Costs of Building and Operating Upstream Oil and Gas Facilities Begin Measured Rise

Capital costs and operating costs show signs of a modest upward trend as impact of the Gulf of Mexico oil spill remains limited

Thursday, December 9, 2010 3:24 pm EST

Dateline:

CAMBRIDGE, Mass.
"Several rigs left the Gulf during the moratorium but most deepwater rigs with long-term contracts remained in the region idle"

The costs of both building and operating upstream oil and gas facilities have regained upward momentum in the past six months after falling the previous year, according to two cost indexes developed by IHS.
 
The IHS CERA Upstream Capital Costs Index (UCCI), which tracks costs associated with the construction of new oil and gas facilities rose 3 percent after bottoming out during the previous six month tracking period. Its index score is now 207. The UCCI’s counterpart, the IHS CERA Upstream Operating Costs Index (UOCI), which measures the operating costs for those facilities, rose 1 percent over the same period to register an index score of 173.

The indexes are proprietary measures of cost changes similar in concept to the Consumer Price Index (CPI) and draw upon proprietary IHS 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 $207 billion. Likewise, the annual operating costs of a field would now be up from $100 million in 2000 to $173 million.
 
The results reflect costs from Q1 2010 to Q3 2010 and are the first results since the oil well blowout in the U.S. Gulf of Mexico. The federally-imposed moratorium on offshore drilling issued in the wake of the spill had a significant impact in the Gulf, according to the index. In the deepwater, six rigs left the Gulf for projects elsewhere but the remainder stayed under contract and simply waited out the moratorium. Service providers to the rigs were also severely impacted. Even in the shallow water where the moratorium was not enacted, the number of new wells drilled has been sharply lower. The subsequent lifting of the moratorium does not mean a return to business as usual, however. The return to drilling will be slow as operators and rig owners move to meet newly enacted certification processes.

“The fact that overall upstream costs are trending upwards points to the increase in oil and gas activities worldwide,” said IHS CERA Chairman and author of the Pulitzer Prize-winning book, The Prize, Daniel Yergin. “While the oil spill in the U.S. Gulf of Mexico and the resulting moratorium has had significant impact on that region, its ramifications have, thus far, shown little impact on deepwater activity elsewhere. However, increased certification and regulations will likely push up total project costs globally in the future.”
 
Overall, upstream capital costs rose after previously bottoming out at early 2007 levels, according to the index. The upward momentum was broad but moderate. While six of the 10 markets tracked by the UCCI posted increases, only one of those (steel) showed an increase above 2 percent.
 
Upstream steel costs rose 7 percent, continuing its rebound after falling nearly 34 percent from Q3 2008 – Q3 2009. Increased activity levels and raw materials costs drove the rise. As demand for steel good returns and supply increases the delicate balance between supply and demand, combined with the industry move to quarterly iron ore contracts, has introduced increased volatility in steel products going forward.
 
The costs of labor and engineering and project management showed little movement outside of regions such as Australia, where the construction labor market remains tight due to activity related to liquid natural gas (LNG) and has stretched capacity. While other regions did show some upward movement, this was driven by the weakness of the U.S. dollar rather than local currency movement.
 
Offshore rig and offshore installation vessel markets were the only UCCI markets to register decreases for the Q1 2010 – Q3 2010 period due to increased supply entering the market and number of rigs and vessels remaining idle in the U.S. Gulf of Mexico.
 
“Several rigs left the Gulf during the moratorium but most deepwater rigs with long-term contracts remained in the region idle,” said Pritesh Patel, director of the IHS CERA Upstream Capital Costs Analysis Forum. “This combined with new rigs leaving the construction yards will bring a softening to the rig market for the time being.”
 
The Upstream Operating Costs Index rose slightly—1 percent—after bottoming out and rising the previous six months. The increase was driven by higher onshore well service (2 percent increase) and material costs (3 percent increase), though both remain below 2008 levels. Other markets tracked by the UOCI mostly remained flat.
 
The aircraft market—particularly helicopter rates for transferring personnel offshore—was one of the few other markets to show definitive growth, according to the index. Aircraft costs rose 2 percent in the past six months. Marine inspection and maintenance also saw a 2 percent increase from higher vessel day rates.
 
“A lack of movement in most of the markets tracked by the UOCI are muting the upward momentum that we are seeing in helicopter rates and well maintenance activities onshore,” said Jeff Kelly, director for the IHS CERA Operating Cost Analysis Forum. “Nonetheless, signs of positive growth have been consistent over the past year and could foreshadow what’s to come.”
 
The indexes conclude that upstream costs are likely to experience escalation at an increased rate in the near term as trends towards deepwater production point to higher rates for offshore services and the exploration and the development of new territories creates the need for new infrastructure and places additional stress on supply chains.
 
 
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About the IHS CERA Upstream Capital Costs Index (UCCI)
The IHS CERA UCCI tracks the costs of equipment, facilities, materials, and personnel (both skilled
and unskilled) used in the construction of a geographically diversified portfolio of twenty eight onshore, offshore, pipeline and LNG projects. It is similar to the consumer price index (CPI) in that it provides a clear, transparent benchmark tool for tracking and forecasting a complex and dynamic environment. The UCCI is a work product of CERA’s Capital Costs Analysis Forum for Upstream (CCAF-U). The UCCI can be tracked on the IHS Index Web Site: www.ihsindexes.com. For
information on the Capital Costs Analysis Forum for Upstream, contact Pritesh Patel at
ppatel@cera.com
 
 
About the IHS CERA Upstream Operating Costs Index (UOCI)
The IHS CERA UOCI measures cost changes in the oil and gas field operations arena. It is similar to the consumer price index (CPI) in that it provides a clear, transparent benchmark tool for tracking and forecasting a complex and dynamic environment. The UOCI can be tracked on the IHS Index
Web site: www.ihsindexes.com. The UOCI is a work product of CERA’s Operating Costs Analysis Forum for Upstream. For information on the Operating Costs Analysis Forum for Upstream, contact Jeff Kelly at jkelly@cera.com.
 
 
About IHS CERA (www.ihscera.com)
IHS CERA is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. IHS CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. IHS CERA is based in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, DC.
 
About IHS (www.ihs.com)
IHS (NYSE: IHS) is a leading source of information and insight in pivotal areas that shape today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 4,400 people in more than 30 countries around the world.
 
IHS is a registered trademark of IHS Inc. CERA is a registered trademark of Cambridge Energy Research Associates, Inc. Copyright ©2010 IHS Inc. All rights reserved.

Contact:

Energy; Natural Resources
Jeff Marn, +1 202 463 8213
Energy Strategy, Renewable Energy
jeff.marn@ihsmarkit.com