Major pipeline projects in Canada continue to progress, however unexpected cost overruns and unpredicted risk events are impacting projects underway, as well as consideration for future projects that could face similar challenges.
There are several examples of such projects which have experienced significant cost and schedule overruns. For example, the estimated cost for TC Energy Coastal GasLink Pipeline Project has risen from $6.6 billion to an anticipated $14.5 billion as of February 1, 20231. Similarly, the Trans Mountain Expansion Project experienced an increase from $12.6 billion to $21.4 billion as of February 20222. These large cost increases are typically compounded with schedule overruns, making the management of these projects challenging and unpredictable. The cost overruns can be attributed to many distinct factors, including unforeseen environmental, cultural, and archeological constraints, regulatory and permitting delays, land ownership conflicts, and constructability concerns. These risks can be categorized as controllable risks (i.e., those that can be identified and planned for ahead of time) versus uncontrollable risks (i.e., those that the owner or contractor have limited ability to identify or control ahead of time).
Pipelines are critically important infrastructure that often cross public and private lands, traditional territories, as well as interprovincial or federal borders. The geographical diversity of these projects also come with the requirement of federal/provincial regulatory approvals, intensive capital investment, and may involve stakeholders and rights-holders with different views on project success. Coupled with the significant terrain challenges often faced by new pipeline projects and political pressures, achieving cost and schedule certainty becomes increasingly difficult. At the same time, shareholders and project developers expect new projects to meet their obligations and achieve the target return on capital. The question then becomes, “what can be done about it?”
Projects start as ideas. A commercial opportunity is identified, and companies begin to develop plans to capitalize on the opportunity. Projects often have typical development paths from idea to implementation in terms of progressing through stage gates and improving project certainty to an eventual final investment decision. A key part of any investment decision is the project risk profile and how much additional contingency is added to the budget to account for known and unknown risks. On large pipeline projects, we consistently see controllable risks such as route selection, construction methods, and landowner agreements never fully quantified or resolved prior to the final investment decision. A part of the reason for this may be that the typical project development process does not force resolution on key risks prior to final decisions being made. An example of this is constructability; a route may be selected that is considered the best compromise for all key stakeholders and rights-holders but may be more difficult and expensive to build than anticipated, leading to cost and execution challenges. Another example is regulatory risk; if the rules are not fully clear and necessary permits are not in hand prior to starting construction, there is a strong likelihood that productivity will be impacted, resulting in increased standby costs.
Pushing issues down the road and assigning dollars without a documented resolution strategy means risks are not understood and could turn into major problems later in the project. A common example of this is related to constructability; engineering teams are engaged early during the project development stage to establish plans and strategies, while the construction contractors who are physically building the projects are not typically engaged until later, despite construction being a major project cost. This late construction engagement misses the opportunity to obtain construction input early in the design process, avoiding costly changes later.
This brings it back to the project organization and importance of establishing a project team and strategy that allows for input from all key stakeholders and rights-holders at the right time to maximize the benefits for the project. For example, implementing an early contractor involvement strategy allows the project to select the right construction contractors earlier in the process so that they are a part of the project development phase and provide detailed estimate input to support an accurate, realistic project price. Good integration of project teams early in the project, with consideration to corporate culture, cost, and alignment with project priorities can go a long way to ensuring proper planning, cost forecasting, and execution certainty before getting into the field. This approach requires revised commercial models, different incentive strategies for service providers, risk sharing, and engagement strategies that are less process-driven and more outcome-driven; revising the process as required to focus on the project’s definition of success rather than forcing a process and dealing with the outcome.
There are other cases where owners and contractors have less direct control over risks that can significantly impact project predictability. In Canada, this may include the regulatory environment regarding timeliness of permit issuance, land claims and historical grievances, public protests, and vandalism. In these instances, early cooperation and alignment with all relevant stakeholders and rights-holders is critical, noting there may still be issues that owners do not have the authority to resolve and therefore, must be taken into consideration when determining project contingency. To manage such risks, varied execution models may be necessary such as public/private partnerships, build/own/operate/transfer, or other strategies that share the risks, while still promoting a framework of cooperation amongst the key project participants. Regardless of the project specific solution, the consideration of how to modify traditional project delivery models to provide better outcomes should be explored where possible.
In conclusion, pipeline projects can be complicated and include many stakeholders and rights-holders with varied views on what a successful outcome looks like. Projects often span long distances across public and private lands and traditional territories where the pipeline can become a source of conflict rather than cooperation. Critically assessing and understanding controllable and non-controllable risks and ensuring there is an established delivery model to best address those risks is imperative to ensure a predictable outcome. Industry experience has shown that failure to identify and address execution risks early in the project can be a hazard to achieving cost and schedule in alignment with approved plans. Industry should be considering more innovative and adaptable project delivery models that drive towards a positive outcome, encompassing all key stakeholders and rights-holders in a collaborative manner, rather than forcing a delivery model or delaying resolution of identified risks until the costs become prohibitive.