleum Committee includes the review, assessment and evaluation of the military petroleum logistics organisation, the development of standardized petroleum products and handling equipment, the monitoring of the operations and maintenance of the NPS and storage depots, the development of environmental guidelines,..

6.2.1.5. The future

With the end of the Cold War, the military importance of the Central Europe Pipeline System has been reduced and the need to optimise the CEPS for commercial objectives has increased. This evolution is clearly supported by the fact that the volume transported through the pipelines of the BPO has increased enormously over the years due to the increase of civil needs 22 . Because the goal of the CEPS has changed to more economical purposes, the CEPS has been modified in terms of operational capacity, flexibility, automation, safety and protection of the environment 14 . For example, the storage depot of Florennes, the loading dock for ships in Schoten or the pipeline to the airport of Brustem have all been discontinued 24 . In time of peace, elements of the CEPS that have become useless or too expensive have been deactivated. For instance, the replacement of a 6 inch aj pipeline by a 12

41 inch ak pipeline or the introduction of a leakage detection system are examples of the adaptations done for commercial purposes 24 .

Because the relevance of military control is rapidly fading away, the North Atlantic Treaty Organisation is looking for a buyer for the NATO Pipeline System 25 . This will lead to a completely different organisation than described above.

6.2.2. RAPL

The refineries of Antwerp used to be supplied by tanker ships coming over the Westerschelde. The ships back then were small and not too deep. Now, however, the tanker ships which transport crude oil are much bigger for economical purposes and, consequently, cannot come over the Westerschelde anymore to supply the refineries in Antwerp 26 . For this reason, the Rotterdam Antwerp Pipeline -or the RAPL- came into existence. The big difference between the Central European Pipeline System and Rotterdam Antwerp PipeLine is that the RAPL transports crude oil through its pipeline and not refined petroleum products. The RAPL transports the petroleum from the storage depots in Rotterdam but has no petroleum storage depots of its own 26 . The RAPL transports the petroleum through a 100 kilometres long pipeline network from Rotterdam to Antwerp where it is transformed into many refined petroleum products. Thanks to the growth of the refineries in Antwerp over the years, now, almost the whole capacity of the RAPL is used to deliver crude oil to these refineries in Antwerp 15 . Furthermore, as most pipeline systems, the RAPL operates 24/7. Just as for other pipeline systems, safety is a priority for RAPL n.v. 27 . Since the RAPL transports petroleum which is flammable, caution and prevention are important. The RAPL is inspected daily by car and helicopter, and the wall of the pipeline is inspected by an intelligent pig –as was also the case in the Fluxys company 28 .

6.2.3. Example: Kerosene pipeline

Appraisal kerosene pipeline Antwerp-Zaventem 29

Start: Antwerp Scheldelaan End: Airport Zavetem

Approximate length: 70 kilometres Pipeline diameter: 10” Wall thickness: 7,1 millimetres

1 exit point al with 4 pumps Expected that the current size of the fleet of trucks am in Zaventem will be sufficient.

Costs of study: € 750.000 (Permits, measurements, soil investigation, designs,…)

Costs of the pipelines: € 5.250.000 (Will fluctuate enormously in function of the unstable price of steel)

Development of the pipeline system according to the Fluxys method: € 21.000.000 (Fluxys method: certain standards of performance and safety that have to be applied)

Study, delivery and development of the exit point: € 10.000.000 (Includes the whole structure with all the mechanics)

Total: € 37.000.000 = € 750.000 + € 5.250.000 + € 21.000.000 + € 10.000.000

This example clearly illustrates the high initial price tag of a pipeline. Although this hypothetical pipeline is relatively small, its costs are enormous.

6.3. Water

Water is indispensable. Because people need water to cook, to clean and to shower or to bade, people should have a right to clean water against a fair price or even for free. Since without water many human rights cannot be fulfilled, an expert commission of the United Nations regards the right for water as a basic human right. In addition, the commission states that water should not be considered as an economic commodity and should, thus, be

43 commercialized in a durable way in order to fulfil the needs of the present and future generation 30 . In Belgium, the first legislation concerning the supply of water goes back to the 18 th century. The industrialisation of the 18 th century contaminated the water and, together with the poor hygienic standards at that time, increased the spread of epidemics 31 . Hence, trying to improve the hygiene, the government at that time made the many districts responsible for the water supply. Only, the districts did not have the knowledge or the funds to develop the desired water network. Because the districts failed in their task, the NMDW an was founded in 1913 to take over their responsibility. Finally, in 1987, the VMW ao took over the responsibility of the NMDW for Flanders 31 . The VMW, together with all the other Flemish water supply companies, are associated in the SVW ap,32 .

There are two types of water production processes when water is not collected from a natural source. Firstly, drinking water can be produced from groundwater 30 to 200 metres underground 33 . Groundwater has the benefit of being already naturally filtered by the earth but the problem is that by producing water from groundwater, the layers of earth which convey the groundwater can be drained completely in the process. Additionally, the VMW analysis concluded that 57% of the ground water was vulnerable to pesticide contamination 34 . Secondly, drinking water can be produced from surface water obtained from rivers. Consequently, this production process is dependent on the capacity of the rivers. In Flanders, however, there are many rivers so this dependence is not a huge drawback.

6.3.1. SVW (Samenwerking Vlaams Water)

The Samenwerking Vlaams Water (SVW) is an organisation that consists not only of the Flemish water supply companies but also of the Flemish sewage companies –many water supply companies are also sewage companies though 29 . The 3 biggest water supply companies of Flanders, and thus the biggest water supply companies of SVW, are Pidpa, TMVW and VMW. Figure 16 illustrates the distribution of the different water companies in Flanders.

Figure 16: Distribution of the water companies in Flanders

AWW TMVW

Vivaqua Pidpa

ISWa VMW

IMWV IWVB

IWM IWVA

United in the SVW, the Flemish water supply companies stand stronger. The SVW enables all the Flemish water companies to present them self as one strong entity and fund research together. By being a member of the Belgaqua aq , the Eureau ar and the IWA as , the SVW tries to be involved in the development of the water policies on a national, European and international level 35 . The SVW is represented by professionals who send a common message to the government and other organisations.

6.3.2. VMW (Vlaamse Maatschappij voor Watervoorziening)

Besides providing clean water for families, the VMW customizes water connections for companies and offers a sewage management service to districts. Moreover, the VMW transports and purifies the water after consumption. Of the 3 biggest Flemish water supply companies, VMW is number one. VMW produces approximate130.000.000 cubic metre water a year and transports it through a pipeline network of 30.000 kilometres to over

2.600.000 people in 170 districts in the 4 provinces West-Vlaanderen, Oost-Vlaanderen, Brabant and Limburg 36 . The majority of the VMW’s water production centres uses ground water instead of surface water 37 . The VMW has 3 major water production centres that use surface water which produce over more than 30 of the 130 million cubic metre water a year. After the water is produced, it is stored, pumped into the pipeline network or transported to a water tower. The water which is transported through the pipeline network is subsequently kept under pressure.

6.4. Technical gasses

There are many different types of gas for many different types of industries and applications. For example, oxygen, nitrogen, hydrogen, argon, carbon dioxide, helium are gasses used in the metal industry and helium, laughing gas and liquid nitrogen are gasses used in the healthcare industry. Most of these gasses are produced by splitting the air into different components creating different types of gas. Linde AG, Air liquide, Praxair and Air Products are the 4 prominent gas companies with respectively approximate 21%, 19% 13% and 10% market share 38 . In Flanders, many customers are not clustered together so that the possible throughput cannot be high enough to profitably manage a pipeline system. Therefore, most companies deliver their technical gas to their customers by truck. However, some industries or companies are clustered together so that pipeline transport becomes profitable for some substances. These 4 prominent companies, in addition, have pipeline networks to supply customers who are not located in the proximity of a gas producing facility. Only, a pipeline connection to the appropriate pipeline network is not widely available because a pipeline system is only profitable over a long distance when the demand is high over a long period. Since, there are not many types of gas which are in high demand over a long period, there are not that many pipeline networks to connect to. A gas pipeline system will only be developed when there are clusters of companies to supply. The demand of these clusters can be high enough over a long period to make the investment worthwhile to develop a long distance pipeline system. Taking into account the limited market opportunities to develop a technical gas pipeline, one can imagine the first-mover advantage. The gas pipeline networks in Flanders – as well as in Wallonia- elevate the chemical industry to a higher level. The pipeline networks attract more businesses that are active in the

46 field of chemistry and make sure that these businesses then stay in place. The pipelines connect the chemical industry clusters of the ARA-area at , the German Ruhr area and other areas in Belgium and Europe 9. The possibility to transport more products and in a cheaper way for the chemical industry allows the firms of this industry to manage their operation in a better way. Hence, firms of the chemical industry in Flanders will be more competitive and/or profitable.

There is, however, little public information available – according to the VIL for reasons of competition - about the pipeline networks of the different companies, especially about the ones in Belgium. It is known that Linde AG is the world market leader and that Praxair has a 31 kilometres long nitrogen pipeline in the port of Antwerp 39 . Even so, it seems that Air Liquide is the dominant technical gas producer in Belgium.

6.4.1. Air Liquide

Air Liquide is an international company which is located in over more than 70 countries and employs over more than 40.000 people 40 . Air Liquide Benelux has 4 production facilities splitting the air in different types of gas, 5 facilities that produce hydrogen, 1 facility which produces carbon hydrogen and 1 facility which produces gasses for the healthcare sector 41 . Their gasses are used in a wide variety of industries such as the chemical industry, the space travel industry, metal industry, electronics industry and the healthcare industry 42 .

Figure 17: Air Liquide its gas pipeline network

Air Liquide’s hydrogen pipeline system is approximately 900 kilometres long, is spread mainly over Flanders and connects the North of France to the South of the Netherlands 43 . Furthermore, it is part of the hydrogen pipeline network of Europe which is the largest in the world, even larger than the one in the United States 43 . In the Benelux, Air Liquide has some 2700 kilometres long pipeline network 44 which consists out of a hydrogen, an oxygen, a nitrogen and carbon monoxide and/or syngas pipeline system to supply its customers. As shown in figure 17, these pipeline systems are part of the gas pipeline network of Air Liquide in the North of Europe. The strategy of Air Liquide is to create value in the long-term by using the air and natural resources 45 . This strategy led to the start of the development of the gas pipeline network of Air Liquide in the fifties 41 . Because Air Liquide was the first to build a substantial network in Belgium that supplied the metal and chemical industry in Flanders, it created a solid position in the European market. Thanks to this solid position and its European roots it is not surprisingly that over more than 50% 46 of Air Liquide’s turnover comes from its activities in Europe. Recognizing the benefits of pipeline transportation, nowadays, Air Liquide transports 84% 44 of its air gasses and hydrogen via pipeline.

6.5. Chemicals

There are only a limited amount of chemicals which are in high demand so that they can be profitably transported through pipelines. Therefore, there are only a few pipelines in Flanders that convey chemicals. In addition, most of the pipelines that transport chemicals are managed by different companies such as: Nationale Maatschappij der Pijpleidingen, Limburgse Vinyl Maatschappij, Ethyleen Pijpleiding Maatschappij, SABIC Pipelines, BASF Antwerpen, Solvay, Dow Benelux,... 12 and this makes it hard to map out and analyze the chemical pipeline network of Flanders. In Flanders there are pipelines transporting liquid hydrocarbon, monovinylchloride, propylene, ethane,...

7. The pipeline network in Flanders

Table 5 General characteristics of the pipeline network in Flanders - Transport of water, gasses and oil - Underground - High investment cost (see Appraisal kerosene pipeline Antwerp-Zaventem) - Social benefits: - gas and oil supply for the citizens - little external costs - Economic benefits: - low transportation costs for the enterprises - reliable supply - anchor effect - Strategic benefits: - increase independence - increase dependence of other countries - Although high governmental interference, little proactive managing by the government

8. Price mechanism and governmental control

The gas, oil, water and sewage and technical gas pipeline network are the major pipeline networks in Flanders. These different pipeline networks consist of different types of pipeline and have to fulfil different operational requirements. But above all, they have to obey different sets of rules due to their difference in past and present economic and social importance. This brings along that there are different price mechanisms and differences in governmental interference for the different pipeline networks.

The natural gas pipeline network operations of Belgium are paramount for the economic and social wealth of Flanders and the rest world. By obligating the European countries to make their natural gas pipeline network more liberal, Europe has improved the performance and transit certainty au of the European pipeline network. In Belgium, the natural gas pipeline network which is managed by Fluxys is since recently controlled by only one company, namely Publigas av . The shareholders of Publigas are the Flemish, Walloon and Brussels district 47 , meaning that Fluxys is actually controlled by governmental institutions. Even

49 though Fluxys is controlled by the government it has a lot of autonomy. Fluxys has been recently reappointed for 20 years as the manager of the big gas pipelines in Belgium. Instituting Fluxys for 20 years as the single enterprise to manage the big natural gas pipeline network creates stability and project management efficiency. However, this also brings along shareholder-manager conflicts; since Fluxys does not has to fear competition in 20 years it does not feel any pressure to achieve the maximum possible wealth for its shareholders. What’s more, is that the costs made by Fluxys will be definitely reimbursed. The CREG determines the price of the transport, transit and storage services of Fluxys but does not meddle in their project investment decisions, they only give advice to the government institutions . This gives Fluxys much freedom to build an empire without too much repercussions. Due to the limited decision power of the CREG an overinvestment problem could exist. The price and control mechanisms of the Central European Pipeline System are more covert since this pipeline network is controlled by the military. Data on the clientele and their capacity reservations are not known to the public and hard to come by. One can expect that the Central European Pipeline system (and the NATO Pipeline System) will be swiftly adapted to the economic needs of the present which will bring more clarity to the various mechanisms in play. The water supply companies of the different districts in Flanders have all joined together in multiple bigger water supply companies. The districts do, however, remain shareholder of the bigger company they have joined which means that the profits made by the water supply companies go back to the government institutions. When water can be supply at low cost then this will create value for the citizens with no or low opportunity costs aw . Hence, there will be an incentive –keeping their citizens satisfied- for the districts to keep the price down for water. Unlike the Fluxys company, the water supply companies suffer less from an overinvestment problem because the water supply market is already saturated. New expensive investment opportunities are unlikely to arise, the sole costs are attributed to the maintenance and renewal of the pipeline network. In general, there is a good balance of power and little shareholder-manager conflicts. Because the technical gas pipeline network is relatively new and not as extended as the gas, oil or water pipeline network, and more importantly, because technical gas is not –yet- as important to society as gas, oil or water, the technical gas companies are not controlled by the government. In Flanders, the sole company with a respectable technical gas pipeline network is Air Liquide. This company is a private company without any governmental interference.

Their pipelines trajectory is constructed without the aid of the government ax whereby the government does not has any say in the policy of the company in times of crisis.

9. Recommendations

Many of the weaknesses and threats shown in the SWOT-analysis can be mitigated or avoided and many of the opportunities can be exploited.

But first of all, the different modes of transport should not be separately examined when contemplating the best possible transport investments. That is why the splitting of pipeline transport and the other modes of transport will probably have a negative influence on the effectiveness of the transport projects. Bringing together all the modes of transport in one department should be the first step to a better transport policy. Albeit, this can only work when the government views pipeline transport as a full-fledged mode of transport that can create wealth for the society. This means that the government must not solely regard pipeline transport as a private matter but must: - Inform firms about the existence and potential of pipeline transport - Work together with firms and neighbouring countries to discover pipeline transport opportunities - Provide pipeline transport services for the common public interest since some substances such as gas, oil and water are far too important for the society or the economy to leave in private hands A choice will have to be made between private, public-private and public ownership of pipeline systems. Some systems that are too important should best be publically controlled while others can be privately or semi-privately controlled. For example, the gas pipeline network in Belgium is managed by Fluxys that has a monopoly authorized and supervised by the government because the gas is key to the wealth of Belgium and other countries. Secondly, the slow bureaucracy can delay the start of a project for a long period. There are too many different procedures to follow and permits to gather. All these different rules should mesh together so that a coherent procedure can emerge that will reduce the elapsed time. Another urgent matter to attend is that even when the government decides that it is better to leave the development of the pipeline network in private hands, it still is in the best

51 interest for the economy and society to take into account the possible territorial extension of the current pipeline network. The Netherlands, for example, already considers pipeline transport as a very important mean of transport and consequently reserves some space for future pipeline projects 11 . Obviously, Flanders should do the same. Further, Belgium has the strategic advantage of being situated in the middle of Europe which entails that Belgium can function as a facilitator of energy and substances for other countries. Belgium already is an important facilitator or transistor of natural gas for most European countries and should encourage this function not only for natural gas but for all other possible pipeline opportunities too, as for chemicals such as ethylene and propylene gas the demand in the different European countries is high enough to economically transport it via pipelines. Brief, in a global world pipeline transport should not be thought of as a closed local network. The Belgium government should use pipeline systems to preserve the economic security by anchoring companies to the Belgium territory. Giving companies the possibility to efficiently and cheaply transport raw materials and products will give them an incentive to stay in or come to Belgium. Not only the Belgium government can make use of the anchor effect, also private companies can use pipeline systems to commit customers to their company. Linde AG, Air liquide, Praxair and Air Products are the 4 prominent gas companies. They all provide gas for different types of industries. However, in this heterogeneous oligopoly it seems that Air Liquide has the most market power since it has the largest pipeline network in Belgium. Since the transportation service and the product transported belong to the same owner, Air Liquide is the only one who can profit from the pipelines it has build. Hence, Air Liquide is able to offer their customers connected to the pipeline system their products at a much cheaper price than their competitors and thus are able to retain their customers: - Air Liquide’s customers will not be inclined to buy products from the competitors since they will charge much more than Air Liquide for the same products because their transport costs will be higher. - The customers of Air Liquide will not be inclined to relocate to a pipeline system from a competitor because this entails high relocating costs. The Belgium government should watch out that Air Liquide does not gather too much power in Belgium and Northern Europe. If the gasses delivered by Air Liquide are too important for the economy, it may be a wise idea to separate the ownership of transport and the gasses transported in order to increase competition and reduce the price for gasses offered. This

52 reduces the cost of technical gas used by companies and makes them more competitive against foreign companies. Anyhow, this could be a problem, but for the far future. If for governmental reasons a pipeline system has to be terminated or adapted, the costs accompanied with this action will have to be paid for by the owner. This brings forth an additional risk that can frighten off potential pipeline investors. Therefore, the government should legally reassure financial aid for pipeline owners who are treated unfairly due to governmental actions. The congestion problems which occur more frequently nowadays could be mitigated by expanding the pipeline network. Pipelines could significantly reduce the work load of road and rail road transport. Having transportation that is reliable (no congestion costs) and durable (low maintenance costs) is a huge benefit for the companies and hence the economy. Especially in big cities where the congestion problems are enormous, capsule pipeline could be a valuable solution. The natural gas pipeline network of Belgium is managed by Fluxys who has a legal mandatory monopoly. The prices Fluxys can ask for its transport services are supervised by the CREG on behalf of the government so that Fluxys cannot demand excessive prices for its services. The costs Fluxys has made are examined and an appropriate mark-up is determined. However, the costs made by Fluxys are not limited by the government and hence an overinvestment problem arises. The government should limit this decision autonomy of Fluxys. Furthermore, the RioP initiative of the Vlaamse Maatschappij voor Watervoorziening should be promoted by the Flemish government. The RioP initiative is the collaboration between the communities and Aquafin, where Aquafin takes over the management of the sewage network. This has a number of benefits: - Since Aquafin works together with the VLaamse Maatschappij voor Watervoorziening –e.g. the RioAct- both the supply of water and the purification of water are done by the same organization which brings along possible synergies 47 . - Leaving the management of the sewage network to professionals increases the efficiency and the development of the sewage pipelines. And a better sewage system will increase the possibility to achieve the European water sewage targets 47 . - Because the RioP initiative is not a privatization of the sewage pipeline network, the communities will still have a say in what goes on. Hence, the common public

interest will not be neglected and the public utility will not be exploited for monetary reasons. Many communities have already signed up for this initiative that starts in 2010. The purpose of the Central European Pipeline System has shifted a lot during the last years. Maybe it would be a wise idea to legally redefine the priorities of the CEPS so that CEPS can be efficiently managed.

Essenscia further recommends that Europe should connect every single cluster of chemical firms in order to create a big European cluster that elevates the efficiency and profitability of the chemical industry. As a result, the European chemical firms should be able to compete more aggressively against foreign producers.

10. Conclusion

Flanders should use pipelines in combination with other modes of transport as a strategic mean to increase the wealth of the society and to stimulate the strength and growth of the economy.

Sources

2. Piping and pipeline engineering, URL:< http://books.google.be/books?id=5hWR4QXOpakC&printsec=frontcover#v=on epage&q&f=false >

9. Essenscia, Pijpleidingstransport: de meest duurzame transportmodus

10. Fluxys: jaarrekeningen

11. Kenneth U. Nnadi, 2006, An economic rating of pipelines as a mode of transport

12. VIL, Pijpleidingentransport in Vlaanderen

13. Documents, Professor Rudi Denys

14. CEPS documents

15.

16. Kenneth U. Nnadi and D Cmilt, Econometric analyses of domestic transportation of refined petroleum products in Nigeria

17.

18. Mr. Goethals, employee at Fluxys

19. Dacon-pigging-brochures

20. CREG, persbericht 22 december 2009, Nr.83

21.

VII

22.

23.

24.

25. Bruno Geltmeyer, Denys

26.

27. Nieuwsbrief cogen vlaanderen, 2006

28.

29. In cooperation with Bruno Geltmeyer and Johan Cooreirts of the Denys company

30.

31.

32.

33.

34.

35. , doelstellingen

36.

37.

38.

39.

40.

41.

42.

43. viWTA dossier, WATERSTOF motor van de toekomst?

44. Air Liquide, Annual report 2008

45.

VIII

46.

47.

Appendix 1

Explanation or translation of key words a. The Flemish Institute of Logistics = het Vlaams Instituut voor Logistiek = het VIL b. BC = Before Christ c. The Romans: 400 BC d. 2 to 8 inches = approximate 2*2,5 to 8*2,5 centimetres = approximate 5 to 20 centimetres e. 8 to 24 inches = approximate 8*2,5 to 24*2,5 centimetres = approximate 20 to 60 centimetres f. hydrogen = waterstof = H2 g. oxygen = zuurstof = 02 h. nitrogen = stikstof N2 i. carbon oxide = koolstofoxide = CO j. argon = argon = Ar k. dredging = baggeren l. silt = slib m. abrasion = technische afslijting n. log = blok, in this context buisblok o. a public easement = een erfdienstbaarheid van openbaar nut p. carbon dioxide = CO2 q. nitrogen oxide = NO r. permafrost = region waar het voortdurend vriest s. ice-gouges = ijs obstakel, ijs uitsteeksel t. volatile organic compounds = VOCs = vluchtige organische stiffen = VOS= stoffen die snel verdampen en zorgen voor smog en verzuring u. European Gas Pipeline Incident data Group = EGIG v. CONCAWE = CONservation of Clean Air and Water in Europe w. one barrel = almost 160 litres x. 500 miles = approximate 500*1,6 kilometres = approximate 800 kilometres y. Eandis does not has much competition. Infrax, for example, is a competitor but is less significant than Eandis. z. interconnection hubs = input connections

X aa. Gas Management Services Limited = GMSL ab. KLIM = Kabels en Leidingen Informatie Meldpunt ac. KLIP = Kabel en Leiding Informatie Portaal ad. CREG = Commissie voor de Regulering van de Elektriciteit en het Gas ae. the North Atlantic Treaty Organisation = the NATO = de NAVO af. 6 to 12 inches = approximate 6*2,5 to 12*2,5 centimetres = approximate 15 to 30 centimetres ag. the NATO Production, Logistics or Service Organisations = the NPLSO ah. the CEPMO Board of Directors = the BoD ai. the NATO Petroleum Committee = NPC aj. 6 inch = approximate 6*2,5 centimetres = approximate 15 centimetres ak. 12 inch = approximate 12*2,5 centimetres = approximate 30 centimetres al. 1 exit point: because we assume there will be only need for 1 pumping facility am. fleet of trucks = tankenpark an. the NMDW = de Nationale Maatschappij der Waterleidingen ao. the VMW = de Vlaamse Maatschappij voor Watervoorziening ap. the SVW = de Samenwerking Vlaams Water aq. Belgaqua = Belgium federation for the water sector ar. Eureau = association of the water supply companies of the European Union as. IWA = International Water Association at. ARA-area = Amsterdam-Rotterdam-Antwerp area au. Liberalizing the European natural gas pipeline network entails the equal treatment of transport and transit. av. Holds 89,97% of the shares aw. Alternative projects that will create more value than delivering cheap water will be rare. ax. When pipelines are constructed with the aid of the government, the company can more easily design the right trajectory and simply expropriate the needed trajectory. In times of crisis the company must let the government use their pipelines as compensation. az. Fluxys has, by taking over the Belgium infrastructure of Distrigas & C° and by taking over the participation of Gaz de France in SEGEO, improved the transit service. Now, Fluxys’ subsidiary Fluxys & Co NV –e.g. the new name of Distrigas & C°- commercializes the pipelines Troll (Zeebrugge-Blaregnies) and VTN1 (Zeebrugge-

Zelzate/Eynatten). And Fluxys’ other subsidiary SEGEO NV commercializes the pipeline between Gravenvoeren and Blaregnies 10.

XII

Appendix 2

Figure 1: The Trans Alaska Pipeline System

XIII

Figure 2: Number of incidents in the European Gas Incident Data Group

Figure 3: Distribution of incidents per cause of the European Gas Incident Data Group

XIV

Figure 4: Safety in oil pipelines

Figure 5: Seismic regions (map)

Figure 6: Pipeline damage

XVI

Figure 7: Permafrost TAPS

XVII

Figure 8: Wall thickness

XVIII