Preparing For The Next Big Labor Squeeze

April 2014, Vol. 241 No. 4

Wm. Chris Daum, Scott Duncan and Sabine Hoover, FMI Corporation


Editor’s note: This is the last in a three-part series about the changing face of the oil and gas industry. It looks ahead at the industry’s need to rethink labor models and business approaches, including the use of union workers to attract enough construction employees as projects ramp up.

Industry experts and company leaders alike have been talking about the looming construction labor shortages for years now. The Great Recession has exacerbated this concern due to the thousands of workers that have left the construction industry.

Today, the depleted skills and knowledge pool has left contractors across the nation and abroad scrambling for skilled workers to build quality work on time and on budget.

“With many former construction workers now employed in other industries, a number of firms are likely to have an increasingly hard time finding enough skilled workers if employment continues to expand,” said Stephen E. Sandherr, CEO of the Associated General Contractors (AGC) of America.

The U.S. oil and gas construction industry, which did not track the typical slowdown of other construction sectors, is bracing for unprecedented labor shortages, particularly in the Gulf Coast region.

As an executive at a large international engineering, procurement, and construction management (EPCM) firm put it, “If all the build-out projects driven by the natural gas supply become a reality, then there’s going to be a major shortfall of qualified, skilled trades on the Gulf Coast, both for union and open-shop contractors.”

These near-term skill shortages will likely peak in 2014 and 2015 when oil and gas construction projects around the Gulf Coast are expected to come online, specifically in the Lake Charles, LA area. Several industry experts have pointed out that there are distinct similarities between the work and labor dynamics in that area and the oil sands region of Fort McMurray, Alberta, Canada, in the mid-2000s.

“There is a natural ceiling to the amount of craft, resources, infrastructure, engineering, equipment, etc. that you can apply in one location at one time,” said Dan Lumma of Kiewit’s Energy Group. “It’s a self-regulating phenomenon, and clients naturally adjust their schedules to react to those circumstances.”

Although craft labor shortages are a regional phenomenon, they can still create a ripple effect across the globe.

Rethinking Old Business Paradigms

Based on the widespread global implications, the need for long-term resource planning and comprehensive risk assessment is becoming ever more important. Construction firms that operate in a direct-perform general contractor role as part of a larger EPC team, for example, have the opportunity to plan for future labor needs well in advance.

“Companies need to work together to solve these long-term resource problems. If owners are going to leave it solely up to the contractors, then they’re going to be sadly mistaken,” said Eddie Clayton, contracting strategies manager for Southern Company Generation, which oversees Southern Company’s coal, oil, gas and hydro generating units. “Owners should develop a craft labor strategy that includes their engagement in workforce development activities.”

With the national construction market solidly in recovery mode, the leadership team at Henkels & McCoy, Inc. knows it is only a matter of time before finding skilled workers to fill field positions becomes a challenge. Finding experienced construction management superintendents and project managers will not be any easier, predicted John Harrower, vice president and division manager of the pipeline construction division. This is mainly due to the large number that exited the industry during the economic recession.

“Individuals who can implement and manage project controls, manage cost controls and forecasting, and handle scheduling are already in short, short supply,” said Harrower, adding “front-end” professions with “basic estimating skill sets” have been difficult to come by for several years.

One way Henkels & McCoy is offsetting the labor shortage issue is by transferring administrative professionals into its “estimating group,” building up the latter to allow for bid on more projects. On the project management side, the company relies on an in-house job rotation and management training program called Growth Opportunities for Leadership Development (GOLD), which focuses on candidates who already have some level of construction management expertise but want to fast-track their project management development.

GOLD participants rotate through assignments in seven different operations platforms over a 21-month period, allowing them to take on larger responsibility upon graduation from GOLD more quickly than those who have not gone through the program.

“Where it used to take 15 to 20 years to build a senior project manager, we’re now able to fast-track them within six to eight years,” Harrower said.

The program incorporates a pipeline division sponsor who also heads up the project management group. Responsible for bringing in new talent, evaluating the candidates every three to four months and then rotating individuals through different assignments on a quarterly basis, the sponsor helps candidates gain perspective in a much shorter time.

As part of this development program, Henkels & McCoy makes a point of promoting foremen into assistant superintendent roles. “That takes some time to cultivate,” said Harrower, “but it’s a solution that we’re using on several of our larger projects right now.”

Finally, Henkels & McCoy has taken a closer look at the specific skill sets needed within the pipeline division. This exercise has helped the company build “pools” of employees who can cover specific aspects of a project while also giving individuals more job options. A new employee, for example, can get his feet wet doing less complicated work, while a senior project manager would take on a larger role within a bigger project.

Stepping Up

For Greg Dahl, vice president of ARB, Inc., the labor shortage is less about not being able to find individuals to fill specific jobs and more about not being able to locate ample skilled labor that are properly trained. To that end, Dahl said the company cross-trains its employees, creating a “fully diversified” group of employees that can handle myriad tasks and responsibilities.

“As a company, we do all types of pipeline work, not only oil and gas, but also pipeline rehabilitation and water work. You name it, we do it,” Dahl said. “In order to hold on to a competent workforce to handle all of that, we’re always cross-training. That allows us to identify future needs and, ideally, have the employees working on other projects until the need arises.”

The fact that the U.S. workforce is aging – and millions of baby boomers are heading into retirement – also challenges companies like ARB, which is bringing in younger workers to offset the exodus. That younger blood creates an entirely new set of challenges, according to Dahl. “Most of them would rather be in front of computers and doing less physical work.”

A union shop, ARB is signatory to contracts with the building trades and the United Association, which includes welders, plumbers and pipefitters. As such, the company has partners in finding skilled labor.

Ultimately, though, ARB is responsible for the quality and competency of its workforce. To make that happen, ARB will in some cases pay higher than union scale, depending on skill and experience levels. The company also provides incentives to employees who show initiative and leadership qualities, Dahl said.

New Regulations, New Requirements

Looking ahead, Dahl said he expects the cost of getting a new employee up, running and productive will increase due to new operator qualification requirements, certifications and safety standards.

“The level of training, knowledge and awareness expected of an individual who worked on pipelines 10 to 20 years ago wouldn’t be acceptable today,” Dahl said. “There’s just so much more that you have to know and such extensive training to undergo.”

Safety, for example, was not seen as a key component of productivity years ago. Today it is an integral part of everything companies do. In fact, Dahl said there are direct correlations between productivity, safety and lower cost.

“Everything these days is integrated as a comprehensive approach to performing the work,” said Dahl. “It costs a lot more to put a competent worker out in the field.”

The industry’s commitment to safety and increased regulation isn’t going away and neither is the labor shortage. These two trends will continue to put pressure on companies to build long-term, reliable workforces that stay in place as long as possible and get the job done in a timely, productive and safe manner.

With the oil and gas boom, many projects are underway, and many more will be kicking off in the coming months.

“If all those projects happen, the peak workforce would have to multiply five to six times above what it is right now,” said Lumma. “The fact is, that’s not going to happen. We’re heading into a very, very significant demographic issue.”

The industry must acknowledge, in these transformational times, not all of the previous forms of labor models and business approaches will still work. The changing competitive landscape, combined with emerging technologies and ideas about how to ramp up and organize companies, has become a real force. As such, we will likely see more union labor re-entering high-growth markets such as the Gulf Coast area, with owners scrambling to get projects off the ground.

As one industry executive said, “There’s a reluctance on the part of the owners to bring back the unions into the market (in the Gulf Coast area), but that needs to be transcended with the pragmatic reality that you cannot get these facilities built all ‘open shop’ or all union. It’s going to take a combination of the two.”

In addition, numerous U.S. construction companies are looking to bring on foreign workers to fill some of the labor void. However, the topic of immigration in the U.S. remains highly complicated and controversial, and is unlikely to solve the immediate labor needs of the oil and gas industry.

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 cdaum@fminet.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 sduncan@fminet.com.

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 shoover@fminet.com.

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