Nostradamus Lite. The past two weeks have witnessed a flurry of movements in the industry far and wide, spurred on by the arrival of a new US administration and the ramifications of the OPEC deal struck back in December. Signs abound about the long-awaited rebound in drilling, exploration, capital project approvals and renewed investment intentions into the future. Just in Canada, we heard last week about accelerating rig count in the Western Canadian Sediment Basin, which can only mean one thing: the industry is in resurrection mode. Alleluia!
Of course, news of this upturn had to be tampered with the reality that it entails. The deep, long-term ramifications of the great dislocation (that I discussed in October in a post so headlined) are starting to be felt. The workforce was the first sacrificial offering made at the altar of profit preservation. It is now the first hurdle to the profitability of the newfound vigor in the industry. Rig operators are already reporting their inability to staff up in support of increasing rig deployments. Just today, Adam Onion posted on this site his observations (see recruiters solve millennial recruiting dilemma) on the Sisyphean task that awaits the industry with regards to hiring against a confluence of seminal labor trends (retiring baby boomers retiring, Millennials shunning the industry as a result of the shale oil downturn). Onion notes that the Great Crew Change has been discussed ad nauseam without every producing a satisfactory solution. In fairness, those discussions were always doomed by the propensity of the industry to hire and fire with abandon as the economic fates dictated. The painful and very hard truth is that the industry’s fulsome reactions to the 2014-2016 downturn crippled its supply chains, its workforce and its very future in the process.
Beyond good and evil. In economic terms, the past two years were wholly dominated by a demand-side motive benefiting owners and producers (almost to the point of monopsony). The pendulum is starting to move rapidly towards the supply-side, in lock step with overall E&P activities. Costs are bound to explode, as in past cycles, but with one salient distinction: throwing money at the problem will no longer solve it. Indeed, how can the industry compete, given its tarnished image, with the planet-saving glamour of green energy, nanotechnology and Silicon Valley? Hourly rates will rise for those willing to get back into the game, with a vengeance unshackled by expectations of loyalty. The industry, as I have written before, is unwillingly being pulled towards a pure transactional relationship with its workforce. What of work share and outsourcing to cheap-labor heavens? Really? Ask yourself what populist-inspired politician would risk the wrath of its constituency for the sake of some foreign-based project? No. The immediate forecast, as well as its long range version, is higher wages, but without attendant productivity increases. In a world where every worker grasps what it means to be a commodity (rather than an investment), the only viable strategy is to get the most of what you can now and forget about what the future could bring. That is, sadly, where we have come as industry. Loyalty is gone; patience is withered; tolerance to bovine fecality is null. Welcome to the age of “moving on for $5 more per hour”.
Reboot. I already see firsthand the effects of this new labor mindset in my project consulting business (NAIAD Company Ltd). Our clients (owners and operators) have not yet caught on to the tidal waves that are re-shaping the landscape. The few capital projects that are being launched are founded on cost assumptions forged over the past two years, and corralled by expectations of delivery certainty antedating the great dislocation. The world of opex and capex used to be round, flattened out in the past two years and is now re-appearing in a fractal form. Projects, exploration, operations and maintenance will not survive the onslaught of changes raining down on the industry. The good ol’ days of deploying capital according to status quo are gone. Most organizations have yet to realize the paradigm shift because we are at its inception. But those changes are already working their way through all aspects of the industry’s execution strategies. The industry needs a reboot, wholesale and foundational. It needs to change the way it executed projects, the way it hires people, the way it operates its assets, and the way it looks at the future. A future that is now getting anchored to renewable energy.
Watch for my next post on what this reboot must look like.