Lessons learned on workforce risk from Australia’s LNG boom

Australia is predicted to overtake Qatar as the world’s biggest LNG exporter by the end of this decade. The country has experienced an unprecedented level of LNG project investment, seeing upwards of $185 billion in capital expenditure, yet the long-term future of the industry in the region hangs in the balance. Rapid growth has impacted the sector’s ability to source skilled workers, as has international competition for experienced and skilled operations personnel.

Fierce competition for LNG-specific resources has triggered numerous project delays, cost overruns, and even cancellations. Looking at the wider energy industry in Australia, similar issues are impacting the progress of unconventional resource projects, including shale and coal seam gas. There is a range of labor challenges embedded within Australia’s industrial framework, driving up wages and creating an adverse impact on productivity in the oil and gas industry.

Australia has a relatively small population, and, despite a great deal of mining expertise, it has little experience in conventional oil and gas, and much less in unconventionals and growth markets such as LNG. Furthermore, Australian oil production is declining steadily, placing even more demand on the LNG project pipeline.

Given the concerns that people shortages will continue to result in more of the project delays and cost overruns seen to date, there is growing doubt over whether planned projects will, indeed, come online—and just how much investors can expect from the market—especially given the level of competition for capital and resources from the booming North American LNG market and the emerging East Africa theater.

GLOBAL ISSUE

To be certain, Australia is not alone in its struggle to source the skilled resources that it needs. The challenges it faces are just as applicable to any industry and region, where projects have capital-intensive and highly-technical requirements. As such, companies across the globe are keeping a close eye on Australia’s LNG projects.

The industry’s project-based structure operates globally, and is underpinned by a mobile, highly skilled, global workforce. It depends greatly on a contingent workforce, and the underlying cause of many of the issues encountered in the course of oil and gas projects is people-related.

Although the industry has, historically, taken a rigorous approach to quantifying and managing technical risk, it has lacked a robust, systematic appraisal of people-related risk that takes into account the particularities of the sector.

Industry professionals are cognizant of the fact that the people aspect of a project presents many potential risks, but they also acknowledge how difficult it is to say which risks will be most pertinent to a specific project. As a result, people risk mitigation—while far from a new way of looking at manpower or people services—is an area that is yet to be addressed with the appropriate level of rigor.

ROOT CAUSES OF PEOPLE RISK

Air Energi recently partnered with Australia’s Queensland University of Technology (QUT) to produce a comprehensive report based on extensive analysis of the potential workforce risks related to Australasia’s LNG sector, particularly involving a contingent workforce. The report confirms that the impact of people-related issues on project schedules and costs is significant in capital-intensive environments, and warns that time and cost overruns cascade through the supply chain.

There are more than 50 different types of risk associated with a contingent workforce during the execution of a major project, but the report identifies two root causes: the ongoing skills shortage, and an aging workforce. Both present a similar risk to the industry, in terms of the recruitment and retention of permanent and contract staff. Getting the right people, at the right time, in the right place, and for the right cost, is a key challenge, and one that is set to become even more acute.

According to the Air Energi/QUT report, skills shortages in Australia are anticipated across the majority of  roles, with the greatest shortage forecast to occur in 2015 and 2016. An acute skills shortage means a lack of domestic talent, forcing companies to consider international avenues for recruitment.

However, this is not always a viable solution. The skills shortage is a global issue that sees employers struggling to find the right people overseas, and to mobilize them quickly and compliantly. In a project-based environment, this inability to secure the right workers to meet demand can have major impacts on schedules, and it subsequently drives up costs.

The need to address skills shortages is confirmed by data gathered by Air Energi. The majority of the workforce (over 50%) holds 31 years of experience or more, whereas only 3% have zero to 10 years of experience in their field, Fig. 1. This not only indicates a difficulty in finding new candidates with the necessary skills and experience, but also hints at another issue facing the industry: the aging workforce.

Fig. 1. The majority of today's workforce has decades of experience, but that is set to change.

AVOIDING FALSE ECONOMY

Although the industry has been aware of the aging workforce for some time, it remains one of the key obstacles to obtaining and retaining the skills required for projects. The industry’s persistent failure to act collectively in addressing this trend, combined with typical approaches to recruitment and retention of experienced professionals (i.e., increasing rates of pay), is false economy: increased labor costs drive up project costs, resulting in continued price pressure in the supply chain.

Similarly, continued price pressure in the supply chain is a self-fulfilling prophecy, because downward pressure on price impacts on the level of investment in training, which is one of the first areas to see cuts at service companies.

Air Energi has seen direct evidence that smaller and mid-size companies are not spending as much time and money on training as larger organizations, which increases risk, given future demand. At present, there is a very real possibility that the required skills and experience may be lost, once the current workforce retires. Therefore, a key challenge is retaining the vital skills and extensive expertise of the mature workforce, and sharing its knowledge with the younger workforce.

IDENTIFY, REDUCE RISKS

The research by Air Energi/QUT involved identifying different risks connected with a contingent workforce during the exploration, execution and demobilization phases of a major LNG project. The report categorizes people risk into six core areas:

• Project appeal: Includes factors such as project duration, remuneration and benefits, location, employer brand of operating company, roster and project phase
• Recruitment: The ability to access and secure the required talent in a timely, systematic fashion
• Onboarding and induction: Can include everything from general orientation and introductions, to transmission of the company culture and “the way we do things”
• Retention: Important for many reasons, such as justifying training expenses, preserving knowledge and building expertise
• Reassignment and demobilization: Presents the highest risk, in terms of resources and time invested, and is also the most fragile stage, due to a reliance on contract workers to effectively complete a project
• Compliance: Includes complying with the legal requirements of the location and country, in addition to internal organizational policies

The research is based on in-depth interviews with a panel of industry experts drawn from a wide cross-section of perspectives, including operations, HR, project management, advisory functions and contractors. A high level of rigor was applied to the process, with the use of QSR NVivo 10 software to identify and explore the key themes, and subsequent analysis conducted by QUT’s industry experts.

Crucially, the research findings have enabled the development of a comprehensive tool for identifying and analyzing the potential workforce-related risks for projects. This tool will be available in second-quarter 2014.

KEY FINDINGS

Arguably one of the most surprising findings from the Air Energi/QUT research is the importance that prospective candidates place on the attractiveness of a project itself. For example, project location is rated on how safe the region is considered, whether taxation conditions are favorable, and if there is a high number of competing projects in the area.

A high emphasis is also placed on company brand and employer attractiveness, in addition to the company’s ability to offer long contracts, appealing rosters, substantial benefits, competitive rates and an exciting phase in the project lifecycle. It is also important that employers are able to offer an appealing mix of contractors and staff on the project (i.e. knowledge transfer being the vital outcome), as well as a positive work environment.

In contrast, it is difficult to attract the skills, experience and temperaments needed, should a project be deemed unattractive by prospective employees. However, an inability to get the best people available, and a lack of required skills to meet project requirements, will almost inevitably lead to project delays, due to the greater number of errors and reduced quality of outputs.

The major overarching risk in the oil and gas industry is the inability to deliver a project on time, and within budget. It is, therefore, essential that businesses today think differently about identifying and managing their people-related risks, particularly in large and complex projects. Successfully improving the industry’s approach to these risks will not only be critical to the future development of projects within Australasia, but of vital significance to the industry, as a whole.

With global demand for LNG expected to increase 50% by 2025, lessons learned from Australia’s experience will be crucial for firms looking to benefit from flourishing LNG activity in North America, East Africa and Russia over the next decade.

REFERENCES

1. Air Energi, The Global Oil & Gas Workforce Survey 2014, http://www.airenergi.com/sites/default/files/brochures/H2%20Workforce%20Survey%202014.pdf, 2014.
2. Air Energi and Queensland University of Technology, Workforce Related Project Risks, http://www.airenergi.com/analysis-workforce-related-project-risks-report, 2014.