Building and operating upstream natural gas and oil facilities regained upward momentum in the past six months after falling in 2009, according to cost indexes developed by IHS.

The IHS CERA Upstream Capital Costs Index (UCCI), which tracks costs associated with constructing new oil and gas facilities was up 3% to 207 after bottoming out in the previous six-month tracking period. Its index score is now 207.

The UCCI's counterpart, the IHS CERA Upstream Operating Costs Index (UOCI), which measures the operating costs for those facilities, rose 1% over the same period to register a score of 173.

The indexes are proprietary measures of cost changes that are similar in concept to the Consumer Price Index (CPI) and use IHS tools that benchmark costs around the world. Values are indexed to the year 2000, which means that $1 billion in capital costs in 2000 would now be $207 billion. Annual operating costs of a field would be $173 million, up from $100 million in 2000.

The latest index reflects costs from 1Q2010 to 3Q2010 and are the first results since the Macondo well explosion in the deepwater Gulf of Mexico (GOM), IHS said. The federally imposed moratorium on deepwater drilling following the spill "had a significant impact in the Gulf," according to the index.

"The fact that overall upstream costs are trending upwards points to the increase in oil and gas activities worldwide," said IHS CERA Chairman Daniel Yergin. "While the oil spill in the U.S. Gulf of Mexico and the resulting moratorium has had significant impact on that region, its ramifications have, thus far, shown little impact on deepwater activity elsewhere. However, increased certification and regulations will likely push up total project costs globally in the future."

Overall, the latest index indicated that costs were up after bottoming out at early 2007 levels. The upward momentum was "broad but moderate. While six of the 10 markets tracked by the UCCI posted increases, only one of those (steel) showed an increase above 2%."

Upstream steel costs climbed 7%, continuing to rebound after falling by almost one-third (34%) from 3Q2008 to 3Q2009.

"Increased activity levels and raw materials costs drove the rise," said IHS. "As demand for steel good returns and supply increases the delicate balance between supply and demand, combined with the industry move to quarterly iron ore contracts, has introduced increased volatility in steel products going forward."

Labor costs, as well as costs for engineering and project management, "showed little movement outside of regions such as Australia, where the construction labor market remains tight due to activity related to liquid natural gas (LNG)," which has stretched capacity. Other showed some upward movement, but IHS said it was driven by the weakness of the U.S. dollar rather than local currency movement.

Offshore rig and offshore installation vessel markets were the only markets tracked by the UCCI to register declines for the latest period, which IHS attributed to increased supply entering the market, as well as the number of rigs and vessels remaining idle in the GOM.

"Several rigs left the Gulf during the moratorium but most deepwater rigs with long-term contracts remained in the region idle," said Pritesh Patel, director of the IHS CERA Upstream Capital Costs Analysis Forum. "This combined with new rigs leaving the construction yards will bring a softening to the rig market for the time being."

The UOCI, meanwhile was up just 1% over the latest period, driven by higher onshore well service (2%) and material costs (3%). The costs still remain below 2008 levels, said IHS. Other markets mostly were flat.

The latest indexes, said IHS, indicate that upstream costs "are likely to experience escalation at an increased rate in the near-term as trends toward deepwater production point to higher rates for offshore services and the exploration and the development of new territories creates the need for new infrastructure and places additional stress on supply chains."

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