Labour Market Tightness Not Uniform in Energy Services

Managing Labour Needs in Energy Services.

Waqar Syed, MBA 720-683-6705

The labor market tightness in the Canadian energy services sector has been a source of concern for investors and corporates.

Oil Service No Longer A Preferred Employer Given its Cyclicality/Seasonality
Total employment in the oil service patch is highly correlated to rig count, which despite recent increases, will likely be down 66% and 38% from 2017 and 2014 levels. Additionally, seasonal volatility impacts labour needs as April/May rig count is typically down 75% from January/February levels, and August/September activity is generally up 175% from April/May levels. The brunt of this cyclical/seasonal volatility has been met by the employees as management adjusts its cost structure with changes in rig activity.

Labour Challenges Higher in Pumping than in Drilling
Within the energy service segment, the tightness in the labour pool is mostly for entry level jobs and even at the entry level, tightness is highest when a Class 1 driver’s license (preferred for pressure pumping operators) or a Class 3 driver’s license (preferred for wireline operators and well service rig operators) is required. For most entry level jobs in oil services, there are no minimum educational requirements, though passing a drug test is mandatory. Given the added hurdle of a Class 1 driver’s license, finding workers for a pressure pumping crew is harder than finding candidates for a drilling rig crew. Firms delivering online orders are attracting Class 1 drivers, with a shortage of Class 1 drivers being felt across North America.

What Are Future Labor Needs in Energy Services?
We estimate that 100 new direct jobs are created by an incremental rig working in the WCSB, an estimate much below the 200 jobs per rig figure estimated by the Petroleum Services Association of Canada (PSAC). We estimate that 20 additional rigs will likely be working in the WCSB year-over-year in 2022e, requiring filling 2,000 direct positions in 2022e. (The relevant PSAC estimate would be 4,000 based on ATB's rig count forecast.) While the incremental labour requirements appear to be not that high, the available pool of unemployed oil service employees is very small (only 3,236 by one estimate). As Alberta’s unemployment level exceeds 40,000, the average unemployment for the 2018-19 time period, we believe the sector can hire from the broader pool.

Service Pricing Needs to Rise; Service Quality at Risk
As the pool of unemployed oil service personnel is nearly exhausted, the service sector will have to hire “green” candidates, which will require higher training costs. In addition, starting salaries have to be high enough to attract candidates from other industries like farming or construction and needs to compensate for the highly cyclical and seasonal nature of oil service work. Service prices are rising and will need to rise more to justify this labour inflation. Pumpers face $10K type costs for Class 1 certifications, a tab E&Ps may eventually have to pick up.

Waqar Syed, MBA 720-683-6705

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