Work force shortage becoming critical

Oil and gas businesses are becoming desperate to add experienced engineers and geotechnical personnel to their rolls and salaries are rising accordingly.

The shortages of oil industry personnel is nearing critical status in the US Gulf of Mexico, an area that went from no activity and less future to the most competitive offshore arena in the world in a matter of months, and it is becoming a pressing issue worldwide. In the North Sea, the world's second busiest offshore theater, the rebound has been less dramatic but is also raising staffing concerns.

In the decade following the collapse of oil and gas prices, the worldwide petroleum industry fought only to survive. Slashed operating budgets halted exploration and development plans indefinitely for all but the most pressing projects. Moribund activity levels forced most companies to retrench and just as many to flee the business entirely. Experienced personnel were forced from the industry in droves while entry level hiring all but ceased.

Then in the mid-1990s, battered industry survivors became cautiously optimistic about their future when oil and gas prices rose to profitable levels. Hope was strengthened when a long-standing gas surplus was pronounced gone and refineries learned the science of just-in-time inventories.

Coinciding with the price rebound was the development of ever more powerful seismic data processing, innovative drilling and completion techniques, and revolutionary business practices that drastically reduced the cost of adding recoverable reserves.

The offshore drilling rig fleet, decimated by years of neglect, suddenly found demand for all the rigs it could supply and more. New deep and ultradeep water capabilities were turning the once inaccessible waters beyond the world's continental shelves into frontiers filled with the promise of giant new discoveries. And a flurry of rig upgrades based on multi-year contracts, climbing dayrates, and growth of outside investment convinced observers the expansion would continue beyond the millennium.

But the oil and gas industry may find the limits of its expansion were set before it began. In an effort to correct past excesses, many companies in the late 1980s cut their ranks beyond fat and deeply into muscle. Contractors, operators, and service companies reduced operating costs by, among other strategies, employing barely enough staff to operate. By 1995, US oilfield employment was half its 1982 peak. Mass layoffs exploded the myth of job security and reduced worker loyalty to collateral damage. At the time few argued the necessity of employee cuts, but now the industry wonders aloud if they went too deep.

Said Diamond Offshore human resources vice president Gary Lee, "The industry as a whole is experiencing a shortage of skilled people because we lost, in essence, a generation of people in the 1980s that just haven't come back or haven't been developed."

No new drilling rigs were built during the downturn and normal attrition has resulted in a net loss of rigs, particularly the highly sought after, harsh environment and deepwater drilling vessels. Either of these two shortages - drilling equipment or skilled personnel - could prove the critical choke points on the flow of the petroleum industry's newfound prosperity. Solving the rig shortage through upgrades and newbuilds will devolve to economics and at least one leading contractor has predicted dayrates will reach a point to justify new building of the fleet within the next 18 months. But adding personnel to run those rigs is likely to prove more difficult.

Employee shortages real, still manageable

Bob Tucker, British Petroleum vice president of human resources said the situation in the North Sea is reminiscent of the heady 1980s. "We started actually getting that feeling about mid-1996 and have been in the market place hiring some select, experienced people since about that time," he said.

Traditionally it is the industry's drilling sector to first feel fortunes shift in the industry. They are the first to benefit from increased exploration and development budgets and first to feel the tug when activity levels are reigned in. Contractors, particularly along the US Gulf Coast, are now heavily recruiting personnel for nearly all rig positions and many staff jobs.

The nature of the industry and its recent history, however, are making recruiters' jobs difficult. Life on a drilling rig can be a difficult one of hard work, exposure to the harsh elements of wind, sun, and sea, and extended stays away from home. In the past such drawbacks were overcome by salaries higher than could be gotten onshore, especially for unskilled, entry-level labor.

But more than a decade of recession in the oil industry has changed the payscale relationship, and a fundamental change in drilling practices have altered the profile of prospective hires. In an ironic twist offshore salaries have slipped while more complex operations require a more sophisticated employee.

Hiring

To find the right-fit employee, for the company and the individual, Noble Drilling uses an in-house psychologist to assess the skills and abilities of all potential new hires. "What you have to do, including with a roustabout, is to show them a career path or you are not going to have a motivated employee," said James Day, CEO of Noble Drilling. "These guys are making more and can make more through incentive pay if they continue to improve. But unless you show them a career path the pay is not enough."

Maintaining a high level of service, said Halliburton's manager of manpower planning, Dan Egg, requires selective hiring practices. "As activity is increased, it is more and more difficult to find skilled and unskilled people to live up to those standards," he said. Halliburton's solution, like that of other companies seeking to expand a trained workforce, is accelerated training programs to bring people to higher levels of expertise in shorter periods of time.

Retention of entry level people is always a problem in the unique environment of the offshore oil and gas industry. For many it is the hard work, elements, and isolation from family and friends. Still others, in times of high activity levels are lured from their first employer by a competitor willing to hasten their advancement and pay. Noble Drilling's personnel director in Lafayette, Louisiana, Jay Hunt, knows that by a sizable margin it is the entry level positions that are the most difficult to keep filled. "All (Noble) turnover is 49%," Hunt said. "Of that roustabout is 27% and roughneck (one higher skill level) runs 14%."

Like his competitors and customers alike, Hunt has come to the conclusion that costly as it may be, training and career opportunities are the best way to acquire and retain good hands.

The search for non-professional, quality people capable of executing the increasingly complex operations in the field is mostly a US Gulf Coast matter at the moment. In Europe unemployment is about 10-13%. And in countries other than the US and Europe the oil industry still holds the attraction of being among the best-paying careers available.

Even during periods of low activity levels, the largest operator and service companies maintained at least a shadow of their former hiring practices among professionals, if only to keep up relationships with favored universities. But even as petroleum engineering class sizes dwindled and whole petroleum engineering programs disappeared, petroleum engineering graduates outnumbered job offers.

The situation is now fully reversed with many 1996 engineering graduates entertaining three or four offers at salaries as much as 15% higher than their predecessors of just one year before.

The reason for the new graduate's good fortune is a badly skewed supply and demand. Not only are graduate classes smaller, but they are competing against a profession whose established members are enjoying almost 100% employment. Even companies that have always ignored untrained engineers in favor of experienced operating company graduates, have no choice but to hire new graduates. "In the past we haven't trained engineers or done R&D so we have never before hired an engineer right out of school," said Jon Marshall, group vice president of Global Marine. "This year we hired two."

Despite the apparent growing demand for graduates with geotechnical degrees, most engineering schools seem disinclined to do anything about the size of their graduating classes, a position which can only enhance the marketability of those few graduates who do come on the market and one more legacy of the industry's recent history.

"The eighties are still very fresh in their minds," said Halliburton manager of professional staffing, Jay Wheeler, of today's engineering school heads. "I haven't seen a tremendous effort by the faculties of the various petroleum programs to increase the number of undergraduates entering the programs. They are willing to sit back and say 'This (size) is where they want to be. The quality of the student is where we want to be.' ."

Dowell Schlumberger personnel manager, Jerard Martellozo, believes his company's practice of hiring and carrying on R&D even during the downtime will now payoff for his company. In the US Schlumberger claims to have hired 50% of all new US engineers. In 1997 the company plans call for about 500 company-wide US hires and about 1,500 new employees worldwide. How many of those hires will be new engineers is problematic said Martellozo and could depend on his company's customers.

"I could see that there might be a shortage of petroleum engineers in the 3-5 years to come if the oil companies decide to return massively to recruiting petroleum engineers," he said. "If the oil companies resume their hiring there could be a shortage."

Virtually all experienced personnel who wish to be are currently employed. And companies are working to keep them which means giving their employees good reason to fend off the attentions of unwanted suitors. And suitors are plentiful and unabashed. "Companies in this business have two choices of where to get people," Diamond's Lee said. "They either go out and try to hire them from other companies or they invest in training programs."

Hiring them is a short term solution, he said. "Intelligent companies are those that that have a game plan of being in the business years down the road are doing exactly as we are doing - investing in training and development of personnel and providing them career opportunities."

Experienced professionals have reached such value that they are being enticed away from employers by higher pay, sign-on bonuses, and periodic performance bonuses - practices not seen in the oil industry since 1982. During 1997, BP has instituted a program designed specifically at employee retention in which they donate to an account employees can redeem in 2000, if they are still with the company. "It is over and above compensation issues," said BP's Tucker. "It is really designed around retention and our expectation is that we will have to do it again in 1998 and 1999 although we haven't committed to it yet."

Impact on expansion

Industry consensus seems to be that worker shortage is not currently governing the size and speed of the current offshore industry expansion. That is more immediately a function of the oil prices and a too-small fleet of drilling vessels.

But how well a company fares in the boom, and what share of the new prosperity it garners for itself is widely viewed to be determined in large measure by how it handles its human resources. Those organizations refusing to acknowledge their workers' new, higher value are doomed to lose them, and the competitive edge derived from their experience, to companies only to anxious to hire them.

"If you don't take care of the people you've got you will lose them," said one engineering manager. "Then you have to hire someone and train them and pay them." The great fallacy of such an approach is that soon the trained person falls victim to the same sub-par treatment and is ready to leave, starting the cycle again. Hiring, orientation, and training costs come straight from the bottom line.

Of course, just throwing money at people is neither a long term nor a healthy approach to the problem. Companies constantly raising salary offers can artificially inflate employees' worth to the point that with the slightest downturn the highest paid become the greatest liability and the first to go. It is an all-too-familiar scenario in the oil industry.

"Another problem you've got with compensation is it is easy to raise salaries," Day said. "It is quite another to deal with it as a fixed cost. As an industry we are going to have to come up with incentive compensation that is substantive enough to keep people, but when things get bad, as they will, you don't have your fixed costs at such a level that you cannot be competitive."

When manpower does become the restraining factor on industry expansion, as many believe it eventually must, it could turn out to be a positive force that extends the prosperity by preventing the kind of radical peaks and valleys that result from unbridled growth and that characterized the early 1980s. "I think any time you have limited resources you limit your opportunities and higher revenues," Lee said. "But if you respond in a structured way you can enjoy the positive side for a long time to come."

Alliances

Beyond the technical innovations that marked the 10 years between 1985 and 1995, were changes in the way the sectors of the oil industry - contractor, service, operator - forged new working relationships. Alliancing, integrated services, and even production sharing agreements created cooperative ventures unlike anything ever before seen in the industry. But those alliances were formed of necessity, of a sort of enlightened self-interest, dictated by an industry looking for a way to survive on commodity prices too small to sustain it.

Today, technology and other efficiencies, along with apparently sustainable growth in oil and gas prices, would seem to render such strategies as alliancing obsolete. But, say observers, they will not go away because they have made more than just financial sense. "I would say the power of alliancing is so strong that that trend will continue," said Tucker, who believes the strategies were more about efficiencies than transferring jobs from operators to service companies. "Technology transfer is quicker today than it ever has been. What is a competitive advantage yesterday is just sort of state of the art in the industry tomorrow."

Day agrees the alliancing trend will not reverse itself because it works to oil company advantage in good times as well as bad. "It is an interesting phenomenon," he said. "In the bad times everyone was outsourcing to reduce costs. In the good times they don't have enough people to do what they need to do so there are incidences now where we are still seeing outsource work because they (operators) don't want to staff up but they still have projects to bring on line."

Few industry executives believe alliancing will end, even as higher oil prices once again change the face of the industry. Global's Marshall believes it will grow in the form of expanded project management. Others say they are prepared to handle the trend's growth or disappearance. On the possibility service companies have taken on more than is necessary in light of the recent turnaround, Dowell's Martellozo said, it was possible, but that his company was prepared to do whatever the customer decides - expand or reduce their alliance positions. "If the customer chooses to outsource those services to us, deciding that these are not competencies they want to retain in-house," he said, "then we will become those competencies."

The impact on safety and environment

Higher oil prices and more income translates to more investment and more people to actually execute those investments. Logic dictates heightened activity levels and an influx of untutored workers means more safety and environmental accidents. But if the oil industry has made impressive technological strides, it has made at least equal progress in issues of safety and environmental awareness.

As a result, despite the rise in absolute numbers employed and working in the sometimes dangerous environs of offshore, and in opposition to most expectations, accident rates continue a fall begun in the past few years. The reason for the seeming contradiction, claim insiders, is a shift in industry attitudes. "Years ago they didn't care how you got the job done as long as it got done," Marshall said. "But it is a different culture now. There is a lot of emphasis on safety."

In some cases rising activity levels actually coincide with improved safety records. Diamond Offshore began to see staff shortages in 1995, the same year their safety incident rate fell by 35%. It fell again in 1996 by 30%. "We are working more man-hours, more people, and seeing a reduction in incidents because of training," Lee said. "That average experience levels and incidents of injury are declining is a direct result of training programs."

Future

How serious is the shortage of workers in today's oil industry depends a great deal on how one views the current expansion and its future. Even as the industry begins to acknowledge the turnaround is not an illusion or a short-lived event, others are warning that a lack of equipment, namely drilling rigs, is going to put a damper on the expansion. Such a damper will limit the number of employees needed in the future.

But signs exist that operators may be ready to pay the kind of dayrates and sign the long term contracts that will spur new rig building activity soon. And, according to one analyst, the current and projected rate of demand for hydrocarbons worldwide, when viewed from the prospective of current oil industry capabilities to exploit known hydrocarbon deposits to meet that demand, is sufficient to sustain a 10 or even 15 year expansion.

On the service side of the industry, jobs are being put on backlog while equipment awaits properly trained operators. Shipyards worldwide are working at capacity on drilling rig upgrades and new production platforms.

But more telling for the future of the oil industry is the fact nearly all the current and planned offshore drilling and acquisition activities are based on what must be considered very conservative oil prices of about $18/bbl and $2/Mcf. And even should prices fall to those levels, most projects, because of efficiencies learned during the past ten years would still go forward.

But the truth about future careers in the petroleum business might be found in a remark made by Global Marine Chairman and CEO, C. Russell Luigs, at a January press conference to discuss dayrates. "A young person would be well advised these days to give this industry some consideration," Luigs told reporters.

It has been more than a decade since anyone in such a position to know has said that about the oil industry.

Copyright 1997 Offshore. All Rights Reserved.