The costs to build, as well as operate, upstream oil and natural gas facilities continued to increase this year and are forecast to jump more in 2013, according to IHS Inc.
IHS, which developed two indexes to track upstream building and operating costs, issued the latest reports on Tuesday. The Upstream Capital Cost Index (UCCI) rose 1% from 1Q2012 to 3Q2012 to an index score of 230, which matches a high set in 3Q2008. Over the same period, the Upstream Operating Cost Index (UOCI) rose 0.5% to a new high of 190.
The indexes are proprietary measures of cost changes, similar in concept to the Consumer Price Index (CPI), and are used as a benchmark for comparing costs around the world. Values are indexed to the year 2000, meaning that $1 billion in 2000 capital costs have risen to $2.3 billion in current dollars. Likewise, the annual operating costs of an oilfield would be $190 million today versus $100 million 12 years ago.
“The 1% increase in the UCCI…is muted compared to the increase during the previous six months, which registered a 2.3% increase,” IHS said. “While equipment costs and dayrates for drill rigs and vessels have continued to increase, this has been muted due to the fall in steel products prices. Oil prices remained above the threshold price of production for most projects, keeping increasing demand for oilfield goods and services steady.”
Meanwhile, the “small rate of increase for the UCCI can be attributed to increased dayrates 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. High spec rigs continue to increase dayrates in North American driven by tight oil and unconventional activity.”
Of the 10 markets that the UCCI tracks, only steel (down 9%), as well as engineering and project management (off 0.1%) declined, according to the index.
“Countries that require a high local content continue to experience the largest cost escalations as demand continues to outgrow local supply,” said IHS “Backlogs for equipment and subsea orders continue to grow, with little pass through of falls in raw material costs. Engineering and project management costs remain static as companies compete for new work; however, construction labor rates continue to rise as new projects are sanctioned.”
Recent project sanctions and new contract awards among contractors confirm the rising industry activity and spending levels, the company said.
According to the IHS Upstream Spending Report, 2012 capital spending (capex) is expected to hit $633 billion this year, compared with $557 billion in 2011. Operational spending (opex) for 2012 is forecast to hit $493 billion versus $464 billion in 2011. Rising costs “remain a major driver of the rise in industry spending,” and they appeared to contribute to about half of the year/year increase in exploration and production capex this year.
“As more projects continue to be sanctioned in 2013, we expect further capex escalation,” said Pritesh Patel, senior director of the IHS CERA Upstream Capital Costs Analysis Forum. “In 2012 we have seen more than 4% in cost escalations, and we expect this trend to continue in 2013 as demand remains strong.”
The UOCI increased slightly to 190 from 189, “despite mixed movements of each component market.” Each of the markets “was impacted by similar factors, namely a decrease in oil prices and uncertainty over the economy in many parts of the world. Nevertheless, activity levels are still high; resulting in tightness in supply chains for what can be very highly specialized services and equipment. The lack of availability of skilled labor has been an issue for the past few quarters, and 3Q2012 was no exception.”
IHS Associate Director David Vaucher, who leads the opex forum, said the outlook for overall cost escalations is “more muted now than it was at the beginning of 2012. Nevertheless, we see costs for skilled workers and technical personnel continuing to increase.” Upstream capital and operating costs are forecast to rise by 4-5% in the coming year.
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