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Oil exploration, production costs on rise according to new index

By TOM FOWLER
Copyright 2007 Houston Chronicle


 
Oil exploration and production costs have climbed 53 percent in the past two years as prices for everything from drilling rigs to labor continue to surge, according to a new price index released Monday.

The Upstream Capital Cost Index, a compilation of nine items central to the oil and gas industry, has been on the rise since 2000, but it spiked sharply beginning in 2005, said Richard Ward, senior director of upstream research for Cambridge Energy Research Associates, which is holding its annual conference in Houston this week.

That means companies are getting less and less bang for the bucks they put into exploration and production, despite high commodity prices. And with oil well below last year's $76.70 record closing at $57.81 Monday companies may consider delaying, if not canceling, some projects.

"When we hit $60 it was the wake-up call for a lot of companies," Ward said.

The index, which goes by the acronym UCCI, was developed by CERA in the past year as a way to consolidate the many factors that affect project costs into one number.

"Whenever I'd ask companies about rising costs, they would jump into the details of specific areas, like equipment costs or labor costs," Ward said. "Everyone kept jumping into the weeds without a clear picture of the forest."

Ward decided to use data already gathered by CERA's parent company, IHS Energy, to get a clearer picture.

Dozens of IHS workers around the world regularly gather price data 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 used to build budgets and estimates for projects.

Ward and his staff then take the data and adjust it to account for differences between the items, such as wellhead equipment in the Gulf of Mexico versus offshore Nigeria equipment.

Starting with 100 as the base in 2000, the index rose gradually to 103.9 in 2002, 105.8 in 2003 and 109.5 in 2004. But in 2005 it shot up to 126 and reached 148 by last November.

Part of the rise was a reaction to high oil and gas prices that started in 2003, which led companies to move forward with more projects, increasing the cost of industry-specific items like drilling rigs and subsea equipment.

But the global economic boom, lead by China, created a demand for other goods and services, such as steel, engineering and construction labor, which led to higher prices for those items.

This "double bubble" of cost increases is unprecedented, Ward said, and doesn't show any sign of letting up soon.

In the past year, the largest increase came in the cost of leasing offshore drilling rigs, which rose 309.2 percent. Drilling rig contractors are expected to expand their fleets by more than 100 over the next four years but rates probably won't ease until 2009.

Rates for offshore equipment installation vessels, such as heavy-lift cranes that lay undersea pipelines, rose 41 percent in the last year. And rates for engineering and project management staff have grown 23 percent, despite an increase in new design centers in Asia and the Middle East, where labor costs are cheaper.

For now, the index will come out twice a year, in May and November, but already there's pressure for it to come out quarterly, Ward said.

The index could help companies get a better handle on expected costs for a project or help those working on projects with foreign governments explain why budgeted costs have risen. Eventually, Ward hopes the index would be used in contracts as way to automatically trigger new negotiations or price increases, should it rise too steeply.

"It could be helpful to have this independent, third-party index that everyone could look to as an indicator of overall costs," Ward said.

tom.fowler@chron.com Houston Chronicle www.chron.com

 

 

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