Upstream Oil Project Cost Rise Slows, Could Plateau In '08

LONDON May 08, 2007 (Dow Jones Newswires)

Capital costs for upstream oil and gas projects climbed 7% in the six months to March 31st, compared with the 13% increase seen in the previous six months, suggesting cost inflation could reach a peak next year, IHS and Cambridge Energy Research Associates said Tuesday.

The new Upstream Capital Costs Index, which tracks some two dozen onshore and offshore projects around the world, hit 179 points over the six-month period, versus 167 points in the previous six-month period.

The index recorded its second consecutive period of slower cost increases, with an annual rate of project inflation at around 14%. While high, this contrasts with an annual rate of 30% in 2006, according to Richard Ward, CERA's senior director for costs research.

"This leads us to think that if this deceleration trend continues, it is possible that a cost plateau may be reached in 2008," Ward said.

However, project costs have a little while to go yet before they ease off, as demand is seen remaining at current levels for the immediate future. Ward is looking to late 2008/2009 for "any significant relief on cost increases."

The lack of experienced staff throughout the industry is a major factor in the cost hikes, and delayed or extended project schedules "stretch these valuable personnel resources even thinner," according to IHS.

The largest increases of up to 24% were in engineered equipment, such as compressors, turbines and generator sets, due to high demand and a limited supply pool.

Other areas are losing momentum, with rates for land rigs in some parts of North America flattening or even declining. Some contractors report that rates for jack-up rigs in the Gulf of Mexico have slipped by more than a third as additional rigs come to market, IHS says.

Canadian trade associations have noted a similar decrease in drilling activity for natural gas, after gas prices slumped by half since their peak in December.

Delayed projects and longer delivery times for key pieces of equipment are forcing projects into longer construction times, bringing some relief to the capacity constraints at the heart of cost inflation, Ward said.

"Demand [is] beginning to come into balance with the ability to supply equipment and services, rather than adding further premiums for faster delivery," he added.

The IHS/CERA index follows the cost of equipment, facilities, construction materials and personnel used in oil and gas development projects around the world. It is released twice a year, in May and November.

Copyright (c) 2007 Dow Jones & Company, Inc.


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