CERA: upstream construction costs up 6% over 6 months

Constructing upstream oil and gas facilities has increased by 6% over the past 6 months and have doubled since 2005, according to the most recent IHS Inc./Cambridge Energy Research Associates (CERA) Upstream Capital Costs Index (UCCI).

May 19th, 2008

Uchenna Izundu
International Editor

LONDON, May 19 Constructing upstream oil and gas facilities has increased by 6% over the past 6 months and have doubled since 2005, according to the most recent IHS Inc./Cambridge Energy Research Associates (CERA) Upstream Capital Costs Index (UCCI).

Areas that have a high level of projects underway in the Middle East, West Africa, South America, and Australia have seen higher than average cost increases, compared with areas of moderate escalation in North America and Europe.

"Rising costs have become one of the 'new fundamentals' driving the price of oil," said Daniel Yergin, chairman of CERA and executive vice-president of IHS. These have been driven by the increased demand for raw materials and transportation.

"These costs are a serious concern and a major challenge for oil and gas companies and are contributing to the delays and postponements of many projects," added Pritesh Patel, director for the Capital Costs Analysis Forum for Upstream, a CERA Industry Forum. "Exchange rate fluctuations and the weakening US dollar also contribute. With the dollar the reporting currency of choice, this has a dramatic effect on final construction costs for projects in some regions such as Europe and West Africa."

The UCCI is a proprietary measure of project cost inflation similar in concept to the Consumer Price Index. It provides a benchmark for comparing costs around the world and draws upon proprietary IHS and CERA data bases and analytical tools.

CERA said the biggest leap on its UCCI was for deepwater subsea equipment, particularly umbilicals and control systems. This has jumped by 12% over the past 6 months due to manufacturing constraints coupled with higher materials and labor costs.

The costs of vessels used to install platforms, lay pipe, and support offshore development are also on the rise after briefly leveling off in 2007. Their rates have increased 2% in the past 6 months.

Contact Uchenna Izundu at uchennai@pennwell.com.

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