CERA index shows dip in downstream costs

By OGJ editors
HOUSTON, June 10 -- Design and construction costs of refineries and petrochemical projects declined during the past 6 months after a long increase.

The proprietary IHS Cambridge Energy Research Associates (IHS CERA) Downstream Capital Costs Index, which uses 2000 as a base year, fell 9% to 170 in the 6 months ending in first-quarter 2009 from its level of the prior 6 months.

In the 6 months ending in the third quarter of 2008, downstream costs were up 6% from the previous period.
The recent move lowered costs to levels last experienced in late 2007.

“The downward pressures that began to materialize at the end of third-quarter 2008 have now taken hold on the cost of construction materials,” said Daniel Yergin, chairman of IHS CERA. “At the same time, slowing demand for both energy-related and general construction projects has slackened demand, causing a further loosening of the construction market costs.”

IHS CERA cited a sharp decline in steel costs and the drop in crude oil prices. It said steel costs fell by more than 25% in the past 6 months.

Projects under construction are proceeding, but drops in demand and prices for petrochemicals and refinery products jeopardize future downstream projects.

“We have seen a notable drop in new refinery project starts as companies react to low margins at a time of high costs and declining product demand,” said Jackie Forrest, lead researcher for downstream cost index. “Due to the long time horizon associated with downstream projects, the slowdown in new project starts will lead to slower demand in the next few years for downstream construction markets.”

Forrest said equipment prices are starting to weaken, but “falling commodity prices have not yet flowed through the entire supply chain to allow for more significant price reductions.”

All regions tracked by the index showed cost decreases over the past 6 months, IHS CERA said. Among the largest dips were those of Russia, 17%, and South America, 16%.

A strengthening US dollar lowered costs in many regions, Forrest said. For example, the value of the Russian ruble against the dollar reduced costs of labor in Russia by more than 25%.

The index tracks the costs of equipment, facilities, materials, and skilled and unskilled personnel used in the construction of more than 30 refinery and petrochemical projects in many regions.