Workforce Woes: Labor Shortage in the Oil Patch

Presented by:

The greatest threat to the U.S.’ ability to ramp up production this year could be an absence of workers who know how to do the job.

The Russian onslaught against Ukraine that began Feb. 24 continues without abatement, and the U.S. government has encouraged operators to produce more oil and gas to counter the energy instability left in the wake of war.

The sector is responding with signs of some growth.

Drilling permits are piling up; the Permian Basin finished the first quarter of 2022 with a best-ever mark for its monthly permit filings in March, Rystad Energy reported.

Producers have added rigs during each of nine consecutive weeks, according to energy services firm Baker Hughes. The U.S. rig count for May 20 reached 728. The total rig count is up some 60% from this time last year.

Jobs to drill the wells are also on the rebound. Rystad forecasts that U.S. oil and gas employment is expected to recover this year, rebound in the coming years and surpass pre-pandemic figures to an oilfield workforce of almost 1.1 million by the end of 2027. By the end of this year, U.S. oil and gas employment is expected to expand 12.5% to almost 971,000, Rystad said.

“In terms of efficiency and making sure that every dollar we spend there is productive, the challenge for [the Permian] team is to make sure we don’t lose productivity and the capital that we’re spending.” —Darren Woods, Exxon Mobil Corp.

But the energy industry slashed 20% of its workforce since the pandemic gripped the global economy in 2020. Not all of those workers appear poised to come back, and there may be little incentive this year to do so.

“The biggest risk to production in the U.S. oil and gas industry is if the skilled blue-collar workers who left the sector during the downturn of 2020 do not return now that production is ramping up again,” Rystad senior analyst Rob Mathey told Oil and Gas Investor. “We have seen evidence from E&Ps and service companies alike that labor is a constraint on meeting production growth targets.”

Counting concerns, seeking stability

Indeed, a sluggish return of its workforce topped the concerns this spring as oil and gas producers reported their earnings for the first quarter. 

Moreover, inflation is pinching the production and service sectors, indicating that wage increases this year will be meager, Rystad reported. Across the industry, salary growth is unlikely to top 2.9% by year-end, providing little incentive for specialized workers to return to a cyclical field.

Recent years have presented a longer trough than many employees have ever experienced in their careers, Halliburton Co.’s vice president for human resources, Tracy Josefovsky, told Oil and Gas Investor. Half of the global services firm’s workforce is younger than 40 years old.

“During the low points of the cycle, oilfield employees and candidates left for jobs outside the industry, hoping for more stability,” she said. “In the U.S., CDL [commercial driver’s license] drivers have seen an unprecedented spike in demand. The need for drivers exists across industries, and the shortage is significant. Some oilfield employees who had labor-intensive jobs before can easily get a job just about anywhere as a driver.”

“The biggest risk to production in the U.S. oil and gas industry is if the skilled blue-collar workers who left the sector during the downturn of 2020 do not return now that production is ramping up again.” —Rob Mathey, Rystad Energy

Business unusual

In the heart of the Permian Basin, unemployment is at pre-pandemic levels near 3.5 % in the Midland, Texas, metropolitan statistical area (MSA) tallied by the U.S. Bureau of Labor Statistics (BLS). Unemployment in the Pittsburgh MSA is well below spring 2020. The BLS reported the March 2022 unemployment rate at 4.7%; the rate didn’t fall below 5.2% in 2020. Similarly in the Bakken, the unemployment rate of 3.1% in the Bismarck MSA is on level with pre-pandemic numbers.

“With unemployment rates the lowest in decades, the short-term effects are driving the market to increase wages, and companies face more pressure to find new ways to attract potential candidates,” Josefovsky said.

Workforce size by basin varies on base production as well as projected drilling and completion activity levels, Mathey said. The Permian has the largest ongoing production, as well as largest expected growth for 2022 from 2021 of all U.S. basins.

“We expect labor to be tightest there, followed by North Dakota,” Mathey said.

The workforce shortage is a challenge not just for the oil and gas industry. Job vacancies within the U.S. in April 2022 totaled 11 million, the highest level ever recorded by the Federal Reserve Bank of St. Louis, indicating that workforce shortages are an issue facing every corner of the economy.

Considering employment numbers by country or region, the U.S. is among the top employers in the world along with Russia, China and the Middle East.

Discipline the capital

Exxon Mobil Corp. CEO Darren Woods said tightening resources is driving inflation in the Permian, but he expects production to grow nevertheless as “some of the logistics constraints get resolved.”

The U.S. super major is taking a “disciplined” approach, he told investors during a recent quarterly earnings call.

“In terms of efficiency and making sure that every dollar we spend there is productive, the challenge for [the Permian] team is to make sure we don’t lose productivity and the capital that we’re spending,” Woods said.

Many independents like Pioneer Natural Resources Co. have promised shareholders they will maintain capital discipline and hold the line on production. Pioneer CEO Scott Sheffield has reiterated the company’s plan to keep growth at or below 5%.

“With unemployment rates the lowest in decades, the short-term effects are driving the market to increase wages and companies face more pressure to find new ways to attract potential candidates.” —Tracy Josefovsky, Halliburton Co.

But Mathey suggested that an insufficient workforce will slow even the most meager of growth plans.

“The production growth strategies set forth by E&Ps at the beginning of the year are dependent on a sufficient labor force,” he said. “There is risk to these plans given the current tightness of the labor market, and operators may be forced to slow down production growth if they cannot find workers.”

Efficiency may not be enough to restore the workforce needed to ramp up production. A loss of long-term field experience is more difficult to calculate; those specialized workers will be highly competitive.

“For certain positions, there are a finite number of people with the skills necessary to carry out the work, with expertise and training being developed over many years,” Mathey said. “There is also the risk of decreased labor productivity as operators are forced to compete for workers with less training or expertise than during times of contraction.”

Rystad anticipates overall production in the U.S. to grow from 11.7 MMbbl/d at the end of 2021 to 13.1 MMbbl/d by the yearend. More than 75% of those barrels are expected to be produced in the Permian Basin.

“Labor shortages in that region threaten overall U.S. production gains in 2022 more than any other region,” he said.

While most producers point to the Permian Basin as the tightest market, it’s not the only one where labor is in tight supply. And a variety of factors may weigh into the availability of a workforce.

Halliburton’s Josefovsky said that in the Rockies area, Pennsylvania and Ohio, constraints on hiring include cost-of-living, competition for workers, extremely high wages, lack of interest in labor-intensive jobs and even industry reputation challenges. Workforce challenges are primarily in hiring experienced and entry level field staff along with truck drivers.

Woo the workforce

Mathey said energy companies will have to be creative to rescale its workforce.

“Producers will need to raise their daily or hourly rates to attract and retain workers, and some operators are likely to set up extra performance targets during upswings like this to incentivize workers to join or stay with the company,” he said.

Halliburton actively works in traditional and nontraditional ways to find and retain the best talent, including partnering with technical schools, truck driving schools and military bases, Josefovsky said.

“We’re advertising on social media, national satellite radio and billboards, and we highlight full annual earning potential for key jobs, benefits and career progression, not just hourly rates,” she said. “We couple this with education about the oil and gas industry, enhanced training programs, conversations on career options and earning potential and even having our employees talk about why they love this industry and Halliburton in general.”