Costs in the oil&gas industry continue to rocket, though IHS CERA says there are signs of moderation. The organisation’s upstream index is up 9.2% over the past six months – 3.2% higher than for the prior six months.
Upstream, continued high activity levels and tightness in the upstream services and equipment markets are behind the latest steep rise in costs. This latest jump lifted the IHS CERA index to 230 points, from its previous high of 210. The values are indexed to the year 2000, meaning that a piece of equipment that cost $100 in 2000 would cost $230 today.
Driven by high demand and escalating fuel prices, cost increases reached even higher points during July and August, 2008, but have moderated as of the end of Q3 2008.
However, there are signs that the upward pressure is slackening as the impact of global recession is increasingly felt.
“Hidden in these substantial increases are the first signs of what may be a change in direction,” said Daniel Yergin, CERA chairman and IHS executive vice-president, in a pre-Christmas statement.
“Moderation in the last two months of the third quarter was a response to the unfolding financial crisis and the spending cutbacks and points to a precursor to a downward turn in the direction of the UCCI (index).”
Of the seven regions tracked by the index, Asia, Russia, South America and Africa saw the highest levels of cost change, registering 11.8%, 10.3%, 10.3% and 10.1% increases, respectively.
Variations in cost escalation across regions over the past six months were most influenced by local activity levels, inflation, currency exchange rates and steel costs.
The increase was driven by a continued high level of upstream oil&gas activities and a marked rise in the cost of steel and subsea equipment.
Upstream steel costs grew an unprecedented 32% from the first quarter to the third quarter of 2008 because of raw material and scrap metal costs.
Though significant by comparison with the 10% increase seen in the previous six-month period, IHS CERA says this increase is in line with its mid-2008 index report.
Subsea equipment demand remains strong, with more deepwater developments planned – especially in South America and West Africa. Rising steel costs have added pressure to that already tight market, with an increase of 14% in the past six months.
While this tight situation and the attendant cost increases are generally expected to persist in the short term, the IHS CERA view is that there are now forces at work that could create significant downward pressure on costs in the mid-term, and possibly even the short term.
Downstream, while the index is up 6% – bringing the cumulative rise since 2000 to 87% – there are also signs that the global recession is starting to slow things down a bit. The downstream index rose from 176 to 187 points over the past six months. Values are indexed to the year 2000 and the index has risen 87% since then, meaning that a project that cost $100 in 2000 would cost $187 today.