In the oil and gas
industry, we have long known that the right people, with the right skills and
tools, will bring about the highest return on investment in any critical
project. But what happens when you don’t have those people with the right
skills to helm those projects?
The oil price fell below $30 in January and this was followed by an almost continuous stream of news relating to job losses, decreasing profits and cost cutting at every corner. The International Energy Agency reported that any recovery in the oil and gas industry will be short lived, and the recent “rise in prices was a ‘false dawn’”.
One key consequence of this continued downturn has been significant cuts of “non-regulatory” or “non-essential’ training by many oil companies. Ironically these “non-essential’ training do play a pivotal role in the continued survival of the industry, and vital for its safe operations. So what happens to an industry that neglects vital skills development? This is hidden element of the current cost cutting campaigns.
Back in 2011 Schlumberger Business Consulting conducted a survey exploring future skills shortages in the hydrocarbon industry. It found that “22,000 senior petrochemical professionals would quit the industry by 2015” and that the recruitment of graduates may offset staff levels but would not fill the experience gap. It later then noted that by 2016 the absence of experienced professionals within the oil industry would reach 20% of the talent pool.
These finding are four years old, and the downturn wasn’t even considered as a mitigating factor in the study. Since then, not only have thousands of jobs been cut, but recruitment budgets have also been slashed and the extended downturn has put graduates off this struggling industry, only worsening the problem.
When the inevitable upturn in the oil price and wider sector does take place, oil companies will find themselves with a potentially vast skills gap. Desperate to increase production with higher prices to make up for lost revenue, many firms are likely to push ahead with under-skilled staff. In doing so, these firms will not just face inefficiencies but potentially catastrophic safety and environmental incidents affecting profits and lives.
The industry has a long history of overlooking issues related to its talent management. Long-term skills development planning has never really been adhered to when oil prices collapse. Most oil companies have been short sighted, pleasing only their masters in the stock market.
Oil company bosses need to focus on talent as much as they did when the price of oil was over $70 – 80per barrel. Granted that we may not see another $100per barrel days in the near future however when oil prices return to its “normal” trajectory, the problem will only worsen. This careless neglect of sustained skills development, will lead to significant shortages, inflated salaries, the overuse of third-party contractors and widespread poaching. Current evidence also suggests that talents that have left the oil sector may not necessary return, unless the price is right. And it will be a high price to pay.
But is this all the responsibility of the oil companies or is there more that could be done by regulators, interest groups, long term oil investors or even the employee unions?
The UK’s North Sea oil and gas fields are feeling the full weight of the crisis due to their high staff and production costs. An estimated 65,000 jobs have been lost across the UK oil industry and further 10,000 are at risk compounded by the recent Brexit mess.
What is a probable
Consider this. The Engineering Construction Industry Training Board legally requires that companies on their register pay a mandatory levy at the start of each year. The levy can only be claimed back through training, forcing firms to conduct training or lose their levy.
this might not be enough to solve the problem entirely but they are certainly
in the right direction towards a more sustainable and competent workforce in
the long run. Be it companies themselves or by regulating bodies, it is vital
that the oil industry understands that by equipping staff with the knowledge and
practical skills, it will keep their business on track in the long term. It can
quite literally save companies millions from overspend, inefficiencies and
What are your thoughts about probable solutions that can resolve the continuing decline of skills and experience in the current oil crisis?
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Recent headlines on the oil industry have focused squarely on the upstream side: the amount of crude oil that is being produced and the resulting effect on oil prices, against a backdrop of the Covid-19 pandemic. But that is just one part of the supply chain. To be sold as final products, crude oil needs to be refined into its constituent fuels, each of which is facing its own crisis because of the overall demand destruction caused by the virus. And once the dust settles, the global refining industry will look very different.
Because even before the pandemic broke out, there was a surplus of refining capacity worldwide. According to the BP Statistical Review of World Energy 2019, global oil demand was some 99.85 mmb/d. However, this consumption figure includes substitute fuels – ethanol blended into US gasoline and biodiesel in Europe and parts of Asia – as well as chemical additives added on to fuels. While by no means an exact science, extrapolating oil demand to exclude this results in a global oil demand figure of some 95.44 mmb/d. In comparison, global refining capacity was just over 100 mmb/d. This overcapacity is intentional; since most refineries do not run at 100% utilisation all the time and many will shut down for scheduled maintenance periodically, global refining utilisation rates stand at about 85%.
Based on this, even accounting for differences in definitions and calculations, global oil demand and global oil refining supply is relatively evenly matched. However, demand is a fluid beast, while refineries are static. With the Covid-19 pandemic entering into its sixth month, the impact on fuels demand has been dramatic. Estimates suggest that global oil demand fell by as much as 20 mmb/d at its peak. In the early days of the crisis, refiners responded by slashing the production of jet fuel towards gasoline and diesel, as international air travel was one of the first victims of the virus. As national and sub-national lockdowns were introduced, demand destruction extended to transport fuels (gasoline, diesel, fuel oil), petrochemicals (naphtha, LPG) and power generation (gasoil, fuel oil). Just as shutting down an oil rig can take weeks to complete, shutting down an entire oil refinery can take a similar timeframe – while still producing fuels that there is no demand for.
Refineries responded by slashing utilisation rates, and prioritising certain fuel types. In China, state oil refiners moved from running their sites at 90% to 40-50% at the peak of the Chinese outbreak; similar moves were made by key refiners in South Korea and Japan. With the lockdowns easing across most of Asia, refining runs have now increased, stimulating demand for crude oil. In Europe, where the virus hit hard and fast, refinery utilisation rates dropped as low as 10% in some cases, with some countries (Portugal, Italy) halting refining activities altogether. In the USA, now the hardest-hit country in the world, several refineries have been shuttered, with no timeline on if and when production will resume. But with lockdowns easing, and the summer driving season up ahead, refinery production is gradually increasing.
But even if the end of the Covid-19 crisis is near, it still doesn’t change the fundamental issue facing the refining industry – there is still too much capacity. The supply/demand balance shows that most regions are quite even in terms of consumption and refining capacity, with the exception of overcapacity in Europe and the former Soviet Union bloc. The regional balances do hide some interesting stories; Chinese refining capacity exceeds its consumption by over 2 mmb/d, and with the addition of 3 new mega-refineries in 2019, that gap increases even further. The only reason why the balance in Asia looks relatively even is because of oil demand ‘sinks’ such as Indonesia, Vietnam and Pakistan. Even in the US, the wealth of refining capacity on the Gulf Coast makes smaller refineries on the East and West coasts increasingly redundant.
Given this, the aftermath of the Covid-19 crisis will be the inevitable hastening of the current trend in the refining industry, the closure of small, simpler refineries in favour of large, complex and more modern refineries. On the chopping block will be many of the sub-50 kb/d refineries in Europe; because why run a loss-making refinery when the product can be imported for cheaper, even accounting for shipping costs from the Middle East or Asia? Smaller US refineries are at risk as well, along with legacy sites in the Middle East and Russia. Based on current trends, Europe alone could lose some 2 mmb/d of refining capacity by 2025. Rising oil prices and improvements in refining margins could ensure the continued survival of some vulnerable refineries, but that will only be a temporary measure. The trend is clear; out with the small, in with the big. Covid-19 will only amplify that. It may be a painful process, but in the grand scheme of things, it is also a necessary one.
Infographic: Global oil consumption and refining capacity (BP Statistical Review of World Energy 2019)
|Region||Consumption (mmb/d)*||Refining Capacity (mmb/d)|
*Extrapolated to exclude additives and substitute fuels (ethanol, biodiesel)
End of Article
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Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.
The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.
Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.
Source: U.S. Energy Information Administration
First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.
Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.
Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.
Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.
Principal contributor: Jesse Barnett