Declaring Project Backlog For Midstream Business

The Problem With Project Backlog

We are talking now about the midstream energy operators – not the service companies or contractors in this industry. Such companies need projects to build pipes carrying natural gas, liquids and other drawn compounds once they know the demand. Now, the company needs to estimate project cost and finish dates. These are capital expenses for backlog projects. Let’s assume the company estimates the various projects to finish in 4 years. Should the company now announce backlog and finish date to shareholders? Or should they defer it until they have signed contracts from customers to transport their products? Should they announce project delays when legal or external issues thwart progress?

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The Riddle

The answers affect the company. It needs careful review. First, it doesn’t sound right to not announce the backlog until formal signed contracts since you will have to commit dollars to make progress on these projects. This spending will affect cash flow and you then have to confront it later. Waiting until next quarter could be embarrassing. If you announce the backlog with a committed timeline, it needs to happen. Announcing delays isn’t a good choice either. It’ll suggest missed planning. 

The Other Method

One possible approach is to announce the project backlog based on calculated risk that it’ll happen by the estimated finish date. We know the pipeline industry faces many risks to finishing projects because of pipe routes. Legal risks include opposition from residents in the path. It could also include external risks from the product leaks through pipes because of accidents or pipe failure. In either case, one needs to measure the risk, foresee it early and reduce the effect. For example, if you have $20 billion in capital expenses for backlog projects, you may still have accounted $4 billion in risk costs based on the types of risks – for example, legal, external or timeline risks. The company could then announce the capital expenses and the risk costs separately. However, this approach would need the company to have a rigorous risk review method and work steps could involve many internal and external groups.

Next Step

Every problem presents an upside. If the pipeline company needs to give accurate status of the capital expenses, it leads to a future for a project-centered company. This could mean a portfolio approach to managing projects in an innovative culture and a strong risk review method. Such a step would advance sustainability.

Written by Suresh Iyengar, P.E., President, Business Unit Execution LLC––“Explosive Business Coaching Houston Results For Small Business”. Want even faster results? Are you ready to learn? Call 281.410.5375 and speak to your Profitability Coach Houston today!

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