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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The Real Long Term Threat To The Oil & Gas Industry

As oil prices continue their downward slide, most investors and firms are understandably eyeing prices, revenues, and exploration costs nervously. All that makes sense, as there is a good chance some oil firms will face liquidity crunches and restructuring over the next year. In the longer term though, there is another specter that could be equally damaging to O&G firms – a shortage of skilled labor.

During the 2008 Recession, many manufacturing firms cut way back on labor and costs everywhere they could, as demand plummeted and customers started asking for lower prices. Fast forward a few years though, and demand has returned. What has not returned are many of the skilled laborers that were instrumental to the manufacturing industry’s success. Many of the industry’s best workers moved on to other fields or retired in the intervening years since the Recession. As a result, manufactures complain frequently about a lack of available skilled labor. The same thing could happen in the O&G industry. Related: UK Determined To Realize Its Fracking Dreams

Oil and gas executives already lament the lack of proper training being done by colleges and universities for entry level employees. The exodus from the industry is only going to exacerbate that problem. Every field in the O&G space from geologists on down, is seeing layoffs and cut-backs. In the short term, these actions might be unavoidable. But if the downturn continues for more than a year or so, many of these workers may move on to new fields. If that happens, the industry could find that those workers are lost for good.

Industry experts are already forecasting that even with the decline in oil prices, 12,000 new O&G workers will be needed in the UK over the next five years. Further, it appears that as the decline intensifies, the structure of the industry may change. Outsourced workers employed by contractors, but working for E&P firms could find themselves without a job as firms look to cut costs by bringing functions in-house. This type of upheaval is going to create a lot of movement in the industry and many workers may exit and look for more stable occupations in the future. Related: Oil Price Collapse Triggers Currency Crisis In Emerging Markets

Over the next 10 years, the UK may need as many as 125,000 new employees. It’s not clear where these employees will come from though, as any university student looking at the news around the world right now will be considerably less likely to focus on petroleum engineering as a career path. There is clearly a real problem here for firms in the long-term and no easy solutions.

With that said, there are a few things firms can focus on doing to maintain their talent pool. First, firms should be looking beyond the current crisis and continuing to engage with universities, colleges, and training programs. Most firms may not need many employees this year or even next year, but maintaining relationships is still critical. Related: OPEC’s $900 Billion Mistake

Second, firms should look for ways to keep their best and brightest talent. Even if a particular job function is being cut severely, perhaps some of those employees can be used in other functions around the firm. Most employees looking at being downsized would prefer to take a lateral move within the same firm even if that move comes with a bit of a pay cut and the need to learn new skills.

Third, where possible firms should bite the bullet and ask employees to take a pay cut or benefits cut across the board in lieu of layoffs. Everyone paying attention to the industry knows that salaries got pretty out of line with reality in recent years, and this is a good opportunity to rein in those salaries to more reasonable levels while still keeping employees on the payroll. These steps can help ensure a company manages the downturn and is prepared to take advantage of the upturn whenever it arrives.

By Michael McDonald of Oilprice.com

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