The U.S. midstream oil and gas construction industry has experienced tremendous growth over the past decade, forcing industry stakeholders from across the nation to work together under extreme environmental conditions, compressed project schedules, persistent labor fluctuations and ongoing cost pressures.
Despite collapsing crude oil prices and declining natural gas prices, the midstream oil and gas market is poised for continued strong growth--mainly due to the huge transportation demand for getting oil and gas from the wellheads to end users. Within the pipeline construction sector, planning, designing, and building activities remain historically high and are expected to remain robust for the near future.
Though business remains strong, many construction projects continue to be plagued by escalating cost overruns, project delays, mounting risks and declining productivity--particularly on megaprojects. Indeed, what we have is an industry imbalance shaped by volatile market cycles and the resulting decades-long push and pull among owners, engineers and contractors.
"The industry hasn't been able to find a good equilibrium where all stakeholders get what they want," said a large global engineering firm's director of construction.
In FMI's discussions and project work with industry leaders in the midstream construction space, we have found many firms operate in a highly chaotic business environment and don't understand the basic "blocking and tackling" of construction. In this article, we explore the preparations needed to prepare a company for the next large oil and gas boom and provide straightforward tips for achieving this goal.
Finally, a case study on TV Driver (a Canadian industrial construction company) and one of its preferred suppliers, Intelliwave Technologies Inc., highlights how a creative partnership has resulted in the development of innovative tools to improve site logistics and reduce rework through effective equipment and material tracking in the oil and gas sector.
An Old Story
The U.S. construction industry isn't readily associated with words like "cutting edge" and "innovation," particularly when compared to high-tech industries such as aerospace or biotechnology. In fact, the U.S. construction industry has a lengthy history of productivity decline, according to numerous industry research studies.
Matt Stevens, president and management advisor at Stevens Construction Institute, Inc., calculated the U.S. construction industry's labor productivity from 1993-2013. He stated, "Generally, the negative changes over the last three decades have outpaced the positive changes. Lack of consistent engagement by construction project stakeholders to each other has made project information flow unevenly, causing chaos. The contracts continue to be draconian, so each party acts with as much legal insulation as possible."
Though one could debate the many reasons for ongoing productivity decline, keep in mind the true meaning of productivity. At its most basic level, productivity describes a relationship between physical inputs and outputs. The formula is disarmingly simple:
Productivity = Units of output/Units of inputs
A productivity index highlights the ways that a company can extract an increasing number of units of output per labor hour, per pound of materials or per machine. Traditionally, productivity in the oil and gas construction industry has mainly focused on direct labor. Given the continuing productivity decline, however, industry leaders now question some fundamental business practices the industry has taken for granted for decades.
"We need to move away from Einstein's definition of insanity: doing the same thing over and over again and expecting different results," said a supply chain manager of a large Canadian oil sands operator. "We just have to...