IHS indexes show near-record high upstream costs

By OGJ editors

Data in this article were corrected July 3 after IHS released a correction notice for its original press release.

The costs of building and operating upstream oil and gas facilities set near-record highs in the first quarter of 2012, according to cost indexes developed by IHS.

The IHS Upstream Capital Cost Index, based on a 2000 benchmark, increased by 2.3% during the 6 months ending Mar. 31. The new index score of 227 means capital costs totaling $1 billion in 2000 would now be $2.27 billion. The index’s high score remains 230, which was reached in third-quarter 2008, IHS said.

The capital cost index increased by 5.3% during all of 2011.

The new cost increases “were driven by strong oil prices that exceeded the threshold price of production for most projects, increasing demand for oil field goods and services,” IHS said.

Increased day rates for deepwater rigs accounted for much of the increase. Also, development of onshore unconventional reservoirs put pressure on goods and services despite the shift to oil drilling that has accompanied a slump in prices of natural gas relative to crude oil prices.

Among 10 markets tracked in IHS’s capital cost index the only two declines were for steel and engineering and project management.

The IHS Upstream Operating Cost Index rose 2.1% over the 6 months ending Mar. 31 to an index score of 189.

IHS noted increases in all component markets: operations, maintenance, logistics, and well services.

“Each of the markets were impacted by similar factors, namely an increase in activity due to high oil prices, tightness in supply chains for what can be very highly specialized services and equipment, and a worsening shortage of the labor necessary to deliver these goods and services,” IHS said.

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