Oil-exporting countries in the Middle East and Africa lost more than $340 billion in oil revenue from their budget in 2015, amounting to 20 per cent of their combined gross domestic product, according to the International Monetary Fund (IMF).
Christine Lagarde, Managing Director of the IMF, said on Monday that supply and demand factors in the oil market suggest that oil prices are “likely to stay low for an extended period.
“This will mean that all oil exporters will have to reduce spending and work on raising revenues. At the same time, these economies need to strengthen their fiscal frameworks and reengineer their tax systems – by reducing their heavy reliance on oil revenues and boosting non-hydrocarbon sources of revenues,” Lagarde said.
The slump in prices led Nigeria to loss of over $62.8 million revenue between November and December last year. President Muhammadu Buhari left Nigeria Sunday for the Gulf in what Presidency officials said is an ongoing efforts by Nigeria and other members of the Organisation of Petroleum Exporting Countries to achieve greater stability in the price of crude oil exports. Speaking at the Arab Fiscal Forum in Abu Dhabi, Lagarde added that such adjustments will help bolster growth and job creation and help maintain debt sustainability.
The US oil and gas industry has lost about 100,000 jobs over the past 16 months, according to the US Bureau of Labour Statistics. Employment losses worldwide are probably at least double that figure. And these are only people employed directly by oil and gas producers, drilling contractors and other oilfield services firms.
Tens of thousands more jobs have been eliminated throughout the supply chain. Job losses range from truckers and sand producers to the manufacturers of everything from drilling pipes, rigs and pumping equipment.
Skilled and highly trained professionals are the most important assets of the oil and industry and parts of the supply chain.
The availability of an experienced workforce, as well as an ecosystem of drilling contractors, surveying firms and other specialist services companies is critical to maintaining and expanding output.
Lack of skilled personnel after the mass layoffs of the 1990s was one of the main reasons oil companies struggled to raise their production between 2002 and 2008 even as oil prices quadrupled. Now history is threatening to repeat itself as layoffs threaten the workforce and ecosystem of companies that will be needed to meet oil demand towards the end of the decade and into the 2020s.
“Previous cycles have shown that the impact of oil prices is long lasting, and that the scars from a sustained period of low prices can’t easily be erased,” Saudi Arabia’s vice-minister of petroleum, Prince Abdulazziz bin Salman, warned last year (Sixth Asian Ministerial Energy Roundtable, Doha, 2015).
“During sharp downturns, the industry tends to lose talent, technical expertise, financial resilience and the confidence to embark on new investments. Unfortunately, none of these adverse impacts on our industry can be quickly reversed.”
Oil and gas companies have tried to protect as much of their specialist workforce as possible during the current slump to be ready for an eventual recovery when the cycle turns. But the lower oil prices fall and the longer they stay there, the more difficult it becomes to preserve the industry’s specialist workforce and supply chain.
The current slump is starting to dismantle and scatter the workforce and community of suppliers rebuilt with so much difficulty and expense over the past decade following the slump of the 1990s. The effect of the current downturn on the workforce and the supply chain could prove to be one of its most lasting effects.
The effect on the workforce and supply chain is the most enduring source of competitive advantage Saudi Arabia can create from the current price war. The techniques at the heart of the shale revolution as well as offshore megaprojects cannot be unlearnt, but the workforce in which they are embodied can be harmed by attrition. If the oil market rebalances over the next 12-24 months, as many analysts expect, consumption starts to outstrip production, and prices rise, how easy will it be for the oil industry to begin increasing output again?
The prolonged slump of the late 1980s and 1990s hollowed out an entire generation of jobs within the oil and gas industry. By the late 2000s, the workforce consisted of a large number of ageing professionals nearing the end of their careers, recruited in the 1970s and early 1980s.
There were also a large number of young and relatively inexperienced professionals recruited in the 2000s with less than 10 years’ experience. But there was a severe shortage of midcareer professionals with 10-20 years’ experience, the missing generation that would otherwise have been recruited in the 1990s.
The “talent gap” on the workforce side was matched by a similar “supplier gap” as the industry struggled to replace the pipe makers, drilling manufacturers and specialist steel producers downsized in the 1990s.
The acute shortage of specialist labour and supply firms contributed to the enormous wage and cost inflation in the industry between 2004 and 2014 as it struggled to increase output in response to soaring prices.
The problem of maintaining a specialist labour pool and supply chain in the face of deep and long activity cycles is both a consequence and contributor to instability in the industry.
The current slump is already creating the conditions that will lead to the next boom at some point within the next five to 15 years.
