It's a brainpower business

The organization and economics of the world petroleum i ndustry changed in so many ways during the past decade that it's easy to overlook an important evolution only now becoming apparent: The panic threshold has risen by several notches.

June 1, 1998

4 min read

Last March, the producing industry passed an important test of its willingness to hold course against adverse business swings. With crude oil prices falling and costs rising, oil companies nevertheless bid robustly for deepwater Gulf of Mexico leases in Outer Continental Shelf Sale 169. The evident attitude: Deepwater leases represent potential long-term value able to endure temporary price slumps. Some industry executives even wondered how anyone could have doubted that Sale 169 would be a boomer.

Susceptibility to panic

The reason, of course, is that susceptibility to panic settled heavily over the industry after the price crash of 1986. Since then, companies have learned to manage their risks and work profitably-or at least sustainably-with prices at levels once considered ruinous. Several cycles toward and back away from the $10/bbl level have fortified confidence that prices don't stay in the dumps forever.

Another durability test for the industry's long view starts now. Companies are reporting financial results for the first quarter. From upstream operations, profits are mostly down. This will shock no one into panic. Upstream profits should fall during a trough in the crude price cycle.

But another puny quarter is taking shape. Coordinated production cuts by the world's leading crude exporters haven't materialized according to promise. The price recovery they were supposed to deliver lasted only a few weeks. Prices are down again.

Is anyone ready to panic yet?

Now is a good time to think about the cost of desperate business responses. In most parts of the world, profitability on $15/bbl and cheaper oil comes mostly from brainpower. The petroleum story for the past decade has been about displacing mechanical work with great ideas-and thus about limiting costs and risks.

Somewhere in this process, important economic lines crossed. While the industry was reducing the number of holes it had to drill, and thus the dollars it had to spend overall, to find, develop, and produce a given volume of petroleum, it was raising the number of brains it took to get the job don e. As economist Robert Gilmer of the Houston Branch of the Federal Reserve Bank of Dallas noted last year, the upstream oil and gas industry is more labor-intensive than it used to be.

This change explains why companies in 1996 seemed to start complaining about a personnel shortage so soon after completing their last rounds of layoffs. For years, they had worked to accommodate fairly static levels of activity with shrinking workforces, calling upon each individual worker to provide an increasing share of total production. Computers and organizational innovations made it possible in a trend not at all unique to the petroleum business.

A rebound in general activity under these conditions, however, not only strained a maxed-out labor force but also required that additions occur at a higher ratio of workers per unit of production than that to which the industry was accustomed. With competition for technically skilled workers high in a strong general economy, the oil and gas business suddenly found itself short of the type of workers on which it had come to depend.

Costly medicine

Layoffs thus would be costly medicine for what currently ails the upstream oil business. Companies know that. Shareholders, though, don't always show the same allegiance to the long view that companies did with their bidding in Sale 169. Holding together an essential technical workforce may yet become a challenge.

This cycle, like all its predecessors, will end. When it does, the companies that profit will be those that kept their wits about them by keeping brains employed during the market's anxious turns.