IHS CERA: Downstream construction costs up

By OGJ editors
HOUSTON, June 23 -- 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, according to IHS Cambridge Energy Research Associates (IHS CERA).

The increase 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,” said Daniel Yergin, chairman of IHS CERA. “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.”