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Blog/April 15, 2015

Adapting to the “New Normal” in Oil and Gas Construction

adapting-to-the-new-normal-in-oil-and-gas-constructionHow the Market Will Endure Growing Regulatory, Labor and Commodity Pricing Pressures

On February 24, President Obama vetoed legislation authorizing TransCanada’s Keystone XL pipeline.  The 7-year regulatory saga is emblematic of the regulatory and public relations burdens on U.S. energy projects. With the Keystone veto, this burden will grow.

However, the difficulties faced by the U.S. energy infrastructure market do not end there. Trade labor markets are tightening and lower commodity prices have made funding and executing projects a struggle. These three factors – regulatory uncertainty, trade labor constraints, and commodity pricing volatility – represent a “new normal” for energy infrastructure markets in the U.S. They also present a unique opportunity for the contractor community to meet the challenges of a rapidly changing marketplace.

The Growing Regulatory Burden
How can an oil pipeline, that would represent less than one percent of the total oil pipeline infrastructure in the U.S., draw such remarkable political opposition?

The answer is threefold.  First, like many political issues, the debate has become symbolic.  In the case of Keystone XL, the debate has transformed into one about climate change and environmentalism.  It is also bearing the brunt of environmentalists’ objections to a U.S. oil industry that has grown with remarkable speed since 2009.

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Second, political activism is changing.  No longer does an activist need to go door to door to generate support for a cause.  Facebook, Twitter, and the broader internet have all changed the political discussion, as well as access to power in the U.S.  As a result, constituencies can be built around tweets and blog posts, with the ability to change rapidly the political debate in Washington.

Third, as the country becomes more politically polarized, politicians use these debates to their own advantage.  According to the Pew Research Center, the most frequent voters and campaign contributors are also the most ideologically extreme (Exhibit 2).  In this self-perpetuating cycle, Keystone XL, can become a debate about climate change and environmentalism, which invigorates both ends of the political spectrum.  The fact that Keystone XL would represent less than 1 percent of U.S. oil pipeline infrastructure, with negligible effect on the environment, is lost in the noise.

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Political polarization, the changing nature of political activism, and the growth of the U.S. energy industry have collided on Keystone XL. For TransCanada, this has been an expensive effort. Last summer, TransCanada’s CEO Russ Girling told the Wall Street Journal that the $5.4 billion total cost of the Keystone XL would nearly double by the time the U.S. government completed its review of the project.

With political activists emboldened in the wake of President Obama’s veto, the energy industry will face greater regulatory burden and public relations scrutiny. This will result in greater compliance costs and project delays.

In this environment, project owners face a dilemma. There is no room for error in project quality or safety. In addition, regulatory costs are increasing and project returns declining. How do owners construct a project at lower cost using contractors that have an excellent safety record and a strong reputation for quality? Moreover, how do contractors that could fill the void face a problem that may grow worse during an extended market downturn – the availability of skilled labor?

This article is part of FMI’s Q1 Oil and Gas Advisor. To download the full article, please click the image below.

For questions regarding this article, please contact Scott C. Duncan at sduncan@fminet.com or Sabine H. Hoover at shoover@fminet.com.

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