Impact of Region, Ownership, and Time on Total Installed Project Costs
The three largest costs for almost any pipeline project are the contractor/labor costs, the materials/equipment costs, and the engineering/inspection costs. Today, we look at how these three major project costs are influenced by three key variables: the region of the country in which the project is located, the public company parent of the project owner, and the calendar quarter in which the project received its FERC approval. While we have focused on these three variables, there is an almost infinite number of factors that could be examined to determine whether they may impact the ultimate cost of a project. If you have other ideas that you would like to test, please let us know. Some key takeaways of this benchmarking exercise are the following:
- Regional variance principally occurs with regard to labor, but the regions with higher costs are different for pipelines and for compressor station work
- Ownership is not a significant factor, but how a project compares to the median is an important benchmark
- Labor costs do vary based on the quarter in which FERC approves a project and approval in the fourth quarter appears to be problematic
For our comparisons today, we have limited the data to projects filed at FERC after October 1, 2012 with an estimated cost in excess of $50 million for which we have final actual costs. We have normalized the data by calculating the costs per horsepower of installed compression and per inch-mile of installed pipeline. To calculate a project’s inch-miles, one just multiplies the pipeline’s diameter in inches by the pipeline’s length in miles. So a 30-inch pipeline that is ten miles long would be 300 inch-miles, and a 16-inch pipeline that is 20 miles in length would be 320 inch-miles. Finally, we have excluded three projects from our data -- Enbridge’s Salem Lateral and Williams’s New York Bay Expansion and Rockaway Delivery Lateral. All three of these projects were short crossings of navigable waters located in the Northeast which substantially increases the per inch-mile costs. Therefore, projects like these three typically cost up to ten times more per inch-mile than the projects we discuss below.
Regional Cost Differentials
Compressors and pipelines are sourced on a nationwide basis and therefore, it is not surprising to find little variance in those costs by region. However, the cost of contractor/labor do vary across the regions of the country. Presumably, this differential is driven by general labor cost differentials. Set forth below are charts showing how these two key costs vary by region across the country.
Compressor Labor and Material Costs by Region
Pipeline Labor and Material Costs by Region
As can be seen above, in both categories, the median material costs are very consistent across the regions. However, the median pipeline labor costs are higher in the Northeast and Midwest and, somewhat surprisingly, the median compressor labor costs are much higher in the Southeast. This difference in regional variance means a thorough understanding of a project’s facilities and the location is needed to accurately predict a project’s cost.
Public Company Owner of the Project
Whether you are an investor seeking to compare one pipeline company to another, or a developer trying to understand how your projects compare to those undertaken by other companies, a valuable competitive benchmark is to compare the costs incurred for projects based on who the public company owner of the pipeline building the project is. It should be noted, however, that the comparison by owner is not necessarily a grade on the ability of that owner to control costs, because total installed costs appear to be more influenced by the region of the country and the size of the projects that a particular company has completed. Set forth below is a graph showing the projects undertaken by each of the public companies that had completed at least five projects during the study period.
Total Installed Costs by Project
In the above chart, the vertical dotted line is set at the median cost for pipeline work, which is $163,157 per inch-mile and the horizontal dotted line is set at the median for all compressor work, which is $2,841 per hp. It is instructive to see how each company’s projects compare to the industry medians. This type of benchmarking is useful for finding projects that may be outliers, so that one can dive more deeply into those projects to understand what may have caused them to be so much higher than the industry average.
Timing of FERC Approval
One other factor that could impact the cost of a project is the quarter in which FERC granted the project its FERC certificate. This timing issue could impact labor costs, in particular. Set forth below is a chart showing how the labor costs vary depending on the quarter in which the project received approval from FERC.
Compressor Labor Costs by Approval Date
Pipeline Labor Costs by Approval Date
Given the usual effort to put most projects into service in the fourth quarter, one might expect that the fourth quarter would be the best quarter, from an economic perspective, in which to get a certificate because that would give the applicant a full year to prepare for and construct the project. Interestingly, the data doesn’t bear that out. For both compressor and pipeline projects an approval in the fourth quarter actually correlates with the highest median cost. Another interesting factor that becomes apparent by plotting these projects in this manner is that there are very few projects approved in the second quarter as compared to the other three. Perhaps, once a project slips past the first quarter, the applicant may lose hope of getting that project into service that same year and so the pressure to get an immediate approval subsides until the third quarter.
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