More than 40,000 people have been laid off since the collapse in commodity prices sent Alberta into an economic tailspin and energy companies responded in lock step with rounds of downsizing.
As the industry continues to shed people, it’s increasingly unclear if headcount reduction is actually an effective approach to address its issues. Sweeping layoffs may actually be creating the conditions for deeper problems when prices rebound and production opportunities arise again.
More importantly, they may be disguising the real issues that continue to hinder the overall efficiency and productivity of Canadian oil and gas companies.
In this conversation, BOE Report Editor James Rose speaks with Bertrand Groulx, Co-Founder & President of Verdazo Analytics (formerly VISAGE) about the hidden costs and opportunities in the industry, what smart companies are doing now, and where we go next.
An Industry Unprepared
James Rose: We all know commodity price downturns are inevitable, but the staff cuts have been so deep, they beg the question: was the industry sufficiently prepared for this one?
Bertrand Groulx: Unfortunately not. Much of the industry is trapped in a reactive cycle that precludes effective planning and future-proofing.
Rose: What do you mean by that?
Groulx: We continue to react and default to job cuts in pursuit of efficiencies, but they may not be achieved with fewer people on the payroll… in fact they have the potential to introduce new inefficiencies. The bottom line is that when oil prices are high, everyone’s too busy cutting down trees to sharpen the saw. When they’re low, everyone’s too busy drowning to invest in a swimming lesson. We are simply not as operationally efficient as we need to be.
Rose: What’s the real problem here?
Groulx: The question we need to be asking is ‘are the benefits of layoffs material enough to make a difference?’ Let’s say a company spends about 65% of G&A on employees (including benefits and bonuses) but G&A only represents about 20% of total operating costs. As a percentage of total operating costs, employees are then just 13%. If you assume a company reduces 20% of their staff, that’s only 2.5% of total operating costs (not taking into account the added costs of severance). That’s a small drop in a big bucket.
Rose: So, are the staff cuts more about optics for shareholders than anything else?
Groulx: We know that some cuts are necessary if they’re related to drilling programs that aren’t being pursued. But $2 billion of production was lost due to downtime in Alberta alone in 2015. That’s a glaring efficiency opportunity that is far greater in magnitude than cost savings associated with G&A reductions.
What Smart Companies Are Doing Now (Or Already Have Done)
Rose: What are smart companies doing right now to manage in this environment and set themselves up for the future?
Groulx: The smartest companies – and there are more than a few of them in Alberta – planned years ago for these conditions. They invested in technology and training for their people to insulate them against uncontrollable prices and the need to reduce headcount. They were strategic and calculated with capital and debt management and operational strategies. They leveraged best practices and expertise within their own industry. As a result, their capabilities and capacity per capita are far greater than their competitors. They are capturing their share of that $2 billion in downtime losses and operating leaner, which means they don’t have the same need to reduce headcounts. They’re insulated.
Rose: What about the organizations that are behind the curve?
Groulx: Think about it at the ground level. In many companies, there are frontline staff who are struggling with responsibilities they’ve never had to shoulder before. They’re dealing with the loss of talent and intellectual capital around them. They’re stressed and overwhelmed. That all has an impact on the bottom line. Now, these conditions may be inevitable for companies to some extent. But what takes the place of those departed people and that knowledge? How do you make up that gap so you can continue to seize on production opportunities when prices rebound? And how do you avoid creating new inefficiencies just so you can make it through today?
Rose: This is what you mean by future-proofing.
Groulx: This is the thinking that goes into it.
Rose: How does technology play into that? Analytics technologies are being broadly adopted across industries but oil and gas seems to lag behind. Why?
Groulx: We’re a conservative industry and a big part of our aversion to technology is based on an inaccurate perception that Business Intelligence takes a long time to implement and costs a lot of money. There are tools, like ours, built for oil and gas with a decade of industry expertise baked in. Because we’ve done this for so many companies, we can leverage previous work and deploy our solution in days for a fraction of the cost of one employee. Companies don’t need to try to build their own solutions anymore. You can see a production engineer’s eyes light up the first day they get a hold of this kind of software.
Rose: What kinds of successes and benefits have you seen companies realize using analytics technologies?
Groulx: They don’t spend hours a day chasing data. Instead they can diagnose problems and identify opportunities in minutes. This provides many benefits for a company but primarily it helps reduce downtime, optimize financial performance and improve the speed and quality of decisions. This results in improved processes and evidence-based insights that help carry them through the bad times.
The Future of Oil and Gas Analytics
Rose: What would broad adoption of these strategies, particularly embedding analytics in core business activities, do for a company?
Groulx: In a time of lower margins and price volatility, they may be the distinguishing factor between companies that survive and companies that don’t. We are heading into a time when analytics will be a key strategic contributor instead of an afterthought. Some of the industries that leverage analytics the most are the ones with the lowest margins. That’s our future. For a lot of companies, it’s already here.
Rose: What does that do for the industry?
Groulx: That’s what is so exciting about it. The impact is so broad-based. Individuals, companies, and the industry as a whole will see benefits from these technologies. All they have to do is take those first steps. It’s never too late to start.
Bertrand Groulx is the Co-Founder and President of Verdazo Analytics and an SPE (Society of Petroleum Engineers) Award Nominee. Get valuable insights on analytics and the oil and gas industry from Bertrand on his Discover Analytics blog.