Facing skills shortage

Facing skills shortage
By Andrew England, Financial Times Published: October 08, 2007, 23:16

Rising drilling and riggings costs, combined with shortages of skilled personnel and equipment, are affecting hydrocarbon projects throughout the Middle East, with some being delayed and other contracts being renegotiated. Producers in the region, from Libya to Saudi Arabia, have embarked on ambitious plans to increase production and capacity to meet growing global demand and take advantage of record oil prices.

But many will struggle to meet their schedules, experts say, and can expect to pay exorbitant prices if they are to ensure they have the material and personnel in a market suffering severe constraints.

"It's having an impact and that impact is going to increase over the next few years. We are seeing projects being delayed simply because they can't get the equipment delivered on the timescale they used to," says Candida Scott, an analyst at Cambridge Energy Research Associates (Cera).

Experts say a critical bottleneck is the shortage of skilled staff, with an industry workforce dominated by people close to retirement and inexperienced graduates.

The issues affect producers worldwide, with the Middle East and Libya accounting for 20 per cent of world projects adding productive capacity between 2007 and 2011, according to Cera.

Significantly, it is also the region requiring the most manpower for design and project management over the same period, with 35 per cent of the world's projected total, the institute says.

One of the most high-profile examples of a project affected is in Algeria where Sonatrach, the state oil company, cancelled the contract of Repsol YPF and Gas Natural to develop the 5tcf (trillion cubic feet) Gassi Touil project citing development delays and cost overruns. When the consortium won the contract in 2004 the deal's economics were "marginal", according to Wood Mackenzie analysis.

Since then, rising upstream costs and the increasing cost of setting up liquefaction plants raised the project's overall costs by 127 per cent from $3 billion to $6.8 billion, according to the energy consultants.

"A lot of people have suggested Sonatrach's decision to cancel the project was nationalism, but we would disagree with that; the fact is it was based on simple economics," says Craig McMahon, at Wood Mackenzie.

At best, the project will start producing in mid-2012, at least two and half years later than expected, he adds.

In Abu Dhabi, which produces around 95 per cent of the UAE's hydrocarbons, the completion of some larger projects is being put back by between nine and 12 months, an industry source said.

Development of the onshore Bab field has also been delayed mainly because of the scarcity of specialised equipment needed for the sour gas project. The lead time for some equipment is 18 months to two years, experts say.

Officials had put the development of the Bab and Shah fields out to a joint tender, hoping the two would eventually produce 3bcf (billion cubic feet) per day. However, given the technical challenges of the sour gas fields and market difficulties the authorities later elected to re-tender just for Shah, which is less complex and has higher liquid yields, analysts say.

Abu Dhabi is also taking a more "stringent" approach in terms of its commercial deals than others, such as Saudi Arabia, the industry source says. "My understanding is they are taking a more liberal view of the market, they will pay top dollar to secure resources, while here we are more prudent and not willing to be bullied by the market," the source says. Saudi Arabia maintains the world's largest crude oil production capacity, estimated to be 10.5 million to 11 million barrels per day.

In 2006 Aramco, the state oil company, announced an $18 billion plan to increase capacity to 12.5 million barrels per day by 2009 and 15 million barrels per day by 2020, according to the US's Energy Information Administration. Experts say the kingdom seems on track, but will pay high prices.

"The Saudis have been fairly adept at ordering equipment and rigs; their project management skills are fairly honed - getting access to the equipment they need. But in doing that they are paying much more than they would have five years," says David Fyfe, at the International Energy Agency. There are about 270 rigs operating in the Middle East, compared to 158 in September 2000, according to Baker Hughes, the oil services company, with Saudi Arabia estimated to be employing around 130.

Four or five years ago, the kingdom would have been using 30 or 40, says Gene Shiels at Baker Hughes. But even as costs rise, Saudi Arabia has the advantage of scale, says Colin Lothian, a Gulf specialist at Wood Mackenzie.

"While the projects in Saudi Arabia are highly capital intensive, when you look at the unit cost of bringing that production on stream it's low in global terms, just because of the size and scale of these assets," he says. For smaller producers it means having to compete with large producers who can offer longer contracts and pay top rates.

The issues can be exacerbated by difficult operating environments. In Libya, for example, there are clear attractions for international oil companies given the nation's unexplored status and its proximity to Europe. But one expert says there has already been a decline in oil majors' interest in the North African state. "If there were no shortage globally the Libyan programme would be challenging simply because of the time taken to get permission to get the necessary people and equipment into Libya, which raises costs significantly [and] slows everything down," the expert says.

"And everybody who has got kit and people has got lots of other places they can deploy, so why on earth should I go through all the time and trouble."