LONDON (Dow Jones Newswires), October 22, 2008

Falling raw material and equipment costs in a slowing world economy offer an opportunity for oil and gas companies to solve the problems of rising costs and delays at major projects, but the industry again finds itself confronting a longstanding enemy - a shortage of people with the skills and experience to lead these developments.

If efforts to plug the skills gap don't succeed, senior industry executives say oil companies' ability to tap new and challenging hydrocarbon resources fast enough to meet demand may have already have reached its limit.

"The really big strategic issue for all oil and gas companies is matching the earth's resource endowment with the capability - technology, skills and know-how - required to bring those resources to market," said BP PLC's head of exploration and production Andy Inglis in a speech at Rice University in Texas last week. Because of the skills shortage, this capability already may have peaked, he said.

Rapid inflation in the cost of doing business, from renting drilling rigs to the cost of steel pipes, has been a growing impediment to companies racing to bring new oil and gas resources to market. It has become increasingly common for major projects to blow out their budgets and come online months or years late.

"At the moment, costs are at an all-time high," said Candida Scott, senior director of cost and technology at U.S.-based consultancy Cambridge Energy Research Associates, or CERA. But she said there are signs that they could begin to fall again. The price of many of the basic raw materials used in energy projects - steel or bitumen, for example - is falling and the availability of vital equipment such as drilling rigs or floating oil-production vessels has grown, she said.

But the shortage of human resources is still a problem. "Even with a drop in activity we are still as an industry absolutely stretched to breaking point. I don't envisage personnel costs coming down," Scott said.

The Legacy of the '90s  

"Where there is a real skills shortage is in the senior technical appointments, engineering, geologists, geophysicists, reservoir engineers, petroleum engineers, drillers," said Bob Greenwood, head of the U.K. oil and gas practice at recruitment firm Odgers, Ray and Berndtson.

"The industry is lean to the point of anorexic," said Jim Babb, international director of energy at executive search company Norman Broadbent. "The day of reckoning is already coming. There are projects that cannot physically start because they don't have the senior management."

This shortage has its roots in the boom-and-bust cycle of the oil industry. "The legacy of the low price of oil in the late '80s and '90s resulted in oil and gas companies shedding staff. That legacy has carried through to a situation you have now where you have an aging workforce and the pipeline of technical leadership talent is not there any longer," said Andy Baggus, head of energy and resources at the U.K. arm of recruiters Boyden.

It isn't just Western firms that are suffering. "The Russian industry has a serious challenge," said Scott Eversman, a partner at Heidrick and Struggles who headhunts for the Russian energy sector, the world's second-largest source of oil and biggest source of gas.

The demise of the Soviet Union reduced the esteem with which engineering as a career was regarded and students began to opt for business instead of technical degrees, Eversman said. "There just aren't enough good, young, bright people coming up through the system," he said.

State-owned oil companies of the Middle East aren't immune to the problem either. They tend to develop their own staff in house, but are dependent on Western oil-services companies for many vital technical aspects of their own projects.

This global imbalance between demand for talent and what's available in the market "is probably the single biggest potential limiting factor for oil and gas companies," Baggus said.                            

The Skills Gap  

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