A Look Ahead at the Industry in 2016 and Beyond
A new year has come and with it the hope for prosperity. While 2015 was marred by a downturn in the oil and gas pipeline industry as result of a historic drop in oil prices, the distribution side of the market remained strong.
According to a market forecast in the November 2015 issue of North American Oil & Gas Pipelines, the U.S. distribution market is poised for continued growth in years to come (see “Who Will Do the Work?” by Mark Bridgers and Nate Scott). Those involved in the market seem to share the opinion that distribution pipelines will have a strong year, but it won’t be without
We polled some of the top distribution pipeline construction experts in the United States to help forecast what lies ahead for the industry in 2016. What follows is a comprehensive overview of the market trends, challenges and opportunities for the coming year from a panel comprised of Grady Bell, vice president of business development at Laney Directional Drilling, Kevin Miller, president of Miller Pipeline, Ben Nelson, vice president of western operations for Michels Pipeline Construction, a division of Michels Corp., Jaeson Osborn, president of Q3 Contracting Inc., Jay Osborn, president, distribution and transmission, at Primoris Services Corp., and Ray Swerdfeger, president of K.R. Swerdfeger Construction Inc.
What is your overall assessment of the North American oil and gas distribution pipeline industry as we enter the New Year?
Grady Bell: I believe that the gas distribution pipeline industry market will be about the same as last year. There will be some projects that might be delayed due to the overall economic trends.
Kevin Miller: The gas distribution market is definitely growing. The housing market is showing signs of recovery in most regions, and many states have adopted policies allowing gas companies to expand their systems to pipe areas that previously had not been cost effective to serve. Along with that activity, almost all distribution companies have started accelerated main replacement programs and system modernizations, which is the bulk of our work.
Ben Nelson: The distribution market is definitely growing as utilities continue to successfully work with state regulators to fund replacement programs and develop their integrity management departments. Many gas distribution companies are aggressively replacing their aging infrastructure. Additionally, the abundance of low-cost natural gas has led to many large-scale expansion projects. On the opposite end of the spectrum, our clients who are exposed to the oil market are constrained by the low price of oil we’ve seen during the last year
and a half.
Jaeson Osborn: I see this as a growing market with years of work to come. This in turn creates ample opportunities for anyone involved in the industry. The biggest contributor to the growth is the need to replace the current infrastructure that is coming up on its projected life cycle. I think the industry is taking a proactive approach to replace these lines before they extend past their life cycle.
Jay Osborn: The distribution market is growing, and I see a lot potential opportunities for the natural gas contractors in 2016 and beyond. The continued focus on pipeline integrity is driving the replacement of the old infrastructure made up of cast iron and bare steel distribution pipelines across America. The utility owners are committed to upgrading their infrastructure from the old metallic products to plastic and coated steel. Also outside of the cast iron and bare steel, I see some utilities replacing all pre-1970 plastic systems with new poly pipe and making the systems more locatable, as well as removing any flaws that may have been in the pipe when plastics were first introduced. Utilities are also getting approvals to capture the cost of replacing the old infrastructure through rate increase approvals from the local and state agencies.
Ray Swerdfeger: The gas distribution pipeline industry is still growing. We see a mix between new construction and upgrades. There is still a huge push to upgrade aging infrastructure and replace the low pressure pipe with polyethylene or coated steel. Until most of the distribution pipe is replaced, there will be a strong market.
How does the distribution sector compare to the mainline or gathering sectors in terms of market health?
Bell: The distribution sector should be better than the gathering sector, which should decline due to oil and gas exploration decline due to low price. But the mainline sector will be much better than the distribution sector due to several very large cross-country pipeline projects in 2016 and 2017 that are designed with pipe on the ground and just waiting on the permitting to get kicked off.
Miller: I think the distribution sector of the market is in great shape for several different reasons. Low interest rates, regulatory approval at state levels allowing for adders to cover the renewal programs, low natural gas prices leading to small monthly bills for their customers — all these things bode well for the distribution companies to continue with their capital programs.
Nelson: The distribution sector is more constant with steadier work compared to mainline pipeline and gathering line construction. Additionally the nature of this work requires utilities and contractors to work closely together and to form strong working relationships that last many years. Mainline and gathering work is typically job to job with more boom and bust cycles. Many oil companies are deferring work until the price of oil rebounds.
Jaeson Osborn: The distribution side is very healthy. Unfortunately, the mainline side saw a down tick in the market [in 2015]. Although the markets share a lot in common they do have their differences. The main difference is the distribution side primarily performs their work in more congested urban areas. The mainline side primarily performs their work in larger more sparse locations. The distribution side is a little more consistent with how work is distributed.
Jay Osborn: Distribution is a more stable segment in the pipeline industry and doesn’t have the drastic swings that are driven by oil prices, permit approval delays, special interest group pressure and state and presidential approvals. Government regulations have been a driving factor in the increased infrastructure rebuild programs for gas distribution and pipeline maintenance across America and will continue as long as the owners can capture the cost of the rebuilds through rate increases.
Swerdfeger: Unlike some of the mainline and gathering sectors, I don’t see that the distribution sector is affected by oil prices. We have seen mainline projects set on the shelf as oil prices dropped. Likewise, the gathering line work has slowed significantly. We have also seen an abundance of welders looking for work in the third and fourth quarters of 2015.
What specific areas of North America have the biggest potential for growth in terms of oil and gas distribution pipeline expansion?
Miller: We work in about 20 states and we are seeing fairly significant growth across most of our work regions. Some areas are showing strong growth in new construction — subdivisions and new homes, particularly the South and Southeast regions. In other regions, we are seeing expansion into areas previously served by propane or electric, like in the North and Midwest regions. On top of that, some geographic regions that may not be experiencing much new business growth are busy doing replacement work on their systems.
Nelson: Larger, older metropolitan areas typically have the biggest need for upgrading and replacing aging distribution infrastructure so we’ve seen above average growth in those markets. Many of these markets are located in the North Central, Northeastern and Southeastern United States where gas distribution companies are ramping up their Distribution Integrity Management Programs (DIMP) to replace aging cast iron, bare steel and pre-1970s plastic pipe.
Jaeson Osborn: The Northeast and West Coast have the most potential. The main reason is the age of the infrastructure, how much of it needs to be replaced and how fast it needs to be replaced.
Jay Osborn: I think the Northeast United States has a lot of potential for the growth of new pipeline gas distribution systems to serve customers in rural areas that could not be served due to cost constraints in the past. The cost of natural gas being low and having access to natural gas from the Marcellus shale is making these projects possible to build at rates more attractive than fuel oil and propane. The challenge of keeping the cost of the build down is still a challenge that we are facing due to the distance and concentration of housing, but has become more practical than in the past. I have also seen larger conversion projects being built in the Midwest due to the high cost of propane and fuel oil, but not to the extent that I have seen in the Northwest.
Swerdfeger: The areas of potential growth for distribution pipelines will most likely be mixed between two areas. The first area is obviously around the highly populated cities that are growing fast. The other area that we have seen growth in is sparsely populated areas that have been developed for many years, but never were serviced by natural gas.
What effect has public perception of the pipeline industry at large had on the distribution market? How can those involved in the distribution side counteract these perceptions?
Bell: The public perception of pipelines in general is bad. They do not want to have a new one built in their backyards and the ones that are there now leak and sometimes blow up. I think that the distribution side is lumped in with all other types of pipelines in the general public’s mind, so short of trading in the backhoes for ice-cream trucks, not much can be done. Just try to keep your construction sites clean and the less traffic jams you create the better.
Miller: I don’t think the distribution market, as a whole, has been negatively impacted by public perception. The exception could be in a few local areas where there have been some unfortunate incidents related to aging infrastructure, but in those cases, the fact that the utility owners have implemented accelerated main replacement programs, which probably have a positive impact on public opinion.
Nelson: From our perspective, distribution projects are often seen as “utility work” to the public and usually lumped in with water, telephone and power work that the general public sees routinely. We haven’t seen a lot of perception impact on the distribution market from the pipeline industry.
Jaeson Osborn: The public has not been too hard on the distribution market. For the most part our main complaints are pretty typical to any construction project that takes place in an urban environment. Our projects tend to be smaller in nature and do not receive the same press that the pipeline projects get.
Jay Osborn: I think the overall public perception of the distribution industry is fine for the most part, but to name a few negative perceptions:
1) High profile incidents such as excavation hits that release gas and have a possibility of a catastrophic outcome. There is a heavy focus on damage prevention in this industry and [Primoris Services] takes this very serious and has partnered with one of our largest customers working in a proactive manner by setting goals, tracking hits establishing root cause analysis and holding field operations accountable for damages that happen under their direction, as well as holding monthly meetings reviewing damages and causes for educational purposes whether at fault or not, correcting any negative practices that could help in reducing hits in the future. Contractors and utilities cannot afford to have utility strikes as part of doing business anymore and must come together for the common good of public safety as the replacement of the old infrastructure increases.
2) Rate increases due to capital improvements. The end user is not aware of all that is involved with getting product to the home and therefore doesn’t understand the need behind the replacement of the aging infrastructure but will notice the increase in the rates to cover the cost of the rebuild. I think the utility does a good job in helping the end user understand this with informational information posted on the websites of large projects as well as informational mailings sent to the home.
Swerdfeger: The general public is concerned for the safety of our natural gas pipelines. When we are working in a residential neighborhood, the homeowners are happy to hear that they will have a new gas line in their yard and in the street.
What effect have general regulatory conditions had on the distribution sector?
Bell: The general regulatory conditions have slowed down the start of some projects and sometimes make it harder to complete projects on time.
Miller: The distribution market has certainly been affected by many significant regulatory changes in recent years. The Pipeline and Hazardous Materials Safety Administration (PHMSA) has been pushing many changes aimed at improving the safety of gas systems, which has created lots of renewal and maintenance work for contractors. It’s also caused us to change the way we go about our work, as we’ve had to do additional training and adopt certain safety initiatives to stay in compliance with regulations. These changes have really increased the cost of doing gas distribution work from a contractor’s perspective.
Nelson: We have seen an increased focus on inspection and efforts to increase the quality of inspectors employed by utilities. As regulators have become more active the utilities have responded by increasing jobsite inspection to ensure procedures are followed and documentation is done right. Contractors have also grown their own internal quality control (QC) departments to train employees and verify proper construction methods are used.
Jaeson Osborn: I think the effect is a positive one. Right now we are in the transition period of change. Once the new rules and regulations are set and we have had a chance to implement them into our everyday operations being compliant will come as second nature to the industry.
Jay Osborn: The regulatory environment has played a large role in driving the replacement of the aging distribution infrastructure mainly due to the focus on safety and the integrity of the pipelines buried in city rights of way. This has driven utility owners to increase budgets and put more focus on replacing the old cast iron and bare steel lines. Some of the utilities that have been more proactive on this are starting to look at the replacement of the early plastic pipes that were used in the replacement of steel and cast iron in the early 1970s.
Swerdfeger: Regulatory conditions have had a big effect on the distribution sector. About half of our distribution work is directly related to pipeline replacement as a result of regulatory mandates.
What opportunities exist in the distribution market? Is now a good time to be in the industry?
Bell: There are always opportunities in any market including the distribution market. But they seem to be much harder to find these days. I personally am not sure if this is a good time to jump in to the distribution industry, might be better to go to Vegas and place it all on red.
Miller: The distribution market has opportunities when you look at the volume of work being done. However, the complications and degree of difficulty, and the expense of doing this type of work have increased significantly. Most of the contractors working in distribution today have been able to adapt to all the requirements and changes within the industry, but there’s probably not much opportunity for contractors that don’t have a long history of doing this kind of work.
Nelson: With utilities continuing along the long-term trend of outsourcing construction work and an increased regulatory focus on replacing old distribution infrastructure we see this as a good time to be in the industry. The challenge that goes along with this opportunity is to attract and develop the right people to satisfy the demands placed on the contractors.
Jaeson Osborn: Opportunity is one thing the distribution market has plenty of. Opportunities exist for companies to expand their market share, individuals to advance their career opportunities and opportunities for people to enter the industry. Now is a great time to be in the industry. We are seeing utility owner’s project budgets out five, 10, 15 and even 20 years.
Jay Osborn: I most definitely see the opportunities in the distribution market for growth and any company that has a focus on safety, quality and runs an efficient organization definitely has great opportunity for growth. The challenge that we face is skilled labor and it is a major hurdle distribution contractors have in growing there business. I also think it is a good time to partner with utility owners and discuss future plans so contractors can develop the workforce to meet the future needs of the utility owners.
Swerdfeger: The opportunities are on the replacement side. It is a good time to be in this industry as long as you are ahead of the curve on operator qualification (OQ). Until the entire aging infrastructure is replaced, it will remain a strong market.
What areas of the distribution market are strongest?
Bell: For the coming year, I think that new installations will be strong, but the maintenance and rehab sections will be the most robust.
Nelson: Rehabilitation and replacement are among the strongest areas. New installation has improved as the housing construction market has rebounded in many locations, but not as much as the rehab and replacement work. We believe the replacement market will remain strong based on the amount of pre-1970s pipe that remains in the ground and the regulatory drive to replace this aging infrastructure.
Jaeson Osborn: In the regions we are in, all aspects of the market are busy. [New installation] has made a substantial comeback in the past two years. We are seeing a strong surge in this market. [Service and maintenance] work is usually done with the in-house utility company’s workforce. Due to high demand and tight schedules, we are seeing a lot more of this work. [Rehab and replacement] is the strongest focus for the distribution market. Most utility companies are creating specific programs to replace their legacy pipe in a methodical way. For example, to replace 100,000 ft of cast iron in two years, replace all bare steel in five years or replace 50,000 ft per year.
Jay Osborn: In the areas Primoris and Q3 works, the replacement sector dominates the others, but new business has been coming back quicker than expected, and we have had to shift a portion of our workforce to handle this work at the same time that replacement work volumes have risen due to increasing DIMP requirements.
Swerdfeger: Rehab and replacement is the strongest area of the distribution market for us.
What do you see as the biggest challenges facing the distribution market? What forces may limit the amount of distribution pipeline work despite the demand?
Bell: The biggest challenges for the distribution market will be some funding issues, but more regulatory problems.
Depending on how utility companies view workforce qualifications, like OQ programs, then the size of crews and numbers of qualified crew available could greatly affect how much work can be done in a week and whether you have nine qualified crews or just six.
Miller: Without a doubt, finding enough qualified people is the biggest challenge we have in the distribution market. Actually, only a small number of the people we hire are already qualified to do the work. Our challenge is getting new hires the experience, training and qualifications necessary to do this work. We are having some success, but it takes time and money to get them up to speed. Legal and/or regulatory issues are probably the next biggest challenge that contractors face. Compliance related issues have led to increased staffing for most contractors, and much of management’s time is spent dealing with those issues.
Nelson: Finding the people to do the work is our biggest limiting factor. It takes time for a contractor to develop a quality team of field leaders, project managers and support personnel. Often times the demands are bigger than the supply. With an increased focus in the industry on quality and safety, the effort required to develop new people has really increased. The lack of people entering the construction trades is a huge issue we need to tackle. The shortage is most acute with regard to fusers and welders.
Another key challenge is how our industry deals with crossbores. Many utilities are dealing with this issue headlong requiring inspections of sewer laterals. However, many take a short-sighted view and don’t want to spend money upfront. The potential dangers of sewer crossbores should outweigh the costs of prevention but it is a continual outreach and education problem within our industry.
Jaeson Osborn: Hands down it is the lack of people. There aren’t even enough people interested in joining this market. As an industry we really need to address this issue. The scenario seen played out way too often is a utility company will have a need for 10 crews, and we can only seem to find enough people to staff five. We are experiencing a generational issue. The boomers are exiting and the millennials are not filling their voids. We need to find ways to engage this generation.
Jay Osborn: Skilled labor is a major hurdle we face in this industry. It’s not only the tradespeople we need but also strong managers/supervisors for support of new crews that we are putting into place. As the utilities increase their budgets to replace the old infrastructure, I can see that it could be challenging for contractors to meet the needs of the increased workload due to lack of trained qualified labor.
Also engineering and design delays can cause the crews not to run at peak performance and losing valuable time with low productivity. I think the utilities need to focus on getting projects designed, permitted and ready for build and also use the 12 months of the year where practical. I also think it is important for contractors and utility owners to have more discussions on future workloads and budgets to better prepare for increasing workloads and work force development.
Swerdfeger: The biggest challenge that we see is definitely finding qualified people. It has been hard enough to find people who are willing to work in the construction industry, but now we add a very stringent OQ program to the mix.
For someone who can read and write English, it may take three weeks for that person to pass the written and performance examinations.
What areas of the business can be improved to help the distribution market succeed long term?
Bell: The single greatest improvement to help the distribution industry succeed long term would be to require municipalities to belong to and participate in the One-Call system. If they don’t know where their stuff is, then how is anyone else
Miller: I think the distribution market is in a great position to be successful over the long term. Gas companies today are really focused on doing all things necessary to make their systems as safe and reliable as possible. They are holding contractors and suppliers to rigid standards, related to safety, quality and installation specifications. They’ve also done a good job in developing long term alliances with contractors to secure the resources needed to complete their projects.
Nelson: There is a huge opportunity for all of us in the industry to improve how we recruit, develop and retain talent. If utilities and contractors work together to establish comprehensive programs for this we can eliminate redundant and competing efforts to feed talent into our industry. The Distribution Contractors Association (DCA) has initiated a joint research project called, “Who Will Do the Work?” This joint effort between utilities, contractors and equipment vendors is being formed to facilitate recruitment to attract new labor resources into the industry. Such efforts are needed as research indicates that the distribution industry will require an additional 20,000-plus skilled workers due to the anticipated workload coupled with the projected retirement of an aging workforce in the coming five to 10 years. These types of efforts together with government training programs are needed to help attract and develop the necessary people to what is a good-paying and highly rewarding industry.
Jaeson Osborn: Education and training is the most critical and always needs to be on the forefront. With a focus on education and training we can assure ourselves that we are performing above the current standards. Which, I know our customers and regulatory agencies want us to perform at.
Jay Osborn: OQ portability between utility owners would help the contractors move between customers more efficiently while we do realize that there are certain tasks that could be different, but in general the work is all very similar. This causes downtime and loss of time that could be spent installing product.
Recruiting and educating new employee’s into the gas distribution industry is critical, and I see a lot of focus in this area from contractors, gas distribution associations, unions, as well as utility owners, but this is more of a long-term solution that needs to be done and will produce results down the road. In the interim we continue to develop workforce needs as we grow while maintaining safety, quality and efficiency by increasing our safety and QA site visits, as well as a good support system for our field foremen and crews.
Swerdfeger: There has been plenty of discussion of OQ portability in the industry. Portability would be the biggest
improvement for the distribution market. It may allow the employee to take their certifications with them if they go to work for a different company whether it is across town or across the country.
What trends have you seen in the distribution market recently? What impact are these trends having on business?
Bell: I don’t know that I have seen any trends in the market except that everyone seems to have to bid a little less to get the work.
Miller: One trend that we’ve seen across the industry is that most of the distribution companies have gone to long term contracts and “alliances” with preferred vendors to handle their expanded capital programs. This has allowed contractors and suppliers to make the necessary investments into people and equipment to meet the needs of the distribution companies. Another trend we see is that the utilities are requiring contractors to provide more services than just construction labor, things like providing materials, doing the pavement restoration, providing permits, doing customer service work, etc. We are constantly adapting our business model to meet the needs of our customers.
Nelson: We are seeing an increased effort on improving quality. There’s been a great focus on documentation, inspection and limiting rework, which greatly benefits both the utilities and contractors long-term. Another trend is an increased amount of outsourcing. Gas distribution companies are now outsourcing other facets of their business that were traditionally done by in-house groups. This includes many back-office functions such as material handling and warehousing, design and permitting. This has also included variations of design-build and EPC contracting methods for large-scale replacement programs.
Jaeson Osborn: I see a lot more focus on the industry in general. The cities are asking more questions. The public seems to be more informed on what we are doing. The customer and the regulatory agencies have implemented new standards and practices. The environmental agencies are a lot more involved on our jobsites. The largest impact I have seen is we have more efficient installation methods than they did when the mains and services we are replacing were originally installed. Except it takes us about the same amount of time to install the new product due to permit times, congested rights of way, storm water expectations and general customer and regulatory
Jay Osborn: I have seen a big push in reducing damages throughout our territory. I think that the proactive approach to damage prevention is a great issue to work together on with our customers in reducing damages and potential risks to employee’s and the public that come with utility strikes. Since we have begun our damage prevention meetings with our customers, we have seen a dramatic decline in hits, not only at fault but unmarked as well. Our monthly meetings review all damages that occur, and we discuss the root cause analysis, as well as at fault charges due from the damage. They also discuss how to eliminate this type of incident from happening in the future, and all management is involved in the monthly call and is held accountable for damages in their area. With all the exposure in this industry, it is important for contractors to take a leadership role in reducing damages and become a model contractor promoting damage prevention now and in years
Swerdfeger: We have seen positive trends in the distribution market that relate to quality assurance and safety. There is a lot of emphasis on QA/QC from the handling of pipe to how it is installed. There has also been a lot of focus on crossbore locating of sewer laterals. In most cases, it has required the use of pre- and post-televising of sewer laterals. This has created the need for sewer cameras that have lateral inspection capabilities.
Editor’s note: Q3 Contracting is a division of Primoris Services Corp.