IHS CERA: Refinery and Petrochemical Construction Costs Continue Steady Rise

Costs rise in the past six months and continue slow march back to prerecession levels

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Wednesday, June 23, 2010 7:00 am EDT

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CAMBRIDGE, Mass.
"Refinery closures in developed countries of more than 1 million barrels per day (mbd) in 2009 show the magnitude of the refining capacity overhang"

CAMBRIDGE, Mass.--(BUSINESS WIRE)--The costs for designing and constructing downstream refining and petrochemical projects rose 1.5 percent from Q3 2009 to Q1 2010, according to the latest edition of the IHS CERA Downstream Capital Costs Index (DCCI). It was the second straight increase for the index since prices bottomed out at 9 percent below peak 2008 levels– costs are now just 6.5 percent below peak 2008 levels.

The IHS CERA DCCI is a proprietary measure of project cost inflation similar in concept to the Consumer Price Index (CPI). It provides a benchmark for comparing costs around the world and draws upon proprietary IHS and IHS CERA databases and analytical tools. The current DCCI rose from 173 to 175 over the past six months. The values are indexed to the year 2000, meaning that a project that cost $100 in 2000 would cost $175 today.

Construction costs continued a steady rise that began in Q3 2009, driven by the global economy’s recovery keeping constant pressure on the cost of commodities and general construction materials and by ongoing activity in finishing downstream projects started prior to the downturn along with ongoing investment in other energy sectors.

“The tide has turned and costs are continuing their ascent, albeit at a measured pace, back to prerecession levels,” said IHS CERA Chairman and author of the Pulitzer Prize-winning book, The Prize, Daniel Yergin. “But the fact that the turnaround in construction costs is occurring despite continued weak refining margins is evidence that costs have bottomed out and are now recovering.”

The rise in the index was driven by commodity cost increases, pushing up the costs of construction inputs such as steel, equipment, wire, and cable. The steel market is beginning to resemble the robust period of early 2008, when surging raw materials prices pushed manufacture steel costs up.

Engineering and project management costs rose slightly (less than one percent) for the second straight six-month period. The increase was driven by a slightly weaker US dollar over the past 6 months. In local currency terms, engineering rates remained flat to declining as high levels of competition continue to keep prices down, especially for downstream projects.

Downstream construction project activity is continuing to move forward in developing countries such as China, India and the Middle East due to outlooks for higher refined products demand and government policies that support investments in downstream refining capacity despite the current weak economics. Conversely, developed countries of North America, Western Europe and Japan will continue rationalizing refining capacity to address overcapacity in the sector that continues to put downward pressure on refining margins.

“Refinery closures in developed countries of more than 1 million barrels per day (mbd) in 2009 show the magnitude of the refining capacity overhang,” said Jackie Forrest, lead researcher for IHS CERA’s Capital Costs Analysis Forum for Downstream. “The closures in developed economies are a necessary first step to reducing spare capacity, but they are currently being offset by new capacity that continues to come online in the developing world.”

The IHS CERA DCCI concludes that upward pace of downstream capital costs will pick up in the near term as recovering construction activity and further increases in raw materials prices push costs closer to their prerecession highs.

About the IHS CERA Downstream Capital Costs Index (DCCI)The IHS CERA DCCI tracks the costs of equipment, facilities, materials, and personnel (both skilled and unskilled) used in the construction of a geographically diversified portfolio of more than thirty refining and petrochemical construction 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 DCCI can be tracked on the IHS Index Web Site: www.ihsindexes.com. The DCCI is a work product of IHS CERA’s Capital Costs Analysis Forum for Downstream (CCAF-D). For information on the Capital Costs Analysis Forum for Downstream, contact Jackie Forrest at

jforrest@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.

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