A nasty shock has hit the oil and gas industry over the last six months. The price of oil has plummeted from more than $110 (£66) a barrel to around $45 due to a glut of fossil fuels from US shale operations and weakened demand from China and the struggling eurozone economies. In the UK, the result has been dramatic for an industry that was already undertaking much soul searching in the wake of the declining production and rising costs of the North Sea.
The major oil producers including BP, Shell and Chevron have announced a total of nearly 1,500 job cuts in the UK and are slashing their spending worldwide. In the supply chain, manufacturers such as Baker Hughes and Weir Group are also making cuts (so far mostly in other countries), as are service companies such as Schlumberger, which is reducing its fleet of support vessels by more than a third, and Wood Group, which has lowered its contractor pay levels by 10 per cent.
“You cannot look at the UK oil and gas industry as just being the North Sea”
Andrew Speers, managing director, Petroplan
In some ways, the collapse in oil prices couldn’t have come at a worse time for the North Sea. After more than a decade overseeing falling production and unhelpful tax changes after the last election, the UK’s oil and gas industry was finally hoping that its decline might be stemmed, at least in the short term.
The last few years have seen a record amount of investment in new oil fields and new technology to get at the North Sea’s remaining but increasingly difficult-to-reach reserves, and production was expected to stabilise and perhaps even grow. Last year’s government-commissioned Wood Review set out a path for the industry to rejuvenate itself through greater exploration and use of technology.
All that has now been called into question by an oil price so low that much of the remaining North Sea reserves may not be worth the expense of recovering them. Energy consultancy Wood MacKenzie estimates that around £2bn of investment in new projects could be at risk of cancellation. And existing operations are looking for possible ways to reduce their costs. Much of this will come at the expense of back-office roles, but it could also have an impact on new engineering jobs.
‘People have been sharpening their pencils,’ said Andrew Speers, managing director of specialist recruitment agency Petroplan. ‘Projects not at the production phase or not fully funded or well established are being put on hold. That’s having a very real impact on the marketplace with regards the opportunities today.’
The North Sea has been dealing with the reality of its long-term decline since production peaked in 2000. A report produced for Oil & Gas UK by consultancy EY in December 2014 found that the number of jobs directly supported by the industry was set to decline by roughly nine per cent from 281,000 to 255,000 by 2019. ‘Cost reduction was already under discussion,’ said Steve Couch, human resource services partner at PwC’s Aberdeen office. ‘We’re trying to make the work in the North Sea last as long as possible.’
In addition, the much reported skills shortage is now thought to be lower than previously claimed. The Oil & Gas UK/EY report found that the oil and gas workforce was ageing less rapidly than the national average and the industry has a high proportion of mid-career professionals, with half the workforce aged 25–45. However, the oil price has potentially acted as a catalyst.
‘We have been seeing a change in recruitment over the last 18 months and the drop in the oil price has really accelerated many changes that have been happening,’ said James Mildon, oil and gas manager at recruitment firm Matchtech. ‘What we have seen to date is companies reviewing their manning levels; reviewing all of their supply chains as well. And that has… had a knock-on effect on recruitment plans. We’ve seen many companies put in recruitment freezes.’
Perhaps the biggest impact has been felt in the amount of exploration and drilling work: the industry expects to drill around 10 exploratory wells and bring 12 new fields on stream this year — much lower than the 10-year average. As such, related jobs in reservoir/petroleum engineering, commissioning and well appraisal and construction are the least in demand in the industry, according to the Oil & Gas UK/EY report.
Despite all of this bad news, however, the UK oil and gas industry is still a major component of the economy, directly employing well more than a quarter of million people.
Oil & Gas UK estimates that, even taking into account industry decline, 12,000 new recruits will be needed over the next five years as existing workers leave or retire. There’s also an expectation that, in order to cut costs, companies may well hire permanent staff where they may previously have used contractors.
More than a third of companies contacted for the EY report said they were recruiting operations staff and almost as many needed new maintenance teams. ‘Projects that have been well funded and are well under way and at a production stage are continuing to hire, develop and do business as usual,’ said Petroplan’s Speers. In particular, there are some key areas where companies still find it hard to recruit the necessary staff: approximately 70 per cent of respondents to the EY report said they had difficulty filling senior positions in technical safety, drilling, geosciences and business support.
The changing nature of the industry is also creating new kinds of jobs as different technologies come into play. More technically challenging operations are starting to rely on enhanced oil recovery (EOR) technologies such as low-salinity water injection and miscible gas injection. More than 20 per cent of respondents to the EY report cited a growing demand for skills in this area. In addition, there’s a desire for much greater use of software and electronic systems, whether for remote control of vehicles or increased data analysis, in order to improve efficiency and initiate an era of ‘digital oil fields’.
Outside of the North Sea, the demand from international markets for UK expertise remains strong and total global investment is expected to rise despite the oil price fall, especially in locations where oil is much easier to recover. The proportion of the UK-based workforce supporting overseas projects is expected to grow from 26 per cent to 35 per cent by 2019. In some key markets such as West Africa, support from the UK is expected to double.
‘You cannot look at the UK oil and gas industry as just being the North Sea,’ said Speers. ‘We’re seeing quite a lot of activity in subsea. One of our clients is in Azerbaijan; their hiring campaign for people with experience in subsea engineering is significant over the next 12 months. In the Middle East, we still see a lot of demand for skills generally because the cost of production is typically much lower than offshore UK.’
The greatest international demand increase is expected in drilling and marine expertise while the UK is set to hold a competitive advantage in subsea, geosciences and petroleum engineering. But international investment also means increased export work for UK-based supply chain firms. The EY report noted that the export market for oil and gas supply chain companies is now worth £14.8bn, up from £10.3bn in 2008.
Finally, it’s worth bearing in mind that the speed with which the oil price has come down illustrates just how volatile it can be. The OPEC cartel of oil-producing nations could decide to cut production in order to reduce supply and force the price back up. Meanwhile, some of the US shale operations that helped produce the current glut of oil are already closing because of the low price.
As such, companies may well be wary of losing valuable engineers who will be vital in maintaining momentum if the industry rebounds. ‘In the past, organisations may have overreacted in terms of cutting specialist employees, so I think there’s some caution around not wanting to cause shortages in due course,’ said PwC’s Couch. Ultimately, the world’s appetite for oil isn’t going to disappear any time soon.