Oil is found in the minds of men
Wallace E Pratt
US geologist and explorer (1885 - 1981)
Summary
The oil and gas industry is beginning to struggle with a serious shortage of fully trained, seasoned technical professionals, and the Majors, the bigger Independents and the bigger contractors are responding with aggressive Recruitment and Retention strategies. In certain areas, for example engineering, they find themselves in competition with hot areas, such as IT and telecommunications, where high salaries are common-place.
There is a Scramble for People afoot, and the battle is being fought just as hard as the Scramble for Resources.
Investors need to recognise that there is a very real chance that smaller oil & gas companies will not be able to access the quality of technical staff that they need to deliver on their promises.
Risk is a significant issue on both sides - smaller companies are unwilling to take the risk of offering long-term contracts, the best people have no need to take the risk of joining a company with an uncertain future.
In a recent (20th October 2006) feature The Herald has highlighted a particular impact on the North Sea where the new and additional skills required by companies in the next three years are dominated by engineers, including chemical, process, drilling, reservoir and project specialists, and also include geologists and geoscientists, scaffolders and electronic technicians. Smaller companies working in the North Sea are losing out in the scramble for people with these skills.
Wherever they're working, small companies that are depending on either exploration or the development of hitherto 'by-passed' discoveries for their future will be especially challenged: not all of them will be able to access the skills they need. Investors need to ask for an assessment of the quality of a company's technical management and technical team - this is as vital as a bottoms-up assessment of the company's assets.
For more information, contact the author, or visit the Richmond Energy Partners web-site at www.richmondep.com
Introduction
We are all more or less used to oil & gas performance metrics which look at some form of unit cost, for example Finding & Development, Operating and Lifting Costs in $/boe. This sort of measure gives encouragement to those industry analysts and commentators who say something like Spend more money and the oil/gas will come!.
But what if there's a different, actually more fundamental, constraint?
Some time ago I was involved on the fringes of a small consultancy's project to measure the effectiveness and efficiency of a handful of companies' exploration, development and production effort in terms of the people engaged on it. Now, regional variations were significant and it was especially difficult to see consistent, meaningful trends in production operations, for example.
However, in sub-surface activities in general, and exploration in particular, it was possible to see that Resources Added per Person was a pretty decent indicator of the effectiveness of a company's exploration effort. Looking over a five year period, companies ranged in performance from around 3 mmboe per person, down to a more typical 1-2 mmboe per person, with the worst performers well below 1 mmboe per person.
The key here is that exploration, reservoir characterisation, reserves management and so on are all knowledge-based activities and are therefore fundamentally dependent on the quality of people working on them. Thus if you have great people and a great leadership team working together then the company is likely to spot the best opportunities, win them, convert them into high quality prospects and get them drilled??. Resources Added Per Person will then be at the high end of the range. Equally, low Resources Added per Person indicates poor people and poor management.
Now, if we admit that exploration is getting more and more difficult around the planet, with smaller, deeper and/or more complex targets, it seems reasonable to regard this 1-3 mmboe per person range as representing what might be achieved in the future, even if new technology helps us a lot.
This being so, it's difficult to see the oil & gas industry's need for sub-surface technical folk declining. More likely, it will continue to grow with the need to find additional resources, in contrast say to demand in production operations where it's at least conceivable that automation could reduce or at least stabilise the demand for technical staff.
And, given the basic demographics of our industry, this may be very bad news!
BP's John Browne has summarised his company's position and analysis thus:
In key disciplines such as engineering, a disproportionate share of our workforce is over 45, and indeed over 50. In our exploration and production business, which is populated by highly skilled scientists and engineers, 50 per cent of the workforce is over the age of 45. In the United States the figure is over 60 per cent.
There are a number of reasons for that including the fact that fewer people, in this country at least, are studying Maths at A-level. That is despite the fact that a good grade in Maths has the strongest positive correlation with future earnings.
Without Maths, people are unlikely to become engineers, and for those that do, the competition is fierce. Engineers are in great demand from rapidly growing sectors such as communications and IT.
The figures from the Engineering Council show that in the UK alone in the last decade, the number of registered engineers fell by more than 8 per cent. Similar issues exist in the United States. The simple fact is that there is a shortage of engineers in our industry and we have every incentive to encourage as many as possible to stay on longer, than would previously have been the case.?
This is a sound description of the problem faced by the industry in the US and the UK. In the next two sections, we look at Demand and Supply issues in more detail.
Employment Trends
John S Herold Inc(1) summarised the past, present and future of energy sector headcounts in their paper Energy Headcount Slumps Despite Record Oil Prices and Bright Fundamental Outlook. Many of their results were either grisly or surprising (depending on your view point, perhaps):
• Based on a group of 15 oil & gas companies (whittled down by M&A activity from 25 first studied in 1974), 1,113,651 employees had been shed since the 1981 oil price peak!
• Despite the recent surge in prices and activity, this same group of companies had shed nearly 120,000 employees since 1999.
• Perhaps because of outsourcing, during 1997 - 2004, the total headcount amongst a group of 18 oil service companies rose by an average of 1% per year.
• Strong growth was anticipated for oil and gas personnel in all facets of the industry.
Schlumberger Business Consulting(2) looked forward in their paper ?Knowledge Management Overcoming the Gap in Petroleum Expertise which:
• Recognised that the age distribution in the E&P industry, for North America and Europe, showed a strong peak in the range 45-49 and a modest trough circa 35; North Asia (i.e. mainly Russia) showed similarities.
• Suggested that globally both demand and supply were rising gradually, with ~1000 additional petro-technical graduates needed per year, roughly in balance.
• Highlighted profound regional differences, with major deficits in North America and Russia, and major accesses in central America and Asia (especially China, India and Indonesia).
• Identified the current major problem in North America and Europe, namely that demand for mid-career technical professionals significantly outstrips supply.
Actually, the membership of the professional societies such as the SPE, AAPG and SEG illustrates the up-to-date history of our industry. Exhibits 1 and 2 show current data from the SPE. Overall, one can see from this data that the number of Members has been relatively stable since a mid-80's peak (Exhibit 1); there has however been a change in the demographics and North American Members are now only just over half the total (Exhibit 2). One might conclude from all this that, in the short term, there will be an intense competition for experienced, knowledgeable staff, for example with the companies with the big battalions actively seeking to reduce attrition [itself an interesting euphemism, comparable with some of the terms invented in the 1980's to obscure the fact that companies were laying off large numbers of people - my own favourite for tackiness was 'rif-ing' - for 'Reduction-In-Force', courtesy I recall of Sohio Petroleum!], poach staff from the contractors, and use their global operations to attract recruits from areas where they are available e.g. China, India.
Ironically of course, the very companies that laid off so many staff in the second half of the 80's and throughout the 90's are now equipped with the essential commodities cash and opportunities to preferentially attract the best talent!
Supply of New Graduates
For the medium term, companies need to think through the implications of a drop in the number of suitably qualified graduates joining the industry in the US and the UK. One reads some 'breast beating' commentary which blames the historical down-sizing of the industry - and an ongoing poor reputation - for a 'perfectly understandable' reluctance of graduates to join it. However, the truth seems to lie elsewhere.
Consider Exhibit 3 which shows the change in the graduating population in the USA over the period 1985-2000: What's clear is that there has been a dramatic drop in the number of Engineering graduates, a sharp decline in Maths, and declines in both Physics and Geosciences.
Exhibit 4 looks at the change in US Geoscience Degree numbers over a longer period, 1973-2000. Overall, numbers are down by roughly half over the period.
There's a similar story in the UK, as is revealed by a recent Review of Geophysical Education in the UK(3). My take on the fundamental conclusions is:
• The number of Geophysics courses in the in the UK is in steep decline, especially at M.Sc. level. Correspondingly, the number of qualified graduates is in steep decline
(Exhibits 5 & 6).
• The number of students wishing to enter University to study Geophysics is equally in decline.
• Overall, the problem lies at the interface between Universities and schools. Although Geophysics occasionally makes it onto the TV News - when there's an earthquake or a tsunami, for example - school students have little awareness and even less understanding of Geophysics. One solution is to make school students much more aware of Geophysics by including it in A-level Physics.
[Which needs to be taught by Physicists; a truly remarkable statistic is said to be that 75% of Physics teachers have a degree in Biology!]
• The University Geophysics departments believe that introducing Geophysics - with its clear relevance to the real world - more comprehensively into Physics in schools would help to reduce the (sharp, see next bullet) downward trend in the number of students doing A-level Physics and possibly Maths.
• A-level entries in Physics have more than halved since 1997. Geography is down by 40% over the same period. Geology seems to have maintained a stable, if relatively small, uptake. (Exhibit 7).
At GCSE, there has been a continual growth in the (more qualitative) Double Award Science at the expense of Physics, Chemistry, Biology and Geography. (Exhibits 8 & 9).
Of course, one can find a few easy 'targets' here, for example:
1. University Vice-Chancellors: who appear to regard practical science and engineering courses as expensive on a per head basis (perhaps they are compared say with English or the History of Art) and who may not have been that reluctant for courses to close down, for example, the at one time excellent M.Sc. Geophysics courses at Birmingham and Durham.
2. The UK (Labour) Government: apparently content to increasingly tax our energy industry whilst presiding over the erosion of the science foundations on which it is based.
The Review makes a number of entirely sensible Recommendations, especially targeting schools.
The publication of this Review and its reception (see for example the Education Guardian on 26th July 2006(4)) has caused some quiet satisfaction amongst the UK University Geophysics community, and one or two of the more modest steps, for example the appointment of a Geophysics Promotion Officer, seem to have a chance of going ahead.
Although this study is focussed on Geophysics in the UK, exactly the same concerns must apply to any of the oil & gas disciplines which have a technical and/or numerical underpinning whether geoscience, petrophysics, reservoir and petroleum engineering, drilling & completions, project development, production operations etc.
In summary, the issue with graduates in the UK and the USA seems to relate rather more to the 'dumbing down' of 'hard' sciences and maths in our schools and universities, and rather less to do with some allegedly unsavoury reputation of the oil & gas industry.
Conclusion
Especially in the exploration, reservoir characterisation and recovery improvement end of the business, the oil & gas industry is knowledge-based i.e. dependent on people. All the signs are that in the short to medium term there will continue to be a shortage of appropriately educated and trained or trainable staff, as relatively few graduates came into the oil & gas industry during the 90's, and that a 'scramble' for this resource will ensue.
It should be anticipated that some companies will 'miss out' in this particular 'scramble for resources'. Considering the combinations of 'Reward', 'Opportunity' and 'Risk' offered by oil & gas companies of various types, it seems likely that the Majors, the bigger Independents and the bigger service contractors will succeed in accessing the staff they need; it will be the smaller companies that miss out.
References
1. John S Herold Inc., 2005. Energy Headcount Slumps Despite Record Oil Prices and Bright Fundamental Outlook, Herold Industry Studies, Special Reports and Analyses.
2. Schlumberger Business Consulting (Antoine Rostand), 2005. Knowledge Management Overcoming the Gap in Petroleum Expertise, World Petroleum Congress,
Johannesburg.
3. British Geophysical Association, 2006. Geophysics Education in the UK, Review.
4. Education Guardian (26th July), 2006. On shaky ground, Article.
Author:
David Bamford
Thursday, January 11, 2007 10:44