Monday, 26 October 2015

$600 MILLION A PINCH: CHANGE THE ONLY TOURNIQUET FOR MUSKRAT

A better Nalcor CEO would tell us what he plans to do differently

The one certainty about Ed Martin’s demand for another $600 million for Muskrat Falls is that it will be repeated, over and over.

JM has written, on this Blog, that Nalcor will have to work hard to keep the final cost below $10 billion. 

A senior Nalcor engineer offered the prediction, more than two years ago, that the final cost will come in around 2.5 times the DG-2 estimate of $5 billion. That’s $12.5 billion.  It’s a scary number. He knows a thing or two about large projects.

Proof of the financial hole being dug at Muskrat is found not just in the third party analysis conducted by JM and James L. Gordon; it is implicit in what Ed Martin did not say. We will come to that in a moment. But, first, to James Gordon and JM.

JM forecasts first power in September 2018 and full commercial power by mid-2019.

Via Cabot Martin’s post, Jim Gordon, a veteran engineer of 45 dam projects, estimates the earliest date for first commercial power occurs in 2020. 

Exhibit from Cabot Martin's Blog Post prepared by James L. Gordon
JM estimates 1st power (optimistically) September 2018; full commercial power mid-2019
Construction delays are costly. 

They include additional interest, costs for management, labour, equipment rentals, camp operations, travel, claims by other contractors financially injured by the delay; the list just goes on and on. Claims by Emera for breach of contract, as the Maritime Link sits idle, can be added.

Were JM’s and Gordon’s forecasts mere guesses?  No.

As highly experienced engineers, the two performed a task conducted every day by project management professionals. Each uses the metrics of their profession, especially past project performance, to calculate the rate of future progress. It is no accident their conclusions are similar. (Note: past performance is used to derive a unit of work within a unit of time. The measurement applies until better efficiencies are proven, i.e. if the contractor demonstrates sustained actual results.)

The two engineers calculated Muskrat’s completion date, without assistance, using published information. In contrast, Nalcor pays a team of more than 20 people to continuously input data into a project management computer software tool. Nalcor uses a model called “Primavera” or one equivalent.

______________________________________________________
Related to this Post:



_______________________________________________________

Primavera is designed to handle large-scale, highly complex, and multifaceted projects. It offers Nalcor the capability to obtain reliable cost and schedule information as well as data that assists the project’s forecasting and logistical requirements, on demand. 

Nalcor engineers and data entry staff input contract data, change orders, payments, invoices, completions, and hundreds of other inputs.  A similar system is used to construct the Hebron project. (It was originally developed by Boeing to manage aircraft construction.)

The management software is very sophisticated.. 

When Ed Martin tells the media, as he did at Muskrat Falls, that he is unable to confirm either the final cost or the completion date, it is not that he doesn’t know. 

It’s simply that he doesn’t want you to know.

When I penned  on July 27, 2015, entitled Engineers Break Silence on Problems at Muskrat Falls, the participants forecast not just the delay to which Ed Martin reluctantly admits; they warned, too, without fundamentally changes the project would run "serious red ink".

So, beneath JM’s and Jim Gordon’s project completion forecasts is Martin’s failure to even attempt to “fix” what is wrong.

Martin’s demand for additional $600 million ought to have been accompanied by changes in Nalcor’s senior management, in the project management team, in its contracting practices, and in the choice of Contractor, Astaldi, whom Nalcor blames for having blown the schedule on the powerhouse and spillway.

When Hibernia fell behind schedule at Bull Arm in the 1980s, at a time when the price of oil was far lower than it is now, Mobil replaced the Project Manager who, in turn, got rid of the principal contractor and a host of senior project engineering staff. He turned the project around; the all-important schedule was made paramount.

Such a “house-cleaning” occurs on a good many projects, in part for incompetence, but also because of mismatched skill-sets. Muskrat is loaded up with engineers with offshore experience (not senior experience either); Muskrat is largely a civil engineering project.

A more experienced and astute Premier than Paul Davis, would have asked Ed Martin why he persists with a failing strategy, why he can’t make the changes this mega-project needs.

The public might be reminded of the Premier Tom Marshall’s promise found on the Government Oversight Committee’s web site.  It states: “On behalf of the people of Newfoundland and Labrador, Government mandated the committee to provide reliable and transparent oversight so that the public can have confidence in the management of project costs, schedule and risks.” Those words have never matched the promise. Not even once!

Premier Paul Davis, too, fails to direct Nalcor to release the data compiled each month by staff the NL public pays for.

Nalcor hides under claims to “commercial sensitivity” when, in fact; it’s all about protecting their own jobs and careers.

The point should be made that overruns, at Muskrat, are occurring as the government is experiencing a worsening budget deficit. The 2015-16 Budget was based on $US62 for Brent crude; it is now $US48. This year’s oil production target is off substantially from the 82.75 million barrels forecast, due mainly to problems experienced on the Terra Nova platform.Other revenues are lower, as well.

If public servants, in the Department of Finance, are not experiencing mortal fear the government is entering a financial “perfect storm”, you can only conclude that Nalcor’s “kool-aid” flows there, too.

Another $600 million.  It deals only with Muskrat’s immediate cash flow problem. 

The sum is merely a pinch compared with the amount that will be needed.

Change is the only tourniquet.

A better Nalcor CEO would tell us what he plans to do differently.

12 comments:

  1. Sometimes the issue is not with the project execution team, sometimes it is a problem with the original estimate and strategy. Although Astladi (and Nalcor) should not be excused for the abhorrent lack of progress in the first year of their contract, they do seem to be turning it around.

    But what is clear is that the DG2 estimate was overly optimistic. This was well known and discussed by us Naysayers at the time. Nalcor's proponents now say that the delays and over-runs were expected "part of doing business". That is bullshit of course. During the PUB hearings Mr. Paul Harrington said that he through that Nalcor would deliver a project well within the esitmate band for a DG2 estimate. I believe he thought that 25% overrun would be an upper bound.

    The problem with this project is that it was flawed from the start. When we have to pay Nova Scotia (Emera) for access to their capacity, due to reliability issues (which Nalcor are suggesting may be required by 2025) it will be clear how flawed the analysis was which Nalcor brought to the PUB.

    Meanwhile the Martime Link is proceeding on budget and on schedule.

    It is the difference between a publicly traded company, and what Nalcor is.

    ReplyDelete
  2. The General Public was completely fooled by the Tories and Nalcor. Some are so disconnected they still think the Federal Loan Guarantee was an actual cheque that was paying $5 Billion towards the project. But as time slips by they are starting to see the chinks in the scheme, applications for rate increases, project delays and cost over-runs. Nothing like a good old kick in the wallet to wake someone up...too bad it wasn't several years ago.

    ReplyDelete
  3. It will be interesting to see what the new premier will do with the Muskrat File in 2 months time. If Ball was smart (which I do think he is) he would call for an independent review of the cost and the schedule, and make it public (warts and all). I would then strengthen the existing oversight committee to make it real, and transparent.

    Ball has nothing to loose on Muskrat right now. However, if he does not separate himself from the historical issues he will wear the project failiure as his own.

    It is amazing how Williams has been able to deflect the blame for MF and the state of the provinces finances. He eventually will wear it. History will certainly identify Williams as the worse manager of our provinces finances. Why do people still support williams...? His popularity really supports why PR is important.

    ReplyDelete
  4. The rationale for this project was that our province had a increasing demand for more electricity going forward and that MF was the least cost of the two alternatives considered. I believe the demand increases forecast was like 1.2 percent per year for a few years then tapering long term to increases of 0.8 percent a year.Readers might correct me whether this was the forecast increase in energy sales or peak demand. But Nfld Power (data filed with their present Rate increase applicaton) now reduces energy sales going forward to an increase of 0.4 percent by 2016 and only 0.1 percent by 2017. What does this say for long growth in energy sales and the need for MF, and for the accuracy of Nfld Power forecasting (which is the basis for Nfld Hydro forecast. Winston Adams

    ReplyDelete
    Replies
    1. http://www.mun.ca/harriscentre/policy/memorialpresents/2012a/lower_chuchill_jan_2012.pdf Page 9 has the Island Load Forecast:
      7585 GWh 2010 8806 (2018) 9235 (2024) 9703 (2030) 10087 (2034) 10431 (2040) 10994 (2048) 11486 (2058) 11924 GWh 2066
      Nalcor expects 429 GWh demand increase from 2018-2024 yet Long Harbor is the only new customer (780 GWh but that is calculated into the 2018 figures) thus far.
      Even Locke stated for every 20% price increase there is a 5% demand decline - residential demand should drop 15% (750 GWh) following that logic.
      Price and demand have no correlation under NF Power/Nalcor/Hydro's 57 year Load Forecast.
      Besides oil price, island demand completion date and cost of the project itself MF is a GREAT project.

      Delete
  5. Winston... The NF Power application is downright scary. They are predicting flat growth, and with some agressive demand management 0 growth over the next 20 years. There will be no better way for demand management that increasing the rates by 50 + percent. If the demand remains flat then the rate payers better look out. The rates will increase much more than the 2% annually.

    The Achilles heel of the entire Muskrat Falls plan, was that Nalcor assumed that electricity consumption on the island would go up by 50% over the next 50 years. This is with no population increase. It was a ridiculous assumption. Quite frankly Nalcor did not do their work on forecasting the demand. This was clearly identified as a deficiency by Manitoba Hydro.

    Look out is all I got to say. When NF Power have Moodies recognizing the high cost of power, and the resulting loss of energy sales (kwhr) as a significant corporate risk you know they are worried.

    I would like to know what the folks at FORTIS really think of Nalcor.

    ReplyDelete
    Replies
    1. Nfld Power says price elasticity for electricity here in Nfld is 0.2, meaning that for a 10 percent price increase, energy use drops 2 percent. Dave Vardy has suggested elasticity for electricity is 0.5, meaning a much bigger drop in electricity use. I did some research, and in some jurisdictions and other countries, elasticity is often higher than 0.5. The main factor is what alternatives are available. At present, here, wood, wood pellets, propane, oil, and minisplit heatpumps all offer much cheaper heating costs, and customers are, in significant numbers, moving away from electric baseboard heaters as the main source of heat, and that is at present electricity rates. Elasticity at 0.2, as proposed by Nfld Power, is wishful thinking. Vardy`s figure is likely closer to what we should expect, and spells disaster for big rate hikes, I suggest. Winston Adams

      Delete
    2. From a source I cannot mention, I was told that a senior management person with NF Power was asked some years ago what their view was of the Muskrat Falls project and the response was " it made as much sense as trying to install a power corridor between NL and the moon".

      My only wish is for Dwight Ball to insist on a complete review of this project going back to it's inception and for the real facts to be presented. It may not change the unfortunate situation we are in, however, I would I hope that will show who pushed this project and why. The why being, who stood to gain from this entire fiasco.

      Finally, if the conservative party of Canada was concerned about the liberal party running a deficit of 10 billion dollars per year, measured against a 2 trillion dollar budget, someone should point out the sad state of our fiscal budget in this province using a similar comparison before November 30th. Paul Davis may have taken over a sinking ship, but he has done nothing to stop the flow of water. Recent announcements requiring additional spending in the millions of dollars given our situation is an insult to the intelligence of the NL taxpayers and just goes to show how inept he is as premier.

      Delete
    3. The legacy of Muskrat Falls will be defined by the poor decision making from June 2010 to November 2010. This is when the Lower Churchill Project mandate changed from developing power for export (Gull Island first) to developing power for the Newfoundland market (Muskrat Falls as we currently know it). At this point of time the entire remit of the Lower Churchill Project team changed. It should have not passed gate II until a full review of the options was presented to determine what the lowest cost power alternative was for the province.

      This was not done, and Muskrat Falls was pushed to the announcement being made with Emera in November 2010. There was insufficient work done at this point, on items which potentially a fundamental impact on the intended purpose of this 10 Billion dollar project, that being the supply of winter power and capacity to the island of Newfoundland.

      There was insufficient work done to understand the reliabiluty of the system, or the try impacts of the WMA agreement. These are now risks which will ultimately be born by the rate payer of the province.

      Meanwhile the aggressive estimates used to sanction the project were shown to be fiction.

      Nalcor did not properly account for the tremendous risks for this project, when they put us on this path. All which supported by a totally inadequate provincial government (by that I mean all three parties).

      This is just starting to unfold now. The next big milestone is the court case in Quebec Courts. If they loose this case, then the premier will have no choice but to remove Ed Martin, and Gilbert bennet.

      For proceeding on a 10 Billion dollar project without legal certainty is indefensible.

      It may also be time for a Royal Commission to understand how such a poor decision could have been made in the Fall of 2010.

      Delete
  6. Sad to say, but perhaps the only way that we can afford this power is to upgrade our oil generation on the island in the short-term, to subsidize this comedy of errors.

    ReplyDelete
  7. Newfoundlanders should be demanding the TRUTH!

    ReplyDelete