IHS: capital costs increasing

6/29/2011

In the newest IHS report, upstream capital costs rose 5% from 1Q 2010 to 1Q 2011, largely because of rising steel, equipment and labor costs. On 29 June 2011, IHS said its Upstream Capital Cost Index indicated construction costs of upstream oil and gas facilities rose 5%, moving the index score to 218.

The Upstream Operating Costs Index also reported operation costs of these facilities rose 2%, moving its index score to 178. Using values from the year 2000, the IHS reports that capital costs of $1 billion in 2000 will now cost $218 billion. Also, operating costs of $100 million in 2000 will now cost $178 million. According to the release, the latest increase is pushing costs to pre-recession levels.

'Reflecting expectations for stronger oil and gas demand is taking the form of an increased rate of new project construction,' Daniel Yergin, IHS CERA Chairman, said.

After declining 34% in 3Q 2008, upstream steel costs continued a year-long increase, rising 13%. As costs for all steel-making raw materials increased, the steel-manufacturers aggressively increased prices to offset the low inventory. Like a domino effect, the rising steel costs increased the equipment costs that suppliers passed along to operators.

Driven by the demand in South America and Asia, the report showed construction labor and engineering and project management costs increased by 9% and 6%. North America's growth continues to be slow, as the continent is still recovering from the recession and the oil spill in the Gulf of Mexico, according to IHS.

Subsea equipment costs are up by 6% as new orders continue to increase, largely due to the activity offshore Brazil and in the North Sea, which compensates for the limited decline in North America and Asia.

Offshore rig and offshore installation costs, however, are the only two markets to reports a decline, due to low activity in the Gulf of Mexico and increased supply of those entering the market. While costs declined, the report says, these two markets have shown an upward movement in the latter half of the six-month period.

The IHS report projects all operating costs to continue to rise in 2011 due to the competition of labor and the rising costs of steel and consumables such as chemicals, food and fuels.

by: Katie Jernigan,
kjernigan@oilonline.com