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Costs related to upstream oil and gas facilities are expected to remain stable in 2Q-3Q 2012 before continuing to climb at year-end.
Higher day rates for deepwater rigs and strong oil prices that exceeded production costs for most projects are partly to blame for the recent rise in the cost of building and operating upstream oil and gas facilities, according to analytics firm IHS.
The costs for such facilities peaked, rising 2.3% over the 3Q 2011-1Q 2012 period and setting an IHS Upstream Capital Cost Index record high. The index measures costs of materials, equipment, facilities, and personnel for oil and gas production projects.
The IHS Upstream Operating Cost Index (UOCI) also rose, jumping 2.1% to a score of 189 for the same time period. Values are compared to the year 2000, with US $1 billion in capital costs in 2000 equating to $2.27 billion today.
The IHS Upstream Spending Report revealed E&P spending hit $641 billion for 2012, up from $586 billion the previous year.
“Given the increased levels of spending, it is not surprising to see a record quarter increase in capex escalation,” said Pritesh Patel, senior director of the IHS CERA Upstream Capital Costs Analysis Forum. “The largest quarter-on-quarter increase was 3Q 2008. It is interesting to see how closely escalation of goods and services has correlated to expenditure.”
Of the expenses, “operation personnel and well services are the big ticket items on the operational side and have increased in the range of 3% to 5% depending on the location,” Patel said.
The largest increases have come in the areas of subsea equipment, offshore rigs, and labor costs as activity has picked up with new orders and contracts being put in place, he added. Day rates for deepwater rigs, for example, range from $550,000 to $650,000. That’s up an average of 7% from the previous reporting period.
“The unconventional drive in the US had put pressure on goods and services although the drop in gas prices has switched some of the drilling from gas to tight oil,” an IHS press release said. “However, the high-duty onshore rigs and fracing crews remain in high demand.”
The company also reported that skilled construction labor is still in short supply.
“Without a doubt, labor is the top concern currently for oil and gas field operations. Building an extra piece of equipment can be done by negotiating with vendors, re-organizing manufacturing schedules, or re-diverting existing resources,” said David Vaucher, the company’s associate director. “On the other hand, training (and retaining) additional competent workers can take months, sometimes years, depending on the positions.”
The rise in the UOCI was caused by increases in the operations, maintenance, logistics, and well services component markets. Each market, IHS reported, was impacted by factors that included high oil prices, tightness in supply chains, and the labor shortage. Retaining crews amid high inflation levels continued to cause employers to struggle.
The increase in building and operating costs is not expected to drop dramatically anytime soon.
Patel predicted costs would remain stable for 2Q and possibly 3Q. But costs could escalate again at year’s end and continue their upward climb in 2013.
To cope with the situation, companies are seeking deals.
“Companies are negotiating with suppliers to obtain [the] best rates possible,” Patel said. “These increases have not yet resulted in project delays.”
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