COSTS associated with constructing new oil&gas upstream facilities have reached a new record high, according to the latest IHS/Cambridge Energy Research Associates (CERA) Upstream Capital Costs Index. They are up 6% over the past six months and have doubled since 2005.
The latest increase raised the index to 210 points from its previous high of 198. The values for the UCCI are indexed to the year 2000, meaning that a piece of equipment that cost $100 in 2000 would cost $210 today.
“Rising costs have become one of the ‘new fundamentals’ driving the price of oil,” said Daniel Yergin, chairman of CERA and executive vice-president of IHS.
“The UCCI, like its downstream counterpart, the Downstream Capital Costs Index, provides a framework and tool for understanding these cost challenges.”
IHS/CERA sees this trend as being of “serious concern” and a major challenge for oil & gas companies; moreover, this huge inflation is apparently contributing to the delay and postponement of many projects. Exchange-rate fluctuations and the debilitated US dollar also contribute. With the dollar the reporting currency of choice, this has a dramatic effect on final construction costs for projects in some regions, such as Europe and West Africa. IHS/CERA says this latest inflation is driven by the rising costs for raw materials and transportation. Raw materials, such as iron ore, which are needed to produce steel have increased considerably – as much as 60% in 2008 as ore contracts have been renegotiated. Rising fuel prices continue to drive the shipping costs upward. The effects of this will be seen in the finished steel and will have consequences for equipment prices.
Specialised deepwater equipment required for the subsea, particularly umbilicals and control systems, showed the largest increase of any area on the index. Continued manufacturing constraints, coupled with higher materials and labour costs, led to increases of 12% in the past six months. The costs of installation vessels – used to instal platforms, lay pipe and support offshore development – are also rising after briefly levelling off in 2007. Their rates have increased 2.5% over the same period.
IHS/CERA notes that cost escalation varies on a regional basis. Areas of high activity such as the Middle East, West Africa, South America and Australia continue to see higher than average cost increases, compared with areas of moderate escalation in North America and Europe.