COST OVERRUNS: IS MUSKRAT FALLS IMMUNE?

The Economist, February
18, 2012 edition, contained an article referring to America’s “…30 year itch”
with nuclear energy, manifested by its inability to move beyond the 1979
accident at Three Mile Island. The item held my interest, not for any reason related
to nuclear energy, though the lengthy period required to pay for the Muskrat
Falls scheme had me thinking of the “half-life” terminology of that industry.

The article
contained two references with a local context; one where a nuclear plant under
construction in Georgia, by a company called Votgle, experienced a spike from
its original estimate of $660 million to a “cool $8.7 billion with electricity
costs spiking as a result”.  (Thinking the
Economist to be an error, the final cost was confirmed by a secondary source).

Fortunately for the
Georgia, it has a population of just under ten million people; twenty times the
population of NL.  Although, that State’s
population will pay for the Votgle’s project cost overruns through their
electrical bills, it is a private company, so the tax payer is shielded from
bankruptsy.  Nalcor, on the other hand,
is playing with our dime.


A second comment,
in the same Economist Article, quoted the head of America’s largest nuclear
utility, John Rowe of Exelon.  Said he: “…this
was not the time to build new nuclear plants, the main reason was not political
opposition or even the threat of cost overruns, but the low price of natural
gas.  “Shale (gas)”, Rowe said, is good
for the country, bad for nuclear development”. 

Cost overruns
and arrival of the shale-gas “era” represent only two of the problems
threatening the viability of the Muskrat Falls project. But they are two
critical issues. The cost problems of the nuclear industry may be disproportionate
but the issue is all too familiar.

When the Muskrat
Falls project was first announced, it was heralded as having a price tag of
$6.2 billion. 

Now, that figure
has been acknowledged by the Government as having increased.  Construction has barely begun.  When it does, design problems and other
issues will start to emerge.

Perhaps people
think that NL will be spared the consequences of a trend that continues to drag
on the viability of all large scale projects. 
Let’s look at some Canadian facts:

  • The CNRL Horizon Project in Fort McMurray:  Original
    authorized cost $6.8 billion. (Source:  CBC February 12, 2008). According to Albertametal.ca,
    final project cost: $9.7 billion.
  • Imperial Oil Limited, Phase 1 of its Kearl project, $10.9
    billion, about a third more than the original estimate of about $8B (Source:
    Albertametal.ca)

The
next three examples come from the National Post Business Magazine:

  • Syncrude’s Upgrader Expansion
    1:  $4.1B project (originally
    estimated at around $3.5B), was started in 2000, came in at $3.7B over
    budget and two years late. Cost overrun of 90%.  The final cost may have actually been
    higher.


  • Suncor’s Millenium
    Project started in April 2000 with a projected cost of $2B. Fourteen
    months later costs jumped 70% to $3.4B.


  • Majority owner Shell
    estimated in December 1999 a cost of $3.5B for their Athabasca Oil Sands
    Project. It came in at $5.7B, 63% over budget. 
 
  • How about a hydro
    project for even greater relevance, say, one constructed by Manitoba Hydro,
    which also circumvented its own PUB. 
    The Wuskwatim Hydro project had a 
    forecast cost of $900 million, says Tom Adams, in an opinion
    article published in the Winnipeg Free Press.  Manitoba’s Clean Environment Commission
    (CEC) which reviewed the project, concluded, “with a 90 per cent
    confidence level, costs will be within minus eight per cent to plus nine
    per cent of the estimated cost.” The final cost of the project…is now
    estimated by Manitoba Hydro at $1.67 billion. (Source: Wuskwatim Under Water – and Sinking, Winnipeg Free
    Press).

How about projects closer to home. 
Let’s see:

  • CBC recently ran a story that Vale’s Long Harbour
    Nickel Smelter has experienced cost overruns of 66% from $2.17 billion to
    $3.6 billion. Vale’s DG-2 cost estimate was $800 million.
  • The cost of Hibernia went from $5.2 billion to at
    least $6.2 billion when it was finished in 1997.
  • The Terra Nova Production Platform started out at
    $1.9 billion, went to $2.5 billion; in March 2009, The Globe and Mail
    confirmed a final price tag of $2.9 billion.

Neither Hibernia
or Terra Nova Platforms were constructed in the overheated labour environment
that has characterized construction at Vale Inco in Long Harbour.

In addition, there
is a fundamental difference between these projects and Muskrat Falls, but
probably not in the way you are thinking.

Both oil and
other commodities, like nickel, benefit from a booming world economy,
especially double digit growth in China and India (less so now, but oil is
still frothy on a relative basis). Increasing prices, if your timing is
fortunate, can justify the huge cost overruns. 
But, high oil prices also drive exploration for alternative energy
sources, like “shale gas”.  Shale gas is
now the chief substitute for coal in the U.S. as that country tries to reduce
its carbon footprint; old coal plants are replaced with gas fired electricity. The
trend is just getting started, but it is only one of the reasons for declining
power prices.

Electricity is
experiencing a paradigm shift, as lower demand caused by a less robust U.S.
economy, smart grid technology, energy conservation programs and the shale gas
revolution, conspire to demonstrate the fickleness of trends.  Adds Tom Adams in the same Winnipeg Free
Press article: “Where a kilowatt-hour of electricity earned Manitoba Hydro
6.422 cents in 2003, last year it was worth only 3.09 cents”.

Most importantly
to residents of this Province, NL is about to make a huge investment on a
trend, that, for the foreseeable future, is not just over, but suffering rapid decline.  It is one that, even in the face of
overwhelming evidence, Nalcor and the Government still refuses to
recognize. 

Declining electrical
prices in the export market magnify the impact of cost overruns and real life
consequences for fiscal policy planners; in contrast, increasing (oil) prices
and cost overruns constitute a recipe for survival.  Little wonder big oil is doing just fine,
thank you.    

SNC Lavalin is
Nalcor’s engineering, procurement and construction head on the MF project.  It will prepare the DG-3 estimates for
Nalcor; SNC will also handle MF design and other issues as they arise.  It has a cost plus contract with no vested
interest in how well or how poorly things turn out. 

The ten
projects cited and their cost overruns:  couldn’t happen to Muskrat Falls, could they?

Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.

NALCOR (Masquerading as ‘Hydro’)LIVES IN AN UPSIDE DOWN WORLD

If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!

REMEMBERING BILL MARSHALL

Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.

3 COMMENTS

  1. In terms of reducing electricity demand, I have calculated that energy efficiency applied to the residential and commercial sectors has the potential to offset 4 times the production of Holyrood for last year. This approach, in the USA gives a net REDUCTION on customers electricity bills of 20 percent. Here it would exceed that, while avoiding the cost of a new gneration plant like Muskrat falls. Winston Adamd

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