Costs of Building and Operating Upstream Oil and Gas Facilities Reach New Highs

The costs of both building and operating upstream oil and gas facilities reached new highs, according to two cost indexes developed by IHS. The IHS Upstream Capital Cost Index (UCCI) rose 2.3 percent over the Q3 2011-Q1 2012 period to a new high index score of 227. Its counterpart, the IHS Upstream Operating Cost Index (UOCI), rose to 2.1 percent to an index score of 189 over the same period.

The indexes are proprietary measures of cost changes similar in concept to the Consumer Price Index (CPI) and draw upon proprietary IHS tools to provide a benchmark for comparing costs around the world. Values are indexed to the year 2000, meaning that capital costs of $1 billion in 2000 would now be $2.27 billion. Likewise, the annual operating costs of a field would now be up from $100 million in 2000 to $189 million.

The 2.3 percent increase in the UCCI over the six-month period ending March 31, 2012 is sharp compared to 2011, which registered a 5.3 percent increase for the entire year. The cost increases were driven by strong oil prices that exceeded the threshold price of production for most projects, increasing demand for oilfield goods and services.

The high rate of increase for the UCCI can be attributed to increased day rates for deepwater rigs. Despite new entries into the market these rigs are in high demand and with rising fuel and labor costs can command premium rates. The unconventional drive in the U.S. has put pressure on goods and services although the drop in gas prices has switched some of the drilling from gas to tight oil. However, the high duty onshore rigs and fraccing crews remain in high demand.

Among the 10 markets that the UCCI tracks, only steel (3.6 percent decrease) and engineering and project management (one percent decrease) declined.

Equipment vendors and subsea manufacturers continue to respond to the high order levels and were able to pass through the increased cost of shipping both finished products and the sub-components. This was most notable in Brazil and North America.

Skilled labor for construction, drilling crews and operations continues to be in short supply. Local currency movements for construction and operations labor saw large increases in the emerging economies where employers struggle to respond to high inflation levels and retaining their crews.

The IHS Upstream Spending Report confirms these increased activities levels showing 2012 spending (CAPEX) for exploration and production (E&P) to be $641 billion, up from $586 billion in 2011.

Operational spending (OPEX) for 2012 is $500 billion, up from $457 billion in 2011. These spending levels exceeded the previous highs of 2008 even when cost escalation is considered, demonstrating higher activity levels in both new construction and producing properties which put additional pressure on the vendors and subcontractors.

“Given the increased levels of spending it is not surprising to see a record quarter increase in CAPEX escalation,” said Pritesh Patel, senior director of the IHS CERA Upstream Capital Costs Analysis Forum. “The largest quarter-on-quarter increase was Q3 2008. It is interesting to see how closely escalation of goods and services has correlated to expenditure.”

The Upstream Operating Costs Index (UOCI) increase of 2.1 percent to 189 over Q3 2011 to Q1 2012 was due to upward movements of all four of the UOCI’s component markets—Operations, Maintenance, Logistics and Well Services.

Each of the markets were impacted by similar factors, namely an increase in activity due to high oil prices, tightness in supply chains for what can be very highly specialized services and equipment, and a worsening shortage of the labor necessary to deliver these goods and services.

“Without a doubt, labor is the top concern currently for oil and gas field operations. Building an extra piece of equipment can be done by negotiating with vendors, re-organizing manufacturing schedules or re-diverting existing resources. On the other hand, training (and retaining) additional, competent worker can take months, sometimes years depending on the position”, said IHS Associate Director David Vaucher, who heads up the OPEX forum.

IHS expects upstream capital and operating costs to continue to rise in 2012 driven by increased costs in rig dayrates, equipment and oilfield services.

About IHS (www.ihs.com)
IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 6,000 people in more than 30 countries around the world.