Expanded drilling of various natural gas supply basins, particularly new large shale plays, and construction of new LNG import facilities has helped create a historic pipeline infrastructure buildup in North America. One result, however, has been a sharp increase in labor and materials costs.
Wilson’s “Market Conditions Update 2008” reported 2008 price increases announced as of July 1 for electric resistance weld line pipe totaling $1,025/ton and $1,325/ton from Tenaris and US Steel respectively. Further upstream in the steel process, steel scrap now costs more than what hot roll coil did as recently as late 2004.
Effect on plans
This cost run-up has begun to affect expansion plans for US oil and gas pipeline systems, with the number of applications for new construction sliding (p. 64) and cost overruns directly attributable to higher labor and material costs seen in a number of completed projects. Examples of these overruns and comments from some large system operators regarding approaches for addressing these moving forward follow.
Rendezvous Pipeline Co. LLC saw line pipe costs for its 21 mile, 20-in. OD project in Wyoming rise by nearly 41%. The company attributed this discrepancy directly to the number of projects being constructed at the same time, which forced it to pay premium prices to obtain the pipe it needed. What Rendezvous described as severe labor shortages also saw it pay premium prices for workers, with actual costs exceeding estimates by nearly 69%.
Other companies, such as Midwestern Gas Transmission Co., were forced to retain manpower and equipment on a stand-by basis—even prior to final construction authorization—to avoid losing the contractor or its personnel to other projects. This approach, combined with the already tight marker for labor and materials, saw Midwestern’s material costs for a 16 in. OD, 31-mile line in Tennessee jump more than 29%, while labor costs more than quadrupled.
Columbia Gas Transmission Corp. estimated the cost of 20-in. OD steel pipe at $25.38/ft for a project it completed in 2007, but actually paid $38.13/ft.
Availability of equipment and labor has also been limited in the offshore segment, particularly in the wake of Hurricanes Katrina and Rita. Tennessee Gas Pipeline Co. invited several contractors to bid on work in March 2006, but a shortage of labor, boats, and other equipment forced the company to negotiate a day-rate priced construction schedule with the only bidder able to do the work. The contractor subsequently had difficulty finding qualified welders, forcing additional delays and expenses. Construction costs on the project were almost four times higher than estimated.
What’s being said
Looking at these factors, Brian O’Higgins, who manages expansion projects in the Northeast US (where cost changes often have their greatest effect) for Williams, commented that beyond the industry-standard 5% contingency included in cost estimates, Williams now includes cost escalations for forward years on a line-item basis for items such as engineering, land, materials, and construction, which it updates quarterly. O’Higgins also said Williams is spending more time in a project’s planning stages getting engineers and contractors in the field to help develop cost estimates on a segment-by-segment basis.
The net effect to Williams for projects already underway has been a lower internal rate of return.
ONEOK Inc., meanwhile, has attempted to lock in material costs when possible by actions such as extending pipe orders with mills already producing pipe for the company. ONEOK says that, though construction costs have increased, volume growth prospects have so far kept pace, resulting in continued favorable economics for its projects.
Enbridge, meanwhile, has acquired enough of its material in advance that it has successfully moved material from one project to another when delays are encountered. Denise Hamsher, Enbridge’s director of federal, regulatory, and public affairs for the company’s major US projects, also says that, though North American steel suppliers have so far been very competitive, the company would be looking further afield for new requirements moving forward.
Hamsher remarked that labor costs have been particularly hard felt on mainline construction projects, but that Enbridge had so far managed to keep its costs in line by coordinating with its contractors.
Jack Crawford, president and CEO of Altex Energy, which plans to build a crude oil line from Alberta to the US Gulf Coast, noted the importance of keeping the overall economic picture in mind when looking at the effects of costs, stating that all of Altex’ competitors were being affected in the same way.
Labor concerns haven’t affected Altex’s plans yet, the pipeline currently being set for completion in 2012-14, and Crawford believes that job losses suffered in other skilled areas (the automotive industry for example) could create a new potential labor pool for the pipeline industry. Crawford also noted that high prices for steel and labor could eventually lead to demand erosion, reducing costs, and that the high cost of transportation could well make continental options for line pipe more appealing than overseas alternatives.
