The cost of engineering services

Alberta’s petroleum producers remain fixated on the still-volatile price of crude oil. But far less attention has been paid to the other side of the profit equation: costs—and these have escalated sharply over the past few years. Looking back in time may give us some clues as to what we can expect in 2015.

For energy producers—particularly those in Alberta’s oilsands—engineering services are a major expense in developing well sites and mining operations. The orange line in the graph below shows how the price index for total engineering services in all industries has risen in Canada. Since 1997, costs have risen about 51 per cent, and have trended more-or-less steadily higher over time. The red line shows that the costs of petroleum engineering services have risen by about the same amount (up 54 per cent).

But where the two lines differ is in their fluctuations. Costs for engineering services purchased by petroleum producers actually fell in 2003, 2006 and 2009. The common feature in these years? Oil prices had slumped. With softer oil prices, producers slowed or delayed a lot of their drilling and mining activity, so engineering services were forced to reduce prices.

We could see a similar pattern in 2015 as oil producers scale back drilling programs and delay oilsand projects. With lower demand and fewer projects to bid on, engineering firms will have to sharpen their pencils and reduce their fees—and that will help restore some cost balance in the industry.