EDITORIAL The costs of cost-cutting

Optimism was palpable last week at the Offshore Technology Conference in Houston. Registration was up. Exhibitors seemed happy. Deals were being made.

While business seems good in the offshore exploration and production industry, caution is in order. Trends never last. An important internal hazard to the current upswing attracted notice at OTC.

Companies are making money from offshore operations. Technology enables them to accomplish more than before at less cost. And profitability gains have occurred despite stagnant oil and gas prices, which not so long ago seemed impossible.

But the drawbacks of general cost-cutting are becoming evident. A shortage looms in a vital area: labor.

Brains, not bodies

The problem isn't bodies; there are plenty of those. The problem is brains. An increasingly technical business demands workers with increasingly sophisticated knowledge and skills. Workers like that are becoming scarce in relation to industry's need for them.

Today's profits come in large measure from yesterday's great ideas. They also come from savings associated with layoffs. Industry leaders must wonder whether enough sufficiently trained people remain in the industry to ensure tomorrow's supply of great ideas and skills needed to apply them.

"We face a looming people shortage that threatens to stymie our growth and prevent us from servicing our customers to the utmost," warns Dennis Heagney, president and chief operating officer of Sonat Offshore Drilling Inc. and chairman of the International Association of Drilling Contractors. He told a press briefing that wages for offshore workers in the Gulf of Mexico have declined in real terms by more than 10% since 1984. Young workers with skills needed by the offshore drilling industry have found higher-paying and more-secure jobs elsewhere.

In a field crucial to service and operating companies alike, petroleum engineering, young people aren't even drawn to the training. U.S. colleges and universities will graduate perhaps 300 petroleum engineers this year. Many of them are non-U.S. residents who will return to their home countries to work.

Technology, of course, has reduced the number of people required to perform a given amount of work. Because of automation and other productivity improvements, the industry doesn't need as many workers as it once did.

Because of its rising demand for great ideas and increasingly sophisticated operating skills, however, the workers that the industry does need must be smarter on average than ever. It's time to wonder whether restructuring has pulled the industry's brain count below the critical level-or at least discouraged too many young brains from seeking the training essential to upstream petroleum work.

When demand exists, supply will materialize once the price is right. U.S. companies willing to employ talent in short supply at home can always recruit abroad or provide their own training. Companies seeking ideas but unwilling to hire or develop talent can buy what they need from service providers-who will have to hire abroad or strengthen training programs.

The price

But any such option has its price. In economic terms, a growing dislocation between U.S. concentrations of company headquarters and sources of industry talent implies diminished efficiency and increased cost. And as returns sag from yesterday's great ideas, the value of new ideas rises, which lifts the price of access to people with ideas, regardless of their locations.

Advancing technology and aggressive cost-cutting cannot march in step forever. The price of cost-cutting technologies and practices inevitably will rise for companies now averse to costs of any kind. Striking the right balance between cost-control and access to crucial ideas and skills is a growing challenge of oil industry management. The essence of this challenge is how industry treats smart people.