The global costs of building and operating upstream oil and gas facilities showed signs of an upturn in this year's first quarter following last year's slump, according to IHS Cambridge Energy Research Associates (IHS CERA). In a separate IHS CERA study, meanwhile, the cost of designing and building refineries and petrochemical plants rose by 1.5% in the 6 months ending at the end of this year's first quarter.
Upstream costs
The IHS CERA Upstream Capital Cost Index slipped 0.3% during the 6 months ending at the end of the first quarter of 2010, while the firm's Upstream Operating Costs Index rose 3%.
The firm said costs were pushing upward toward the end of the first quarter, before the oil spill in the Gulf of Mexico.
IHS CERA assigns costs in 2000 an index value of 100 and measures changes against that base. Index scores for the latest 6-month period are 201 for capital costs and 172 for operating costs.
Daniel Yergin, IHS CERA chairman, said the new indexes "showed costs poised to begin an ascent back to prerecession levels after a precipitous fall last year."
But he said the oil spill in the Gulf of Mexico "adds a level of uncertainty to future forecasts owing to the moratorium and liability limits and as companies struggle to assess the full implications."
Upstream capital costs bottomed after falling 9% in 2009, with overall costs at early-2007 levels, according to the index. Although the index was level, volatility was evident in cost components such as raw materials, yard-and-fabrication costs, and labor and engineering.
The slight rise in the operating-cost index was from a low level to which it had sunk in the previous study period. It rose largely on the strength of an upswing in onshore service rates, increased material input prices, and rising manpower costs.
Downstream costs
The increase in downstream costs was the second straight half-year increase for the index.
The IHS CERA Downstream Capital Costs Index, with a 2000 benchmark of 100, increased to 175 from 173 from the previous 6 months.
According to the index, downstream construction costs now are 6.5% below peak levels of 2008. They had fallen in 2009 to 9% below the peak.
A steady increase began in the third quarter of last year, IHS CERA said, as global economic recovery raised costs of commodities and general construction materials and as projects begun before the recession were pressed toward completion.
"The tide has turned, and costs are continuing their ascent, albeit at a measured pace, back to prerecession levels," Yergin said. "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."
IHS CERA noted that downstream construction continues in developing countries such as China, India, and the Middle East, where demand for refinery products is growing and governments support refining investments.
In the developed countries of North America, Western Europe, and Japan, refining capacity will continue to be rationalized.
"Refinery closures in developed countries of more than 1 million b/d in 2009 show the magnitude of the refining capacity overhang," said Jackie Forrest, a lead IHS CERA downstream researcher. "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."
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