IHS CERA: Falling Refinery and Petrochemical Construction Costs Have Hit Bottom

CAMBRIDGE, Mass.--(BUSINESS WIRE)--The costs for designing and constructing downstream refining and petrochemical projects rose 1.5 percent in the past six months after bottoming out at 9 percent below peak 2008 price levels, according to the latest edition of the IHS CERA Downstream Capital Costs Index (DCCI).

The IHS CERA DCCI is a proprietary measure of project cost inflation similar in concept to the Consumer Price Index (CPI). It provides a benchmark for comparing costs around the world and draws upon proprietary IHS and IHS CERA databases and analytical tools. The current DCCI rose from 170 to 172.5 over the past 6 months. The values are indexed to the year 2000, meaning that a project that cost $100 in 2000 would cost $172.50 today.

"Just as we saw the beginnings of a downward cost trend after the third quarter of 2008 we are now seeing the beginnings of a turnaround as the return to economic growth in most regions of the world in 2010 increases the demand for commodities and materials for general construction," said Daniel Yergin, IHS CERA Chairman. "But we are still a ways off from a return to the rapid price escalation that preceded the decline."

The turnaround in the IHS CERA DCCI was driven by construction labor costs, which rose over 5 percent. But the increase was due exclusively to exchange rates as local currencies were converted into a weakened U.S. dollar. If currency exchanges were excluded, the DCCI would have registered a two percent drop instead of its modest gain.

Engineering and project management costs also posted a modest gain of one percent due to the weak U.S. dollar. Excluding the impact of exchange rates, the engineering market saw the largest decline over the past 6 months of the markets that comprise the DCCI.

“The impact of the weak U.S. dollar on engineering and project management costs is masking a very high level of competition in this market,” said Jackie Forrest, lead researcher for IHS CERA’s Capital Costs Analysis Forum for Downstream. “These firms are slashing profit margins, overhead costs and risk premiums to win new work.”

A wait-and-see approach to the economic recovery and low refining margins continues to cause downstream projects to remain delayed. Given the announced project delays and cancellations, the amount of new refining and petrochemical projects over the next 5 years is projected to be 15 percent lower than the outlook at the end of 2008.

“The current abundance of spare refining capacity, low refining margins and the shrinking price differential between light and heavy crudes as well as questions about biofuels and demand in some regions have made the economics of new refining projects marginal,” said Matthew Konvicka, IHS CERA associate director for cost and technology. “This is causing companies to reassess future refinery investments.”

Despite the currently poor economics, the bulk of new downstream construction planned for regions such as China and the Middle East are expected to eventually proceed, fueled by forecasts of growing regional demand and often by economic support from local governments, the study finds.

The IHS CERA DCCI concludes that slight increases in downstream capital costs should be expected in the near term as demand for materials rise, but not to the point where it will stretch the market’s ability to supply.

About the IHS CERA Downstream Capital Costs Index (DCCI)

The IHS CERA DCCI tracks the costs of equipment, facilities, materials, and personnel (both skilled and unskilled) used in the construction of a geographically diversified portfolio of more than thirty refining and petrochemical construction projects. It is similar to the consumer price index (CPI) in that it provides a clear, transparent benchmark tool for tracking and forecasting a complex and dynamic environment. The DCCI can be tracked on the IHS Index Web Site: www.ihsindexes.com. The DCCI is a work product of IHS CERA’s Capital Costs Analysis Forum for Downstream (CCAF-D). For information on the Capital Costs Analysis Forum for Downstream, contact Jackie Forrest at jforrest@cera.com

About IHS CERA (www.ihscera.com)

IHS CERA is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. IHS CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. IHS CERA is based in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, D.C.

About IHS (www.ihs.com)

IHS (NYSE: IHS) is a leading global source of critical information and insight dedicated to providing the most complete and trusted information and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security, and Environment, all supported by Macroeconomics. By focusing on our customers first, IHS enables innovative and successful decision-making for customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS is celebrating its 50th anniversary in 2009 and employs more than 4,150 people in 23 countries.

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