Upstream Construction, Operating Costs Rise

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 results reflect costs from second quarter 2010 to third quarter 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.

“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.”

Upstream steel costs rose 7 percent, continuing its rebound after falling nearly 34 percent from the third quarter of 2008 to the third quarter of 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 first quarter of 2010 through the third quarter of 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 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.

IHS concludes 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.