Celebrating Service - Cost Overruns
As a veteran-owned business, service is always on our minds, especially today. On Veterans Day, we're also reminded about the success of energy industry entrepreneurs, including those who helped unlock American resources during the shale gas boom, which has led to our country's energy independence.
As more pipeline projects get close to completion, the question becomes, especially for those analyzing the impact of the developers' balance sheets, how close were the initial cost estimates? When cost overruns occur, who's on the hook? And, as shown in the below data visualization, there's a strong association between late in-service dates and cost overruns.
A year ago, Boardwalk's Gulf South Pipeline Company, LP received its first notice to proceed with construction of the Coastal Bend Header Project. The project involves the construction of 66 miles of 36-inch diameter pipeline, as well as several new compressor stations. Gulf South entered into 20-year firm precedent agreements for 100 percent of the available capacity across the project to transport natural gas to serve the first two trains of the planned Freeport LNG liquefaction terminal. In its recent earnings call, Boardwalk stated that construction is nearing completion and service is estimated to occur on February 1, 2018.
Typically though, for a project to be deemed a success, it must not only be put into service on schedule, but also, on budget. On some projects, a developer has been able to pass cost increases on to its shippers through provisions of the precedent agreement. For example, Kinder Morgan's Tennessee Gas Pipeline has included provisions that allow the developer to adjust negotiated rates. Developers can, at times, mitigate the effect of cost changes through their contracts with the construction contractors. But absent these cost mitigations, any cost overruns will generally fall on the developer and thus reduce the expected returns for the project.
A developer is required to file an estimate of its costs as part of its FERC application and is required to file an actual cost report six months after the project goes into service. But between those two dates, there is limited transparency into whether those costs are increasing and how they will affect the "success" of the project. Gulf South estimated that the project's construction would cost $690,357,089. What will the final cost report show?
One of the conditions regularly included in a Certificate is the pipeline's obligation to maintain an accounting of the costs incurred in constructing a project, specifically "separate books and accounting of costs attributable to the proposed ... services." When providing project costs, FERC simply requires that companies provide a "good faith estimate." These cost estimates are, in fact, quite detailed, and must be provided upon filing an application to seek a Certificate, as well as when the project is placed in-service. But the rates can be amended, which can be particularly important when costs vary so dramatically that they impact the proposed recourse rates for the project facilities.
Through our analytics platform, subscribers can gain insight into the expected costs in a number of ways. First, you can quickly see a developer's past history for bringing projects in on budget. Second, you can compare the costs of an existing project to similar projects to see whether the estimated costs are consistent with costs of similar projects.
Project Cost and Service Variance (2008-2017)
