The Distribution System

1. As liquid hydrocarbons, oil or LNG, flow from the wellhead to the consumer, patterns of ownership change along the course. Let us see how the distribution system functions. The United States will serve as the example, since it is the world's single biggest petroleum market and since other distribution systems follow the general pattern.

2. The U.S. distribution system has three parts. What is called the primary distribution system handles crude oil and products from the wellhead to large bulk terminals for petroleum products. The secondary distribution system divides the large quantities of product from large bulk terminals into smaller quantities for delivery to retail outlets and smaller bulk storage facilities. The tertiary system includes storage facilities and inventories of product consumers.

3. The primary distribution system begins at the lease tank, a storage unit near the producing well. Crude oil moves from there into gathering pipelines or tank trucks. Gathering pipelines may connect to larger trunk pipelines or to loading stations for trucks, barges, or rail tank cars. The crude may travel to a storage terminal or directly to a refinery, where it usually spends more time in a storage tank. Imported crude oil arrives by tanker for unloading at marine terminals, which have storage capacity and pipeline links to refineries or trunk pipelines. Crude oil purchased by the U.S. government goes into storage facilities of the Strategic Petroleum Reserve.

4. Refineries have storage tanks for crude, intermediate products (those requiring further processing), and finished products. The finished products move from refinery storage by pipeline, tank truck, barge, or tanker toward a general market area, stopping usually at the large bulk terminal that represents the end of the primary distribution system.

5. The secondary distribution system includes localized storage facilities and retail outlets. The storage at this stage usually involves wholesale bulk plants that receive products by tank car or truck. From wholesale storage, products move to tanks at retail outlets, including service stations and retail fuel oil dealers.

6. Storage in the tertiary distribution system includes everything from fuel tanks for boilers at factories to fuel oil tanks in homes, to gasoline tanks in automobiles. Sometimes, products move directly from the primary distribution system to the tertiary system. High-volume fuel users often invest in direct transportation links to the primary system in order to avoid the costs of the secondary system. Large airlines, for example, purchase jet fuel directly from refineries where logistics are favorable.

7. Downstream of refineries, product ownership can change several times. Especially in the case of gasoline, this is not always apparent because of widespread brand identification with oil companies. A motorist filling up at a service station identified by the brand of a major refiner indeed buys that refiner's gasoline, but the station attendant may or may not be an employee of the refiner. In fact, the attendant probably works for an independent business person who owns the station and pays for the right to use the refiner's brand. The station owner might also be an investment company operating stations on behalf of the refiner.

8. In 1985, 81.5% of gasoline sales by all refiners were to independent dealers or wholesalers. Service stations operated by refining company employees accounted for only 16.4% of total gasoline sales. The rest of the sales were to bulk purchasers.

9. When crude oil comes out of the ground, then, it and its derivatives most likely will have several owners before a consumer buys the finished products. Each of these changes in ownership implies a business transaction. Petroleum changes many hands and rings many cash registers, as it passes through production, processing, and distribution systems

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