Refinery and petrochemical construction costs continue steady rise
7/6/2010 12:00:00 AM
Costs continued a steady rise that began in Q3 2009, driven by the global economy’s recovery keeping constant pressure on the cost of commodities and general construction materials and by ongoing activity in finishing downstream projects started prior to the downturn along with ongoing investment in other energy sectors.
“The tide has turned and costs are continuing their ascent, albeit at a measured pace, back to prerecession levels,” said IHS CERA Chairman and author Daniel Yergin. “But the fact that the turnaround in construction costs is occurring despite continued weak refining margins is evidence that costs have bottomed out and are now recovering.”
The rise in the index was driven by commodity cost increases, pushing up the costs of construction inputs such as steel, equipment, wire, and cable. The steel market is beginning to resemble the robust period of early 2008, when surging raw materials prices pushed manufacture steel costs up.
Engineering and project management costs rose slightly (less than 1%) for the second straight six-month period. The increase was driven by a slightly weaker US dollar over the past six months. In local currency terms, engineering rates remained flat to declining as high levels of competition continue to keep prices down, especially for downstream projects.
Downstream construction project activity is continuing to move forward in developing countries such as China, India and the Middle East due to outlooks for higher refined products demand and government policies that support investments in downstream refining capacity despite the current weak economics. Conversely, developed countries of North America, Western Europe and Japan will continue rationalizing refining capacity to address overcapacity in the sector that continues to put downward pressure on refining margins.
“Refinery closures in developed countries of more than 1 million barrels per day in 2009 show the magnitude of the refining capacity overhang,” said Jackie Forrest, lead researcher for IHS CERA’s Capital Costs Analysis Forum for Downstream. “The closures in developed economies are a necessary first step to reducing spare capacity, but they are currently being offset by new capacity that continues to come online in the developing world.”
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