Energy Transfer Partners’ Rover Pipeline is a prime example of extreme demand escalation. For context, Rover is a 710-mile pipeline being built across Ohio to supply Michigan and Ontario gas markets with diameters ranging from 24 to 42 inches. Capex on the project is forecast to reach $4.2 billion.

The FERC approved five projects in one week, including Rover, just before Chairman Norman Bay left his position—resulting in a quorum issue. Everyone involved in the project scrambled. The very next day, Rover hit the ground running and began clearing and started construction to avoid the region’s environmentally crucial bat mating season.

In a very short time frame--my guess is one month--15,000 workers were needed to build Rover. Sadly, of the 15,000 initial interviews, many couldn’t pass the drug test required to work, according to press reports. To make matters even more difficult, the labor that is in demand favors individuals with experience in the Appalachian Mountains, a region with continuous hills, sporadic weather and rocky terrain. Inexperience working in the pipeline industry and these conditions pose a heightened risk for safety incidents.

This surge took place after a historic downturn for the oil and gas industry where 400,000 workers were laid off. The bigger problem is most of those people are not coming back. After getting laid off, many joined more stable industries and have no plans to return to the highly cyclical energy market.

No equipment
Meanwhile, large machines able to contend with the hilly terrain disappeared from the market. As crazy as it sounds, the Northeast had very limited amounts of large equipment within the rental market. This required Rover contractors to source any equipment that they did not already own from the South or elsewhere. However, even this strategy is not ideal for these reasons:

  • Trucking equipment across the country is phenomenally expensive. And rail options can result in very lengthy delivery times;
  • Excavators need single- grouser track pads to climb the Northeast mountains. In flatland areas like Texas, triple-grouser tracks are customary. Initially, contractors could mobilize machines from the South and put in an order for new grouser pads from Caterpillar, John Deere, Komatsu or another supplier, which took six weeks. Now, single-grouser track pads are becoming difficult to source and many suppliers are out of stock;
  • To make matters even more expensive and complicated, most of these machines need to be paired with a winch to hold the heavy equipment safely on the Pennsylvania/West Virginia mountains; and
  • If there is absolutely no way to acquire the necessary, larger sidebooms, two smaller machines can be used in place. But this requires an additional operator and two winch systems, which immediately exceeds initial pricing estimates of the bid.

Contractors that landed the projects early this year were first out of the gate and fared a lot better in regards to locking down equipment. For example, contractors building the Sabal Trail Pipeline, completed in the second quarter, had equipment that they will most likely hold onto for future projects even though the bid phase has not occurred. Those contractors, even if they aren’t on a project immediately afterward, will hold onto their large-sized pipeline specialty equipment that cannot be found on today’s rental market, even if not involved in a current project, to prevent coming up short in the future.

What are we doing to fix this?

Caterpillar is on overdrive, pumping out equipment from its plants as fast as it possibly can. However, Caterpillar is a global company, and it’s not just Appalachia driving incredible demand. China is seeing an uptick, too. John Deere is now making a boom conversion package to compete with Caterpillar’s 594/587 size range, and there are also imports from Europe filling the void.

This year, all of a sudden, we hit a record pace again but were unprepared for the surge. The problem is, contractors went through a demand escalation expectation in 2015. According to forecasters, 2015 was expected to be a record year. Unfortunately, even though contractors invested in equipment and geared up, they got burned because it never actually came to fruition.

This year, hesitation held out because no one has millions of dollars to waste on another forecasting mishap.

Contractor readiness
During the economic downturn, contractors with available capital placed orders with equipment manufacturers and contractors that had held onto machinery acquired historically. Contractors who struggled during the downturn didn’t have capital to invest and therefore had no choice but to rely on the rental market for equipment during the demand surge.

Either way, no one wants to put any actual money down to set aside 300 pieces of equipment in inventory—at $500,000 to $1 million each—until these projects get green-lighted. If those parties put down cash and a project doesn’t get approved, it creates a sobering risk of bankruptcy.

This tendency toward risk aversion creates reactionary production and a ripple effect of extreme demand escalation, as we have seen with Rover and other projects, like TransCanada’s nearly $1.4 billion Leech Xpress gas pipeline in Ohio and West Virginia.

With the ongoing battle to get equipment that can navigate the Appalachian Mountains, the biggest challenge is knowing when the project will start. As one Caterpillar official told me, it’s a “fun game of forecasting with hundreds of millions of dollars at stake.”

Courtney McShane is director of business development for Willbros Construction (U.S.).