The oil and gas industry has become one of the most productive sectors of the Canadian economy since oil prices collapsed in late 2014 and those gains are likely to be maintained even as capital investment returns during a moderate recovery, says a new productivity report released by Petroleum Labour Market Information (PetroLMI), a division of —Enform.
Labour productivity gains as high as 41 per cent in in situ oilsands and 36 per cent in oil and gas services have been realized since 2014, according to PetroLMI.
Doing more with less through technology and process improvements, and the continuation of mergers and acquisitions to strengthen the industry’s competitiveness are expected to extend that trajectory, adding a further two per cent in productivity between now and 2021.
The costs of producing oil and gas have come down and will likely stay low.
“That’s good news because, according to historical business trends, labour productivity typically declines during a growth or recovery cycle in oil and gas activity,” says Claudine Vidallo, team lead at PetroLMI.
“If it weren’t for significant and ongoing technology and process improvements, labour productivity could decline during the forecasted moderate recovery period of 2017-2021.”
Productivity losses during industry growth are driven by several factors, including cost inflation as producers compete for services, but it also has a lot to do with how productivity is measured.
The standard productivity metric relates revenues to the number of workers employed.
“In oil and gas, however, we acknowledge that commodity prices swing significantly. So Gross Domestic Product (GDP) per labour input isn’t really a good measure of productivity. So in this report we measure production output over employment,” Vidallo says.
In using this metric, new facilities and infrastructure construction during periods of better oil and gas economics registers as a decline in productivity because there is a lag between construction and when the additional production actually comes onstream.
This dynamic is seen in the PetroLMI study’s comparison of three productivity periods: the expansion years of 2010 to 2014, the bust years of 2014 to 2016, and the forecasted “moderate recovery” years of 2017 to 2021.
In situ oilsands projects invested heavily in expansion during the first period, but production mostly came on in the second period.
“And since in situ oilsands operations are more able to respond to the economic environment than oilsands mining operations, which are typically larger scale, megaprojects, we saw a significant decline in capital spending in in situ during the downturn,” Vidallo says.
Plugging the numbers from these two trends into PetroLMI’s employment analysis versus productivity ratio, resulted in in situ oilsands showing the highest labour productivity gains.
Exploration and production companies (excluding oilsands) also ramped up during the first period, but compared to the oilsands, their spending is typically associated with staffing costs. They’re also even quicker to react to poor economic conditions. The sub sector was able to adjust capital spending and implement staffing reductions with modest outputs, resulting in a 30 per cent productivity gain.
Pipelines expansion between 2010 and 2014 was somewhat suppressed so it showed an 18 per cent boost in productivity after midstreamers cut staff in the downturn.
“So [labour productivity] shouldn’t be the only measure of the health of an industry because it cycles with industry’s growth and contraction,” Vidallo says.
If measuring productivity in this way seems limited, the results of a revenue-over-employment metric would provide even more skewed results.
“The value of this report is its benchmarking data. The study has to be taken with a grain of salt, but benchmarking is always useful information because it provides a baseline measure from which industry can move towards a productivity target,” Vidallo says.
PetroLMI’s comparison of the oil and gas industry to other sectors of the Canadian economy is also interesting. Although it’s not a true apples-to-apples comparison because the rest of the economy is measured on revenues over employment, the findings nonetheless suggest that from 2010 to 2016, oil and gas is six times more labour productive than all industries in Canada.
During the study’s “moderate recovery” period between 2017 and 2021, some sub-sectors are expected to continue to see productivity gains while some will experience declines. Upgrading, for example, is expected to see the biggest boost, at 32 per cent.
“Companies with upgrading operations have spent a lot of effort in improving operational efficiencies even before the downturn occurred. So they have been working on that intention for a long time and I think we’re now seeing the effects of that reflected in the numbers,” Vidallo explains. Oilsands mining is also expected to see strong productivity gains. With no expansion projects on the horizon, all the debottlenecking, optimization and new technology implementation are expected to translate directly into labour efficiency.
E&P labour productivity, however, is expected to drop by eight per cent, largely because higher commodity prices mean better economics, which will drive growth and expansion.
“We might see more capital spending in this sub-sector than in the oilsands going forward,” Vidallo says. “But other factors include the regulatory environment. New methane rules, for example, require compliance. So you’re adding work in monitoring and implementation, but these efforts don’t necessarily result in increased production.”
During a moderate recovery, PetroLMI says that a stable or declining labour productivity may be “acceptable and even necessary” for the industry’s health and sustainability. Even so, the report provides recommendations to help industry and government protect hard-won gains.
This includes removing constraints to the transportation of oil and gas, streamlining regulatory processes, supporting the development of value-added processing, supporting the development and promotion of critical technical skills, and improving industry labour market data.
Some of the recommendations in this report also mirror those in the PetroLMI’s labour supply report.
“Because there is a notion that jobs will be displaced—which isn’t necessarily the case because it’s more of a shift in needed skills than the elimination of jobs—we thought that industry and government need better communication and insight into that shift and then, of course, to prepare the labour force for that shift as a result of innovation,” Vidallo says.