July 2010 Vol. 237 No. 7

Features

Gas Pipeline Project Cost Containment Using Real Time Dispute Management

Construction in the gas pipeline industry ranks among the riskiest undertakings of any in the energy business, or, arguably, of any industry. There are many risks associated with all phases of the development and capture of new discoveries. These risks run the gamut from discovery and acquisition of the reserve itself, permitting, financing, including the resolution of partnership questions, to design and construction of gas capture and transport. From any perspective, the business itself is fast-paced. Opportunities, when they arise, must be dealt with quickly, in order to gain or maintain a competitive edge.

By its very nature, the question of a competitive edge drives risk. Yet, it also provides substantial reward to those who can successfully navigate the obstacles, and remain focused on a clear and achievable goal. Defining what is clear and achievable is often the most difficult, most onerous, and most expensive activity.

More often than not, new discoveries require the cooperation of partners to bring the product to market. Working relationships historically are established through a variety of methods, and usually include more than a single entity as concept driver. This aggregation of entities in whatever form, in and of itself, often creates additional risk pressures on contract vehicles selected. These relationships might include partnerships, acquisitions, joint ventures or other legal constructs, sometimes with international components, and there is always time pressure on making the pieces fit.

Add to that the financial, environmental, and other regulatory patchworks which must be navigated successfully, the acquisition and confirmation of clear land rights, all of which in today’s world are closely observed and monitored by property abutters, labor and industry groups, politicians or others with powerful voices, and it is easy to understand some of the risk associated with development and construction in the pipeline industry.

The risk clock ticks continuously in the gas pipeline development industry. Time commitments must be upheld on all phases of product development, or investment milestones will not be met, and these pressures must be closely managed in order to keep costs under control. Failures can be devastating.

Perhaps more critical than the development risks may be the risks involved with the design and construction phases. This is why contract delivery systems are experimented with so frequently, with results ranging from very good to extremely poor, depending upon how well risk potentials were identified and mitigated before the work commenced.

Projects involving natural gas development come in spurts as producers scramble to increase capacity in order to capitalize on new discoveries. This congregating of projects puts further strain on an industry which is forced to rely heavily on a small group of designers possessing the specific engineering experience and skill required. This small group of designers is often hard put to keep up with the demand, especially for large development initiatives.

There is an even smaller group of constructors who have (1) the industry knowledge and experience necessary to deliver, (2) the financial wherewithal to carry the load of construction costs, (3) equipment (keeping in mind that most of the equipment is highly specialized for the gas pipeline construction industry), (4) manpower availability to meet the schedule demands, and (5) a willingness to attempt to earn a reward by accepting the risks in this industry.

All this serves to illustrate many of the risks in gas pipeline construction. Some would say these risks pale in comparison to the “burn rate” required in the industry. Gas pipeline projects experience what is arguably one of the fastest “burn rates” in any construction industry. “Burn rate” is defined as the rate of spending required on the part of contractors to gear up, begin constructing and maintain the pace once the way has been cleared.

Money is spent very rapidly once the action starts, every minute of every day, whether or not things go well. Any delay can rack up huge losses very quickly, and anyone who has ever been involved on such a project when there are delays knows how difficult it is to try to reconstruct what happened and when, and who was at fault.

Far better to institute as many dispute management process controls into as many areas of known contention as possible. The amount spent on such process controls will be a tiny percentage of the costs involved in trying to settle things after the fact.

Full-blown disputes at the end of a construction project, whether resolved in the courts, or at arbitration often approach 10% of the total project cost, so the concept of spending a few thousand dollars on “real time” dispute management, is a favorable concept to many.

As teams of workers head into the field, most often in remote, inaccessible areas, and begin construction operations, they must try to accomplish as much as is reasonably possible in the shortest duration of time. Field managers must follow the work, monitor progress, and still somehow assure that all the necessary detail behind the prosecution of the work falls into place.

This herculean effort proves the old adage that the devil is in the details, or more likely, the lack of them.

“Real time” dispute management as described in this article necessarily involves a blend of process methodologies, and it works best if all parties, from senior management on down, know about, and are supportive of the concept.

The idea for “real time” dispute management flows from the DRB (Dispute Review Board) model, as well as from experience with trying to resolve disputes on such projects after the fact.

The DRB model had its early roots in the work of some international groups, such as the International Federation of Consulting Engineers. The use of DRBs has spread to construction projects throughout the world.

DRBs are established within the construction contract and are seated when construction begins. They are readily available and offer non-binding recommendations after review of the facts. This is designed to happen without slowing or stopping construction. The non-binding recommendations of DRBs more often than not, are accepted by all parties, making it a viable dispute management tool.

A shorter form of DRB establishes one individual “project neutral” rather than a panel. A project neutral can be even more agile and swift in its review and recommendations, simply because that one individual is not tied to two additional panel member’s schedules.

More information on Dispute Review Boards is available at American Arbitration Association (www.adr.org), or at the Dispute Resolution Board Foundation (www.drb.org).

“Real time” construction administration consulting services is an iteration of the “project neutral” concept, and the services of that individual can be provided in a number of ways.

One example relates to the use of a project neutral on a gas producer’s capacity expansion. This expansion included the replacement of some pipeline, the addition of new turbine compressor units, and upgrades to other existing facilities.

The project neutral’s services included oversight on contract compliance issues, oversight on contract administration, involvement in the preparation of and disposition of payment requisitions, disposition and management of RFI’s and change orders, attendance at progress meetings, and facilitation of all significant interactions between contractors, designers, and the owner. It also included help with the integration of team members between consultants, owners, designers, and construction teams.

An additional service provided in this case was the mediation of a global settlement. This settlement allowed work to continue, rather than to continue being bogged down in a growing dispute. The settlement dealt with a number of issues around the construction of a greenfield compressor station, which were creating serious doubts on the contractor’s ability to deliver on time.

The mediation of the open issues involved in this case, at least in part, helped turn the project around. The mediation clarified a number of points for all the parties and it led to two months of round the clock construction which ultimately brought the whole expansion in according to schedule.

This happened, despite the fact the contractors were new and inexperienced and from out of town. They had been struggling with these union contracts, and were having some difficulty working with some of the toughest locals in the area.

The “real time” efforts on these projects also helped focus safety initiatives more clearly among the hundreds of employees involved, and the overall project was completed on-time, with no lost-time accidents, despite the significant amounts of overtime work required.

Author
James H. Keil has a B.S. degree in secondary education, played college and professional football, and is a former commissioned naval officer. He is a published author and lecturer and was a corporate sales and marketing manager for three Fortune 500 companies. He served the Maine state government, directing a 260-person bureau with a $35 million operating budget. He is an experienced mediator, arbitrator, facilitator, and Dispute Review Board Panelist, and has worked on projects as large as $2 billion. He can be reached at jimkeil@maine.rr.com.