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Project development costs in the downstream industry are rising. Scarcity of labor among engineering, procurement, and construction companies, the combination of a record number of projects and a decrease in the number of skilled engineers (due to retirement), has led to project cost increases. Premium steels are no longer readily available in some markets. Basic commodities such as cement, copper, and diesel fuel have become tight in many regions as a result of the unexpectedly rapid expansion of the Asian economies. These and other factors have driven downstream project costs up sharply and may continue to do so for the foreseeable future. Many of these commodities are shared with the upstream oil industry, where cost rises of 68 percent have been seen since 2000.
Although the immediate impact of these changes is reflected in the price of equipment and raw materials, the longer-term effect on downstream portfolios and strategy is less apparent. Projects that were economically viable a year ago may no longer be attractive. Complicating the picture, the costs for various components of project development have not risen in unison.
In response to this environment, IHS CERA is pleased to offer the IHS CERA Capital Costs Analysis Forum—Downstream: a new Advisory Service to help our clients better monitor, forecast, and manage costs within their portfolio of projects.
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At the core of IHS CERA’s Capital Costs Analysis Forum—Downstream is the Downstream Capital Cost Index (DCCI) for monitoring the current state of the global refinery cost environment, together with the methodology used to define and generate index values. The DCCI defines a series of marketplaces that drive these changes and that are tracked individually. IHS CERA experts apply their expertise and industry knowledge to frame changes in Index values against larger drivers such as changes in industry fundamentals or geopolitical shocks.
Likewise, the tools used to develop and analyze the Indices also enable forecasting of the potential impact of long-term trends in project fundamentals. The DCCI leverages the analysis in IHS CERA’s Dawn of New Age study to create three robustly developed future scenarios that explore possible changes at future points in time. The initial stage looks out to 2009, with subsequent years to be added as the forum proceeds.
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The main benefit of Forum membership is access to unique, timely insights concerning project costs, their direction, and the strategic implications associated with changes in the global cost environment. By developing and monitoring a set of indicators specifically designed to reflect the critical issues in upstream project development, this service helps forum members to better understand strategic issues such as
- Which region is experiencing the greatest or the least change in refinery development costs?
- How does a firm’s specific portfolio of projects compare to the IHS CERA Capital Costs Analysis Forum Indices?
- What is the real versus estimated rate of inflation for large projects?
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The Capital Costs Analysis Forum—Downstream delivers value through four main components.
Quarterly Reports
The IHS CERA Capital Costs Analysis Forum—Downstream Quarterly Reports
- Track the current state of industry costs using unique indices
- Analyze the drivers behind changes in industry costs
- Describe the near- and long-term implications of current and forecasted changes in costs
- Provide comparative analysis of cost trends across regions and development types
- Forecast long-term cost trends using a scenario-based process
Workshops
In the spring and fall, Forum members convene for a half-day workshop to discuss the most recent Forum research and to debate the factors influencing long-term cost trends. The results of these debates will then guide the next round of analysis and modeling.
Web Site Access
Participants have access to the Forum web site, which will serve as a reference tool and on which will be posted selected research analysis and findings, summaries and workshop proceedings, projects schedules, and logistics information.
Telephone Access to Research Staff
Forum members have access to IHS CERA research staff for telephone consultation during normal business hours.
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IHS CERA’s Capital Costs Analysis Forum—Downstream is based on a methodology from which the core insights of the forum are derived. The basis of the methodology is to derive meaning through the tracking of the "purchase price" of a set of project portfolios. As component costs (e.g., steel, insurance, labor rates) rise and fall, so will the cost of a given portfolio. However, this portfolio-based methodology provides a unique real-world context for the cost picture. This approach can be likened to that of a consumer price index, in which a basket of component costs are tracked over time. What differentiates our approach from a simple basket of component costs is the methodology by which the ratio and influence of each component is calculated, as follows:
- A representative portfolio of projects is defined.
- Each project is modeled to the equipment level of definition.
- Each project is then "priced" using a multiyear database of industry costs.
- Individual project values are then aggregated into indices, with components compared and analyzed.*
Using this methodology IHS CERA answers questions such as
- What will be the impact of a 10 percent rise in labor rates on the total portfolio?
- How much would steel costs have to drop to compensate for such a rise in labor rates?
and other questions requiring an in-depth understanding of the actual relationship between cost components.
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*The Downstream Capital Costs Index Advisory Committee, composed of a subset of IHS CERA Capital Costs Analysis Forum—Downstream members, will govern the composition of the portfolios that contribute to the publicly distributed Downstream Capital Costs Index.
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Project Director
Richard Ward, IHS CERA Senior Director, Cost Research
Project Supervisor
Candida Scott, IHS CERA Director, Capital Costs Analysis Forum
Project Team
Jackie Forest, IHS CERA Associate Director, Capital Costs Analysis Forum
Pritesh Patel, IHS CERA Associate Director, Capital Costs Analysis Forum
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