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Skills shortages in a booming market: The big oil and gas challenge

06.09.2014  |  FMI Corporation,  Hydrocarbon Processing, 

Keywords: [employment] [upstream] [downstream] [craft] [engineers]

Skill Shortages in a Booming Market: The Big Oil and Gas ChallengeThe strains on labor capacity in oil and gas construction markets worldwide are becoming increasingly well known. These strains continue to affect forecasted project costs, and several large capital projects have already been delayed or canceled (see Shell’s Louisiana gas-to-liquids plant as an example) as a result of rising costs and questionable long-term profitability projections. As demand continues to increase in the face of the liquefied natural gas export gold rush, construction firms are faced with unprecedented pressures to retain and grow talent.

To keep up with this extremely dynamic and competitive—if not unprecedented—business environment, US energy infrastructure construction firms need to develop a robust talent pipeline to tackle the industry’s many business challenges in the coming years. In 2008, just 3.8% of the total construction workforce was engaged in direct oil and gas construction. By 2012, 6.4%—nearly double 2008’s number—of that workforce was engaged in direct oil and gas construction. According to FMI’s estimates, by 2017, nearly 10% of the total US construction workforce will have moved over to this burgeoning segment of the industry, Tables 1 and 2.

 


 


Fierce competition for talent in this sector is already driving construction companies to think about their human capital needs and the strategies required to optimize their access to—and retention of—qualified and experienced workers.

“The oil and gas construction market remains vibrant, and many firms are seeking new ways to expand and grow their market presence,” said Scott Duncan, a vice president with FMI Capital Advisors. “As competition for limited resources intensifies, labor and talent management are quickly becoming a key differentiator in company performance and overall company value. Companies seeking to build a presence in this market need to ensure they have the systems and processes in place to maximize productivity and retain top talent.”

Top business imperatives for energy infrastructure construction firms

If companies do not figure out how to transfer knowledge from soon-to-be-retiring employees to younger generations of workers, decades of industry wisdom and expertise will be lost forever over the next five to seven years.

Following is a summary of the top-five business fundamentals pulled from 25 in-depth interviews with executives of energy infrastructure construction firms and select FMI industry experts.

Develop comprehensive in-house training programs and build long-term knowledge pipelines. The recent expansion of the US oil and gas industry, coupled with the retirement of many experienced supervisors, is causing overstretched construction firms to rethink their training and succession plans. Successful companies are developing comprehensive knowledge transfer programs, shifting knowledge from senior (and soon-to-be-retiring) employees to the next generation and leveraging organizational expertise and best practices across the business.

Fast-track leadership programs are also becoming critical as experienced craft workers move into leadership and mentoring roles, training less-experienced employees in a very short time frame. As one industry executive explains, “With the limited amount of skilled labor available, we took many of our company’s highly skilled craftsmen and turned them into supervisors to help manage less-experienced workers. These skilled craftsmen went from being welders one month to foremen the next month, which doesn’t necessarily mean they’re good-quality supervisors. Leadership and mentoring skills are very different from technical expertise.”

In the fast-paced oil and gas industry, a purposeful approach to training and knowledge transfer will not only significantly increase the readiness and skill sets of the employees, but it will also attract new talent to the industry with the compelling story of commitment to the individual employee. For energy infrastructure construction firms to succeed, they will have to effectively attract, develop and retain human resources. Developing a long-term strategy to address these human talent issues and following through with diligence and consistency on the execution of that strategy will become the key competitive differentiators among firms in the oil and gas sector.

Engage your people.  In an industry that is constantly in flux and characterized by extreme working conditions, company executives must keep their employees engaged and devoted on a daily basis. Industry leaders who have established a good reputation over the years with corporate cultures focused around safety, education and employee well-being find themselves at an advantage in the war for talent. “If we’re talking about retention, then two things are very important: Employees have to like what they do and also like the people they work with and for,” noted Rena Lo, human resources manager at AMEC Oil and Gas, Inc.

Motivation, reward management and performance appraisal largely drive employee retention and satisfaction. Even when offered higher salaries and/or compensation packages, for example, the most engaged and trained employees are less likely to jump ship.

“It really must be more than just the dollars,” said Cory Jodoin, president of Jen-Col Construction. Every single person in my company can find a job elsewhere that will pay more than what they earn here at Jen-Col. So you need a culture where people value more than dollars. That’s the challenge: coming up with a plan for retention, training [and] development, and making every job meaningful.”

Another industry executive added, “A key focus for us is succession, and we try to keep our people engaged at all times. You have to treat people right, and these days many companies don’t seem to invest enough in their people.”

In addition to the methods mentioned above, the oil and gas sector is using techniques like e-learning to retain current employees and recruit new ones. Also playing a key role in both retention and recruitment are fundamentals like safety culture, working conditions, supervision, co-workers/interpersonal relationships, job security and organizational policies.

Integrate HR with other core business functions.  Look at your organizational structure and reevaluate how all the different departments and business units are performing—both together and separately. Over the last few years, CEOs in the construction industry have started to look for synergies among functional areas, finding ways to leverage support functions, such as HR, IT and finance, to be “fit for a purpose” and ensure that they are more closely aligned with the overall enterprise strategy.

“I see a lot of stand-alone systems work counter to each other. It can be very inefficient. For example, if you have a strong HR department, and you are hiring great people but have no systems in place—such as a strong career path or effective incentive-based compensation program—then you’ll end up being a prime target for your competitors to recruit talent,” said Jason Baumgarten, FMI’s Western consulting group manager.

In the oil and gas sector, specifically, this could not be more accurate. Human capital has become a hurdle, and overcoming that obstacle requires buy-in from technical, operating and HR leaders. From the board down to the individual operating company level, new attention is being paid to human resource functions whose operational objectives must be linked to the firm’s overall operating targets. Aligning different business functions in more integrated ways will help increase communication across the organization and push employees to work collaboratively and more effectively toward common strategic goals.

Understand your risk.  According to the US Bureau of Labor statistics, the domestic oil and gas industry lost a record number of workers on the job in 2012—the same year that industry fatalities increased to 138 from 112 (in 2011). This represents a 23% increase and the largest number of oil and gas worker fatalities since the current data series for the BLS Census of Fatal Occupational Injuries (CFOI) began in 2003.

These numbers echo the rapid pace at which the oil and gas industry has been expanding in recent months. As energy infrastructure construction firms scramble for skilled workers to keep up with demand, companies are more apt to hire less-experienced workers who lack the necessary safety training or technical skills. An executive of a large EPC firm stated, “We’ve seen brokers recruit people who worked as fishermen in the past and say they can weld and now they’re applying for offshore welding jobs. Most of these people don’t have any experience working in safe environments, and it’s a huge risk for a company like ours to hire them on our projects.”

To circumvent this whole frenzy and scramble for last-minute “bodies,” construction firms and end users/owners must rethink their collaboration efforts. Progressive energy infrastructure construction firms are already looking into innovative partnering approaches where the company establishes relationships with the respective entities years before the project even starts, including working with local union halls and talking to them about their labor peaks over time.

In the oil and gas industry, where owners demand rigorous safety standards and thorough risk management practices, construction companies cannot afford to make any mistakes. A competent workforce—particularly skilled supervision—will become ever more crucial in managing risk and productivity on oil and gas construction projects. Mark Breslin, CEO of United Contractors, added, “In five to seven years, I believe contractors’ ability to grow will hinge on their ability to procure competent field supervision. The boomer retirement curve is going to be painful. It won’t be bonding, capital or the market—but the contractors’ ability to provide qualified foremen superintendents who can build work in a risk-averse environment.”

Work smarter and increase project management capacity.  Oil and gas projects worldwide are increasing in complexity and scope as more companies discover new frontiers and invest in nontraditional exploration methods. Environmental impact, employee safety, and strict adherence to budgets and schedules top the list of stakeholder concerns. Successful energy infrastructure construction companies are investing heavily in building their project management capacity by innovating in areas such as prefabrication, technology, knowledge management, and communication, among other things. In the coming years, clients will focus on construction companies that can limit rework orders; optimize labor, equipment and materials scheduling; and use a modular approach to project management. These tactics will help improve productivity and manage costs in a tight labor market—two key concerns for owners in this sector.

Brian Johnson, executive vice president at Michels Corporation, stated, “Due to the current shortage of skilled welders as a result of the increased volume of pipeline work throughout the country, we are taking a harder look at automated welding systems to offset the needs that our clients are requiring of us—although this only helps in the large-diameter pipe sizes.”

The US oil and gas industry is on the brink of its largest human capital shortfall as it faces one of the most significant expansion periods in its history. Successful companies are thinking long term and building new talent pipelines, developing targeted interventions, assessing the business impact of skills shortages, and considering the options available to build competency. While there is no silver bullet to solve significant skills shortages (the ongoing nursing shortage is a good example of this), tactical combinations of programs and new paradigms will become the standard as the US oil and gas industry labor shortages exacerbate. Potential implications for the industry might include higher wage-push inflation, potential decreases in international competitiveness, and even the erosion of future domestic oil production capacity.

It is time to tie HR objectives directly to business objectives and to build continuous feedback loops that will help improve management techniques and ultimately influence strategy. Through these and other efforts, oil and gas infrastructure construction firms will find themselves better positioned to tackle the labor shortages and move beyond to ongoing success. Without these proactive moves, the US oil and gas construction industry will struggle to right itself during a period of unprecedented labor shortages. HP 

The authors
 
  WM. CHRIS DAUM  is a senior managing director and officer with FMI Capital Advisors, Inc., FMI Corporation’s registered investment banking subsidiary. As leader of the Investment Banking group, he oversees the IB teams in Raleigh, North Carolina; Denver, Colorado; and Tampa, Florida. Daum has extensive experience representing companies for sale, and providing valuation and ownership transfer planning services. 


 
  SCOTT DUNCAN is a vice president with FMI Capital Advisors, Inc., FMI Corporation’s registered Investment Banking subsidiary. He works with construction industry firms on mergers and acquisitions, valuations and ownership transfer issues. 


 
  SABINE HOOVER is a senior research consultant with FMI Corporation, and has more than 10 years of applied research experience. During the past 10 years, she has specialized in market research and thought leadership focused on the design and construction industry. She has also conducted comprehensive research studies for a wide range of industry stakeholders. 



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Doug Land
07.23.2014

I'm jumping in on this discussion a little late, but being a Project Management Trainer and Coach for the past 2 decades, I can't help myself! Solid Project Management best practices are not a magic wand that will guarantee to bring every project in on time, on budget and on requirement; however, even a small amount of attention to some basic processes in any type of project will improve the bottom line. There is a direct ROI to money spent on PM training and the data is there to prove it. Fundamentals such as effective communication management; stakeholder management; change management and organizational effectiveness generally, can make a huge difference, not only in project success but in hiring and retaining younger talent.

JIMMY KUMANA, CEO Kumana & Assoc
06.23.2014

The idea of a skilled labor shortage is nonsense. There are tesn of thousands of highly experienced engineers twiddling their thumbs (at least in the USA) forced out of the labor market by layoffs and cutbacks by operating firms as well as EPCs. The problem is that most Companies are not willing to pay a fair wage for experience, and the long-term unemployed are not willing to work in a situation where their experience is not respected and they have to report to some freshly graduated punk as the boss..

Eric Marshall
06.19.2014

I agree with a lot of what you have said the big trouble is that the HR people do not know what is expected of Piping designers and the job specification is totally stupid to put it mildly.
The companies are wanting one man/women to be efficient in the process as well as vessel/tank/pump and then know about structures and project management and all the CAD packages need I go on oh forgot that they have to be a BsC and no more than 25 years old; if it was 25 years of experience it might just be possible yet the person would be the head of engineering so why apply. All the companies are their own worst enemies as they have failed to properly train designers over many years as they are run by bean counters who have know idea of what the job needs to complete it successfully.
I served an apprenticeship of 5 years and have 45 years of experience on top, so I have seen the senior management change over the years into computer can do it attitude and you do not need trained people to do the job. I know this for a fact as the amount of work I have had to correct over the years is unbelievable. I rest my case and still looking for work.

Antonio D'Alessio
06.16.2014

Until tender will be only EPC turn key (not separate engineering& design contracts and then construction contracts), and the award criteria by Oil%Gas Companies will be evaluated 80% cost, 20% completion time, 0% quality, construction companies have no interest in hiring skilled engineers, and engineering companies will disappear, "eated" by construction companies, in order to eliminate "disturbs" on their job.
Disasters will come later, when awarding manager have been promoted (thank to savings obtained in awarding) in higher positions.
Also field supervision should be assigned separately to the engineering&design company, and not to the main contractor:there is conflict of interests.

Tyler Harvey
06.10.2014

I disagree strongly. If oil and gas engineering paid as well, offered the perks of tech, and the benefits of NOT living in Houston, you'd see a lot more people trying to get a job. Not every young person involved in oil-and-gas wants to live in bright red state.

John Light
06.10.2014

We continue to run into folks that still believe that there is a large pool of skilled, experienced talent, just waiting in the curtains, (or clouds) ready to return to work. They are not there.

DOUG POSEY, P.E.
06.10.2014

Construction companies disregard the ability to recruit highly skilled construction workers through building trades union's networking capabilities. When I was a young worker in the 1960’s employed on a major project with Bechtel building the Monsanto plant at Chocolate Bayou outside Houston we had a majority of workers called "travelers" recruited from across the United States. These workers were highly skilled with extensive experience and performed exceptionally well. Training of skilled workers needs to continue but "travelers" are still available if union labor is utilized in today's market. Unions can alleviate the projected area shortages of construction workers with “travelers”. FMI can assist clients by including union labor availability of “travelers” in their manpower projections.

Chempro
06.10.2014

The shortage of trained labor can only get worse, as today's engineering students are being taught less and less about "first principle" engineering, and more about "real time simulations".

Project Management is a shambles - with the introduction of the PMP certification, even inexperienced designers and maintenance engineers are after a 4 day course - suddenly a "Project Manager" - the certification institutes are cashing in on this lucrative market.
Experience cannot be bought - only earned, and this is why so many pipelines are not installed technically correct - the PMP certification only concentrates on schedule and cost (and a few other essential PM activities), but there is no technical or engineering content - great if you are in IT or moving offices, but surely not for installing chemical refineries where the lack of technical knowledge WILL kill innocent people.

Food for thought!!!

cheluvakumar
06.10.2014

You have perfectly analysed the situation and this should be a wake-up call for the oil & gas industry captains not only in the US but elsewhere too.

Ruslan Zakirov
06.10.2014

Do you truly believe in what you are saying here? There is no issue with manpower in real life. People are struggling to find a new job even with years of experience and big number of projects behind their belts. On many projects I have seen that experienced and knowledgeable people are laid off and green-hands are hired instead. There is no logic and no real retention initiatives - only declarations.

Amarjit Bakshi
06.10.2014

There is a shortage of talented and experienced and pool but it has been made much more due to the hiring Manager's inadequacy of not being able to hire people;
-- Who are highlt talented and experienced and concern about their own job.
--- Want to hire a friend and not atalented or experienced person saying one is overqualified
--- Leave out the people who are age discriminated who can provide much needed and valued input and better employee then any engineer coming out of the school.
--- Go for only Ivy league.
--- I can add many more reason's why shortage is there and why hiring managers might be at the wrong place to find the talent and they are there due to contacts which is called networking. Networkings other name is nepotism.

Hiring managers have problem not all the argument that there is on shortage of pool

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