Box IEA Upstream Investment Cost Index

We have prepared an overall index of upstream capital costs worldwide in US dollars, based on disaggregated data for the different cost components, back to 2000. The aim is to determine the average annual rate of increase in underlying costs incurred directly by operating companies for both exploration and production, stripping out the effect of shifts in spending on different types of upstream projects and regions as well as the impact of changes in drilling productivity (e.g. average well depth). These costs include the acquisition of seismic data, project management, rig hiring, drilling services and the construction of production facilities (including treatment and processing plant, compressors, generators and gathering pipelines). The underlying costs of labour, materials and equipment are incorporated in charges for drilling, related services and facilities.

Indices for exploration and production are calculated by weighting the contribution of each component within those activities. Costs for onshore and offshore developments (broken down by shallow and deep water) are assessed separately, so that the index is not distorted by a shift in spending over time between these locations. The overall Upstream Investment Cost Index (UICI) is the average of the two separate indices for exploration and production, weighted by capital spending (based on the results of our survey of upstream investment). Our approach differs from that used by IHS/CERA3 in preparing its Upstream Capital Costs Index, which tracks the costs of equipment, facilities, materials and personnel used in the construction of a geographically diversified portfolio of 28 onshore, offshore, pipeline and LNG projects. The IEA and IHS/CERA indices report similar increases in costs between 2000 and 2007.

Figure 13.11 • IEA Upstream Investment Cost Index by activity

Figure 13.11 • IEA Upstream Investment Cost Index by activity

Cera Index Lng
Source: IEA database and analysis.

3. More details can be found at

There are signs that the pace of upstream cost-inflation is slowing, largely as a result of new capacity coming on line and a slowing of growth in demand for oilfield services and related materials. This is partly because some companies are baulking at high costs and are delaying investment decisions in the hope that costs will fall back later. Day-rates for jack-up rigs in the United States, for example, have already come down from peaks reached in mid-2006 (Figure 13.8, above). The surge in day-rates in recent years has prompted a new wave of construction of rigs, especially for offshore drilling (Figure 13.12). Around 160 offhsore rigs were under construction in mid-2008, compared with close to 140 in 2007 and fewer than 20 in 2004. Utilisation and day-rates are nonetheless likely to remain at historically high levels: all of the deepwater rigs that will come to market between now and 2010 have already been assigned to projects that are under development, leaving no free rigs for any new opportunities that may emerge in the next few years (see the Spotlight below).

The discovery of Tupi and other large deepwater fields in Brazil has led to an increase in demand for heavy-duty rigs: Petrobras has announced its intention to order 26 such rigs in the next decade. On the other hand, new land and offshore rigs being brought into operation generally use more efficient technologies (such as rotary steerable systems), cutting the number of days needed to drill a well. This will reduce the number of rig-days needed to find and develop hydrocarbons in the coming years. In the light of these uncertainties, we have assumed that costs stabilise in 2009 and remain flat in real terms (adjusted for consumer price inflation) thereafter.

Was this article helpful?

0 0
Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook

Post a comment