Large oil companies typically rely on oilfield service companies to perform work in places where they find oil. Finding and producing oil depends on a wide range of tasks performed by service companies who combine labor (employees), equipment and knowhow to get the oil out of the ground.
There are three ways a company can retain the employees it needs: it can (a) hire them from the outside, (b) hire them from the inside (generally least expensive), or (c) borrow them (i.e. sub-contract – generally most expensive). These choices present different business considerations to a company trying to determine a strategy that best suits its industry and individual conditions. The range of contemplations include (i) what skills do we need today vs. tomorrow? (ii) how much investment do I need to make in my workforce before I realize a return? (iii) how do I source for mission-critical functions vs. short-term requirements? Service companies appeal to their customers for a number of business reasons including that they handle recruiting and retaining the specialized workforces needed to operate in locations all over the globe.
In the context of the Energy industry we can observe that by relying on oilfield service companies, oil companies are “borrowing” a workforce to perform mission critical functions. In other words, oil companies are relying on the most expensive form of sourcing labor to complete an essential function. This expense is compounded by the detrimental effect of a oilfield workforce with more inexperience currently than ever before. Stated another way, oil companies are sourcing their workforce through the most expensive means available (i.e. borrowing), doing so at the highest rates ever, and subject to a notionally less productive labor pool. Add it all up and you get the chart below:
To put this in terms of math, available oilfield employment statistics indicate that average hourly rates for field workers rose approximately 35% during the period 2006 through 2011. During the same period (per the chart above) finding costs per barrel of oil rose 28%. If we assume that labor comprises 20% of the total finding costs, we can infer that each one dollar increase in the cost of labor during the period 2006 to 2011 corresponded to a three dollar increase in all other finding costs.
The point is that the Oil Industry is locked into a labor strategy designed to mitigate downturns but whose course now has a compounding negative consequence. We believe that the implied costs of on-the-job training is revealed in the three dollar increase. All other things held equal the only way to reverse the consequence of this course is to decrease dependence on labor in general and reduced exposure to its inexperienced elements.