Refinery construction costs fall 9 pct-IHS CERA

By Erwin Seba

HOUSTON, June 9 (Reuters) - U.S. refiners struggling with slack gasoline demand, sinking profit margins and soaring inventories could see one bright spot on the horizon in the form of falling construction costs, according to a new report released on Tuesday.

According to IHS Cambridge Energy Research Associates, an energy consultancy, the cost of building new refining and petrochemical plants fell 9 percent between the third quarter of 2008 and the second quarter of 2009, after years of steady increases.

"The cost decline we've seen so far is due to the commodity cost coming down," said Jackie Forrest, director of IHS CERA's downstream capital cost forum. "We do anticipate further decreases."

The decline comes too late for several refinery projects such as the nearly $3 billion in planned hydrocrackers U.S. refiner Valero Energy Corp (VLO.N: Quote, Profile, Research) shelved last week saying it would be cheaper to buy refineries, which are selling at deep discounts against replacement costs.

Some companies are taking advantage of lower costs already, adjusting budgets downward and rebidding contracts.

Saudi Aramco officials said last week that two joint-venture 400,000 barrel-per-day refinery projects would be re-bid and were expected to cost $10 billion, down $2 billon. Both projects began with $6 billion pricetags.

About two-thirds of the decline was due to the slide in the price of commodities such as steel, which fell 25 percent in the past six months, and oil, Forrest said.

"The downward pressures that began to materialize at the end of the third quarter 2008 have now taken hold on construction costs," said IHS CERA Chairman Daniel Yergin in a statement.