New Index for the Oil and Gas Industry

A new index for the oil and gas industry that tracks costs for materials, equipment and labor could help companies get a better idea of what they'll pay for large projects all over the world. As Houston Public Radio's Jack Williams reports, the new Upstream Capital Costs Index is similar to the familiar Consumer Price Index.

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While the CPI tracks costs everyday goods and services, the UCCI is a similar consumer basket for oil and gas companies who want to compare costs for upstream oil and gas projects. Richard Ward is a senior director with Cambridge Energy Research Associates, the organization behind the index.

"Costs within the industry have really sort of changed and gone up dramatically. About 18 months ago we were looking at this and asking people about it and everyone immediately started talking about the details, the cost of this rig has gone up or the cost of this engineering equipment has gone up and we tried to say well, where's the big picture? Can you tell me roughly how much things are going on across the board. And we didn't really find a good answer so we worked and we came up with one by coming up with our own portfolio of projects and then pulling it all together into a single number."

According the numbers, costs for offshore and land-based upstream projects have jumped dramatically since 2004.

"The things that we've seen recently, we've just published our most recent number, is that over the course of the last two years on a global basis, so all of these different kinds of projects everywhere in the world, the costs for these projects has gone up about 53 percent in two years. Now that's a very dramatic raise in cost over a very short period of time for a very large basket of things."

That so-called basket includes nine key cost areas for projects, anything from the cost of an oil rig to wages for workers. Ward says the UCCI can be used much like the Consumer Price Index in negotiations and as a way to show what things in the oil and gas business actually cost.

"You can start to write it into contracts. So just as in many other contracts like labor agreements, you find that the Consumer Price Index is built in there as an automatic factor for adjusting how much you get paid. We're finding that there's a very strong interest between the oil companies as well as the governments to perhaps include this index as kind of like an automatic adjustment factor so that they can avoid some of these discussions around things and everyone understands what's going on."

According to the UCCI, the cost of an oil rig has jumped more than 300 percent over the past year and the cost of engineering and project management has jumped 23 percent.

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