Cutting personnel is a big risk for oil companies, says SBC
Oil companies seeking to cut costs by reducing numbers of engineers and other technical personnel risk becoming uncompetitive within a decade. Indeed, now is the time to invest in human resources, write Jean-Marie Rousset and Pierre Bismuth from SBC
The oil-price slump has made oil companies reassess the financial outlook and their spending plans. Predictably enough, the shock has led to brutal cost reductions, some imposed in panic mode.
Yet the evidence indicates that, when applied indiscriminately to human resources (HR), cost-cutting destroys long-term growth potential and value.
Human capital is not an optional cost that can be reduced without consequences; it is a strategic enabler of growth, equal in importance to access to technology, capital and even hydrocarbon resources.
Its significance is reflected in the intensity of competition for talent when oil prices, and upstream activity, are booming, or in the upheaval to operational continuity caused by the big crew change.
Previous hiring freezes demonstrate that short-term savings in HR costs are vastly outweighed by the increase in long-term costs that they cause, as companies scramble to buy in talent when competition for engineers is at its most intense. Hiring freezes have also discouraged generations of university students from choosing an oil-related career, which has eventually fed through into a general shortage of engineers and technical personnel, and has hampered the search for new managers and leaders. They have also left students with the enduring – and damaging – impression of a cyclical, unstable industry.
Years of investment in reversing that perception, and ensuring the industry receives the steady supply of engineers it needs, are now at risk. Weeding out unproductive and ineffectual staff is one thing. But now is arguably the worst time in the oil industry’s history to cut back on the number of capable petrotechnical professionals (PTPs) – petroleum engineers and geoscientists. Such a response to falling oil prices is based on dogmatic, obsolete thinking: as companies develop more complex reservoirs and seek to extract additional value from mature assets, reliance on technical staff is actually increasing.
Indeed, over the past 10 years, growth in capital costs has far outstripped growth in the numbers of PTPs managing capital projects as a result of the widening scope and growing complexity of projects (see Figure 2). The demonstrable results – evidence of the critical nature of PTPs to successful upstream operations – are deteriorating project management, delays and cost overruns.
Over its 11-year history, the results of the annual Schlumberger Business Consulting HR survey have consistently shown that oil and gas production is directly correlated to PTP headcounts (see Figure 1). A PTP is to the oil business what a doctor is to medicine – the backbone of the industry, the custodian of knowledge and the enabler of productivity. Simply put, production cannot be increased without increases in technical staff. Conversely, the industry’s growth potential would be impaired by any slow-down in the hiring of PTPs.
Between 2009 and 2014, the global level of PTP professional graduate hires averaged about 10,000 per year – an adequate level in view of expected long-term production growth and the big crew change.
Safeguarding the future
Yet hiring at this rate is not, on its own, an unimpeachable safeguard against future shortages. There is a crucial distinction between outright numbers of PTPs and the number of experienced PTPs within that group. Graduate recruits cannot immediately make up for the loss of experience suffered by the business at large as industry veterans retire. At present, it typically takes seven to eight years for a new PTP hire to progress to a level that can be described as experienced. The SBC HR survey indicates that there is, at present, a shortage of experienced professionals of 12,000 and that this will rise to over 20,000 within five years (see Figure 3).
In order to fill the talent gap, oil companies must not just shield university-recruitment programmes from the fallout of the oil-price collapse, and keep the talent pipeline filled, but they must also accelerate the development of new recruits and improve the productivity of all PTPs. In recent years, the oil and gas industry has made great strides in reducing “time to autonomy” – the average number of years it takes for a new engineering graduate to become technically proficient and capable of working without supervision. This now ranges between five and 10 years, depending on the company and on the role. And yet it remains uncompetitive in comparison with other industries and efforts to reduce it must be stepped up.
Encouragingly, recent experience suggests significantly reducing time to autonomy in the oil and gas industry is achievable (see Figure 4) through, for example, structured training and coaching. New technologies (in, for example, field automation, remote operations, situational awareness, virtual collaboration, computer-aided workflows and decision-support systems) can also radically improve PTP productivity, and leverage their experience and knowledge in a way that can transform company-wide operating efficiency.
Meeting future oil and gas demand depends not just on operational consistency and improvement, but on managerial excellence. SBC estimates that 25% of industry leaders will need to be replaced in the next five years, requiring the creation of around 3,000 new leaders every year. Combating historical resistance to workforce diversity by attracting more women to management and technical positions, and by nurturing local content, will be vitally important in enhancing leadership capabilities as well as technical ones (see Figure 5). Companies will also have to become more creative in the way they recruit by, for example, systematically tracking down the best talent and the most innovative leaders in distressed companies – in the oil sector and beyond.
Despite the challenges it poses, the need for managerial regeneration presents a unique opportunity to engender a deeper cultural change and a shift away from the conservative and outdated, yet deeply ingrained, business practices that are shackling the industry’s growth potential. Enlightened thinkers among today’s leaders should seize the chance to create a platform for ways of working to flourish.
Many already are: according to recent SBC studies on large capital projects and performance optimisation, a number of companies have introduced new business models that have yielded a superior level of performance by enabling more collaborative practices, removing barriers to the free-flow of information and expertise, and rethinking incentives. Positive cultural change can, in turn, unleash the power of emerging technologies, such as digital oilfields and collaborative petrotechnical workflows, while catalysing the use of the state-of-the-art training techniques and technologies that are needed to reduce time to autonomy.
In the past two decades, faced with rising costs and deteriorating performance, the automotive and aerospace industries revolutionised the way they think and work, introducing lean practices in manufacturing and enhancing collaborative practices, for example. Now it is the turn of oil and gas. Under pressure to improve productivity in response to the lower oil price, companies must avoid the temptation of falling into the old and myopic cost-cutting trap.
Views among industry leaders on how long the down-cycle will last vary. But whether it is months or years, an eventual rebound is inevitable. Only companies that protect their supply chain of talent from the present round of cost cutting and invest in the development of their workforces will be in a position to capitalise on recovery when it happens.
Jean-Marie Rousset, vice president SBC, and Pierre Bismuth, senior advisor, SBC. SBC is the management consulting arm of Schlumberger