A plateau in rising E&P project costs?

The high cost of doing business in the energy industry may be showing some sign of slowing down, according to a relatively new index of capital costs.
The IHS/CERA Upstream Capital Costs Index (UCCI) climbed 7 percent during the six months ending March 31, but that’s less than the 13 percent increase over the previous six-month period.
In February we wrote about the launch of the index, which tracks nine items central to the oil and gas industry, from equipment costs to labor costs. It uses data gathered by dozens of workers at CERA’s parent company, IHS, on everything from engineering services in Malaysia to pipelines in the North Sea. The numbers are fed into a software product called Que$tor that IHS clients use to build budgets and estimates for projects. The index organizers are hoping it will provide the industry with a useful benchmark to compare their own costs to and for future planning.

ucci_chart Still going up, but…

“This new point indicates an annual rate of project inflation of 14 percent, which is high, but this is the second consecutive period of deceleration in the rate of increase,” said Richard Ward, senior director for cost research at Cambridge Energy Research Associates. “In 2006, the UCCI measured annual rate of project inflation was 30 percent. This leads us to think that if this deceleration trend continues, it is possible that a cost plateau may be reached in 2008.”

Some of the index components that have seen the smallest increases include processing and utilities equipment, installation vessel day rates, and yard construction activity. The only area to show some cost decline is rig day rates in specific regions.
But it’s hardly time for project managers to begin sighing in relief.

” … even with oil consistently above $50 per barrel providing a strong demand signal, the high cost levels are starting to have an effect on project announcements, scheduling, start-up delays, and, in one or two cases, outright cancellations. This effect is even more pronounced in gas projects.”

Capacity constraints in the markets for equipment, services and supplies continue to be the biggest factors behind the increases, Ward said.

“Project delays and lengthening of project delivery schedules, often to accommodate later delivery of equipment is beginning to provide a natural balance. However, the shortage of experienced personnel is still a major factor.”

Here’s Ward talking about the index on CERA’s Web site.