(June 20th, 2014) The UK North Sea will remain an important region for oil and gas for years to come. Most of its fields are expected to remain economically viable until 2020 at the earliest, and high oil prices have given a boost to exploration in the North East Atlantic basin in areas previously considered marginal and thereby uneconomic. The region still boasts estimated oil and gas reserves of 9.4 billion boe with a 50 per cent plus chance of recoverability.
Despite this, UK drilling activity is in decline, and nowhere near the levels necessary to unlock the area’s remaining potential. Production drilling has remained constant at about 120-130 wells per year since 2009, but remains well below pre-2009 levels. More worryingly, the last three years have seen the lowest rate of exploration activity in the region’s history. 2013 saw 44 exploration and appraisal wells drilled, below initial forecasts, and down from 53 in 2012. This year may see a lower level of activity still, with plans to drill just 25 exploration wells and 11 appraisal wells. Around 66 further exploration and appraisal wells are expected to be drilled through 2015 and 2016, suggesting that the yearly rate is not expected to rise significantly.
This is not just a concern for the industry, but the entire country. UK offshore oil and gas continues to be the country’s largest industrial investor, paying more tax to the Exchequer than any other corporate sector. North Sea oil and gas supports around 450,000 jobs across the country and contributes to around 1.5 per cent of national GDP. Without domestic production, we would have had to import an extra £31 billion worth of energy in 2012. But we can only produce as much as we drill – ultimately, the stakes could not be higher.
So what are the factors behind this dip in activity, and what obstacles do drilling companies in the North Sea face? Much of the issue comes down to the sector’s inherent volatility. Drilling companies largely operate on a project-by-project basis, the availability and location of which are highly sensitive to moveable factors such as the prices of oil and gas, the emergence of new technology and new discoveries. Opportunities can arise with little forward notice, leaving companies scrambling to ready themselves to take advantage. On the other hand, a dip in prices can lead to prolonged periods of reduced or low activity.
For drilling companies this volatility manifests itself in three major ways: access to rigs, access to financial capital, and access to human capital.
No money, no rigs
Demand for rigs, and their lack of availability during periods of high activity, is a major challenge facing North Sea exploration drilling. Of the 55-60 exploration and appraisal wells forecast to be drilled last year, 20 were postponed and four cancelled. 42 per cent of these postponements/cancellations were down to a lack of rig availability. Another 8 per cent involved cases where the company had in fact secured a firm rig slot to drill, but delays on other drilling sites ended up preventing use.
The number of mobile rigs deployed in the UK at the end of 2013 was the highest since 2008 (20 jack-up and 19 semi-submersible rigs respectively) – however relative to the region’s potential this still very much represents a shortfall. Current high rig rates (combined with the fact that the average drilling period has risen to 17 days) only increase the strain.
A lack of access to funding was also a significant constraint on exploration in 2013, accounting for a further quarter of the postponements and cancellations. As one might expect, this factor hit smaller drilling companies disproportionately hard relative to their larger, more resilient counterparts. As a result, small to medium sized companies contributed just 25 per cent of wells in 2013, a lower share than in previous years (partly offset by increased activity on the part of energy utilities during the same period).
The people problem
Another major manifestation of volatility – though more subtle than the above two – are the difficulties inherent in getting the right people with the right technical skills to the right place for the right duration, often at short notice. To some extent this challenge is common to drilling companies across the world: the global oil and gas industry faces an acute skills shortage of workers with 10-15 years’ experience, thanks to a near universal shut-down of training and recruitment programmes during the 80s oil gut, when prices hit record lows.
However there are additional issues particular to the North Sea region that exacerbate the challenge. Firstly, competition with other regions around the world – in an industry already short on human capital – makes it especially difficult to retain talent. Drilling personnel working abroad might typically command salaries 35-50 per cent higher than equivalent UK North Sea-based personnel, and the difference becomes marked when one includes taxes and bonuses.
And it’s not merely a matter of pay. It’s also a matter of job satisfaction and the opportunity to work with cutting-edge technology. The North Sea is, of course, a very mature, developed region, filled with aging ‘rust-buckets’ and manually-operated drilling rigs built on older technology. These do the job, but other newer regions tend to have a higher proportion of newer generation rigs. At the very cutting-edge this includes ‘cyber rigs’ – high automated drilling rigs where instead of roustabouts and rough-necks rushing about switching pipes you are more likely to see staff in comfy chairs, pushing buttons and monitoring proceedings via highly sophisticated computerised control systems. Many newer generation mobile rigs boast far better conditions for workers, and come replete with a host of extra facilities designed to improve the living standards of those posted there.
Rig availability is largely a matter of supply and demand beyond the immediate control of drilling companies, as are the factors that dictate the availability of financial capital. Therefore drilling companies have limited options when it comes to mitigating the impact of volatility in these areas. When it comes to the impact of volatility on human capital, however, there is more that can be done.
We are increasingly seeing companies engage in ‘logistical acrobatics’ to minimise the people problem. Employers will incentivise workers to remain offshore instead of departing for leave, or work extra shifts. The ‘quasi-demotion/promotion’ is another weapon in the arsenal: e.g. an assistant driller might be promoted to a driller on a strategic per-project basis, and similarly a tool-pusher might be ‘demoted’ to driller in order to fill an urgent gap, while remaining on the higher tool-pusher rate of pay.
In the same vein, some companies in the UK North Sea are reorganising shift rotations in order to make hours more appealing to prospective workers. ‘Roving trips’ are increasingly common, as they can afford candidates a chance to travel and get out onto different rigs. Another trick increasingly on the uptake (at least within larger organisations that have the capacity) is to identify when your international workers will be home, and use them at this point. For instance, say you have someone working on a 28 days on/28 days off rotation in Angola; that contractor may be amenable to doing a two week shift in the North Sea whilst he is back in the country visiting family. Mapping out where your workers are across your organisation, and when, and then using that information intelligently, can make all the difference.
Maximising the size of your talent pool
But there is a limit, of course, to how far these ‘sticking plaster’ solutions can go. The real key to mitigating the impact of volatility on human capital is to widen the talent pool from which you recruit as far as possible. The potential talent pool that oil and gas companies tap into can typically be extended in two dimensions: geographically and into other sectors.
For various historical and cultural reasons, many oil and gas companies remain reluctant to hire outside of the local market, at least in mature fields within developed Western economies (such as the North Sea or Canada). Yet a planning engineer (for instance) is more or less the same whether he or she hails from London or Calgary.
To take an example: a Senior Project Engineer from Dubai – whom had secured permanent residency status in Canada – was looking for work at a major Canadian oil and gas company. Having previously applied for various vacancies via the company’s online portal without receiving a single response, he would come into the company’s office nearly every day of his final visit to Canada, frantically seeking work prior to the daunting step of relocating his family. Yet he was routinely dismissed. Interestingly, the company in question had installed a third party recruitment specialist firm that same week. Once said specialists reviewed his CV and got talking to him on the Tuesday, it became clear that his previous experience in Dubai would make him a very good fit for a role in the Canadian company. By Friday he had secured the role! The worker proved a good hire, was rapidly promoted to Project Manager, and the company is now far less reticent about hiring from outside of the local market. The talent was there, the barrier was cultural.
This is starting to happen among North Sea companies, who are increasingly recruiting those with experience on land rigs, particularly from North America and Eastern Europe. These workers require minimal training to get them up to speed on offshore rigs, and there is often a greater economic incentive for them, especially for workers from Eastern Europe. For instance a land-based driller from Croatia may be able to double their take-home when working in the UK North Sea. Roles in international waters, while attractive, are highly competitive – for these candidates the North Sea affords an opportunity to get into the offshore business and build valuable experience. And more and more, companies are offering staff retention bonuses that rise with every continued year of service, as a means of encouraging skilled workers to stay put.
The other major way to maximise the talent pool is for the industry to overcome a similar historical and cultural reluctance to hire sideways from other sectors that cultivate transferable skills. In certain countries such as Australia and South Africa this can mean taking advantage of similar roles in said countries’ large mining sectors, and companies operating in the UK North Sea have access to a pool of ex-servicemen and women from the Army or Navy.
While companies can do more to mitigate the impact of the people problem than they can a lack of rigs or poor economy, there is still no magic wand solution. Companies need to be flexible and use all possible resources at their disposal to retain and attract talent in this crucial area. A common factor behind successful sideways and global hiring is the use of third party workforce specialists such as recruitment agencies. It was a recruitment agency which – thanks to its understanding of the industry together with it’s experience in the Middle East – helped the Canadian company see the potential in the project engineer from Dubai. In a situation where demand is so high, and timing so crucial, positions can be routinely filled in mere minutes after becoming available simply by being able to tap into a global network of highly skilled workers. To have access to the full picture of just who is available, and when, can put firms at a major advantage.
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