Competition for top talent keeps pay scale high in oil industry
A July 5 Bloomberg report focused on two aspects of compensation in the energy industry - which executives made the most and how oil and gas compares to other industries.
The recently retired CEO of Chevron, John Watson, got attention for his estimated $25 million pay package in 2017, both because of its size and because it dwarfed the compensation of the CEO of Exxon Mobil, a larger company.
The report also noted that the ratio of energy CEO compensation to the median is generally lower than in other industries, including high-tech. Median compensation in oil and gas is $123,000; at Dallas-based Kosmos Energy, for example, the median is a whopping $230,000.
That may seem odd considering that the industry just emerged from a three-year slump. Hundreds of companies filed for bankruptcy, service companies were “invited” to lower fees and hundreds of thousands of jobs were cut worldwide.
This compensation phenomenon reflects at least three defining aspects of the oil and gas industry: a very small base of low-paid employees, competition for highly skilled employees, and where oil and gas is produced. And Houstonians in oil and gas and those who care about our long-term economic prosperity must take heed: The big paydays most certainly won’t last forever.
The public sees the industry at gas stations, but most stations are independently owned. The familiar logos of Exxon Mobil or Shell still appear, but the low-paid station workers aren’t on their payrolls. This is demonstrated by the exception: Marathon Petroleum Corp. (the refining and marketing company) owns its stations. The ratio of pay for CEO Gary Heminger to the median employee is 935-to-1, but take away the folks at the gas stations and the ratio drops to 156-to-1.
The skill level of oil and gas employees tends to be very high, notably among the geoscientists and engineers who find ways to produce oil and gas miles below the surface of the ocean, frack horizontally for miles through narrow seams of hydrocarbons, refine crude oil and process gas into a range of products.
Location plays an important part because Mother Nature was fickle in placement of resources. They are widely dispersed around the world and in relatively remote parts of the U.S., such as the Bakken of North Dakota or the Permian in West Texas. Overseas, most employees are local nationals, but the 5 percent or so of expatriates are handsomely compensated. Much the same is true of offshore workers who may work 14 days on, 14 days off domestically or 30 days on, 30 days off internationally. Onshore in the U.S., truck drivers and rig crew members make solid six-figure salaries to compensate for long hours, lack of amenities and separation from families.
What does the future hold? More volatility for starts. There has been a tendency in the industry to project current conditions into the future. When times were bad - 1986, 2008 and 2015 - pessimism prevailed. When times are good, visions of $150 to $200 oil hang over the bar at the Petroleum Club. But the recent price bust chastened both seasoned executives and young people about to enter the industry. The industry got a reprieve through its own cost reductions and from the OPEC-Russia production cuts. It is determined not to screw it up again.
The great disruptors of the energy industry have always been politics, markets and technology -- and their interplay. The shale boom in the U.S. upset global markets because of increased production resulting from technological breakthroughs led by Houstonian George Mitchell. Before him were geoscientists such as Mike Forrest at Shell and others who found new ways to identify resources and extract them in some of Earth’s most remote locations and deep water.
The industry’s future will again be impacted by politics and technological change, plus a newer factor, human-resource availability.
Political uncertainty is abundant worldwide, which has traditionally impacted production. Add to that organized opposition to hydrocarbons, increasingly competitive renewables and revolutionary changes in vehicle transportation.
In terms of technology, operations are experiencing an unprecedented digital revolution. Important functions on offshore platforms may be operated remotely in offices in Houston. In the shale play, big data is capturing and applying information in real time. While this may reduce the numbers employed, it also increases required skill levels.
During the boom, energy companies paid top dollar to recruit and retain key employees, especially those with critical technical skills. Now the long-predicted “great crew change” is reaching its conclusion. An aging work force is retiring. There is a staffing gap behind them and the next generation because of the decade-long shutdown in hiring that followed the 1986 collapse. The 60-somethings are being replaced by 40-somethings. Graduates in their mid-to-late 20s have reservations about the volatility of the industry -- and they have options in high-tech. One of my former students saw his job offer from BP rescinded in 2015, only to get a better offer from Apple.
Houston has been the world energy capital for decades because of its concentration of technical, financial and managerial talent. That will be challenged on many fronts, and policy makers and business leaders need to keep a long view of what it will take to strengthen the Houston economy for the next generation of those wanting to earn a high wage, too.
Arnold is a professor in the practice of energy management at Rice University’s Jones Graduate School of Business and a former energy banker and Shell executive.