Content area
The costs are tracked by IHS/CERA for its Downstream Capital Costs Index (DCCI). The DCCI is a proprietary measure of project cost inflation similar in concept to the Consumer Price Index. It provides a benchmark for comparing costs around the world and draws upon proprietary IHS and CERA databases and analytic tools.
"The latest increases have been driven by continued high activity levels globally, continued tightness in the equipment and engineering markets, as well as historically high levels for raw materials," said Jackie Forrest, lead researcher for the Capital Costs Analysis Forum for Downstream, an on-going research project of CERA.
"As a result of all of this activity, lead times for engineered equipment has increased up to 50% percent in the last 6-12 months for some items, and as expected, prices have increased," Forrest added. "Further compounding the problem is the raw materials and shipping situation. Both of these sectors have experienced recent increases, ultimately passing through costs to projects."
Refinery and petrochemical plant construction costs are at a record high, according to an index published by HIS and Cambridge Energy Research Associates (CERA). These costs are beginning to act as drags, leading to delays and postponements in the building of new refineries and petrochemical plants required to keep up the growing demand.
The costs are tracked by IHS/CERA for its Downstream Capital Costs Index (DCCI). The DCCI is a proprietary measure of project cost inflation similar in concept to the Consumer Price Index. It provides a benchmark for comparing costs around the world and draws upon proprietary IHS and CERA databases and analytic tools.
For the quarter ended Sept. 30, the DCCI registered a high of 166 points, indicating an 8% increase in the last six months in the costs associated with constructing new refinery or petrochemical plants. All values are indexed to the year 2000. Thus, a piece of equipment that cost $100 in 2000 would cost $166 today.
Downstream facilities are required to turn raw oil and gas into useful end products such as gasoline, heating oil, plastics and fertilizer. As the cost of construction rises, firms may become reluctant to invest in new plants, or delay and postpone these projects thus, in turn, constraining the growth of capacity, IHS/CERA said in announcing the results of the index.
The DCCI has been on an upward trend since 2003 with annual increases in the last three years of seven, 17 and 14 percent, respectively.
"The latest increases have been driven by continued high activity levels globally, continued tightness in the equipment and engineering markets, as well as historically high levels for raw materials," said Jackie Forrest, lead researcher for the Capital Costs Analysis Forum for Downstream, an on-going research project of CERA.
"On a global basis, the refining and petrochemical sector is currently facing heavy strains with new builds in the Middle East and Asia, expansions in the United States and heavy oil projects in Alberta all occurring simultaneously," Forrest continued.
"We expect global refining capacity to expand 1.7% per year for the next five years, adjusted for expected delays and cancellations," she added. "This is 20-30 percent more expansion activity per year than we have recorded in the recent past. This may not sound like much, but 1.7 percent growth in refining capacity equals about 1.5 million barrels per day and that is significant as these are complicated facilities to construct.
"As a result of all of this activity, lead times for engineered equipment has increased up to 50% percent in the last 6-12 months for some items, and as expected, prices have increased," Forrest added. "Further compounding the problem is the raw materials and shipping situation. Both of these sectors have experienced recent increases, ultimately passing through costs to projects."
Looking forward, Forrest said: "Unless there is a sudden and dramatic change in the industry, activity and market pressures should keep the DCCI at these levels, if not higher, for the next 12-18 months. After that period, there may be a re-balancing of the industry with either fewer active projects or a greater amount of delivery capacity available, or both." - Gary Clouser
Copyright Hart Energy Publishing, LP Nov 26, 2007