The workforce crisis

The petroleum industry lost half a million jobs between 1982 and 2000.

The demographics of the current workforce contribute to the current crisis in the upstream market. The following are key components of demographics that have an impact on the industry’s ability to grow and develop its workforce:
• aging workforce;
• dwindling number of graduates;
• negative image; and
• demand.

The petroleum industry lost almost half a million jobs between 1982 and 2000 (API 2004 survey). The cyclical nature of the industry contributed to increased layoffs, while hiring has been at an all-time low since the early 1990s. Currently, the average age of an experienced employee in a management or technical position (e.g., petroleum engineer) is approximately 48 to 50 years old.

The impact of workforce reduction is not being addressed from the strategic viewpoint of long-term succession planning. The current domestic workforce composition reveals that the majority of employees are baby boomers.
In 10 years, the first wave of 77 million baby boomers will start retiring. This wave of retirements could trigger the first decline in the white collar labor force in our nation’s history; however, it is anticipated that many of them will continue to work even after they retire. There is an air of expectation and likely hope that these baby boomers will become consultants to their former industry.

Unfortunately, many view this as a short-term fix that does not address the problem of replacing the baby boomer generation with a Generation X workforce. Generation X totals only 46 million people. As a result, the industry may need to attract and cross-train the 30-something Generation X worker and encourage the Generation Y (those born from 1977 to 1994) to obtain a petroleum-focused degree to avert the impending shortage that is coupled with increased demand.
Ironically, one of the most significant employment perks of the energy industry, the pension plan, has accelerated the current crisis. These generous retirement packages have made early retirement a viable opportunity for a large portion of the workforce.

Qualifications needed

Still another challenge in today’s market is recruiting candidates with the qualifications that are necessary to be successful and productive in the industry. The lack of graduates with the right qualifications has forced the market to hire individuals without the background needed to be immediately productive within an organization. This has added a significant cost component to the hiring costs in the upstream industry.

The cost-cutting measures of the 1980s and 1990s eliminated broad bands of the Generation X and Y employees who would otherwise have been the natural choices for today’s senior technical and management roles. The composition of the sector’s workforce is such that only 27% of the oil and gas workforce is 20 to 40 years old, compared to 59% in corresponding technical fields such as the software industry.

The reduction in enrollment programs has had an unexpected impact on the image of the industry. The energy industry reduced its profile as a competitive employer in the media and on college campuses across the country during downturns in the economic cycle. Without the need to hire, the industry allowed other voices to speak to Generations X and Y. Unfortunately, the loudest voices were deeply critical of the energy industry. This backlash tainted the industry’s image and continues to plague recruiting efforts today.

Presently, the industry is experiencing a period of explosive growth in demand driven by unprecedented modernization in China and, to a lesser extent, the entire Indo-Asian Pacific region. Geopolitical uncertainties, including wars in the Middle East, shifts in South American politics and increasingly aggressive Russian energy policies, have driven price speculation to a near all-time high.

Another factor in the rising demand for Western oil is the dominance of national oil companies. According to one analyst report, about 77% of the world’s 1.1 trillion barrels in proved oil reserves are controlled by governments that significantly restrict access to international oil companies like ExxonMobil, Shell, etc. More than 90% of rigs are drilling for 6% of the world’s oil in an effort to reduce dependency on the Middle East and other unstable, less developed countries. To put it in perspective, many of the wells in the United States produce as little as 5 to 10 boe/d. The more difficult it is to extract hydrocarbons, the more technical expertise is required; additionally, the price of oil dramatically impacts the financial viability of these low-producing wells.

What the industry is doing today

Increasing the international workforce. Survey responses indicated companies with a global business and global access to employees were having an easier time recruiting qualified workers. Many were hiring a significant number of employees from abroad and mentioned Russia or the Former Soviet Union, China, India, Nigeria, Indonesia, Egypt and Jordan. Domestic companies with operations primarily in the United States indicated the workforce shortage was much more severe than those that had access to or a desire to utilize an international workforce. Another practice mentioned was to target people who are leaving the military and recruit them into the oil sector.

Increasing compensation rates. As these findings have indicated, many companies are increasing salary and overall compensation rates to attract and retain employees.

Recruiting practices and industry image. Many survey respondents discussed an increase in recruiting efforts at universities with engineering and geology programs, regardless of whether the programs were focused on petroleum. Others mentioned internships for students during their college careers as well as co-sponsoring programs with universities to increase awareness of their companies and the industry overall.

Promoting earlier. The trend is to promote field engineers to drilling engineers in half the time proposed in the 1980s. Today many drilling engineers are promoted with two to three years of experience instead of the more traditional five to seven years.

Other practical solutions

Given the amount of money that is being lost as a result of the crisis, the industry has the opportunity to be creative with potential solutions. Those in the industry who are counting on executives to realize short-term savings from mass layoffs need to be carefully considered along with the long-term impacts on the company and the industry. Although the purpose of this study is not to identify a solution, a few ideas collected through interviews and research seemed worthy of highlighting.

Best-in-class recruiting and training. Although some of the integrated oil companies have a fairly robust recruiting program at the college and graduate school level, it is not a major focus for the industry.

• The investment banking and consulting industries have created a world-class recruiting and training “machine” at both the undergraduate and graduate levels. The energy sector might be able to identify some successful practices from studying these models.
• Transferring these approaches to the high school level, fostering students through college and utilizing them in the summer might really help to “build the bench” and improve the industry image.
• Partnering with universities and sponsoring new programs, possibly even starting a few new petroleum-based engineering and geology programs, will help increase the number of trained new hires and increase awareness of the industry. On a smaller scale, many universities would be willing to partner with companies for employee training programs.

Building the bench today. Many companies have started to do this, but there may be some unique opportunities to cross-train younger employees from other industries. The industry has had a lot of success with ex-military employees, and there are other possibilities as well.
• Capitalize on the reduction of employees in other industries such as automotive manufacturing and computer manufacturing and proactively hire and retrain these individuals.
• Hire mid-level managers from outside the industry to improve the management bench, which is projected to be very bare within the next five to 10 years. Often employees that have been retrained by a company feel more loyal to the company because the employees see the investment the company has made in their future.

Conclusions

Should the energy industry fail to address the long-term impacts of the workforce crisis, the damage will come in the form of market corrections and diminished domestic energy security. There is currently increased globalization of the domestic energy industry.
The returns on an investment in the workforce in the oil and gas industry are not just financial but economic and social as well. A long-term approach to workforce management would have a stabilizing effect on market values of industry constituents and the price of energy itself. With the cost of responsible workforce management shared, the economic benefit of a stabilized market is a significant return. n

Editor’s note

This information is excerpted from the University of Houston Global Energy Management Institute (GEMI)/Boyden report “The Workforce Crisis in the Upstream Oil and Gas Sector.” The project was supervised by Christine Resler. GEMI is part of the department of Finance at the C. T. Bauer College of Business.he demographics of the current workforce contribute to the current crisis in the upstream market. The following are key components of demographics that have an impact on the industry’s ability to grow and develop its workforce:
• aging workforce;
• dwindling number of graduates;
• negative image; and
• demand.

The petroleum industry lost almost half a million jobs between 1982 and 2000 (API 2004 survey). The cyclical nature of the industry contributed to increased layoffs, while hiring has been at an all-time low since the early 1990s. Currently, the average age of an experienced employee in a management or technical position (e.g., petroleum engineer) is approximately 48 to 50 years old.

As evidenced in Figure 1, the impact of workforce reduction is not being addressed from the strategic viewpoint of long-term succession planning. The current domestic workforce composition reveals that the majority of employees are baby boomers.
In 10 years, the first wave of 77 million baby boomers will start retiring. This wave of retirements could trigger the first decline in the white collar labor force in our nation’s history; however, it is anticipated that many of them will continue to work even after they retire. 

There is an air of expectation and likely hope that these baby boomers will become consultants to their former industry.

Unfortunately, many view this as a short-term fix that does not address the problem of replacing the baby boomer generation with a Generation X workforce. Generation X totals only 46 million people. As a result, the industry may need to attract and cross-train the 30-something Generation X worker and encourage the Generation Y (those born from 1977 to 1994) to obtain a petroleum-focused degree to avert the impending shortage that is coupled with increased demand.
Ironically, one of the most significant employment perks of the energy industry, the pension plan, has accelerated the current crisis. These generous retirement packages have made early retirement a viable opportunity for a large portion of the workforce.