Editor’s note: This is the second in a three-part series on the changing face of the oil and gas industry. It deals with growing strains on the industry as seeks ways to find and replace qualified employees in the burgeoning energy landscape.
The burden on labor capacity in oil and gas construction markets worldwide is becoming increasingly well-known. These strains affect projected project costs, and several large capital projects have already been delayed or canceled (see Shell’s Louisiana GTL plant as an example) as a result of rising costs and questionable long-term profitability projections.
As demand continues to rise in the face of the LNG export gold rush, construction firms are faced with unprecedented pressures to retain and grow talent.
To keep up with this extremely dynamic and competitive – if not unprecedented – business environment, U.S. energy infrastructure construction firms need to develop a robust talent pipeline to tackle the industry’s many business challenges in the coming years.
If companies do not figure out how to transfer knowledge from soon-to-be retiring employees to younger generations of workers, decades of industry wisdom and expertise will be lost forever over the next five to seven years. Fierce competition for talent in this sector is already driving construction companies to think about human capital needs and the strategies required to boost access to – and retention of – qualified, experienced workers.
Questions that are starting to move up company executives’ strategic agendas include, “How do we prevent knowledge loss with a large percentage of experienced workers preparing for retirement?” and “How do we anticipate and prepare for the workforce depletion and adapt to a shifting employee culture?”
Following is a summary of the top-five business fundamentals culled from 25 in-depth interviews with executives of energy infrastructure construction firms and select FMI industry experts:
Develop In-House Training Programs
The recent expansion of the U.S. oil and gas industry coupled with the retirement of many experienced supervisors is causing overstretched construction firms to rethink training and succession plans. Successful companies are developing comprehensive knowledge transfer programs, shifting knowledge from senior and soon-to-be-retiring employees to the next generation and leveraging organizational expertise and best practices across the business.
Fast-track leadership programs are also becoming critical as experienced craft workers move into leadership and mentor roles, training less experienced employees in a very short time frame.
As one industry executive explained, “With the limited amount of skilled labor available, we took many of our company’s highly skilled craftsmen and turned them into supervisors to help manage less experienced workers. These skilled craftsmen went from being welders one month to foremen the next month, which doesn’t necessarily mean they’re good-quality supervisors. Leadership and mentoring skills are very different from technical expertise.”
In the fast-paced oil and gas industry, a purposeful approach to training and knowledge transfer will not only significantly increase the readiness and skill sets of the employees, but also will attract new talent to the industry with the compelling story of commitment to the individual employee. For energy infrastructure construction firms to succeed, they will have to effectively attract, develop and retain human resources. Developing a long-term strategy to address these human talent issues will become the key competitive differentiators among firms in the oil and gas sector.
Provide Safe Work Environment
In an industry that is constantly in flux and characterized by extreme working conditions, company executives must keep employees engaged and devoted on a daily basis. Industry leaders who have established a good reputation over the years with corporate cultures focused around safety, education and employee well-being are at an advantage in the war for talent.
“If we’re talking about retention, then two things are very important: employees have to like what they do and also like the people they work with and for,” said Rena Lo, human resources manager at AMEC Oil and Gas, Inc.
Motivation, reward management and performance appraisal largely drive employee retention and satisfaction. Even when offered higher salaries and compensation packages, for example, the most engaged and trained employees are less likely to jump ship.
Cory Jodoin, president at Jen-Col Construction, agreed, saying, “It really must be more than just the dollars. Every single person in my company can find a job elsewhere that will pay more than what they earn here at Jen-Col. So you need a culture where people value more than dollars. That’s the challenge: coming up with a plan for retention, training, development and making every job meaningful. Just really creating opportunity, growth and development for people – that is key.”
Another industry executive added, “A key focus for us is succession and we try to keep our people engaged at all times. You have to treat people right, and these days, many companies don’t seem to invest enough in their people.”
In addition to these methods, the oil and gas sector is using techniques, such as e-learning to retain employees and recruit new ones. Also playing a key role in both retention and recruitment are fundamentals, including safety culture, working conditions, supervision, co-workers relationships, job security and organizational policies.
Integrate HR With Other Core Functions
Companies must look at organizational structure and re-evaluate how all the different departments and business units are performing – both together and separately.
Over the last few years, CEOs in the construction industry have started to look for synergies among functional areas, finding ways to leverage support functions, such as human resources (HR), information technology (IT) and finance to be “fit for a purpose” and ensure that they are more closely aligned with the overall enterprise strategy.
“I see a lot of stand-alone systems work counter to each other. It can be very inefficient,” said Jason Baumgarten, FMI’s Western consulting group manager. “For example, if you have a strong HR department and are hiring great people but have no systems in place – such as a strong career path or effective incentive-based compensation program – then you’ll end up being a prime target for your competitors to recruit from.”
In the oil and gas sector, specifically, this could not be more accurate. Human capital has become a hurdle, and overcoming that obstacle requires buy-in from technical, operating and HR leaders. From the board down to the individual operating company level, new attention is being paid to HR functions, which must have operational objectives linked to the firm’s overall operating targets. Aligning different business functions in more integrated ways will help increase communication across the organization and push employees to work collaboratively and more effectively toward common strategic goals.
Understand Your Human Risk
According to the Bureau of Labor Statistics (BLS), the U.S. oil and gas industry lost a record number of workers on the job in 2012 – the same year that industry fatalities increased to 138 from 112 (in 2011). This represents a 23% increase and the largest number of oil and gas worker fatalities since the current data series for the BLS Census of Fatal Occupational Injuries (CFOI) began in 2003.
These numbers echo the rapid pace at which the oil and gas industry has been expanding in recent months. As energy infrastructure construction firms scramble for skilled workers to keep up with demand, companies are more apt to hire less experienced workers who lack the necessary safety training or technical skills.
“We’ve seen brokers recruit people who worked as fishermen in the past and say they can weld and now they’re applying for offshore welding jobs,” an executive of a large EPC firm said. “Most of these people don’t have any experience working in safe environments and it’s a huge risk for a company like ours to hire them on our projects.”
To circumvent this frenzied pace and scramble for last-minute “bodies,” construction firms and end users must rethink collaboration efforts. Progressive energy infrastructure construction firms are already looking into innovative partnering approaches, such as KIEWIT Energy Group Inc., which establishes relationships with the affected entities years before the project starts, including working with local union halls.
In the oil and gas industry construction companies cannot afford to make any mistakes. A competent workforce – particularly skilled supervision – will become ever more crucial in managing risk and productivity on oil and gas construction projects.
“In five to seven years, I believe a contractor’s ability to grow will hinge on their ability to procure competent field supervision,” said Mark Breslin, CEO of United Contractors. “The boomer retirement curve is going to be painful. It won’t be bonding, capital or the market – but contractors’ ability to provide qualified foremen superintendents who can build work in a risk-averse environment.”
Work Smarter, Increase Capacity
Oil and gas projects worldwide are increasing in complexity and scope as more companies discover new frontiers and invest in non-traditional exploration methods. Environmental impact, employee safety and strict adherence to budgets and schedules top the list of stakeholder concerns.
Successful energy infrastructure construction companies are investing heavily in building project management capacity by innovating in areas such as prefabrication, technology, knowledge management and communications. In coming years, clients will focus on construction companies that can limit rework orders; optimize labor, equipment and materials scheduling; and use a modular approach to project management. These tactics will help improve productivity and manage costs in a tight labor market.
“Due to the current shortage of skilled welders as a result of the increased volume of pipeline work throughout the country, we are taking a harder look at automated welding systems to offset the needs that our clients are requiring of us. Although this only helps in the larger diameter pipe sizes,” said Brian Johnson, executive vice president at Michels Corporation.
Don Thorn, president at Welded Construction, added, “We’re seeing some advancements of processes and equipment through the use of technology. The long, large-diameter pipes will probably be done with mechanized welding in the future, and that will certainly help with the craft shortages to some extent. As a result, we will need people with experience utilizing mechanized welding equipment and increased training activity from our labor forces.”
It is time to tie HR objectives directly to business objectives and build continuous feedback loops that help improve management techniques and ultimately influence strategy. Through these and other efforts, oil and gas construction firms will be better able to tackle the labor shortages. Without these proactive moves, the U.S. oil and gas construction industry will struggle to right itself.
Successful companies are thinking long term and building new talent pipelines, developing targeted interventions, assessing the business impact of skills shortages and considering the options available to build competency. While there is no silver bullet to solve significant skills shortages, tactical combinations of programs and new paradigms will become the standard as the U.S. oil and gas industry labor shortages exacerbate.
Potential implications for the industry might include higher wage-push inflation, potential decreases in international competitiveness and even the erosion of future domestic oil production capacity.
Authors: Wm. Chris Daum is a senior managing director and officer with FMI Capital Advisors, Inc., FMI Corporation’s registered Investment Banking subsidiary. He oversees the IB teams in Raleigh, NC, Denver, CO and Tampa, FL. Daum may be contacted at 919-785-9264 or email@example.com.
Scott Duncan is a vice president with FMI Capital Advisors, Inc. He works with construction industry firms on mergers and acquisitions, valuations and ownership transfer issues. Duncan may be contacted at 303-398-7250 or firstname.lastname@example.org.
Sabine Hoover is a senior research consultant with FMI Corporation and has more than 10 years of applied research experience. During the past nine years, she has specialized in market research, focused on the construction industry. Hoover may be contacted at 303-398-7238 or email@example.com.