Upstream costs may be bottoming out, IHS CERA says

The falling costs of building and operating upstream oil and gas facilities may be close to a reversal, according to a study by IHS Cambridge Energy Research Associates (CERA) just announced.

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John Waggoner
Technology Editor, Drilling & Production

HOUSTON -- The falling costs of building and operating upstream oil and gas facilities may be close to a reversal, according to a study by IHS Cambridge Energy Research Associates (CERA) just announced.

“The IHS CERA upstream cost analyses show that some confidence has returned to the industry as oil prices have recovered and expectations rise for a strong economic recovery in 2010,” says Daniel Yergin, IHS CERA chairman. The group found operating costs rose slightly and the descent of capital costs began to slow down in the past six months.

The IHS CERA Upstream Capital Costs Index (UCCI), which tracks costs associated with the construction of new oil and gas facilities, is down 4% over the past six months, although costs are near a bottom, the report finds.

The UCCI’s counterpart, the IHS CERA Upstream Operating Costs Index (UOCI), which measures operating costs for those facilities, rose by 1% in the past six months after falling 8% during the prior year. Yergin cautions: “However, uncertainty related to present low oil demand and large spare capacity continues to hinder many projects.”

The indexes are tracked similar to the Consumer Price Index (CPI) and provide a benchmark for comparing costs around the world. The reduction in capital costs was driven by sustained lower levels of upstream oil and gas activities, which resulted in a sharp decline in the costs of drilling rigs and yards and fabrication, the study finds.

Upstream steel costs continued to fall through 2009, dropping 12% from 1Q to 3Q 2009 on top of the 25.2% over the previous six months, but in the past quarter it now appears to have stabilized around the cost floor.

Costs for offshore rigs fell 3.1% due to continued weak demand for jackup rigs. Yards and fabrication, impacted by the sharp drop in general shipping construction saw costs decline 13% over the past six months. A decline in new orders compounded with higher funding costs for equipment operators and difficulties obtaining financing fueled the drop, the report says.

IHS CERA says the contrast of rising operating costs with overall lower capital costs is explained by a rise in personnel costs and increases in the consumables market. Operating personnel costs rose 6% in the past six months. But this is a somewhat confusing picture as the increase was driven largely by foreign exchange fluctuation when converting local manpower rates into a weakened US dollar. However, the personnel market is expected grow as hiring freezes begin to thaw out as the US emerges from recession.

“The slowing pace of the decline in index suggests that costs are poised for a turnaround as commodity prices begin to recover and labor costs rise,” says Pritesh Patel, director for the IHS CERA Capital Costs Analysis Forum.

Overall, the indexes project an increase in costs in the near term, with relatively stable oil prices and recovering gross domestic product growth driving capital costs; and rising demand for services and vessels, along with rising materials and feedstock prices escalating operating costs, the report concludes.

12/08/2009

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