By Ryan M. Couture
As we reflect on the Labor Day here in the U.S., it is important to remember all the workers who make this industry possible. While Huey Lewis sung about “Workin’ for a Livin’” many of us have made the industry more than just a job, but a career. From the roughnecks and refinery operators to the engineers and executives, the U.S. oil and gas industry employs millions of dedicated people. We firmly believe it is these people that make the U.S. oil and gas industry what it is today. Last week, we looked at some of the advantages U.S. refiners had both in the past and today that give them a competitive edge. While we touched on their domestic workforce advantage, in this week’s blog, we will look closer at exactly what makes it different and why that is the case.
“Somedays won’t end ever and somedays pass on by”
It is easy enough to say that the U.S. has a “dynamic workforce,” but what exactly does that mean? What, in particular about the U.S. makes us more dynamic or flexible than our counterparts in Europe, Asia, Africa or South America? After all, we constantly hear about how the U.S. educational system is failing, especially in STEM education, when compared to other countries. The reality is, the U.S. educational system, while not number one in STEM education (the U.S. actually ranked 27th in math and 20th in science, among 34 countries when looked at by the OECD) is better than most. By other measures, we still rank in the top five most literate countries in the world, and we manage to turn out hundreds of thousands of engineers and other skilled technical and business leaders each year.
The skilled labor that is required to efficiently build and operate a refinery spans across many disciplines. Beyond the need for skilled engineers, a far larger number of smart and capable operators and tradespeople are required to run and maintain the complex oil and gas facilities. This requires an understanding of math and science, the ability to clearly and decisively communicate, and to work together closely. In the U.S., there are educational programs in place intended to train people to be in operations. These associate degrees prepare them to be safe and effective in a highly complex and potentially dangerous refinery environment. We also have a pipeline for the development of tradespeople: machinists, welders, electricians, pipefitters and the list goes on. While it seems forgotten by the mainstream (which focuses squarely on college), the importance of developing the trades and having these skilled people available is critical to the operation of a lot more than just our energy infrastructure.
“Hey I’m not complaining ‘cause I really need the work”
While the educational systems in most developed countries produce plenty of skilled workers, in the developing world it is still a challenge. This forces companies in these countries to rely on outside labor support for large projects. Two prime examples were the Reficar refinery project in Colombia where local workers went on strike after the contractor was accused of paying hundreds of foreign workers higher wages, due to the shortage of qualified local workers. Saudi Arabia faced (and still faces) similar challenges, having to import thousands of workers for its construction projects amid shortages of Saudi workers. Even within their existing plants, expatriates are a fixture in their operation. These countries are not unique in their struggle of aligning labor with needs. On the contrary, the U.S. has a broad base of laborers and a wealth of construction and contractor firms exist to provide support, logistics and know-how to the industry. The ability to call upon experts with a simple phone call is a huge competitive advantage.
Even without a shortage of workers, strikes over increased pay or better benefits are common around the world. The difference is, in the U.S., these strikes don’t often have the same crippling effects than they do elsewhere. The United Steelworkers (USW) union went on strike in the U.S. in 2015. While the USW is the dominant union for refinery operators, workers only went to the picket lines at a handful of refineries (despite the dozens the union represents), and disruption was minimal. Only one refinery, the Tesoro Martinez refinery, did idle itself, but it had been operating at sharply reduced rates due to turnaround at the time. The other refineries that experienced walk-outs continued operation using the non-union professional staff until the union and companies could reach an agreement. This meant a minimal disruption to operations; few outside the refining industry even knew it was taking place.
In contrast, workers of Brazilian state-run Petrobras went on strike over pay in late 2015, reducing rates and slowing projects for several weeks. Over two million barrels of production were lost during the few weeks in November. French oil workers went on strike in June over proposed labor reforms, causing severe disruption to six of the eight operating refineries and logistics infrastructure (as discussed in a previous blog). Fuel shortages were rampant across the country until the situation could be resolved via government intervention and the release of emergency fuel reserves. South Africa experienced a similar strike this August, which impacted the energy sector broadly; however they fared better than France and were able to keep their largest refinery in operation and a majority of the fuel stations supplied during the negotiations.
“I’m takin what they giving”
A big reason the U.S. doesn’t suffer from these disruptions is the labor laws. These laws protect both the employees and the employers. Over half the states in the U.S. are “right to work” states, which have laws in place prohibiting mandatory union membership. While unions do exist across the country, they do not have the same ubiquity or power that they hold elsewhere. Labor laws are not as flexible in many other developed countries, which push workers’ rights, but can serve to limit flexibility by putting up hurdles to switching employers or jobs.
U.S. workers are also not afraid to work. Having worked on turnarounds in the U.S. (and Canada), it was common to work 12+ hr shifts for weeks with a single “lunch” or “dinner” break, until the work was done. This contrasts to the stories of working in Italy. Shifts were 8 hours at a time, and the contractors were keen to take every break they were entitled to (which were every couple of hours). Work also stopped on Sundays. The result was a job that should have only taken two weeks in the U.S. took a month to complete. The recent French labor strikes were in part defending their 35-hour workweeks and other generous benefits. While short workweeks and generous entitlements are great for workers in the short term, when you compete in a global market for a commodity that is heavily traded and ubiquitous, the ability to maintain competitiveness is weakened. Eventually what were very comfortable jobs turn to no jobs at all. This is being felt in refineries in Europe, Australia and Japan, where the higher costs of operation, coupled with local demand falling, has made these facilities uncompetitive as export facilities on the global market.
This effectiveness translates into a reduced number of workers and higher output. This contrast can be made very clear when comparing U.S. independent refiners to the refining sector south of the border in Mexico. In the U.S., independent refiners range from about 3500-6500 employees per million BPD of capacity. This varies depending on the average size of refineries, number of refineries, and a number of other factors. Compare this to PEMEX, who in 2014 reported having approximately 47,600 people in the downstream sector. PEMEX operates six refineries with 1.69 million BPD of capacity, making an average of over 28,000 employees per million BPD. While the number of employees is likely to change as PEMEX is “de-nationalized” amid Mexican oil industry reform, it highlights the inefficiencies present when there are barriers to free-market competition.
While less of a direct labor issue, corruption is also something that detrimentally impacts competitiveness in certain regions. Scandals in Brazil (throughout much of Petrobras, including the Comperj and Abreu y Lima refineries) and in Colombia with the recent Reficar expansion, highlight the challenges with operating in regions where corruption and graft are the norm. In the U.S., such anti-corruption laws protect companies against this, and violators are prosecuted. This keeps project scope and cost in check and reduces anti-competitive behavior among workers and employers. It is unlikely that such cost overruns seen in Latin America could or would ever occur in the U.S. to the same degree.
“Livin’ and workin’” – Conclusion
The U.S. remains an excellent place to do business. Not without its faults, the U.S. labor force manages to hold its own in a highly competitive environment against its lower-cost competitors. This is done by leveraging our flexibility and collective ingenuity to get things done faster and cheaper. Over the years of a truly free-market refining system, the U.S. energy workforce has evolved into the best. As markets continue to shift in the coming years, it is this workforce that will carry the industry through and continue to bring the sector success. So, to all the hardworking men and women working to keep our gas tanks full, happy (belated) Labor Day.
Turner, Mason & Company has looked closely at the factors that keep U.S. refiners ahead of the rest. We take such factors into account when we put together our 2016 Crude and Refined Products Outlook. This biannual publication covers supply, demand and pricing for global refining markets. In addition, it looks at many of the factors (including labor) that influence these markets, as well as future trends that are taking place. For more information on The Outlook or for our other publications that we have or other services we may be able to provide, please visit our website, or send us an email or call.