Petro-Canada International Assistance Corporation and World Bank 1988 Conference on Petroleum Industry Management (Vol. 5 of 9) : Planning and Managing a Major Pipeline in a Remote and High Cost Area

Suite 200, Notre Dame Place, 255 - 17 Avenue S.W. Calgary, Alberta T2S 2T8 (403) 228-0822 18 Telecooier #: (403) 228-395 -January,21, 1'988 File: 1436-5 BY COURIER Mr. Zhou Bingyuan Economist Engineer, Planning Department Ministry of Petroleum Industry The People's Republic of China Deshengmenwai Liupukang BEIJING, CHINA Dear Mr. Zhou: Enclosed is Paper 12, "Planning and Managing a Major Pipeline in a Remote and High Cost Area" for MOPI translation and internal distribution for the March 21, 1988 conference. Mr. Pearce's biography is also enclosed. Also enclosed is additional information, papers, and a bibliography on the Norman Wells project for your information and use as you see fit. Sincerely, E. W. Best EWB/pj Enclosure cc: 17.Shumt The World Bank J. B. Ridsdel Petro-Canada International Assistance Corporation I N. 4s1 iq4 $  William M. Pearce, vice-President, Special Project Interprovincial Pipe Line Ltd. 10201 - Jasper Avenue Edmonton, Alberta T5J 2J9 Telephone 420-5201 Mr. Pearce has been engaged in crude oil pipeline work for the last 30 years primarily in the engineering and management fields. He was born and studied in England principally the Central Technical College, Burmingham and specialized in electrical power engineering. He came to Canada in 1953 and is a registered Professional Engineer in Ontario and Alberta. After working in the power generation field, he joined IPL in 1957, as a pump station design engineer and continued work in the changeover from diesel to electric equipment. with increasing responsibilities he was appointed Manager of the Company's engineering dept. in 1978 and the next year was appointed Project Manager of the Norman Wells Pipeline group. He managed the project from its initial to operational stage in 1985 and later set up the Special Projects group to plan further frontier pipelines for both oil and gas together with a proposal to transport water in Canada using high pressure oil pipeline techniques.  m)RL BANK aHINA, CONJFERENCE MARCH 1988 PLANNING AND MANAGING A MAJOR PIPELINE IN A REMOTE AND HIGH COST AREA Introduction This paper describes actual work on the Norman Wells pipeline which was constructed by Interprovincial Pipe Line Limited from 1982 to 1985. Much of the engineering detail, particularly the technical problems of working in permafrost are not discussed, in order to focus on management issues, particularly project administration and cost control. Interprovincial is the largest crude oil pipeline system in North America with approximately 11,000 km of lines. Engineering and environmental papers have been previously written and are referenced in this paper (with copies available). To better understand the challenges in building Canada's first major oil line connecting the North with Southern markets, some time has been given to describing the historical, geographic and political background. -1-  General Information Geographical Most of the oil and gas in Canada has been found in the western sedimentary basin principally in the Province of Alberta, but the potential for oil and gas continues northward into the Northwest Territories and significant finds of both oil and gas have been made in the Beaufort Sea and the High Arctic. The most accessible discoveries have been made in the delta of the Mackenzie River and within the continental shelf. The Northwest Territories of Canada consists of approximately 3.4 million square kilometers with a population of only 52 thousand (See Fig. 1). The principal access is along the Mackenzie River Valley and there are very few roads in the Valley except during the winter. Most native people have moved into small settlements along the river and major transportation is by river barge and air. The mean annual temperature at Norman Wells is -60C and in December there is only about 3 hours of daylight. Historical In 1921 Imperial Oil Limited conducted a drilling program which resulted in a significant discovery of oil at Norman Wells. The oil field -2-  extended under the present course of the Mackenzie River and following that discovery, a few wells were drilled on the shore and from islands in the river with the oil being processed through a small local distillation plant. Esso Resources Canada Limited is a subsidiary of Imperial Oil Limited and now operates the oil field. This small production continued until 1979, when Esso planned to introduce a secondary recovery program using water injection and a major drilling program which would increase the production from 450 cubic meters per day to 4500 cubic meters per day. With the river being frozen for about 6 months of the year, barging the oil to market would require huge storage tanks and the only reasonable alternative was a 324 mm buried pipeline. Following long negotiations, Esso Resources agreed that Interprovincial should apply to government agencies for the necessary permits to construct a pipeline from Norman Wells to Northwest Alberta to move Esso's increased production. The agreement contained clauses pertaining to capital, operating costs, and tariff structure to satisfy Esso that the line would be built at minimum cost and in time to meet the oil field development program which also required considerable government approvals. In southern Canada, oil and gas pipelines have been constructed for over 100 years and with this experience, construction practices are -3-  c- onventional except perhaps in very wet or swampy areas where heavy - equipment cannot be supported and work is then carried out in the winter when the ground is frozen. In the North, winter work is essential and this pipeline was seen as a "pilot project" for larger projects in the 1990's. Regulatory In Canada the National Energy Board is an agency of the federal government responsible for the movement of oil and gas either across provincial or international borders. The Board has overall legal authority and has the power to call public hearings, approve or disapprove proposed projects, and make rulings on the proposed tariffs of oil and gas pipelines. In Northern Canada the use of most land is controlled by the Federal Government through its Department of Indian Affairs and Northern Development. Application was made for a strip of land 30 metres wide on which to build the pipeline and this resulted in a second public review process focusing on environmental and social issues. The Provincial government of Alberta has an established process for pipeline construction and followed the recommendation of the National Energy Board. -4-  -The project required many applications to other levels of governrent and -the public hearings were attended by all interested public groups. -The major opponents to the oil field development and pipeline were environmental groups who were concerned with the impact of construction, and the native people who claimed that the land and its resources belonged to them. The applications and public hearings took 1 1/2 years and although the project was approved, it was subjected to a further two year delay to allow native people time to become better prepared, and to allow completion of many environmental and socio-economic conditions imposed on the pipeline company. The complex regulatory system required special attention throughout the life of the project. Appendix 1 shows the list of additional studies that were required during the two year delay. On completion, these studies were forwarded to each of the public interest groups for their review following which the National Energy Board approved or disapproved the study. It will be noted that these studies covered a wide range of subjects and the process created a precedent in Canadian regulatory history. Political Until recently there has been no formal agreement between the native people of the Northwest Territories and the Canadian Government so that -5-  ownership of the land and its resources has been subject, to considerable,- political dispute. over the past few years, the -concern for -the northern environment in Canada has resulted in a series- of land use. regulations which must be followed on any construction project, and these are supported by public hearing processes where anyone may voice their concerns prior to the start of major work. This concludes the background of the project which I have included to show that in Canada, major projects particularly in remote areas present unique management problems in addition to normal industrial issues. We will now consider the resulting management processes starting with the preliminary approvals in 1981 and finishing when oil flowed through the line in 1985. The Pipeline Project The objectives of the pipeline company could be simply stated as follows: "To design, construct and operate a crude oil pipeline with the lowest capital and operating costs and in accordance with approved environmental practices. To maximize the amount of socio-economic benefits to the northern region and native people, and to complete the work in a restricted timetable". -6-  Pipeline projects of this size and complexity require some 1400-- construction people during the 3 month peak period with i- peak staf-f-of ---about 350 design, supervisory and management persons. As shown on Fig. 2, the distance from Norman Wells to Zama which is the closest connection to a pipeline in Alberta is 874 kilometers. The route crosses large areas of muskeg which are impassable except in winter. There would be two major river crossings, the Great Bear and the Mackenzie River with 140 smaller stream crossings. Intermittent permafrost is found over almost the entire route. Three pump stations and several maintenance bases had to be built. Approximately 50% of the length of the pipeline would run through permafrost most of which is concentrated at the north end (Fig. 3). Project Management Pipeline companies in Canada do not have sufficient permanent staff to undertake all aspects of such a large construction project and it was decided at an early date that the Interprovincial staff team would be kept small and provided with sufficient authority to allow fast decisions to be made on all aspects of the work. This team of only six managers and about ten immediate staff supervised the work of two contract management groups (See Fig. 4). This practice was unique as in Canada companies generally recruit larger staffs for projects of this size. -7-  Ie -success of the Interprovincial approach was due to. the selection process used to choose consulting staff and the careful description -of their responsibilities. The Company management team directly operated the Northern Public Relations policies and the Northern Development policies which identified and encouraged business opportunities in Northern communities and employment of northerners. All other work was divided into two management groups. Technical Services Group The principal responsibilities of this group are listed below: Engineering Design - Pipeline Engineering Design - Facilities Engineering Design - Communications Materials and Installation Specifications Land Surveys Purchasing Environment Geotechnical Hydrological -8-  Quality Assurance The group was made up of six companies working in their specialized field and at its peak the staff total was about 100 people. The Engineering and Technical problems connected with the Norman Wells pipeline have been previously published and these are listed in the bibliography. Construction Services Management Group This large group using the designs and specifications of the Technical group carried out the process of contract award, logistics and construction supervision. Their total responsibilities were as follows: Detailed Construction Plan Construction Schedule Construction Logistics Construction Contract Documents Invitation to Tender Contract Awards Contract Administration Construction Cost Estimate Construction Manpower Plan -9-  Overall Project Schedule Overall Project Cost Control Project Monthly Progress Report Materials Expediting Construction Inspection Staging Areas and Camp Management Hydrostatic Testing Program Commissioning and Project Start Up Construction Approvals Process This group operated both in the South and on the pipeline location with a peak staff of about 250. Selection Process The award of consulting, management or technical contracts is not necessarily made to the lowest bidder. On Northern work, particularly pipelines, it is impossible to quote a fixed total price for services which would be acceptable to the pipeline company. Prices are generally quoted on a unit price basis of "man-hours; or "man days" together with a multiplier which would apply to overhead costs and profit. A multiplier would range from 1.8 to 2.5, depending on the scope of the work. -10-  The selection process for Management and Technical Support Services was generally as follows: * A number of suitable consulting companies were identified and invited to bid; * The project was described in general terms and the bidders were required to provide their own estimate of total personnel requirements and total man-hours; * Costs were quoted as hourly wages for each classification together with a multiplier which would provide for overhead costs and profit. * Related previous experience was required together with the personal experience of their senior staff. The evaluation of these bids consisted of two parts, the quantitative part which considers the validity of estimated man-hours and their associated unit costs and the qualitative part which is more difficult to analyze and translate into a measurable value. A company selection team compiled a list of all the desirable qualities that would be expected from a support group working on the actual project. The individual qualities were given a value in relation to other qualities which reflected their importance to the success of the project. -11-  The main qualities that were considered in the above review are as follows and were adjusted to suit the particular work being considered:- v Previous experience on similar projects; Corporate resources, Canadian content in personnel and technology; * General acceptability of proposed organization; * Present workload or availability; * Knowledge of project; 4 Quality of senior personnel; a Administration capability; * Logistics planning capability; . Estimating capability; e Quality control capability; G Cost control methodology; * Contract production and administration; * Supervision and inspection; * Labor relation capability; * Knowledge of special Northern requirements; * Safety management; * Knowledge of terms and conditions imposed by government regulators; * Understanding of Northern political issues. -12-  The selection teams then reviewed all the proposals and estimated the -- expected performance of each bidder in each of the quality-areas. The - final -two or three companies were then interviewed for additional assessment. The estimated values of the various qualities and the estimated performance of each bidder were combined to provide an overall measure of potential success. This provided the best method of determining the most suitable group to provide the needed support for Interprovincial. In this type work work where costs are not fixed but based on man-hours and unit costs, emphasis should be placed on the unit costs rather than the estimated total. The work is then managed to minimize the total hours expended. For all subsequent work the contracts were administered by the Construction Services Management group, the most important of which was the actual pipeline construction. Purchasing On this project, senior management devoted considerable effort to develop most of the business strategies which would lower the cost of both materials and construction. Generally this was achieved by using market competition within the terms and conditions stated by government -13-  agencies. In addition it was possible to take advantage of a- manufacturer's knowledge in other areas such as transportation.and this was achieved by selection of the delivery location. The general purchasing principles were as follows: 1. Maximize market competition 2. Maximize Canadian content 3. Require a satisfactory production control system 4. Establish quality assurance procedures and data recording. 5. Design specific strategies for each major purchase to minimize cost. Two examples will be quoted, the first for the supply of all the main line pipe and secondly to plastic coat and transport the pipe. Enquiries for pipe were sent to Canadian mills and also to certain Japanese mills. This resulted in a Canadian mill being the most competitive and increased the Canadian content of the pipeline. Cost savings were about 35%. The three factories who bid on the polyethylene coating of the pipe were deliberately not told where the pipe would be made and were required as part of their bid to transport the entire shipment by road, rail and barge to the stockpile locations in the North. In addition any damage to the pipe or coating would have to be repaired and payment would not be made until the material was delivered -14-  in-acceptable condition. This resulted in lower costs than the original -: ectimate and at the same time ensured that the pipe would arrive in good - condition. The cost savings were approximately 30%. Transportation and Logistics Fig. 2 shows that a highway and a railroad connects Alberta to the lake and river system in the Northwest Territories. From the town of Hay River a barge system operates to the Arctic Ocean and road transport can be used to the Town of Fort Simpson. Before construction crews can be moved north, living quarters, equipment and fuel must be in place and the scheduling of these shipments became a major factor in planning of the pipeline. In late winter and early spring, truck loads must be reduced to avoid breaking the road surface, the barge system only operates for only about six months and air transport is subject to weather conditions. Stockpile sites along the river were carefully chosen, and supplies were unloaded by barge during the summer preceeding the first winter of main line construction. Along the pipeline three 450 man prefabricated camps were set up, several pipe stockpiles and three main equipment areas. Additional supplies were hauled by winter road after the ground was -15-  frozen and personnel were flown in, using small airstrips and the main airport at Norman Wells. When the work was completed it was necessary to move all equipment and supplies to a river location or southwards along the winter road so it would not be trapped in the North for another season. The transportation and logistics planning was a success and there were no major holdups due to lack of supplies. Construction Planning Fig. 5 shows the construction timetable. An analysis of available manpower and materials had shown that it was not possible to build the pipeline in less than two winters. This coincided with the time required to develop the oil field and processing facilities so that both would be completed at the same time. Special permission from government agencies had been given to start "pre-construction" work before the end of the two year time delay and this allowed the 30 metre pipeline route to be cleared of trees and all preparations made for the main construction groups. By awarding the pre-construction contracts to Northern companies, particularly native groups, it was possible to increase the benefits to Northern people and the separating of the work forces allowed different rates of progress. -16-  There is a great incentive to complete the pipeline on-schedule when-the overrun costs are considered. The loss of oil field production for one year and the cost of interest on the total investment for one year is enormous and suggested that incentives be used to encourage fast pipeline construction. Incentives were not needed on pump station construction because work can take place in either summer or winter. The entire length of the pipeline was divided-into six "construction spreads" each of which would work for one winter season. These are shown on Figs. 2 and 6 and to provide an incentive it was decided that the spreads #1 and 2 would work towards the south and spreads #3 and 4 would work towards the north. The crossing of the Mackenzie River would be a separate contract. Spreads 5 and 6 moved northwards but had access from both ends. There would be three separate contractor groups each having two sections of work. It was known that contractor costs for the second year would be higher than the first year because of escalating labor and other costs which were occuring in Canada at that time. The contractors were encouraged to complete more than one section of work in the first winter by agreeing to pay the second year prices for the additional production. In the second year, two contractors would be working towards each other, one from the north and one from the south. It was planned that if one contractor did not meet the required production rate, some of his work -17-  would be taken away and awarded to the other contractor- The- results of these incentives were that the pipeline was completed within the timetable and at only a small increase in the incentive costs. Contractors In Canada large pipeline contracts are awarded on the basis of competitive bids. Most of the larger contractors operate under agreements with several trade unions ahd on this project it was important to ensure that there was no work stoppages due to disagreement between the unions and contractors. The Company proposed a "no-strike agreement" for the duration of the project and after agreeing to a common wage policy for all contractors, an agreement was signed which covered 19 different trades and lasted until the completion of the work. Any labor disputes which arose were settled without the need to strike and no time was lost. For effective control of costs, the contract documents must clearly and accurately date the following: 1) Scope of Work; 2) Contractor Obligations and Responsibilities; 3) Owner Obligations and Responsibilities; -18-  4) Contractor Price and Price Breakdown by Systems-; --- 5) Method of Compensation; -6) Rates for Extra Work; 7) Contractor Equipment and Manpower Schedules; 8) Contractor Work Schedule; 9) General Conditions; 10) Special Conditions (Environmental, Socio-Economic, Archaeological); 11) Design Information; 12) Construction Specifications; 13) Procedure for Identifying Extra Work. A lump sum price per linear metre was required and a fixed move-in and move-out cost was to be quoted. For special items of work such as concrete weights, additional depth of ditch etc. unit prices were quoted which could be applied to the actual quantities. A construction schedule submitted with the bid provides the basis for subsequent comparison of actual and scheduled progress. Fig. 6 shows the resultant production. If the work falls behind schedule the pipeline company retains the right to direct the contractor to increase the work force or equipment and if this is still not successful can take over the work itself. This is rarely needed in Canada as contractors are motivated by the desire to complete the work and then be paid. -19-  Construction Inspection Pump stations, maintenance areas and other similar facilities built by contract were continuously inspected by the Construction Management Group for both quality and production rates. Mainline construction required a team of about twenty five inspectors per spread to which is added radiographic personnel for weld inspection and a clerical group. The total for the most northerly spread would be about forty people all in radio contact to a central office and the chief inspector. A small survey group records the actual location of the pipeline and provides a ground profile on completion. Financial Controls The financing of major projects is generally supported by the use of borrowed funds. In this project it was decided by the Company and agreed to by the National Energy Board that 75% of the investment would be borrowed from the financial market and 25% would come from the Company's own sources. This is a common "debt" to "equity" ratio for such projects. Funds were made available to meet demands based on a financial forecast which in turn is based on the timing of major material and construction purchases. -20-  Cost Management Within the financial controls group, one of the most important areas is cost management. This item is important on any major project, but in remote areas there is a greater chance of error and other factors such as weather which can lead to major cost overruns. On a project which has almost 3000 separate orders and contracts which vary from simple lump sum payments to complicated contracts worth several million dollars there must be an integrated control system to minimize errors and subsequent costs. Fig. 9 shows in a diagramatic way, the process which was used. The essential elements are as follows: The comparison and analysis of actual costs to the control estimate. Corrective action to bring the actual costs into line with the control estimate. * Measurement of the results of any corrective action. It will be realized that the production of the control estimate is the basis from which all future comparisons are made. This estimate is most -21-  - - ~ carefully prepared at the time a decision is made to-proceed with the proje&t and provides the best possible figures prevailing at that -time. iThe quality of the estimate depends on the degree of knowledge -(or ignorance) of the components and an allowance or contingency factor is provided. These factors vary generally from 1.00 to 1.35 at this stage of a project, and each section of the estimate was carefully scrutinized before the figure was agreed upon. As work is completed, unused funds from these contingency items are removed so that they cannot be used for other items. Additional funds. needed for cost overruns can only be obtained by approval of senior management who would require a satisfactory explanation why the control estimate is being exceeded. Some cost increases are not due to human error such as landslides, flooding, early thawing etc. and provision is made in the control estimate for such an event. On this project the figure was roughly $50 million but in practice was not needed. It would be almost impossible to manage such a large amount of data without the use of computers and several programs are now available on the market to assist in project cost management. They allow continuous checking of incoming costs and provide a forecast to completion. The forecasting will result in necessary corrective action taking place and assist management to check the results of this action. -22-  Appendices 2A and 2B show copies of some of the computer-printouts. 2A shows the final major cost items and it will be seen--that the- project- was completed at $355 million with a control estimate of $450 million. The cost overruns and underruns can be seen and it will be noted that the special contingency item which is named "project reserve" was not used. 7B shows how this method was applied to section #1 of the main pipeline and the individual components can be seen. A similar process was used for the entire project which requires large printouts, but provided important management support on a monthly basis. The accounting and printing format was also acceptable to the National Energy Board and copies of these detailed reports were sent for their information. The project management included an audit process which checked the accuracy and reporting of all costs, this was supplemented by a separate audit group paid for by the Company but independent from it. The National Energy Board as the principle government agency conducted its own audit of costs so that the final capital costs were agreed by all parties and was used to calculate the resulting tariff. -23-  NORTHWEST TERRITORIES YUKON TERRrTORY Apprumalles Seell f kiltomlress 0 ISO 320 'I0 640 46~~~~~~~~~~~~~~~ II T teh~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,0 s ala ~~~~~~~~~~~~~~~~~2L4.__ Xff~~~~~~~% "F'.ra' ' i r . d' <! _  FIGIJRE 2 ~~~~~~~~~~~~~~~~~~~~~~.1 ...,......... 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