The “other natural resource” shortage in the energy industry.

Implications: While much has been written regarding the potential for natural resource shortages in the energy industry, recent articles have highlighted a shortage no less severe: the shortage of highly qualified technical personnel.  The skill level of personnel is often cited as one of the leading causes of production problems in refineries, petrochemical facilities, and power plants. An interesting article by Sheila McNulty in the January 16th, 2008 Financial Times covers a number of initiatives by oil companies to replace retiring experienced personnel and to attract new talent. The scarcity of young talent may ultimately be best addressed by bringing their pay scale in line with other highly desirable fields, such as investment banking, law, etc. The Financial Times article concludes by citing Mr. Tony Ward, a director of Ernst & Young’s energy, chemicals and utilities group saying: “It is a very good time to be an engineer”. I am not so sure!

Analysis:

While much has been written regarding the potential for natural resource shortages in the energy industry, recent articles have highlighted a shortage no less severe: the shortage of highly qualified technical personnel.  The skill level of personnel is often cited as one of the leading causes of production problems in refineries, petrochemical facilities, and power plants. An interesting article by Sheila McNulty in the January 16^th, 2008 Financial Times covers a number of initiatives by oil companies to replace retiring experienced personnel and to attract new talent.

A recent report by Cambridge Energy Research Associates (CERA) states that there are not enough engineers to meet current demand, and that by 2010 there will be a shortfall of 10-15%. In its report, CERA predicts that 50% of today’s engineers, who now on average exceed age 50, will retire by 2015, and that their loss will not be offset by a sufficient number of new entrants in the engineering profession. The problem is not only in the numbers, but is especially severe with respect to the experience and knowledge gap.

A survey of energy industry human resources leaders by Ernst & Young reveals that the difficulty of adequately replacing skilled and experienced workers is considered one of the “top five business challenges” for growth.

This problem, experienced in the refining, petrochemical, and oil and gas industries, will be even more severe for the power industry, which is already stretched. Exacerbating this will be the need for additional experienced personnel that will be required to handle the wave of refurbishments expected to occur to bring plants into compliance with new emissions laws soon to be issued, and especially with the wave of new conventional and nuclear power plants that are projected to be developed in the next twenty or thirty years. Solar and wind energy will undoubtedly play a role in the future of clean energy, but nuclear is indispensable to satisfy power demand. Five major American utilities have already submitted license applications and, although these projects have very long schedules for permitting, engineering, equipment delivery and construction, many observers believe that people training and expertise will be one of the biggest hurdles for utilities and E&C companies to overcome.

The article lists a number of initiatives taken by certain energy companies to retain employees in their ranks well beyond age 65, while simultaneously attracting new young talent. These are all important and useful initiatives, but market forces suggest an even more powerful catalyst: compensation.  The scarcity of young talent may ultimately be best addressed by bringing their pay scale in line with other highly desirable fields, such as investment banking, law, etc.  These professions offer to young talented people more immediate rewards plus the promise and the possibility to have several million dollars saved in their bank accounts by age forty. A study by Capstone Partnership, a leading provider of executive search services, shows that total yearly compensation for an investment banking associate five to seven years out of college is in the range of $350,000-$500,000 per year and it is not uncommon to be a vice president or a director after eight or ten years of experience and have over one million dollars of total annual compensation. What is the attraction to embark in very demanding engineering studies and in a career that will likely require you to work in challenging places, and to sometimes be exposed to health and safety risks? In fact, as an example, the Engineering Workforce Commission (EWC) reports that peak enrollment in electrical engineering was in the fall, of 2002 with 62,448 students and has continued to decrease to less than 56,000 in the fall of 2005. Another interesting statistic is that in the spring of 2007 there were 794 undergraduates at Princeton University of whom 32% were women. In ’05- ‘06 the school enrolled 508 graduate students including 25% women.

The McNulty Financial Times article concludes by citing Mr. Tony Ward, a director of Ernst & Young’s energy, chemicals and utilities group saying: “It is a very good time to be an engineer”.

I am not so sure!