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Upstream Labor Costs Still Rising, But 'Strong' Decrease for Some Drilling Services

The costs to build and operate upstream oil and natural gas facilities have seen limited growth this year, with labor costs still escalating but the price of some drilling products nearly flat, according to IHS Inc.

Energy consultancy IHS CERA uses two cost indices to benchmark upstream costs. The Upstream Capital Costs Index (UCCI) tracks costs associated with building oil and gas facilities, and the Upstream Operating Costs Index (UOCI) indexes costs to operate them. The indices, with values benchmarked to 2000, are similar in concept to the Consumer Price Index.

The latest indices reviewed prices from the end of March through the end of September, 1Q2013-3Q2013.

Researchers found that capital costs of $1 billion in 2000 now are trending at about $2.29 billion. Likewise, the annual costs to operate a field have risen to $196 million from $100 million.

Although the swing in prices is high over the 13-year period, capital costs only rose less than 1% in the six-month period.

Capital costs were only slightly higher because of market fundamentals, and in particular, declining steel prices and a soft market for drilling rigs, according to the UCCI. Operating costs measured by the UOCI rose at about the same rate, up around 1%.

The rise in operating costs primarily was labor-related, and those costs continue to increase across all skill levels, IHS said. However, higher labor costs were tempered by "strong" cost decreases for commoditized products, including proppant and tubing, which are widely used in pressure pumping services and other completion activities.

"The individual markets that comprise the indexes will likely finish the year with varying levels of strength," said IHS operational costs research chief David Vaucher. "While it is now much easier than it was a few years ago to procure pumping equipment and proppant, it is still harder than ever to find qualified, technical professionals who can hit the ground running on projects."

Steel costs, on the decline for more than two years, fell another 4.2% in the six-month period and currently are at levels comparable to the 1Q2010, IHS said. Many producers reported that prices are now at or near their cost of production.

Upstream engineering and project management costs fell by 3.5% in the index period, researchers found. However, in local currency terms, costs rose by 2.5% because of a strengthening U.S. dollar that increased against foreign currencies.

Subsea costs also were slightly higher, up 1% over the index period. Trees and control systems were flat, while manifolds and risers increased by 2%, umbilicals by 1% and flowlines, 3%. The Brazilian pre-salt basins continued to be the region with the most activity.

"This leveling off in cost escalation is the calm before the storm,” said IHS Senior Director Pritesh Patel, who heads upstream costs research. "While line pipe and tubular goods costs have fallen and equipment costs have shown little movement in the past six months, these trends are likely to change in 2014 and we could potentially see large increases by the end of next year."

Despite lingering uncertainty about the global economy and lower oil prices, oil remains at a price level "that justifies initial and continued investments," IHS researchers concluded.

"IHS expects a slow period in 4Q2013 as companies wrap up year-end projects, but momentum should then pick up as they move into new budgeting and spending cycles."

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