Costs Of Building, Operating Oil & Gas Facilities Bottoming Out

The costs of building and operating upstream oil and gas facilities — which fell drastically in Q1 2009 after a prolonged period of escalation — hit bottom and were beginning to show signs of an upward trend at the end of Q1 2010, according to two cost indexes developed by IHS Cambridge Energy Research Associates (IHS CERA).

The IHS CERA Upstream Capital Costs Index (UCCI), which tracks costs associated with the construction of new oil and gas facilities remained flat, registering a drop of 0.3% over the past six months. Its index score is now 201. The UCCI’s counterpart, the IHS CERA Upstream Operating Costs Index (UOCI), which measures operating costs for those facilities, rose 3% over the same period to register an index score of 172.

The results reflect costs from Q3 2009 to Q1 2010, which occurred prior to the oil well blowout in the U.S. Gulf of Mexico.

The indexes are proprietary measures of cost changes similar in concept to the Consumer Price Index (CPI) and draw upon proprietary IHS and IHS CERA tools to provide a benchmark for comparing costs around the world. Values are indexed to the year 2000, meaning that capital costs of $1 billion in 2000 would now be $2.01 billion. Likewise, the annual operating costs of a field would now be up from $100 million in
2000 to $172 million.

“The IHS CERA upstream cost analyses for Q3 2009 to Q1 2010 showed costs poised to begin an ascent back to pre-recession levels after a precipitous fall last year,” said Daniel Yergin, IHS CERA Chairman. “However, the onset of the Gulf of Mexico oil spill adds a level of uncertainty to future forecasts owing to the moratorium and liability
limits and as companies struggle to assess the full implications.”

Steel Costs Show Stability
Upstream capital costs bottomed out after falling 9% in 2009 and are holding at early 2007 levels, according to the index. However, the flat trajectory hid volatile up and down movements in the underlying markets that comprise the index.

Upstream steel costs stabilized and ultimately increased for the first time in 12 months as the result of higher raw material costs. Steel rose 3% from Q3 2009 to Q1 2010 after falling nearly 40% in the previous year.

Yards and fabrication costs turned upward and rose 4% after falling 13%
in the previous six-month period. Increased orders for offshore platforms and upward movement in general offshore construction fueled the turnaround.

The costs of labor and engineering and project management were tempered by the strengthening of the U.S. dollar but still rose 3% and 2%, respectively, due to a shortage of skilled labor in the market.

“We can expect to see more volatility in raw materials going forward as supply responds to increasing demand,” said Pritesh Patel, director for the IHS CERA Capital Costs Analysis Forum. “This will be passed through as manufacturers and contractors continue to balance backlogs against new orders coming in.”

The Upstream Operating Costs Index rose slightly after bottoming out over the previous six months. The index rose 2% due to an upswing in onshore service rates, increased material input prices and escalating manpower costs.