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Cost inflation slowing for upstream projects Costs rose seven percent in the last six months, compared with a 13 percent rise in the previous half-year period, survey shows Allen Baker For Petroleum News
Costs for upstream capital projects in the oil and gas industry continue to climb, but at least the rate is slowing a bit. Over the last six months, costs rose by 7 percent, according to Cambridge Energy Research Associates. That was only about half the rate of climb in the prior six months.
CERA, which released its latest numbers on May 8, has been tracking upstream project costs since 2000. Over those seven years, CERA’s Upstream Capital Cost Index has grown by 79 percent. By comparison, there was a gain of just 16 percent in the Producer Price Index-Commodities for finished goods (excluding food and energy) over the period 2000-07.
Downstream projects and costs for gas liquefaction plants have been rising as well, with LNG capacity now running about $800 per tonne of annual capacity, four times the figure just a few years ago. Across the industry, the price hikes, shortages, and associated project delays have been most pronounced over the last two years.
In both downstream and upstream, shortages of skilled workers have driven up labor costs as the industry moved into high gear. There have also been big impacts from the rising cost of steel and other basic materials. Delays due to shortages of both workers and equipment have added to the final completion costs as well.
Over the last six months, the largest cost increases came in engineered equipment, such as compressors, turbines, and generator sets. Those components cost 20 to 24 percent more as of March 31 than they did six months earlier, due to high demand and limited supplies. A shortage of manufacturing capacity for subsea equipment has triggered big price boosts in the same period for the highly specialized pipes and tubing used to make flowlines and risers.
Domestic rig costs down Rig costs are declining a bit in North America, particularly in the Canadian gas fields and the Gulf of Mexico, but the worldwide average cost continues to rise in that sector, according to the CERA report. Jack-up rigs used in the Gulf showed the most substantial decline, with some contractors reporting decreases in day rates of up to 35 percent as a result of additional rigs coming to market.
While the rate of project inflation remains high, “this is the second consecutive period of deceleration in the rate of increase,” said Richard Ward, CERA senior director for cost research. “In 2006, the UCCI measured annual rate of project inflation was 30 percent. This leads us to think that if this deceleration trend continues, it is possible that a cost plateau may be reached in 2008.”
But while some relief may be coming, costs aren’t expected to drop any time soon, Ward said.
“Analyzing the projects already committed over the next two to three years, we can see that the demand for equipment and services will remain at these levels for the immediate future,” he said. “Additional market capacity that is currently planned will not be sufficient in most markets to bring very much relief to high costs during this time period.”
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