The Death of Project Management

November 3rd, 2008
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My Open Range column from the November 2008 issue of Alberta

Venture magazine:

Oilsands developers have themselves to blame for their reversal of fortune

In the Fort Hills debacle a few weeks ago, the forecasted costs of a single oilsands project hit $23.8 billion, driving the project’s financially weaker junior partner, UTS Energy Corporation, to the brink of collapse. It brings to eight years the oilsands sector’s record of blowing budgets and timelines. Suncor’s Project Millennium began the trend in 2000, going $800 million over budget, a figure that seems quaint today. For a guy who grew up in a much poorer Alberta whose can-do, lean-’n’-mean, do-more-with-less spirit enabled us to build a world-class industry through tough times, it’s bewildering. Not that this or that project goes off the rails, but that a whole sector does business on the basis that today’s numbers don’t mean anything; there’ll be billions more coming tomorrow.

Several years ago I spent over a month working on a big article about oilsands costs. I learned about how the overruns happened and how senior managers were salvaging the wreckage, but I never quite figured out why they occurred. This, the biggest calamity to hit the industry since the National Energy Program, had triggered no public blame and surprisingly few firings. The underlying message from oilsands managers was, “We’re pissed off you’re even writing about this. We’ve got this under control. It’s yesterday’s news. Let us do our jobs.” That was in the spring of 2004. The industry’s combined overruns were $7.3 billion.

You know what’s happened since then. Fort Hills alone is over by more than that amount. And the unanswered question remains: why? Lame press releases grudgingly give up the barest facts about the latest evaporated billions through figuratively gritted teeth, offering at best circular reasons – for example, costs are escalating because labour got more expensive. We’ve grown so inured to overruns, it’s a triumph when Canadian Natural Resources Ltd.’s Horizon project comes in a mere 36% over. I’m amazed investors (not to mention directors) stand for this stuff.

The best explanation I’ve heard comes from people in the construction industry. They say many big oil companies gutted their project-management expertise during the dark 1980s – and newer companies never got any. They nonetheless convinced themselves they could pull off immensely complex projects; Syncrude’s upgrader expansion involved 900 modules and required 100 cranes and 6,000 workers. Some adopted trendy management theories like “multidisciplinary teams,” creating what one insider I spoke to derided as a “coalition of the willing.” They rebuffed offers from construction management companies to handle the general contracting at a fixed if somewhat higher initial price, relegating construction and engineering companies to subcontractors. As costs escalated, many of these refused anything except cost-plus jobs, transferring all risks to the customer.

It’s a sad legacy, because elsewhere construction costs are dropping, thanks to new design and materials plus improved project management. The day the Fort Hills debacle hit newspapers, a breathtaking 1,200-foot bridge spanning the Mississippi River in Minneapolis opened to traffic. It replaced the Interstate 35W bridge that collapsed in August 2007, killing 13 people. The consortium building the new 10-lane St. Anthony Falls Bridge used a rolling, overlapping work schedule (something oilsands companies would love to apply successfully) and state-of-the-art elements such as self-consolidating concrete and epoxy-coated rebar, enabling the project to be conceived, funded, designed, approved, built and tested in 13 months. Without throwing cost control out the window. The final price was $234 million US, roughly the cost of two Calgary interchanges – which routinely take five years.

It’s true the oilsands’ remote location complicates matters, as does the province’s refusal to build decent roads. And everyone building at once inevitably drives up costs. But the panoply of rationalizations could soon be irrelevant. Global credit is tightening, hence UTS’s perilous state. One major project, Northern Lights, has bitten the dust. Oilsands startups can’t get capital. Crude prices have fallen by 40% and could drop to $50 US per barrel, making Fort Hills a bust. Directors, shareholders and Albertans seem limitlessly tolerant of our curious way of managing the oilsands, but the wider market may hold its own reckoning.

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By George Koch