Testing times for the global oil and gas sector

With oil prices continuing to fall and interest in new types of production, such as fracking, on the rise, the global energy sector is facing a range of challenges. Re:locate investigates.

After a decade of high oil prices, the energy sector is in a state of flux dominated by a plummeting price per barrel. Until June 2014, the price of oil had been hovering at around $100 per barrel since 2010.A combination of factors created favourable conditions. Consumption was growing, thanks largely to China and other developing nations, while geopolitical upheaval in countries such as Iraq, Libya and Iran had restricted supply, driving up demand.In North America, the higher price spurred drilling efforts in areas that had previously not been cost effective – notably North Dakota’s shale beds and Alberta’s oil sands – with many companies engaging in further exploratory operations.The picture has changed dramatically, however. In June 2014, the oil price started to slip. Nine months ago, it was at a high of $115. By January 2015, the price of North Sea Brent Crude had slumped to $48 per barrel, its lowest point since March 2009.A confluence of factors has come into play to drive the drop. Demand is being squeezed from a number of different directions. At the macro level, sluggish global economic growth has depressed demand. At the consumer level, the growth in viable alternative energy sources is driving down consumption, while tougher fuel regulations and increasingly efficient engines are meaning that users can do more with less.Meanwhile, output is climbing, thanks in large part to increased US production, bolstered by hydraulic fracturing (fracking) and horizontal drilling. US output grew by 15 per cent in the 12 months to last November, while imports dropped by 4 per cent.Added to this mix is the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia. Driven by the fear of market-share loss, OPEC has refused to reduce production to stabilise prices – a move that further depressed oil prices when it was announced in late November.The Saudis, backed by other producers with deep pockets, such as Kuwait, Qatar and the United Arab Emirates, have effectively embarked on a game of chicken with other producers, betting that they will shut off their pumps first as production becomes uneconomical.The US Energy Information Administration (EIA) estimates that, in 2014, the increase in supply of liquid fuels was twice the increase in global consumption. Similarly, OPEC forecasts that demand for its oil will hit a 14-year low of 28.2 million barrels per day in 2017. That’s 600,000 barrels less than it predicted a year ago, and a drop from its current output of 30.7 million.It adds up to troubling news for large companies such as BP, ExxonMobil, Shell, Total and Chevron, which invested tens of billions of dollars in exploration while prices were high without seeing a boost in production or profit.Predictions for the future of the oil price vary. Some analysts are predicting further falls, while the likes of the EIA forecast that Brent Crude will average $58 per barrel in 2015 and $75 per barrel in 2016.While the short-term outlook for oil is gloomy, however, the International Energy Agency warned in its World Energy Outlook 2014 that the current picture of a well-supplied market should not obscure future risks. As demand in the Organisation for Economic Co-operation and Development (OECD) countries remains flat and growth in China slows, India, South East Asia, the Middle East, and parts of Africa and Latin America are expected to drive growing global demand. The upshot for oil, the report says, will be increased reliance on the currently unstable Middle East, and Iraq in particular.RenewablesWhile the exploitation of new oil and gas resources through fracking and other techniques has been one upshot of previously high oil prices, growth in renewables has been another.International renewable energy advocacy group REN21 said in its 2014 annual report that renewables accounted for more than a fifth of global electricity generation in 2013. Capacity grew by 8 per cent, accounting for 56 per cent of global net additions.Over the longer term, the International Energy Agency said in World Energy Outlook 2014 that it expected renewables to account for nearly half the global increase in power generation to 2040.Solar photovoltaics continue to expand at a rapid rate, adding almost 55 per cent annually over the last five years. Wind continued to be a strong component, despite a fall from 2012, thanks largely to a slowdown in the US market. Both solar and onshore wind have been boosted by falling costs, and an increasing number of projects are being built without public financial support.The sector sees strong support from developing nations, which account for 95 of the 138 countries that have support policies in place for renewables, according to REN21.While some analysts have claimed that falling oil prices will negatively impact the renewables sector, Adam Sieminski, head of the EIA, said in January that this was unlikely, noting that oil was not in competition with renewables for electricity generation, and that many initiatives were shielded by government incentives.Skills shortagesThe falling oil price has led to belt-tightening worldwide. Projects have been paused, delayed or cancelled, and companies have been reassessing hiring plans as a result.Andrew Speers, managing director of Petroplan Global, laid out the context for Re:locate. “Oil and gas firms are beholden to macroeconomic factors and exposed to substantial levels of risk relating to market volatility, uncertainty, and geopolitical instability. Despite the fact they are operating in a strategic global industry, many firms tend to be reactive.“Costs have increased substantially in recent years, against the backdrop of high oil prices. But when oil prices slide, there is shareholder pressure to cut costs across operations, including the workforce. This has been illustrated by the recent oil price slump, with several international operators and service companies announcing layoffs and cuts to contractor rates.”Neil Gascoigne, global business development manager for Hays Oil & Gas, said that the situation was still in flux, but noted, “There is a lag in effect, as the projects that had received Financial Investment Decisions, or FID, prior to the fall still need to recruit the talent required to ensure the projects reach their successful completion.“That said, we have seen some high-profile companies announcing redundancies, and, should the price not recover in the short to mid term, we would expect to see further consolidation and further companies announcing restructuring programmes.“The longer the price remains sub $70, the deeper the cuts and prolonged freeze in hiring will last. However, despite the uncertainty, employers have strategic hiring plans in place to target the specialist skills needed now and for future talent pipelines when growth returns.”Discussing areas seeing the greatest churn at the moment, Tom Watts, director of Chronos Oil and Gas’s Birmingham arm, told Re:locate, “Geographically speaking, it seems as though the whole world is feeling the pinch. However, the most movement continues to be in the Middle East region.”Andrew Speers added, “We expect the falling price of crude will have a bigger impact on countries with higher production costs. To date, the majority of workforce-related announcements have been focused around mature markets with ageing assets and marginal fields, such as the UK North Sea. Falling oil prices are also threatening the viability of many US projects.”The sixth annual Hays Oil & Gas Salary Guide, completed in November 2014, showed that skills shortages were once again the biggest headache for employers, with 30 per cent of respondents saying that they were a concern. This was followed by economic instability, cited by 24 per cent of respondents.While conditions have been changing rapidly, Neil Gascoigne said that those responses still held water. “We are still seeing companies struggle for highly skilled candidates despite the current situation in the market. I think that, if we were to ask the question today, skills shortages would remain a major concern. Given some of the conversations I’ve had with hiring managers recently, I would say that the economic backdrop would also be among the top concerns for employers in the current climate,” he said.Discussing the particular skills areas that were producing movement, Tom Watts said, “I think that, during any downturn in any industry, the big players are likely to invest in sales and business development personnel, to ensure that they are capturing what business is out there.”Conversely, skillsets relating to finding new assets are most vulnerable to cuts. “The two main concerning areas are geosciences and petrochemicals. Both of these skillsets are likely to be hit hard, as they are utilised during exploration stages. Oil operators have announced significant reductions in their exploration and production budgets – in the region of 25 to 30 per cent on 2014 budgets – as the focus shifts to maximising revenues from existing wells rather than exploring new plays,” said Neil Gascoigne.Andrew Speers echoed the sentiment that exploration-related roles were likely to be affected, adding, “Certainly, producing assets will not be affected to the same degree, because the capital investment has already been made.”Beyond the immediate problems raised by the fall in the oil price, Mr Speers pointed to certain producers’ focus on local hires as something that restricted mobility. Some countries, such as Oman, have requirements that large percentages of their workforce be nationals. Beyond that, firms are looking for local workers to keep total package costs down, though this can be short-lived, as those same hires take the experience they’ve gained elsewhere.Andrew Speers said that cutbacks might be used as an opportunity to address other workforce issues, however. “The industry may use this period of austerity to address persistent recruitment issues, such as the balance of contractors and full-time employees. Contractor rates have increased three times more than staff rates over the last five years; thus, it can be more cost-effective for firms to hire contractors as permanent employees.”Talent pipelineOver the longer term, there’s a real danger that the talent pipeline will suffer. Neil Gascoigne noted that the long-established concern of the industry losing knowledge as senior staff and engineers retired was heightened by current conditions.“A decrease in hiring is likely to exacerbate the skills gap and could result in further skills shortages in the future. This year’s survey revealed 22.5 per cent of respondents worldwide are aged 50 and above, which means that a significant portion of the tenured, skilled workforce will be retiring over the next five or more years. With the anticipated reduction in hiring of Gen Y workers, the industry could be creating a future skills gap issue, much like it did in the mid-to-late 1980s.”This is a particular concern in the vulnerable area of geosciences. In the US, for example, two-thirds of all geoscientists are five to seven years away from retirement. Failure to hire graduates in the field could leave a substantial void.“So, as companies seek to make cost reductions to balance the books, they have to make tough decisions. If they cut from the higher-earning employees, you lose the knowledge and experience required to nurture the next generation. Stop hiring from the newer, less-experienced talent pool and they face the possibility of not having sufficient talent to pass the knowledge on to. It’s a fine balancing act.“The longer operators’ appetite for exploration remains low, the greater will be the long-term effect on other engineering disciplines, as the lag between new exploration and projects increases,” said Andrew Speers.ScotlandAs noted by Mr Speers, the UK’s oil and gas sector is one of the areas that have been hit hardest by the price drop. Companies including KCA Deutag, Weatherford, ConocoPhillips, Chevron, BP and Shell have all announced job losses over the last few months.While that’s a reaction to short-term problems, it’s part of an ongoing trend. A recent study commissioned by Oil and Gas UK and skills body OPITO, Fuelling the Next Generation, predicted that as many as 35,000 of the current 375,000 oil and gas industry jobs could be shed by 2019.The report shows that Britain runs contrary to the ‘ageing workforce myth’ prevalent in engineering fields. Just over 10 per cent of sector workers are over 55 (compared with a national average of 32 per cent), while 40 per cent of the workforce is under 35 (compared with 31 per cent nationally). However, OPITO UK’s managing director, John McDonald, told Re:locate that the shedding of jobs could still lead to the UK’s own talent pipeline issues.“Companies are doing what they can to safeguard jobs and retain skilled people now. The question is, what message is being sent to the future potential talent pool in terms of oil and gas being an attractive and aspirational career choice in the future?“What we don’t want to see is the progress made in recent years to invest in the pipeline of talent through apprenticeships and graduate schemes compromised.”There’s danger of a talent bleed to other countries, too, Mr McDonald warned. “People with North Sea experience are highly sought after the world over. Following previous downturns, the industry has created its own skills shortage, and cried out for skilled people who were laid off only months before. The North Sea today is very different to how it was 15 or 20 years ago, and, if they are not already doing it, talented, well-qualified people will move overseas.”Tom Watts told us that the UK had problems prior to the price fall. “I think that the North Sea was also struggling to attract people due to good personnel going overseas to avoid tax,” he said.Despite the air of gloom around media reports, John McDonald remains upbeat about the opportunities available in UK oil and gas. As well as new work surrounding decommissioning, he pointed to the boom in shale gas.“Recent figures from the British Geological Survey estimate that there is around 1,300 trillion cubic feet of shale gas located in the Bowland Shale in the north east of England, with a further 80 trillion cubic feet in the Midland Valley in Scotland, so it has the potential to be significant.“As a sector, shale is still in its infancy. However, with much work currently being undertaken to set the regulatory framework, it is evident that much of the skills and experience honed in the offshore industry in the last 40 years will be transferable onshore.”While oil’s immediate future looks troubled, there are still opportunities in the energy market for those prepared to be flexible.

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