IHS CERA tracks downturn in upstream costs

A long surge in the costs of building and operating oil and gas production facilities has reversed course, according to two proprietary indexes.

HOUSTON, June 5 -- A long surge in the costs of building and operating oil and gas production facilities has reversed course, according to two proprietary indexes.

The IHS CERA Upstream Capital Costs Index, which uses 2000 as a baseline with a value of 100, fell 8.5% to 210 during the 6 months between the third quarter of 2008 and first quarter of 2009. The index tracks costs of building oil and gas facilities.

And the IHS CERA Upstream Operating Costs Index, with the same baseline for operating costs, fell 8% to an index value of 187.

“The first signs of a downward shift in costs were evident in a moderation that we observed in the last 2 months of the third quarter,” said IHS CERA Chairman Daniel Yergin.

The dip in capital costs reflects cuts in upstream activity and a decline in the cost of steel and subsea equipment, IHS CERA said.

Upstream steel costs fell 25.2% in the latest 6 months after rising by 32% in the prior 6-month period.

Operating costs fell because of “a slackening of project activity and lower levels of resource utilization,” IHS CERA said.

Some of the largest cost declines were in transportation and consumables, reflecting falling energy prices and the slumping global economy. Costs of well services also dropped.

Costs of offshore operations didn’t fall as much as those for onshore work—6% vs. 15%—between third-quarter 2008 and first-quarter 2009.

In that period, operating and capital costs didn’t fall as much as crude oil prices did, IHS CERA noted. A reason is the tendency of some costs, such as those for personnel and deepwater vessels, to resist downward pressure.

IHS CERA expects upstream capital and operating costs to continue falling because of further declines in materials costs and slackening demand.

The firm’s Upstream Capital Costs Index covers equipment, facilities, materials, and skilled and unskilled personnel used in construction of a geographically diverse group of 28 onshore, offshore, pipeline, and LNG projects.

The Upstream Operating Costs Index measures cost changes in oil and gas field operations.

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