Tuesday, April 24, 2007

Human Capital Trends in Energy, Oil and Gas Sector

Energy is one of the most essential and most visible industries in the world. So it is not surprising that in today’s increasingly complicated world, political volatility and economic struggles have a significant impact on petroleum and natural gas companies. After several years of lackluster hiring, oil-and-gas exploration and production companies are drilling for executives who can help discover new fields or extend the life of existing fields. Industry employers also are hiring senior finance executives and experienced technical professionals, such as geologists and engineers. Analyzing these trends from executive search industry’s perspective it can be concluded that all these recent developments and macro-economic factors affecting energy and utilities sector are going to create an immediate requirement for experienced and talented leaders to tackle these issues. Eventually, executive search and HR consulting firms will get new opportunities from all these developments to consolidate their positions in a sector which till date was quite unexplored.

This article takes into account all these industry trends and macro-economic factors and analyzes the underlying opportunity for Executive Search, HR Consulting, Management Appraisals and Talent Management services in this sector.

Leading executive search firms are consulting with a number of utilities to identify senior managers with the skills necessary to lead their organizations’ transition to the competitive market. The industry requires leaders with deft management skills, international experience and the ability to navigate politically charged situations. This is especially critical as companies expand operations to capture growing reserves in countries such as Russia, and reach new markets, most notably in China.

Instability in Oil producing regions
As many of the world’s main oil producing regions are unstable, petroleum and natural gas companies require leaders with the financial and technological expertise to monitor and reduce their organizations’ risk and liabilities.

Following factors are forcing companies to look overseas for new finds.
# Domestic reserves are dwindling,
# Oil and gas prices have risen at the wellhead, making exploration and production more profitable.
# Rise in prices also boosts overall company valuations, making it more expensive for companies to grow through mergers and acquisitions.

"Companies want to add more through the drill bit than by trying to acquire," says Richard Preng, managing director, global energy, in Houston for recruiter Spencer Stuart. Domestic oil-and-gas companies are clustered in Texas, Colorado and Oklahoma, so U.S. demand is strongest in oil-and-gas centers such as Houston, Denver and Oklahoma City, notes Michael Saunders, a recruiter with the Energists, a Houston-based search firm, who describes hiring activity in these cities as "quite buoyant."

Start-ups and Smaller exploration companies are springing up in major centers
Smaller exploration companies springing up in major centers also have become a hiring force. These companies typically are founded by oil-and-gas executives who have left larger players either voluntarily or as part of a layoff due to mergers or reorganizations. They're then seeking funding and teaming up to start organizations that will tap or explore reserves that aren't profitable to the oil-and-gas behemoths but can be lucrative ventures for smaller, more nimble organizations. Often, the goal of the founders is to build value quickly and then sell the new company. Their game plan is to build up the company and then sell it, so they aren't concerned with hiring feedstock for the future.

Demand is moderate to good for senior exploration executives with strong technical and international backgrounds and good track records of discovery. Small- to midsize U.S. or foreign oil-and-gas exploration companies need such executives to fill VP, SVP, or International VP of EandP roles.

Energy sector could see more mergers in '07 / Production and access challenges may drive growth
Industry experts feel that energy sector could see more mergers and acquisitions to counteract difficulty in gaining access to oil and natural gas and higher costs of getting it to the surface. Analysts expect more mergers in 2007, particularly with increased competition from state-owned oil companies that can make acquisitions unfettered by investor pressure for near-term increases in earnings or cash flow.

Fadel Gheit, an oil analyst with Oppenheimer and Co. in New York, said many oil companies are in prime financial condition with clean balance sheets and billions on hand. But he said the challenge to maintain production - let alone increase it - in the face of rising costs and competition for access could prompt companies seeking growth to go shopping. This year companies largely pumped up or streamlined asset bases with multimillion-dollar deals to buy and sell portions of each other's holdings. Such deals often involved interests in oil and gas fields in North America and the Gulf of Mexico or access to unconventional resources such as oil-soaked sands in Canada or oil shale in the United States.

"They're just seeing an increasingly challenging reinvestment environment," said Dan Pickering, an analyst with Pickering Energy Partners in Houston. "Access to foreign jurisdictions is tougher, competition from national oil companies is hotter, and host governments from across the world are extracting more money to participate." Simmons and Company International, a Houston-based independent investment bank, said in a recent research report that so-called organic replacement of reserves - or ability to replace reserves on their own rather than through acquisitions - was less than 100 percent in the last two years and likely to remain "relatively meager for some time to come." Simmons estimated that oil majors would generate $245 billion in cash flow and asset sales in 2007, and have $80 billion of that available for stock buybacks or acquisitions. Simmons also speculated on which companies are likely acquirers or likely to be acquired.

E.g. ConocoPhillips closing on its $35.6 billion purchase of natural gas producer Burlington Resources.
Anadarko Petroleum Corp. bought Kerr-McGee Corp. and Western Gas Resources for more than $21 billion to increase its North American footprint, particularly in the Rocky Mountains and the Gulf.

Statoil, Norway's state-controlled oil company, announced plans to buy offshore energy and oil operations of Norsk Hydro, Norway's largest publicly traded company. The $28 billion deal, expected to close in the third quarter of 2007, will create the world's largest offshore operator, surpassing Royal Dutch Shell.

It is speculated that potential acquirers would include Irving-based Exxon Mobil Corp., the world's largest oil company, which can best afford an all-cash deal, "but appears to be patiently awaiting one of its large peers to be selling at a steep enough discount to make the plunge." The report also noted that San Ramon, Calif.-based Chevron Corp. has spare cash as well, and Houston-based Marathon Oil Corp. has said it's seeking a Canadian oil sands partner.

CEO Movements in 2005
In 2005, 48 CEO positions changed in the energy sector (including utilities), according to Chicago-based Challenger, Gray and Christmas, a human resources consulting and research firm. Twenty-one of the CEOs retired; 12 resigned or stepped down; and 15 moved on to other companies or pursuits.

Demand for Talent in Energy Sector
Trends in the occupational structure of both mining and the utility sector:
• Employment is projected to decline especially in skilled trades and, to a lesser extent, in administrative, clerical and secretarial, transport and machine operatives and elementary occupations
• For sales and personal service occupations, small increases are expected
Replacement demands of both mining and utility sector:
• Until 2012, there is a replacement demand of (in total) 12,000 staff in administrative, clerical and secretarial occupations
• A number of other occupational groups such as personal service and sales / customer service occupations will experience growth of over 50% of current employment levels over the decade
• Managerial, professional and associate professional occupational groups are all projected to require replacements amounting to 25-35% of current employment levels.

“The oil and gas sector is probably better compensated than most other industries, [and executive] pay tends to be higher for companies in this sector than in other industries,” according to Steve Cross, business leader for executive remuneration in the Houston office of Mercer Human Resource Consulting. (See April 2005 Mercer report, “The Wall Street Journal/Mercer Human Resource Consulting CEO Compensation Survey.”)

Talent and Experience requirements
Attractive candidates typically have 15 to 20 years of experience, with at least five years in management and a few years' working overseas, says Lue Gates-Weiss, an independent oil-and-gas industry recruiter in Houston. "The last two years have been pretty dismal, but now companies are assessing possible expansion," says Ms. Gates-Weiss. "Optimism is increasing on the hiring side." Ms. Gates-Weiss says she hasn't seen pay offers increase much for recruited executives, but compensation is rising for employees. In 2003, exploration and production (EandP) companies planned to give executives raises averaging 5.2% and exempt employees raises averaging 4.4%, according to a survey by Effective Compensation, a pay-consulting firm in Lakewood, Colo. Among the 70 surveyed companies, about 95% had short-term bonus programs for executives, managers and professionals.

Demand for Exploration Executives increasing
In larger organizations, top exploration executives are in demand to help find and oversee discoveries in foreign countries and regions, says Ms. Gates-Weiss. They must have experience negotiating for concessions, such as agreements regarding how discoveries might be shared and operated, with foreign governments for single countries or entire regions and continents, such as Latin America or Africa. "They also need a strong technical foundation plus management skills to give them commercial acumen," she says. A vice president in charge of exploration might earn a salary ranging from $200,000 to $300,000 plus a bonus, she says.

Opportunities for Outsiders
Changes in the CEO office, the Sarbanes-Oxley Act of 2002 and the complexity of financial reporting in the oil-and-gas industry also are generating searches for senior financial executives. While new hires for exploration, production and other technical positions always need strong direct-industry experience, oil-and-gas companies occasionally hire finance executives from outside the industry from sectors that typically are stronger than in the oil-and-gas industry in other areas, such as investor relations.

Technology Leaders Needed
The technology executives sought are those who can help EandP companies gain an advantage by using modern exploration technology, says John Westropp, a principal with Christian and Timbers, a New York-based search firm. He is seeking a new CEO for an early-stage company that has developed proprietary technology for the industry. Candidates should have excellent leadership and management skills, plus experience in getting major oil-and-gas companies to adopt new technology. Cash pay for the position will be about $300,000 annually, plus equity.

Demand for technical contributors -- geologists and engineers -- also is high as new EandP start-ups build their teams, says Mr. Saunders. The scarcity of skilled professionals is helping to keeping pay healthy for such candidates. A senior technical professional can negotiate an annual base salary of about $130,000 to $140,000, says Mr. Saunders.

Recruiting crisis in energy industry
While the public frets about high gasoline prices and disruptions by rusty pipelines, one of the biggest threats to future energy supply lurks in the personnel departments of oil and gas companies.

An industry expected to deliver a 50 percent increase in energy supplies by 2030 faces this expanding demand with a shrinking pool of available talent. The industry is on the verge of losing a whole generation of professionals who are reaching retirement age, creating a huge vacuum of talent and no experienced replacements. Finding and retaining qualified talent is a management problem that could turn the situation into a serious operating crisis for many companies.

This assessment comes from Damon Beyer, a Houston partner with the New York consulting firm of Katzenbach Partners. The statistics project a grim scenario for an industry that has long paid too little attention to succession planning, retention, training and recruiting.

# More than 500,000 petroleum jobs were lost between 1982 and 2000 in the United States, from a high of 860,000 in 1982.
# The average age of workers in the oil and gas industry is 49, while average ages in other technology-focused industries hover in the 30s.
# Enrollment in critical U.S. undergraduate programs, e.g. petroleum engineering, fell 85 percent from 1982 to 2003. Only 1,000 graduates are expected this year.
# A quarter of U.S. employees in the most scarce exploration and production skill sets will be eligible for retirement by 2009.
# By the end of this decade, there will be a 38 percent shortage of engineers and geoscientists and a 28 percent shortage of instrumentation and electrical workers.
# The most skilled -- and most critical -- jobs are now the hardest ones to fill. Asked to name the biggest skill gaps, executives of 22 leading energy companies named petroleum engineering (77 percent), and geology, geophysics and engineering analysis (73 percent each).


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