Crude-Oil, Gas-Extraction Costs Starting to Rebound, IHS-CERA Indexes Show

Costs of extracting oil are starting to rebound after bottoming at the end of last year as prices of building materials such as steel rose, according to indexes produced by IHS Cambridge Energy Research Associates.

IHS CERA’s Upstream Operating Costs Index rose 3 percent during the six months to the end of March, while the Upstream Capital Costs Index slipped 0.3 percent, it said today. The oil spill in the Gulf of Mexico, the worst in U.S. history, from a rig leased by BP Plc will “very likely place downward pressure on costs” over the coming year, the consultants said.

“We did have some increases,” IHS-CERA analyst Pritesh Patel said in a telephone interview. “We track upstream steel, so things like piping, casing, tubular goods, structural steel actually used on facilities - we did actually see a 5 percent increase within that market.”

The Upstream Operating Costs Index advanced to 172, and the index for capital costs dropped to 201. Both are indexed to 2000. That means that an oilfield which required $100 million per year to operate in 2000 would now need $172 million, and capital requirements of $1 billion during that year would now be equivalent to $2.01 billion.

Operating costs increased because of “an upswing in onshore service rates, increased material input prices and escalating manpower costs,” IHS-CERA said in the statement. Upstream capital costs had sustained a “precipitous” drop of 9 percent in 2009, its chairman Daniel Yergin said.

Staff costs for oil companies gained 5 percent “as demand for skilled production personnel remained firm, particularly for highly skilled managers and engineers,” the report said.

Oil Prices Jump

Oil futures surged 19 percent in the six-month period, protecting companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc against any extra expense. Crude traded for around $78 a barrel on the New York Mercantile Exchange yesterday.

President Barack Obama’s six-month ban on new offshore drilling may lead to lower costs as semi-submersible drills become more easily available, according to the report.

“The immediate impact you’ll have over the next six to 12 months is more supply onto the market, and that will actually lead to a decrease,” Patel said. “With the longer term implications with further regulations, further procedures to follow, it could have potentially an increase.”

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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