The lay-off legacy

June 19, 2000
The oil and gas industry will find enough people to do the work required of it. But it will pay dearly for them.

The oil and gas industry will find enough people to do the work required of it. But it will pay dearly for them.

A study published this month by John S. Herold Inc., Stamford, Conn., assesses the head-slashing conducted by large oil and gas companies during the past dozen years. It doesn't make for pleasant reading. Some numbers:

  • Since 1988, the largest 25 surviving oil companies have reduced their combined payroll by an average of 5.2%/year. There was only 1 year of gain during that period-1997, when employment rose by 1.1%. A resumption of lay-offs the following year wiped out the increase.
  • Since 1982, the industry's peak employment year, the 25 largest oil companies have cut headcount from more than 1.6 million to about 600,000.
  • In the last 2 decades, the top 10 companies alone have eliminated more than 677,000 jobs.

'Short-sighted'

"Facing unrelenting but valid pressure from Wall Street to 'trim the fat' and be 'lean and mean,'" the study says, "industry executives may soon find that recent downsizing programs are in fact extraordinarily short-sighted. In the pursuit of higher returns and efficiencies, many companies have adopted 'rough justice' headcount reduction and cost-savings targets." As a result, optimistic financial forecasts by the companies "may prove nigh impossible to deliver without the innovation and experience of both young and veteran oil professionals."

These observations will receive no challenge here. But the numbers do need perspective. Employees of the biggest oil and gas companies don't do all of the petroleum industry's work. Outsourcing has transferred many tasks to professionals no longer on oil company payrolls. Similarly, a growing share of the international work on which large companies increasingly concentrate goes to local contractors.

Furthermore, small fish feast on what whales don't even see. Much downsizing by the largest companies comes from renewed emphasis on scale economies. Projects dismissed by the behemoths as too small or too mature become opportunities for smaller, more-focused operators.

So headcount reductions documented by Herold don't all translate into jobs lost to an industry with a labor force that is nevertheless shrinking. Some of them represent work shifted away from companies in the Herold study but still performed somewhere by someone.

But that perspective gives little consolation to the petroleum engineer laid off in mid-career on the heels of an industry-wide hiring binge, however fleeting it was. And the tendency of industry employment to follow wildly variable oil prices can hardly appeal to college students planning careers.

So it is not the plummeting headcount of the biggest companies that should most worry industry leaders. It's the recruiting challenge that companies face in the next round of hiring.

Herold notes that the industry's reputation has been hurt.

"At worst," the study says, "energy companies can be charged with shabby and brutal treatment of their professionals. At best, the oil sector is tarred with being a mature low-growth 'staid' field, making it unattractive to bright young talent."

And Herold's comments apply to an industry that survived its preceding market slump largely on the strength of technical innovation, the combined product of creative ideas available only from people.

Of course, some companies didn't lay off workers in droves when oil and gas prices slumped. Their stock prices probably suffered for it. But they're now drilling wells, making money from the price upswing they knew would come-and buying depopulated competitors whose managers mistakenly thought prices could stay abysmal forever.

Playing catch-up

As a whole, the industry now plays catch-up. Upstream and downstream, practically everything is running at capacity. Inventories of oil and gas must be rebuilt. From drilling to transportation to processing, the supply system for oil and gas needs work.

And work means people, whom companies laid off by the thousands during 1998 and 1999. Some of them will return. But too many of them are alienated and will gladly stay away. The industry will have to make up the shortfall by cross-training workers holding degrees not focused on petroleum.

So the work will get done. But the people who perform it won't be cheap. Savings from past lay-offs are about to give way to leaping costs for recruitment and training. Someone should warn the shareholders.