Oil industry costs continue steep rise: CERA

Oil rigs are seen in Midland, Texas May 9, 2008.

NEW YORK (Reuters) - Costs to tap into new oil and gas projects escalated about 6 percent globally over the past 6 months and the climb can be expected to steepen on soaring prices for steel and other raw materials, according to a study released on Wednesday.

Cambridge Energy Research Associates (CERA), a unit of information and consultancy IHS Inc (IHS.N), said that costs to build new refineries and petrochemical plants also rose 6 percent.

"So long as oil prices remain high and demand for the end products remain high, I think we're going to see continued high level of costs," Candida Scott, senior director of cost and technology at CERA, said in an interview.

"We'd really have to see a slackening of demand and oil prices coming down to see any reduction in costs."

According to the study, costs to produce oil and gas have more than doubled since 2000, with most of that surge coming in the last three years.

Demand for oil has soared in that period, leading to the shortages in labor, equipment and raw materials that have driven much of the rise in costs. The weak dollar also contributed to the rise, CERA said.

Oil prices have also skyrocketed over that same period, and hit a record of nearly $127 a barrel on Tuesday.

Daniel Yergin, chairman of CERA, said in a statement that the rising production costs acted as a "new fundamental" supporting the rise of oil prices.

NO RELIEF IN SIGHT

CERA said its upstream capital costs index, which measures oil production costs, rose to 210 at the end of the first quarter from its starting point of 100 in 2000, meaning that a project that would have cost $100 in 2000 would have cost $210 in March.

Areas of high activity, such as the Middle East, West Africa, South America and Australia saw higher-than-average cost increases compared to North America and Europe, where activity was more modest.

The study found especially sharp increases in costs for raw materials and transportation, as well as for specialized underwater equipment required for deepwater production.

Scott said that drilling rig rates, historically one of the drivers of the cost increases, have actually stabilized over the last year.

But she said there is no relief in sight, expecting costs to climb over the next year, with steel costs being the largest driver.

She said that over the six weeks since the end of the first quarter, steel costs have already climbed 25 percent. That surge alone would translate into an 8 percent rise for the oil production.

CERA's downstream capital costs index -- which measures costs to build refineries and petrochemical plants -- rose 6 percent to 176 in the six months through the end of the first quarter.

The values are indexed to 2000, meaning that a piece of equipment that cost $100 that year would have cost $176 in March.

CERA said demand for gasoline and other refined products, high energy prices and the weak dollar have driven that increase.

The group said that unless there is a sudden and dramatic change, these costs should stay at similar levels if not higher over the next six to 12 months.

Margins to produce gasoline have plummeted in recent quarters as refiners have struggled to pass through the record crude costs to consumers.

Despite weak profits, CERA researcher Jackie Forrest said she does not expect investment in new refining projects to slow.

"Despite project delays owing to capital costs and record activity levels, the inventory of refining projects is still 20 percent to 30 percent higher than we have recorded in the recent past," she said in a statement.

(Reporting by Michael Erman; Editing by Tim Dobbyn)