The demand for pipelines is far outstripping the capacity to build them. The situation is particularly acute in Texas, which is already experiencing conditions similar to 2007-2009, when many companies had a hard time completing projects on time. Delivering on time and on budget is critical, as the Wall Street and VC firms that have flooded companies with capital to build are paying close attention to who the performers are vs. the nonperformers.
These conditions pose challenges for all operators, but especially for smaller ones, who have neither the deal flow nor scale to capture the attention of the large engineering and construction companies. By default then, small operators will end up competing for the attention of the smaller E&C firms, who themselves are likely to have more projects than they can handle. As such, project sponsors will often find that pricing, terms, and risk appetite will favor the E&C firms. Compounding the challenges is that such firms often lack the sophistication, knowledge, and experience of the larger firms, putting greater burden on the operators.
Given the competition for resources, it’s understandable that operators would feel pressure to move quickly. But that should be no excuse for acting hastily, i.e. rushing to market with a partially completed set of plans. By being smart and sophisticated about contracting and putting controls in place around procurement and delivery, project risk can be better managed from both a process and safety standpoint.
One seeming advantage to working with a smaller contractor may be a more attractive price. But beware: A contract, even one with a fixed price, is no protection against an ill-defined project. Lack of specificity opens up the possibility of price variations in the change-order process. For example, ambiguous unit-price or cost definitions can result in overbilling. Some common indicators of this problem include excessive timber-mat purchases instead of leap-frog placements, linear pipe laid through mainline valve stations, and bore-length measurements based on total pipe length instead of total length between tie-ins.
Contract disputes can be thorny and time-consuming, and are rarely resolved in favor of the operator. A clear project-development project plan, including one that outlines activities the owners need to undergo for certification, permitting, and environment regulations, and rights of way acquisition, must be done in parallel with getting the contractor onboard. A natural-gas pipeline project that starts construction before all of the rights of way and permits are secured can too easily result in unanticipated contractor moves, cost escalation, and a prolonged schedule.
While contracts are an important part of the process, the vagaries associated with them is why operators should focus primarily on controls and data – capture, storage, and retrieval. Doing so can help predict delivery time, costs, and enable compliance with complicated safety issues.
There is often great reluctance, especially among operators looking to run lean, to institute controls, fearing they are expensive and will hinder the process. This is a mistake, as complex midstream construction projects such as pipelines are especially vulnerable to delays, reduced profits, and disputes.
Another common mistake is relying on unverified information from contractors and unspecified information. For example, clients frequently struggle to verify if the size of the crew the contractor is charging them for matches with the number of people on the crew.
It’s also important to capture and analyze key data elements from the E&C firm. Doing so will aid accuracy in forecasting. Again, it’s not sufficient to rely on the firm’s data for productivity status or predictions for a completion date. Very specific pieces of info must be extracted from engineering reports, and these pieces of information must be decided upon upfront. Too often operators are frustrated because they didn’t think about what info they needed to capture and how they were going to use it, so they capture the wrong information – or none at all.
Project reporting processes that provide early warning signals derived from predictive metrics should be the goal, instead of relying on lagging indicators about cost-based metrics. For example, in many projects, using metrics like firing line and tie-in weld productivity per day or planned moves vs. unplanned ones can give more predictive information than one would get by focusing on the linear feet of pipeline constructed per day.
The ability to verify billing should be a byproduct of a strong controls process, not its purpose. Its real value is in forecasting, from both a cost and a scheduling perspective. Assessing costs is not nearly as important as meeting the commitment date to have gas or oil flowing. Properly designed controls allow for a higher certainty that the project will be completed on time. This is a business process strategy that too few project sponsors are using.
How documents are captured also has a major impact on compliance with the Pipeline Safety, Regulatory, Certainty, and Job Creation Act of 2011. The act significantly expands operators’ record-keeping requirements to include inspection upon demand by both government and law-enforcement personnel. Operators must capture and store this information so that it is instantaneously retrievable.
But in doing so, it allows companies to commit to pipeline integrity from the beginning; it’s not something that can be committed to after the fact. To be sure, companies are still in the early stages of wrapping their arms around documentation needs and requirements. The universe of records that it takes to comply with the act is vast – around welding, supply chain, and procurement.
A final word of caution: Don’t expect the CIO to anticipate the blind spots with regard to safety, compliance, or efficiency. Operations, not accounting or technology, need to be the drivers and overseers of the process.
In Texas’ competitive pipeline business, he who fights best, wins. For small operators who approach the market with sophisticated buying techniques and good audit practices can succeed. The project management process matters far more than the contract. By being thoughtful and deliberate about the controls put in place and how the information supplied is used, it is possible to increase the probability of a successful project and increase the confidence the executives have that the project will complete on time and on budget.
Regina Mayor is KPMG’s National Advisory Energy Sector Leader, and Geno Armstrong is a Principal in the Major Projects Advisory Practice. Both serve KPMG’s energy clients. They can be reached at firstname.lastname@example.org and email@example.com.
The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP.
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