Waiting for Crew Change

The Energy Industry’s Crew Change Resource Model Is Not Working

In Samuel Beckett’s famous absurdist play “ Waiting for Godot “, the two main characters constantly wait for another individual named Godot, assuming his arrival will bring some form of salvation.

He never comes. And in many ways the wait seems pointless, leaving the two characters more perplexed than before.

The oil and gas industry has tried to anticipate its staffing requirements for many years using a Crew Change model (see here for an example), and like the two protagonists in Godot, it has been waiting for it to arrive with the hope that having encountered it, it will resolve a number of concerns.

The problem is it’s the wrong model, addressing a view of reality that doesn’t exist. Worse than that, by fixing on a single event it has caused the industry to overlook major changes that have already occurred, leaving them inadequately addressed.

The Crew Change model is simply described – its really just an actuarial statement. In the mid 1980s, in response to an oil price collapse, oil companies let staff go across the board, and stopped hiring again for the best part of 15 years to keep costs low and develop efficiency. Estimates are that globally about half a million staff left more or less for good, or about 25% of the technical and engineering expertise base.

Since the 1990s this has led to a constant unease about the lingering bimodal distribution of the industry work-force: a group of workers in their mid-late forties who stayed and nursed the industry through the dark times, and a new assembly of staff in their late twenties freshly hired after 2000 when the oil price ticked up again. In the direst Crew Change scenario, the older group retire in a single episode around now, and the newer group do not possess the skills to take over the business effectively – the gap of the capable mid-career forty-somethings in the middle never having been solved.

The problem with this Crew Change metaphor is it is too rigid, and one-dimensional to deal with the oil industry skills and staffing reality. By taking a static viewpoint, it has missed or avoided longer-range changes underlying the industry, potentially harming the business it is trying to preserve.

All industries have to deal with work-force aging and replenishment. In some cases, like the UK Steel and Coal industries they die strategically, and the workforce perishes with them. In 1971 over 300,000 people were employed in the UK Steel industry, now there are less than 20,000.

In Europe and the UK, the energy industry has been more robust. Oil and Gas employment has been steady at about 50,000 in the UK since the 1980s, and gas and electricity power employment has steadied around 100,000. Together they make up about 7% of the UK industrial workforce, and their jobs often have multiplier effects.

The industry was voicing a reasonable concern about staff replenishment, but it was really only a small part of a bigger issue. When a business changes, the skills of the workforce have to change as well. The actuarial and quantitative Crew Change mind-set assumed a static skills base that faced a burgeoning retirement issue. This should have seemed wrong from the outset. Its rare that in any industry the capabilities of the 1980s would be the exact ones required in the 2010s – look at IBM and hardware dominance versus the software industry now, or the automotive industry and its struggle with restrictive practices.

In fact the oil industry faced a major competency transformation well over 15 years ago and has potentially missed it: the shift from production to production plus projects.

A more important existential issue for oil and gas companies was one posed in the 1990s – what would many of the major international firms do when the very large oil field discoveries of the 1970s entered late life? When Forties, Brent, Prudhoe Bay and so on moved into their decline– as they would due to physical reservoir constraints – how would the majors replace the production? A big oil field decaying at 7-10% a year needs a lot of new production just to stand still – maybe 2-3 medium sized fields to fill the gap, each of then taking maybe a decade to develop effectively.

This emphasized an obvious but overlooked staff skills issue. Many of the huge oil fields had been in production mode for over a decade or more during the 1980s and 1990s. The cadre of leaders in the oil majors therefore had been engineers or financiers who had overseen and stewarded massive operating assets, learned to do this effectively, and shave costs efficiently as production and hence revenue declined. As in the 1970s when the international oil firms had to learn how to grow assets away from the traditional Middle East base, a new cohort of managers would now need to learn how to mange all the various and complex projects to replace the limited number of well-understood oil reservoirs.

Managing international projects is an empirical, multi-disciplinary competency – it is a large experiential distance from the traditional production and operating proficiency of the 1980s-1990s production mind-set. And from 2000 onwards, projects began to dominate the cash expenditure of oil companies – by 2005 even the largest oil energy firms would be replacing their entire capital every 3-5 years with gradually more complex ventures designed to keep production up to previous highs.

Its worth noting here the two vital facts, and the mental model behind them, as to why the project influence would be so far from the previous working norm.

First, the implicit assumption that production must stay near previous highs required a vast array of new projects ranging from simple offshore tie-backs, to new beach-head ventures in the Russian Far East – and everything in between. No previous experience would have been readily available for these oil and gas activities. Second, large simple oil fields did still exist – but the national oil companies had gathered enough skills to run these now, and so kept them nationalised. The international oil majors therefore had to develop enough projects, in the areas where national oil companies did not want to compete – ie the most complex technical and commercial zones in the world.

Overall – for international firms to keep production steady, from the late 1990s onwards many projects suddenly emerged, and almost all at engineering’s technical and geographic limits.

But no senior leader of the oil majors had actually overseen major projects in their career, nor had they created any Project division as an organizational tool to develop them effectively. Even today, only a limited number of oil firms have dedicated project based organisations and staff to develop them. Up until the mid 2000s, major projects were a subset of traditional operating centres, with ill-fitting operating asset clothes, and improvised systems and procedures largely developed in situ.

The oil industry went through a philosophical shift in less than a decade – from operating efficiency on a limited set of giant centres, to a myriad of project developments to restore dwindling production. Firms like Shell, BP and others developed project academies and Project divisions – but even these were developed as projects were well underway.

A Crew Change was absolutely necessary, but not due to any mass retirement event – that was still a long way off. The transformation from large-field production to project development rapidly took place without much planning having taken place, and many oil firms had to learn as they went how to deal with this.

Not adequately preparing means that even today, the oil majors wrestle with the project paradigm. Many integrated energy firms still struggle to accommodate the vast capital sums that upstream projects require, especially when other divisions such as retail and chemicals live off fractions of the expenditure. As a result major oil projects still tend to have to live with compromises in terms of systems and performance indicators, and indeed management capability.

Projects today in the energy industry are vast, but they are transitory – by definition. This means that traditional operating or downstream steady-state structures struggle to accommodate them, and individuals are not always attracted to them due to their temporary nature, uncertain career paths, and personal demands.

This improvised response to the massive surge in project requirements has had performance consequences. Energy worker productivity and oil and gas project performance have both been relatively poor by industrial standards, and the industry now stands at a cliff edge as oil prices plunge downwards. Most current and future projects cannot survive at anything below $60/bbl. The industry’s lack of true expertise in project delivery, and its willingness to plough vast sums of capital into projects the leaders themselves had limited or no previous experience in, makes today’s downturn more severe and potentially far longer than it needs to be.

The oil industry is now defined by its project portfolios. The news surrounding oil price collapse is followed immediately by its impact on future project capex. Latest views are over $400bn of capex cut compared to last year, and most firms are reducing project investment by 25-40%. and staff numbers by the thousands.

The industry’s dominant staff planning model – the Crew Change – no longer works.

It did not anticipate a major skills transformation in the late 1990s, and its forecast for skills requirements is discarded as soon as the oil price collapses, and short-term measures dominate. To illustrate – in 2013 the giant oil-field services firm Schlumberger estimated that the industry would need to hire 10,000 technicians a year until 2020 to offset existing vacancies, and cover for retirees. In January 2016 it laid off 10,000 workers by itself.

What does this all means for the oil industry that will emerge from the oil price rout of 2015-16 and beyond?

Short-term, an emergent capability, excellence in project management, may well be snuffed out before it can reach maturity, which will have performance consequences for the next set of major projects to be embarked on when they resume.

Longer-term, the industry will have to re-invent itself. It has been profligate with high oil prices, reinvesting wealth into high-risk and under-performing projects, and has had little contingency planning ready to deal with a commodity price collapse other than freeze investments and rip up staffing plans. It likely won’t be allowed to do that again even if prices rebound substantially.

If prices remain in the lower rage of expectations, what will reinvention mean?

Some fundamental philosophies will have to reframed or discarded. The mind-set may have to move from production stability or increase to lower volumes and higher value- the larger oil fields will be produced by National Oil Companies. The dominant culture of the development of large reservoirs may shift to smaller more advantaged ones – lower cost to develop, or in a strategic location for example. Oil firms will also need to analyse and develop value chains as well as developing lots of molecules – the strategic acquisition of mature projects may become more attractive than their organic development. Above all they will have to completely reassess their ability to handle high risk assets, and reshape portfolios accordingly, recognizing that even the largest players will be price-takers in all future scenarios.

A prolonged downturn may also lead to revisiting the integrated model – a permanent hedge is no longer a hedge.

And at some point the large entities in today’s energy business will need to truly grapple with the emergence of renewable energy projects, people and policies. They will need to learn to work with the requirements of governments and policy-setters, rather than gamble on renewable energy never gaining any ground.

All of the above needs different crews and different skills. The industry needs to adapt and restyle itself for the changes ahead. It can’t assume the capabilities and beliefs of the past will be those that are successful far into the future. That is too big a bet.

The industry must act differently from the characters in Godot, who only waited passively for salvation. It has to make its moves now, and position the new reality ahead.