Record High Oil & Gas Project Costs Expected for '07: IHS/CERA Launch CPI-Like Index to Track Equipment, Materials & Personnel Costs

The costs of major oil and gas production projects have risen more
than 53% in the past two years, and no significant slowing is in
sight, according to a new benchmark index developed by IHS and
Cambridge Energy Research Associates (CERA).

The IHS/CERA Upstream Capital Costs Index (UCCI), which tracks
nine key cost areas for offshore and land-based projects, climbed 13%
to 167 during the six months ending October 31, 2006, compared with an
increase of more than 17% in the previous six months. Since 2000, the
UCCI has risen 67% -- with most of the increase in the last two years
-- while the Producer Price Index-Commodities for finished goods
(excluding food and energy) moved up just 7.5% during the same period.

"This continuing cost surge is central to every energy company's
strategic planning and to every energy user's expectations for supply
security in the coming years," said CERA Chairman Daniel Yergin.
"Rising capital costs rank right alongside more widely recognized
issues such as world market trends, geopolitics, globalization and new
technologies at the top of the agenda for the energy industry," he
said. "And this will be a central issue at CERAWeek in Houston,"
referring to the CERA conference that opens in Houston on Tuesday.

Index Data

The UCCI tracks the costs of equipment, facilities, construction
materials and personnel used in a geographically diversified portfolio
of more than two dozen onshore and offshore oil and gas development
projects. It is similar to the consumer price index (CPI) in that it
provides an easy to understand tool for tracking and forecasting a
complex and dynamic environment. The UCCI is unique in that it
leverages the proprietary cost database and cost modeling tools of the
IHS QUE$TOR(TM) suite of software. It also provides the platform for
CERA's Capital Costs Analysis Forum.

"If current trends continue, 2007 is shaping up to be a year of
further increases. Despite a slight slowing in the rate of increase
during the six months to October 31, we expect project capital costs
to continue reaching new record levels during 2007," said CERA senior
director and UCCI project manager Richard Ward. "With high oil prices
driving new development projects, capacity constraints continue to
support increases in the cost of equipment and services."

Deeper water projects have experienced the largest cost increases,
according to the UCCI data, rising 15% in the recent six month period,
primarily due to drill rig rates, technology limits and skills
requirements, and are expected to continue to rise due to tight
industry capacity. Onshore facilities, including LNG, have seen the
slowest rates of increase, 12%, but are still only slightly behind the
overall averages.

"Higher costs, combined with the recent drop in gas prices, have
made some projects uneconomical and triggered a re-evaluation of
plans." Ward said. "This has produced a slight relaxation of tight
support service or commodity markets, particularly in the U.S. And
most noticeably for natural gas projects, where development costs have
remained high. However, the slight additional capacity made available
was rapidly mopped-up by other geographical areas where these
resources were required."

Cost Drivers

Of the nine primary drivers of project capital development costs,
steel is the only segment to decline over the past 12 months,
primarily because steel prices began accelerating globally prior to
the recent increase in oil prices and demand. Most of the others -
except equipment and bulk materials - are specifically focused on the
oil and gas business and are at near maximum capacity.

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Market 12-mo % Change (1)
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Steel 3.5%
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Offshore Rigs 309.2%
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Equipment 16.5%
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Yards - Fabrication 21.7%
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Bulk Materials 12.5%
----------------------------------------------------------------------
Offshore Installation Vessels 41.0%
----------------------------------------------------------------------
Land Rigs 18.2%
----------------------------------------------------------------------
Engineering & Project Management 23.0%
----------------------------------------------------------------------
Construction Labor 13.0%
----------------------------------------------------------------------
(1) Data through October, 2006

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-- Steel - With oil industry steel less than 2% of total steel
production and special mill runs required for oil industry
grade steels, the industry faces premium pricing and
constrained capacity.

-- Offshore rigs - A rush by drilling contractors to expand their
fleets has produced plans for construction of over 100 new
rigs over the next four years. If demand stays high, the
majority of these rigs will come to market and some additional
rigs may begin construction. This should ease rates, but not
until mid-to-late 2009. Because drilling accounts for 40% to
50% of development costs, a 25% rise in the rig rate can
produce a 10% or larger increase in total project cost.

-- Equipment - The market for long lead time oil and gas
equipment - such as generators, compressors, vessels, towers
and exchangers - is very tight with extended delivery times
and premium pricing. CERA and IHS estimate current capacity at
185,000 tons/year and have not observed moves by vendors to
extend their facilities. Quality control requirements and
local content rules also constrain the supply market.

-- Yards & fabrication - In competition with the currently
booming general ship building segment, specialized, one-off
oil and gas fabrication encounters premium pricing. Yards are
currently at capacity and, even with an expected 15% expansion
by 2012, utilization will remain high, as will demand for gas
carriers, especially LNG tankers.

-- Offshore installation vessels - Plans announced by pipeline
installation companies to expand capacity of the current
56-vessel fleet by 8%, or 3 new vessels, is insufficient to
meet short-term demand. The world's fleet of 26 heavy lift
crane vessels is projected to expand by one in 2009,
increasing total lift capacity by about 15%. If demand for
installation projects should soften due to a decline in oil
prices, previously delayed decommissioning projects are likely
to claim the available capacity, but at reduced rates.

-- Design & project management - Although vigorous efforts to
attract new talent and to open design centers in Asia and the
Middle East have brought a potentially large number of
personnel into the detailed design arena, at least five years
time will be required for the new entrants' experience to
reach the level required for lead engineering and project
management tasks. IHS and CERA expect design and project
management costs to continue to escalate until then, with
additional premium pay required for specialists in deep water,
subsea and project management.

"What this analysis tells us is that capacity is tight in all
markets," Ward noted. "The question is, where are the expansions and
capacity additions? The answer is that in many markets they are
underway. However, much of this requires significant investment and
many years to bring on line, in addition to confidence in strong
demand. While oil prices stay above $55/bbl CERA expects that
confidence to remain. Should prices slip below $50/bbl, the industry
should expect some expansion projects to be cancelled or delayed," he
said.

"The oil and gas business is at a crossroads. Costs for multiple
components of major projects have escalated dramatically in the last
three years. An all-in measure of project costs, the UCCI is up 53%
since the end of 2004. While commodity prices are still strong, and
are expected to continue to be strong in the near future, this rise in
costs is causing firms to re-evaluate the economics and viability of
many important initiatives. CERA's analysis indicates that for the
remainder of 2007 costs should continue to escalate, but perhaps not
as rapidly as in previous years, a situation we shall continue to
monitor for change," Ward concluded.

For additional information, you are invited to participate in the
following conference call to discuss this further:

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WHO: Daniel Yergin, CERA Chairman; Richard Ward, CERA director
WHAT: Teleconference press briefing on oil and gas production
cost trends
WHEN: 9:00 a.m. (Eastern), Monday, February 12, 2007
Dial in Number -- 1-888-419-5570
International -- 617-896-9871
Participant Code -- 31990879
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