Neglecting Their People: The Biggest Mistake Oil and Gas Executives Make

The U.S. Energy Opportunity Window

According to the Department of Energy, in the coming years, rising global energy needs will drive a sharp increase in domestic oil and gas production. And while the U.S. currently imports more than 60% of its oil requirements, analysts project enough domestic reserves to last 200 years. On the natural gas side, although prices are at decade-low levels, recently-discovered rich reserve shale plays could help the U.S. become the world’s largest exporter of natural gas.

Oil and gas executives will need to make smart decisions to take advantage of this opportunity. In this article, I will argue the biggest mistake oil and gas executives make is to ignore–or merely give lip-service to–the importance of attracting, developing and retaining their people.

Learning From the Past

In 2010, the Deepwater Horizon disaster killed 11 people and sent 4.9 million barrels of crude oil into the Gulf of Mexico. It was the single largest oil spill in history.  A government investigation revealed that in addition to systemic cost and safety issues, the accident’s severity was largely attributable to human error.

For example, in a test assessing cement job integrity, workers needed to verify that drill pipe pressure was at 0 psi. When a test showed 773 psi, they bled off pressure and deemed the problem fixed. But shortly afterwards, pressure shot to 1,400 psi.

How could this have happened? A central contributor was a lack of adequate skill and experience.  According to John Konrad, veteran rig captain and author of Fire on the Horizon: The Untold Story of the Gulf Oil Disaster, it takes decades to build skills to run rigs. Because of a re-organization, none of the crew had been in their job for more than six months when the accident happened.

Great Crew Change + Great Engineering Shortage = Trouble

According to the Bureau of Labor Statistics, oil and gas supports more than 9 million U.S. jobs. A 2010 study by Wood McKenzie projects that the industry will create more than 1.4 million jobs by 2030.

Yet while talent requirements are increasing, “The Great Crew Change” will be in full force, with skilled workers exiting en masse as Baby Boomers retire. A Schlumberger study reports that 22,000 experienced geoscientists and engineers will retire by 2015. About 25% of positions vacated by Boomers will be filled by less-experienced, younger workers. The sophisticated skills needed for drilling in the shale play reserves will compound the problem.

What’s worse, fewer young people are becoming engineers. “The Great Engineering Shortage” is already being felt by companies who are fiercely competing for new graduates from top schools like Colorado School of Mines, Oklahoma University and Texas A&M. The National Center of Education Statistics reports that in 2009, the U.S. granted 88,700 undergraduate engineering degrees, compared with 172,800 degrees in history and the social sciences.

An even more insidious source of industry talent shortages began in the 1980s. According to Jeff Brady of NPR, when oil prices dropped and companies shrank their workforces, fewer undergraduates entered engineering. Between 1986 and 1990, engineering degrees decreased 15%. Sadly, the workforce we lost in the 1980s would possess much-needed experience to fill vacancies left by retiring Boomers.

Three Imperatives to Survive the Great Crew Change

The absence of strong talent will be a primary factor limiting the Great American Energy Boom. And given these alarming trends, it would be foolish not act. However, a recently-released Society of Human Resource Management study reports that 40% of organizations are doing nothing. From a risk-management perspective, this is simply foolish. Just as drilling operations must manage and mitigate environmental risks, executives need to manage human capital risks (particularly because these investments make up more than half of most operating budgets).

Ignoring the risk of workforce shortages won’t make them go away. As the saying goes, hope is not a plan. Below are three imperatives for oil and gas executives.

Imperative #1: Build a Compelling Employment Value Proposition

Does your organization have a compelling answer to the question, “Why should I work here?” The popular “you should be grateful to have a job in this economy” response is not only banal, it will never work with your best people. Talented employees with in-demand skillsets will almost always have a choice about where they work. If they don’t have a reason to work for you, you’re in trouble.

If you can clearly articulate why employees should choose to work at your company, you’ll stand out from the pack. Employment Value Propositions (EVPs) can include elements related to rewards and compensation, career development, challenging work, people, or organizational prestige. EVPs need not be complicated, but they must be honest and genuinely reflective of what working for your organization is really like.

For example, at Starbucks, employees have “the first experience.” Their EVP includes an environment where employees can be themselves at work and receive meaningful career development. Similarly, Southwest Airlines believes that “Employees come first, customers second.” This doesn’t mean that the customer isn’t given exceptional service—that is an outcome of having employees who are deeply valued and treated well. Other organizations like biotech firm Genentech offer employees paid six-week sabbaticals. And companies like SRC, a military research entity, hire only 1% of job applicants, giving new hires automatic prestige.

Executives can leverage their organization’s EVP to attract and retain top talent through marketing, Best Companies to Work For lists, job fairs, word of mouth, and university recruiting. In general, organizations with strong EVPs are more likely to attract passive candidates not currently searching for a job. And according to the Corporate Leadership Council, companies with strong EVPs see 30-40% more employee commitment versus those with weak EVPs.

Imperative #2: Build to Your Talent Pipeline

Just as oil and gas companies maintain capital equipment to ensure performance, they must invest in their people. Research on this is clear: talent practices like leadership development, career development, training, mentoring and succession planning increase shareholder returns and help organizations compete for the future.

How can executives ensure their workforce possesses the right skills to meet current and future business needs? At a minimum, I recommend an annual talent review to identify your company’s critical positions and top talent.

Identifying critical positions: All jobs aren’t created equal. Executives must prioritize time and resources to grow and maintain talent in their most important positions. Critical positions typically possess two characteristics: they play a disproportionately significant role in business success and are difficult to hire/replace. For example, most companies employ a staff with specialized, scarce skills as experts in their Environmental Health and Safety group. Losing these employees might have a more direct effect on the business than losing an employee somewhere else.

Grow top talent: Knowing critical positions isn’t enough. You must also identify your best people and create meaningful strategies to ensure their development. Carefully and thoroughly evaluate talent in critical roles, including your senior leadership team (typically SVP/VP and above). With a particular focus on “talent sharing” across operating units, identify (at a minimum) one to two high-potential successors for each critical position. Make sure that you identify the skills needed for these critical positions and create a proactive plan to build those skills in successors.  Meaningful development plans require focus (1-2 development activities at a time), support (a supervisor who helps drive development) and resources (internal or external development and learning programs).

Imperative #3: Be Vigilant to Improve Retention

It is all-too-common in this industry to hear tales of promising hires who were lured away by competitors. This happens most with talented employees, and often leaves managers feeling helpless.

What should executives do? Companies will reap huge benefits from “back to basics” practices like appreciation and recognition, competitive compensation, career development, and flexibility. For example, NuStar Energy pays 100% of employee health insurance, matches 401(k) contributions, and lends its corporate jet to employees in crises. Chesapeake Energy offers on-site daycare.

Hopefully the above information is not earth shattering. However, there is one secret to employee retention that often makes leaders wide-eyed: if you are worried about losing your key employees….talk to them! I suggest regular “stay interviews” with key employees—ideally, monthly, quarterly at minimum. Begin the conversation with a genuine appreciation for the employee’s contribution. Then dive in. Some sample questions:

  • What are the frustrations you are currently facing? How can I help manage or remove them?
  • Is there anything you need to be effective and happy in your role? What would help you contribute to your fullest?
  • If you were to get a call from a competitor tomorrow, what would you do?

Moving the Industry Forward

The strategies organizations use to attract, develop and retain their talent will be a critical factor enabling the industry’s imminent growth. The Deepwater Horizon accident is a cautionary tale about skills and talent practices needed in all oil and gas companies. Don’t ignore these imperatives. Don’t let this mistake happen to you.