Summary: In 1968, a feasibility cost study estimated that an oil pipeline system from Prudhoe Bay to Valdez, Alaska, would cost $863 million for a 500,000 barrel-a-day line or $1.046 billion for a 1.2 million barrel-a-day capacity. After construction began in 1975, the Alyeska Pipeline Service Company, the agent for the companies designing and building the pipeline, established a base control budget of about $6.4 billion. By December 1977, this budget had been exceeded by about $1.5 billion. The $19.8 million additional direct labor hours needed to complete the project accounted for most of the $1.5 billion increase.
Several key lessons can be learned from Alyeska's experience and applied to similar future projects: (1) first and subsequent cost estimates should be viewed with skepticism; (2) as much site-specific data as is economically practicable should be obtained; (3) technical and geological uncertainties should be thoroughly investigated; (4) government approval should be contingent on detailed planning for management control, including budgetary controls; and (5) the Alaska natural gas pipeline project's expenditures should have an ongoing government audit to protect the public interest. Alyeska's contract with its execution contractors were reimbursable cost-plus-fixed-fee and fixed overhead; the contractors did not have the financial incentive to minimize costs as they would have had under other contractual arrangements such as fixed-price contracts. Alyeska's experience showed that the no-strike clause in the project labor agreement prevented section-wide or project-wide strikes. Contractor personnel generally interpreted the environmental requirements less restrictively than did government personnel, and Alyeska had to make some adjustments to accomodate the government's interpretation.
