Dearth of Skilled Workers Imperils $100 Billion Projects

03 07, 2013 by Bloomberg

After spending years searching for enough crude to pump, the U.S. oil and natural gas industry now is struggling to find and pay for enough skilled workers to tap the abundant supply in shale rock, putting $100 billion in planned petrochemical projects at risk.

Engineers and similar professionals earned an average $183,000 to $285,000 in 2012 depending on their position and background, a 20 percent to 50 percent jump since 2009, NES Global Talent data show. Wages in energy and mining have grown at nine times the rate of all industries since 2008, and starting salaries for petroleum engineering graduates are about $98,000, up 9.7 percent since 2008, according to PayScale Inc.

The need is acute at the newest chemical, refining and export complexes that serve a shale-drilling renaissance that has given U.S. companies the competitive advantage of low gas prices. As shale projects and their infrastructure multiplies, the ensuing war for talent will double labor costs by 2020 for skilled workers such as geoscientists and engineers, according to NES Global and Piper Morgan Associates.

“If you can spell ‘shale,’ you can get a job,” Ryan Lance, chief executive officer of ConocoPhillips, said March 5 at the IHS CERAWeek energy conference in Houston.

Wage costs that already have pushed up price tags for energy-related plants from Australia to Canada by as much as 20 percent are forecast to balloon more, putting $100 billion of U.S. projects at risk during the next decade, based on data compiled by Bloomberg.

Potential Projects

The crush of potential projects, the breakneck pace of drilling and greater manpower needs due to the complexity of efforts that include drilling 5 miles (8 kilometers) below the seafloor have driven up U.S. labor costs for some positions, Dane Groeneveld, North America regional director for NES Global, said in a telephone interview.

Skilled and experienced workers such as engineers are earning an average of between $183,000 and $285,000 a year depending on the position and experience level and about $120,000 a year after graduating from college, NES data show. Salaries in some fields may double in the next seven years, Groeneveld said.

‘Wonderful Problem’

“The cost of labor is being bid up, and that’s a problem for our competitiveness,” said Peter Robertson, a former vice chairman of the board of Chevron Corp. (CVX) who is now an independent senior adviser to Deloitte LLP. “What a wonderful problem to have.”

Projects already being built by companies including Chevron Phillips Chemical Co. and Cheniere Energy Inc. should escape the hurdle as they are expected to be completed before half the global energy workforce retires in the next 10 years.

George Biltz, a Dow Chemical Co. (DOW) vice president, said “early is better” when it comes to avoiding a labor pinch. Dow expects to complete construction of new ethylene and propylene plants in Freeport, Texas, by 2017 at a cost of $4 billion.

Sasol Ltd. (SOL) may need 7,000 laborers at the peak of construction for a pair of new factories to be built for as much as $20 billion near Lake Charles, Louisiana, said Mark Schnell, general manager. Sasol may phase construction to make the best use of available resources, he said.

“It’s going to be a challenge for the industry,” Schnell said. “We need to do this as quick as possible.”

Competitors may be forced to scrap plans for new plants if regulators, educational institutions and industry leaders are unable to meet demand, according to Deloitte’s Robertson, who didn’t cite company names.

ConocoPhillips Poaching

Demand for skilled workers is so great that companies such as ConocoPhillips have begun to poach graduates from other fields such as electrical, mechanical and civil engineering and develop programs to train them in petroleum engineering, said Sheila Feldman, vice president of human resources for the Houston-based energy company.

“We’re really trying to expand the universe of candidates,” Feldman said at the IHS CERAWeek conference in Houston. “We have to find new solutions to old problems.”

ConocoPhillips is also developing a program to recruit military veterans, she said.

The practice of poaching engineers and skilled workers from outside the energy industry and training them is likely to grow, said NES’s Groeneveld. Many energy professionals are in their 50s or in their 30s, with a gap in between, said Carl Tricoli, global head of natural resources at Denham Capital Management LP in Houston.

Missing Generation

“The oil and gas industry has a missing generation,” Tricoli said in a telephone interview. “You have men and women who are in their 50s, and then from call it 1985 to the late 1990s no one was graduating with petroleum engineering degrees and those sorts of things.”

Oil prices between 1985 and 1995 averaged below $20 a barrel in New York.

Technological advances including the use of horizontal drilling and hydraulic fracturing have allowed the U.S. to vie with Russia as the world’s largest gas producer and may push oil output ahead of Saudi Arabia by 2020, according to the International Energy Agency.

The energy boom was among the reasons Harvard University graduates in 2012 were out-earned by those from the South Dakota School of Mines & Technology, according to PayScale Inc.

In Texas, the epicenter of the project boom on the U.S. Gulf Coast, the unemployment rate was 6.1 percent in December, compared with 7.4 percent a year earlier, the Texas Workforce Commission said.

Polyethylene Profit

Abundant gas pushed prices to a 10-year low in North America last year. As a result of this cheap feedstock, profit margins from making ethylene and polyethylene plastic from natural gas liquids such as ethane and propane may hit a record in the current quarter, Don Carson, a New York-based analyst at Susquehanna Financial Group, said in a March 1 report.

The cost advantage has led companies producing chemicals, plastic, fertilizer, diesel fuel and liquefied natural gas to consider building projects representing more than $100 billion in U.S. industrial investments through 2020.

Petroleum engineers are consistently paid the most among engineers, according to the U.S. Bureau of Labor Statistics. In 2010, the most recent year for which comparable data are available, a petroleum engineer with a bachelor’s degree earned a median salary of $114,080, 14 percent higher than nuclear engineers, the second highest-earning engineering class, according to BLS data.

Wages Rise

Wages in mining and oil and gas exploration grew by 6 percent in 2012, the most of any sector in the economy and nearly double the national average of 3.5 percent, according to PayScale, which tracks compensation trends. Wages for real estate and rental services, the second fastest-growing sector, grew at 4.5 percent.

Labor shortages are among the primary reasons that costs of some projects around the world have skyrocketed. Not having trained workers can delay investment decisions and lead to costly errors during the execution phase of projects, NES’s Groeneveld said.

“It is particularly prevalent where there is a concentration of projects competing for the same talent,” he said.

Cost overruns driven in part by high labor prices have plagued projects from Australia to Canada and may force some companies contemplating new investments to drop their plans, Deloitte’s Robertson said in an interview at Bloomberg’s Houston office Feb. 26.

Project Boom

Chevron Phillips expects to employ 10,000 engineers and construction workers to build an ethylene plant and two plastics factories outside Houston at a cost of $5 billion. Chevron is racing competitors such as Dow, Exxon Mobil Corp. and a half dozen other companies that have announced plans to build plants for converting gas into ethylene, the most used petrochemical, on the Gulf Coast.

“We are first out of the gate,” Chevron Phillips Chief Executive Officer Peter Cella said in a June interview. “That will serve us well if the set of circumstances comes about that there is a tight labor market.”

Colleges in Texas and Oklahoma are leading the nation in efforts to tailor programs to industry needs, said Dan Clark, managing partner of Energy Headhunter, a recruiting firm in Houston. The fluidity of movement in the U.S., as well as an increasing willingness in the industry to train non-technical graduates for some jobs such as in North Dakota, will help meet the challenge, he said.

Ohio Drilling

In Ohio, where producers have drilled more than 500 wells in an effort to tap the Utica shale field, the state plans to invest as much as $30 million in worker training programs.

“There’s a real concern about managing capital costs and labor’s a big part of that,” said Daniel Yergin, author of books including “The Prize” and a vice chairman at IHS Inc. “It’s not only our logistics, but the workforce needs to catch up with these new opportunities, and that will be a constraint.”