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Labor issues plaguing oilfield service industry could impact production

Oilfield service companies are struggling to find workers to replace the hundreds of thousands of employees forced out of jobs during the industry downturn, which is stifling equipment utilization growth and impacting production potential.

During the latest downturn in oil prices beginning in 2014, oilfield service companies downsized staff in order to keep the doors open. Through forced retirements and layoffs, the industry lost more than 400,000 workers, many of whom permanently left the industry.

"People is the biggest issue. During the long downturn, experienced people left our industry and they are not coming back," Rick Ingram, a safety and health adviser at BP America Inc., said Feb. 22 at the Association of Energy Service Companies' annual winter meeting. "These people are not willing to come back to the roller coaster energy industry."

Event attendees said their companies have lost labor to the construction industry and the wind turbine industry, where work is steadier.

"This is a cyclical industry; it always has been and always will be," Todd Tomlin, co-founder of investment firm Turnbridge Capital LLC, said during a Feb. 22 panel discussion.

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In the latest industry downturn, the price of West Texas Intermediate crude oil went from above $100/bbl in June 2014 to below $30/bbl by January 2016 before recovering to above $60/bbl in January 2018.

According to Tomlin, there is a misconception that the energy equipment and services industry is driven only by commodities prices, whereas he said that well count and production stream also should be considered measurements of industry health. Instead, the industry remains mired in the perception that daily oil price movement is going to really affect the health of the industry.

"This has created a real problem around labor," Tomlin said. Of the 10 companies in which Turnbridge invests, the rehire rate on average is about one fourth of the number of people laid off for less than 12 months.

In the midst of this labor shortage, the U.S. is still in the early innings of a massive infrastructure build, Tomlin said. "This has been a heck of a recovery so far," he said. "Things are tight. Labor is tight, prices are improving and activity is up."

Regional reports presented Feb. 22 indicate that equipment utilization rates are high among reporting companies, averaging nearly 60%, with each region reporting labor as a key hindrance to higher utilization.

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"Everything that can be working is working," Mike Miller of the Association of Energy Service Companies Gulf Coast chapter reported. Miller said about 40% to 50% of rigs operated by reporting companies within the region were working while crew utilization was at 100%.

Labor issues are widespread with a particular need for experienced workers and drivers. "Labor is our biggest constraint. There is no interest, people are not seeing that the market is coming back," Mark Bishop of the Michigan chapter said.

But the industry is coming back strongly, Tomlin said.

With prices at $50/bbl and $60/bbl, oilfield service firms have been able to put money back on the revenue side. The industry forecasts annual revenue growth of approximately 2.3% to roughly $70.9 billion through 2022, according to Alex LaPiana, vice president at investment firm Chiron Financial LLC. As exploration and production activities grow, there will be more opportunity for energy services, he said.

Tomlin said exploration and production companies are being encouraged to live within their means and to carefully measure the life-cycle return on their wells, which provides a great opportunity to the oilfield service industry but could also bring a lot of instability in spending.