BEYOND THE HORIZON: Price-driven industry crisis

June 1, 2001
As oil and gas operators reach new levels of profitability associated with last year's industry turnaround, as well as their own cost cutting efforts, they are finding themselves in a new form of crisis situation - lack of available skills needed to conduct business. Is this really a "new" crisis?

As oil and gas operators reach new levels of profitability associated with last year's industry turnaround, as well as their own cost cutting efforts, they are finding themselves in a new form of crisis situation - lack of available skills needed to conduct business. Is this really a "new" crisis?

When the industry went bust in 1986, there was a tremendous and needed downsizing initiative. Many oil and gas extraction employees were shown the door and moved on to other industries. In the aftermath, purchasing teams, profit centers, and strategic alliances were formed to help control costs.

By 1990, US operators were ready for an industry rejuvenation. As the industry turned upward, oil and gas companies decided to keep profits for themselves. If oil and gas were to be treated as commodities, then so would the resources needed to get them out of the ground. This new mentality served the industry well until late-1999, when the industry took a turn for the worse again.

More downsizing, layoffs, and squeezing of suppliers to stay afloat took place. But the storm was short, and once again, the industry bounced back, stronger this time. This time, however, there is a conflict between controlling costs and procuring the skills needed to sustain an efficient and effective operation.

The oil and gas industry is struggling to find the skills and equipment needed to operate and be competitive. Operators are in a fight for people and resources and the employees are beginning to call the shots. Not surprisingly, the MMS in the US recently confirmed that drilling and production accidents are on the rise. Operators who lose sight of the importance of well-trained skills face the risk of catastrophe.

What is taking place now is exactly what occurred in the early 1980s as well as the late 1990s. Day rates for rigs, equipment, and personnel are rising at a fast pace. The average rate for a drilling rig is now back in the $40,000-50,000 range and climbing. The average rate of pay for a highly-skilled production operator is now $16-18/hour. Last year, it was $13-15/per hour.

Why is this happening, even as new technology makes people unnecessary? It is occurring because of new life on the Gulf of Mexico shelf associated with an increase in gas activity, new fields being developed internationally, and in the deepwater Gulf of Mexico, and most of all, because there has been no real effort to train, develop, and bring new talent into the industry, given the fact that the average age of workers and retirement action are on the rise. Most of the training initiatives in the past 5-10 years have been to meet government compliance standards, rather than to develop skills. And why should new talent come into the industry?

  • Those familiar with the industry know they are expendable commodities - layoffs begin as soon as prices begin dropping.
  • There is no clear career path for someone to move up - people are entering the industry now because they can make a quick dollar, not because they foresee a long prosperous career.

There is a tremendous recruiting effort taking place now. The problem with this effort is that everyone is trying to pull apples from the same tree. This can only lead to low profits for everyone in the end. Operator costs will escalate to the point of diminishing all the gains associated with cost-cutting efforts.

Many companies are stunned at the market rates for people and equipment. How could this be happening with so many competitors in the supplier marketplace? US suppliers are growing wiser, too. They are looking at other potential markets to sell services, rather than the US alone. International markets are happy to pay higher rates and sign longer-term contracts to bring in the needed people and equipment.

Many companies, including large service companies, are changing entire business plans to boost growth and profitability. They now have an advantage in selecting who they want to do business with. The "good old boy" mentality has mostly reached its end on both sides of the coin, and the concept of "win-win" has been reduced to a joke at industry receptions. What is the solution to this problem?

  • Stop recycling apples (people) from the same tree, and plant new trees - together. This is the only way that the industry can remain profitable in the future.
  • Realize that there must be a sharing of risks and costs in bringing new talent and equipment into the industry.

Operators are poised for a sustained growth cycle, but suppliers are gaining more leverage by the day and will soon have more "alternatives" to choose from regarding who they will do business with. "What about our relationship?" resource suppliers will be asked, as their equipment becomes less available and prices skyrocket. The answer will be simply: "We have no relationship."

Why are relationships dissolving? With the current industry practice of commodity-based purchasing, there is no relationship - only paper. "Alliance thinking" will once again become fashionable in the industry as operators position for growth. The situation reduces to "the here and now" verses "the future," and "prosper today, and worry about tomorrow tomorrow" verses "prosper today, but pay close attention to how it affects tomorrow." With the growing air of panic associated with the procurement of those resources critical for sustainable growth now and in the future, many operators will be left holding a big basket without any apples.

Wade Boundreaux
Danos & Curole, Inc.
Larose, Louisiana

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