Costs to construct new oil and natural gas upstream facilities reached a record high in the second half of 2008, according to the most recent report by IHS and Cambridge Energy Research Associates (CERA). However, as the financial crisis began to affect markets worldwide, costs began to moderate toward the end of the third quarter.

The IHS CERA Upstream Capital Costs Index (UCCI) and companion Downstream Capital Costs Index (DCCI) were issued on Thursday. Similar in concept to the Consumer Price Index (CPI), the UCCI and DCCI measure project cost inflation and provide a benchmark to compare costs around the world. They also use proprietary IHS and CERA databases and analytical tools. The values are indexed to 2000, which means that a piece of equipment that cost $100 in 2000 would cost $230 today. Cost increases were even higher in July and August, but they began to moderate toward the end of the third quarter as the financial crisis loomed.

Sustained high activity levels and tightness in the upstream services and equipment markets led upstream costs to increase 9.2% globally in the second half of the year, up 3.2% from the first six months of 2008. The higher costs since the end of June raised the UCCI to 230 points from its previous high of 210.

“Hidden in these substantial increases are the first signs of what may be a change in direction,” said CERA Chairman Daniel Yergin. “Moderation in the last two months of the third quarter was a response to the unfolding financial crisis and the spending cutbacks and points to a precursor to a downward turn in the direction of the UCCI.”

Cost increases were driven by a continued high level of upstream oil and gas activities and a marked increase in the cost of steel and subsea equipment.

“Upstream steel costs have grown by an unprecedented 32% from the first quarter to the third quarter of 2008 because raw material and scrap metal costs,” the report noted. “Though significant in comparison with the 10% increase seen in the previous six-month period, this increase is in line with the UCCI report issued six months ago.”

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