The US crude oil, natural gas, and chemicals (OG&C) industry employs close to 1.5 million people and hires a global cadre of engineers and scientists to unlock the earth's energy reserves. It was on the strength of this cadre that US energy companies were able to shift the discussion from energy scarcity to energy security. This talent tapped into new offshore and unconventional reservoirs, developed an integrated transportation network, and fueled the downstream renaissance in the United States. OG&C companies, in return, rewarded them handsomely via large paychecks and lucrative offshore jobs, thanks to high oil prices and margins.
Then came the shale boom a decade ago and the industry ramped up its hiring. But problems started appearing in 2014 when the boom triggered a collapse in oil prices to US$50/bbl, and the talent narrative shifted to mass layoffs. From July 2014 to June 2016, the industry laid off 200,000 people. Additionally, the short-cycled nature of shales made hiring extremely cyclical. During 2014–2019, the sensitivity of OG&C employment to oil prices was at its highest, especially in upstream and oilfield services (OFS) sectors (see sidebar, “About 70% of jobs lost in 2020 may not come back by the end of 2021 in a business-as-usual scenario”).
The employment situation took a turn for the worse due to COVID-led slowdown of the economy and the resulting oil price crash, leading to the fastest layoffs in the industry—about 107,000 workers were laid off between March and August 2020, apart from widespread furloughs and pay cuts. Even the relatively stable sectors, such as refining and chemicals, reported up to 35,000 layoffs combined. Such large-scale layoffs, coupled with the heightening cyclicality in employment, are challenging the industry’s reputation as a reliable employer.
Although attracting new talent may not be an immediate priority—and understandably so given the slowdown in production and the pressure to reduce costs—retaining top employees and tackling the challenge of an aging workforce (median age of above 44 years) are of utmost concern for the industry. Existing OG&C employees having fungible digital skills are at the risk of migrating to other industries (e.g., technology and consulting firms, digital solution providers, etc.) where the prospects of career growth seem to be brighter.
Employment cyclicality and downturn are also having a knock-on effect on a few fast-growing specialty chemicals businesses that compete with relatively stable businesses (such as pharmaceuticals) in sourcing talent in the growing material informatics and advanced materials sciences space. So, what does all of this mean for the future of the OG&C industry? Some might argue that this is what cyclicality looks like, and the industry and employment will both pick up as oil prices recover. We, however, take a different view.
This downturn is truly like no other … and a big opportunity for repositioning
The OG&C industry is in a “great compression” where companies’ room to maneuver is restricted by multidecade-long low prices, unforeseen demand destruction, and changes in end-use consumption due to mass telecommuting, mounting debt loads, and a renewed focus on health from COVID-19. The gravity of this compression is reflected in the shrinking valuation of the energy sector, which is now the second-smallest segment in the S&P 500, with a share of only 2.5% as of August 31, 2020.
The compression is challenging the three deeply connected dimensions of an OG&C organization-the hydrocarbon business model itself (the work), who does the work (workforce), and where the work is done (the workplace)—making this downturn like no other. The cost of waiting the downturn out or playing for cyclical upswings in oil prices could be very high for the industry. In a business-as-usual scenario of oil prices staying at around US$45/bbl, as much as 70% of jobs lost by the industry in the pandemic may not come back by the end of 2021 (see sidebar, “About 70% of jobs lost in 2020 may not come back by end-2021 in a business-as-usual scenario”). How are the work, workforce, and workplace undergoing a change in the industry?
Worryingly, the rate of recovery in employment will likely be slower over the next 15–18 months. In a linear business-as-usual scenario for 2021, where oil and natural gas prices are projected to recover to US$45/bbl and US$2.5/MMBtu, respectively, along with the associated uptick in industry fundamentals, 70% of OG&C jobs lost during the pandemic (107,000) may not come back by the end of 2021 (figure 3). The rate of recovery will likely be higher in the chemicals business but still below 100% as the pandemic has significantly dented consumers’ buying behavior. In a pessimistic scenario of US$35/bbl and US$2/MMBtu, the rate of recovery in jobs would be only 3%.
Redraft the future ways of working for the entire organization: Instead of developing a piecemeal digital and automation road map for a business unit, organizations need to redraft the operational vision and ascertain the future ways of working for the entire organization. All costs that are not aligned to this vision or future ways of working—facilities, personnel, and administrative costs that don’t enable remote operations or are not in line with customers’ new workflows—should be driven down. An oilfield service major, for example, aims to reduce its costs by US$1.5 billion annually by combining its many product lines into four divisions, structuring its geographic footprint around key basins of activity, and streamlining its management structure.44
“Variabilize” fixed costs of support functions: In general, support functions are the prime cost-cutting targets in a downturn. Considering high fixed technology (hardware including data centers and software licensing) and personnel (about 15–20% of total personnel expense) costs associated with support functions, significant opportunity lies before companies to make these fixed costs highly variable through outsourcing intelligent process automation, and cloud-based technology solutions. Companies, however, have to cut these costs deliberately as about 90% of back-office reductions return to previous levels in 3-4 years.45 The transition of support functions to an “as-a-service” model or moving them to the cloud can bring a structural change in the industry’s annual SG&A costs and mitigate workforce cyclicality.
Explore flexible and scalable resource models: OG&C largely follows a permanent “on-balance sheet” workforce model, which it scales up or down by incurring significant hiring, training, overhead, and separation costs. Given that production of resources or utilization of plants will likely become more variable, could leading OG&C organizations continue with this traditional model? For baseload capacity, probably yes. But for task-based, on-demand, or transactional roles, leading organizations should consider exploiting new and off-balance sheet resource models that lower fixed cost and minimize business disruption.
Move toward open energy platforms: The OG&C industry is often held to ransom by brutal price cycles and painful successions of over- and under-capacity periods. Appallingly, these periods come in the way of the industry’s progressive efforts toward sustainability, operational agility, and workforce improvement. For example, overinvestment in petrochemicals has led to a crash in the prices of virgin polyethylene terephthalate (PET), which is now US$200/tonne lower than recycled PET, squeezing economic opportunities to switch to recycled plastics. Similarly, the lack of visibility into demand and the shortage of raw material and even suppliers lead to idling of resources, nonproductive time, disruption in supply chain, and significant project delays.
Industry participants across the value chain could forge an open energy system—a multisided platform of operators, suppliers, and even potential talent that reduces costs and delays in the “ecosystem” through timely hiring, contracting, procurement, scheduling, and management of material and services. Furthermore, the open energy system can be expanded to change customer interactions. Online B2B marketplace platforms such as Knowde, CheMondis, and OneTwoChem are targeting the US$5 trillion chemicals space by providing e-commerce-like web catalogs for buying and selling chemicals and enhancing customer experience by offering samples and providing technical literature on a product. The future is wide open for e-commerce platformers to predict supply and demand shifts, integrate with enterprise resource planning platforms of their customers, and reduce delays in shipment and contracting, among others.
Expecting blanket transformation across the industry or even an organization is unwise. But piecemeal transformation and solutions (tweaking the existing processes and throwing in a few cyclical solutions) could yield suboptimal results in the post-COVID-19 environment. Successful organizations of the future will make sustainable energy their core “work,” elevate human-machine interactions, and reimagine their traditional “workforce” model and “workplace” culture. Can this happen? Why not? The industry has transformed itself in the past and it will do it again in the next decade. We take a positive view after hearing the plans of a few organizations in their 2Q20 results.
Building the organization of the future
The coming years are pivotal in determining the path of the OG&C industry at large. Naysayers may call the new normal part of the industry’s cyclicality. However, organizations that see the coming decade as an opportunity for transformation will likely not just outlive this compression but may even lead the industry into the future of work. But for that, fundamental changes will be needed across each element of the income statement and balance sheet—from traditional on-balance sheet budgeted expenses to off-balance sheet outsourcing, and even shifting to pay-as-you-go models.
The ultimate expectation is to move from a traditional oil, gas, chemical business model to a solution-driven, customer-centric energy company. That mandate must come from the top. The CEO/chairman should bring this vision to the board and ask each member of the executive committee to align their businesses to the new vision and, most importantly, to live the new purpose
Implementing a new strategy would mean extensive changes in the very foundation of the business. While tackling these questions won’t be an easy exercise, it is vital in kick-starting aggressive efforts to bring organizational change from the long-term focus to the “medium term.” And the current environment will only accelerate these efforts.
On the way to transforming the organization, the leaders will have to constantly probe their plans and course correct to deliver added value.
On the way to transforming the organization, the leaders will have to constantly probe their plans and course correct to deliver added value. They have to continually assess hard or even unfavorable business decisions. Such continual self-assessment will go a long way in generating a resilient company. After all, the end goal in tackling these questions is simple: building an OG&C organization of the future by making bold choices today for the work of tomorrow, expanding job canvases of the workforce by creating redesigned, cyber-physical teams, and fungible roles, and embracing a digital workplace culture that remains open to future innovations.
For more information visit the online report.
