Oil and gas industry suffers brain drain
By Andrew Speers
The skills shortage facing the oil and gas sector in the mid-tier 35-50 age range (those with approximately 10 plus years industry experience) is growing increasingly acute, to the point of crisis.
With global energy demand showing no signs of slowing in coming decades, the demographic crunch point is looming larger than ever.How the industry got to this stage? What are the difficult challenges the skill shortage poses for the sector? What can be done? These are the questions that need solutions.
How did we get here?
The story starts in the 1970s with the energy crisis, when the Organization of Petroleum Exporting Countries (OPEC) forced systematic rises in the price of oil, culminating in the 1980 peak of $98 a barrel, inflation adjusted (and only recently surpassed). As a consequence, economic activity in industrial countries was slowed, significantly reducing oil consumption (by 13 percent in the U.S., Europe, and Japan from 1979 to 1981).
The high prices also spurred, for the first time, co-ordinated and effective energy conservation methods across the developed world. For example, the U.S. saw a mandated increase in CAFE, increasing the average gas mileage in U.S. car production; given that the U.S. was still leading worldwide demand at this point, the move had a disproportionate impact on global consumption.
The shift in the balance of supply and demand was further exacerbated by the removal of traditional barriers to production, for example Presidents Carter and Reagan removing market controls that limited supply, as well as the lowering of the U.S. Oil Windfall Profits Tax in 1981, further incentivizing producers.
These and other contributing factors led to what has been termed the “1980s oil glut”; a serious surplus of crude oil. Prices accordingly went into free-fall, with a six year long decline in oil prices culminating in a 46 per cent drop in 1986. The real 2004 dollar value of oil fell from an average of $78.2/barrel in 1981 to an average of $26.8/barrel in 1986.
Such a prolonged slump combined with uncertainty as to future prospects for the industry understandably led to a change in behavior across the oil and gas sector. With profits plummeting and cost pressures looming, companies simply shut down their recruitment and training programs. Demand for such places also dried up, with skilled graduates looking elsewhere to build a future.
Where are we now?
As is clear to anyone who has been paying attention, the pendulum of supply and demand has firmly swung back in the other direction in the intervening years. The proliferation of low-gas mileage SUVs (exempt from CAFE) along with the growth of light trucks and rising commuter times worldwide has increased petroleum demand against initial expectations. But of course the major factor driving demand is the rise of emerging economies, particularly China and, to a lesser extent, India.
The U.S. Energy Information Administration’s recently released International Energy Outlook 2013 predicts world energy consumption will grow by 56 percent between 2010 and 2040, largely driven by non-OECD countries where it will soar 90 percent during the same period.
The industry is now facing a prolonged boom, and difficult politics in major supplier countries such as Iraq, Iran, Venezuela, and Nigeria mean that prices are very sensitive on the upside (the oil price hit its record peak in July 2008 at $145/barrel).
Yet the industry is still feeling the effects of the ’80s downturn thanks to the shutting off of training and recruitment, which has now translated into a severe skills shortage at the mid-tier level. The gap is where the recruits-that-never-were would be in their careers today: 35 to 50 years of age, with 10 or more years of experience.
The shortage is being felt right across the breadth of the industry, from the back office to the drill bit. The numbers speak for themselves. The average age of oil and gas workers is astonishingly high, at 56. Almost half of the industry workforce is now over 45, and over half of experienced engineers within the industry will be eligible for retirement in the next five to 10 years.
Recruitment at the lower levels is no longer a problem – the boom has seen to it that graduate programs at all the major businesses are oversubscribed – the problem is the gap.
This is already a major headache for the sector, not just in the sense that getting good quality staff for new roles is increasingly difficult, but also in the sense that the dearth of talent is driving up wages, and fast. So far the sector has been able to muddle through by leaning on that upper layer of experienced workers: in many cases said employees are working well beyond retirement age.
The nature of the industry means this has worked as a short term solution; skyrocketing profits have allowed businesses to absorb the heavy remuneration costs required, and job satisfaction is very high relative to other sectors, meaning that for the most part convincing old hands to work past retirement isn’t an issue. But this is a short term solution: there is an obvious demographic limit to this stalling tactic, and the industry is fast approaching crunch point.
According to PwC, the skills pipeline is a major concern for more than 60 percent of energy CEOs. Opito (the industry training body) and the Engineering Construction Industry Training Board report that over half of firms in the oil and gas sector see the skills shortage as their number one challenge.
The problem is also no longer purely demographic. The rise of resource nationalism in developing countries (where a large portion of the future extraction lies) has added an additional dimension to the skills challenge.
Understandably, governments in these jurisdictions are keen to ensure that newfound wealth from oil and gas makes its way, at least in part, to the domestic population. This has led to the proliferation of quotas for national workers in territories such as Azerbaijan and Brazil.
For historical reasons, however, local talent pools are far more limited than those in developed countries, exacerbating the squeeze on skills. This is having a real dampening effect on exploration, with major companies in some cases having to abandon plans to exploit assets post-investment, due to not being able to fill national quotas. Initiatives to train up local talent face the difficulty of wage disparity: for example, an Azeri worker, once qualified, will be able to get around four times the level of remuneration in the States as opposed to their home country.
Where do we go from here?
Education in the form of training, shadowing programs, and fast-tracking promising recruits will obviously be a key component of the solution, but the difficulties here underline just how much of a challenge the skills shortage poses. Any major training initiative will bring with it substantial cost.
Companies in the space are reluctant to shell out the money to fast-track promising candidates to the mid-tier level due the commercial risk involved. Once trained up, it is all too easy for rivals (who then don’t themselves have the overheads associated with the training) to swoop in and snatch a worker away with the promise of a slightly larger remuneration package.
In effect, the danger is that companies end up subsidizing the training costs for rival workforces. Companies can always ‘lock in’ such candidates to fixed periods of employment following the qualification, but such periods can’t be long enough to justify the costs without also falling foul of fair employment contract laws.
No wonder then the reluctance for any individual companies to unilaterally embark on such an investment. The training and education portion of the solution will need to be co-ordinated, multilateral – a joint effort from across the industry, which includes governments and national oil and gas organizations – but this is of course far easier said than done.
And training programs cannot breach the gap alone. Keeping experienced engineers on past retirement is one thing, but the industry will need to go further and use this talent – while it still exists – in a mentoring, educative capacity to help fast-track promising candidates from below. Even then, another crucial component of the solution will have to involve the industry recruiting staff with the right skillsets sideways, from other, related sectors, such as construction, mining, engineering and so forth.
There is big cultural barrier here; the oil and gas industry is used to sourcing talent entirely from within, and usually reluctant to depart from this tradition. But another factor that has contributed to the skills shortage in the past two decades is greater competition for talent from sectors requiring similar skill sets, such as nuclear and power infrastructure – so why not return the pressure?
An important part of this process is also the need oil and gas companies have to partner with external specialists to leverage their wide, global network of contacts and high quality relationships across the industry if they want to find the right people for an ever-expanding number of roles.
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.