Quantifying the Impact of the Drop in Oil on the Future Manpower Needs of the UK Oil and Gas
Industry
This is the continuation of the Data Analysis of :
1) Indirect, Direct, Induced employment vs Oil price.
ii) Indirect, Direct, Induced employment vs Years.
iii) Production vs Years
iv) Capex(cost) vs Years
CHAPTER 3: METHODOLOGY
3.1. Introduction
The dramatic and drastic decline in the oil and gas prices in the UK over the years has
significantly impacted on the future workforce needs of the country’s gas and oil industry. The
instability of oil and gas production which has been orchestrated by the declining prices has
heightened this devastating effect on the future workforce needs in the UK’s oil and gas industry.
This is attributed to the fact that, the consistent decline in oil and gas prices has created an
unsuitable environment for the oil and gas industry to continue its growth through production
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 2
expansion, and this has subsequently led to a negative impact on the future workforce drivers and
needs. As a result, quantifying the impacts of this decline in gas and oil prices on the future
workforce needs of the UK is imperative in order to enable formulation and implementation of
corrective as well as mitigation measures for minimizing or effective management of these
effects of declining oil and gas prices (Dixon & Rimmer, 2012).
Therefore, the research design and methods adopted in study strive to ensure that the
objectives of the study are achieved. Thus, using the appropriate research methodology will
enable the five research objectives of this project to be achieved based on the quantitative data
collected about the stipulated research variables both independent and dependent. The specific
research objectives of this study are as follows: 1) To demonstrate how the dramatic and
unexpected drop in gas and oil prices affected the UK upstream oil and gas workforce; 2) To
describe the types of skills profiles and demand in the upstream oil and gas workforce; 3) To
evaluate the skills set of those have been most impacted; 4) To demonstrate the future Manpower
needs of UK upstream workforce by using statistical graph based on probability of production;
and 5) To discuss or analyze the effective responsibility of UK’s oil and gas industry human
resources towards employment.
As a result, the aim of this study is to quantify the impacts of the dramatic drop in prices
of oil and gas on the future workforce needs of the United Kingdom Oil and Gas Industry. The
study will use the dynamic Computable General Equilibrium (CGE) model in order to effectively
quantify the impacts of dramatic fall in oil and gas prices on the future workforce needs of the
UK Oil and Gas Industry as an appropriate research strategy to ensure that the research
objectives are achieved. This research method has used oil and gas price scenarios to enable
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 3
measurement of the trends of declining oil and gas prices impacts on the future workforce needs
in the UK relative to the baseline.
3.2. Research Philosophy and Design
Research philosophy and design have been widely applied in studies as a guide to
achieving the research objectives. Saunders, Lewis and Thornhill (2009) noted that, mainstream
researchers had been commonly applying two main research philosophies such as positivist and
interpretivist. According to Lewis and Thornhill (2009), the wide application of these two
research philosophies has been attributed to their significance in guiding the research studies as
well as the nobility of research in demanding researchers to adopt them and ensure that they are
in conformity with the objectives of the study.
In this research study, positivist research philosophy has been applied in order to quantify
the impacts of the dramatic drop in prices of oil and gas on the future workforce needs of the
United Kingdom Oil and Gas Industry based on the dynamic Computable General Equilibrium
(CGE) model. Hill (2003) noted that the reason why positivist philosophy is commonly used
because of its recognition and adherence to the norms and rules on the business environment. As
a result, for the application of positivist research approach a researcher is required to rely on the
businesses’ background environments and use the appropriate scientific methods to enable the
determination about the nature of such business scenarios subsequent to their quantification. This
is the reason that justifies why this choice of research approach was selected in this study.
In addition, the study also a quantitative research because the variables chosen for
quantification such as oil prices, the number of employment (indirect, direct and induced),
production levels as well as capital investment in oil and gas production requires collection of
quantitative data. This is mainly because the study particularly involves quantification of the
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 4
impacts on the future of workforce needs in the UK’s oil and gas industry if crude oil prices
continue to drop or there is a change in this trend and crude oil prices begin to rise. This means
that the research is a projection study. Furthermore, based on the outcomes or findings obtained
from the quantification of the impacts of the drop in oil prices on the future workforce needs in
the UK’s oil and gas industry, the researcher attempts to devise the appropriate course of action
for the oil and gas industry to implement in achieve sustainability in relation to Manpower.
3.3. Research questions
The research will focus on answering the following questions, by which they will act as
the blueprint of all the analysis:
1) Has the number of employees differ significantly?
2) Is there a significant decrease in the price of the oil in United Kingdom?
3) How does the dramatic and unexpected drop in gas and oil prices affected the UK
upstream oil and gas workforce?
4) What type of skills profiles and demand in the upstream oil and gas workforce?
5) Which skills set have been most impacted mostly?
6) What is the future manpower needs of UK upstream workforce by using statistical
graph based on probability of production?
7) What effective responsibility of UK’s oil and gas industry human resources do
towards employment?
3.4. Research Model
The Dynamic Computable General Equilibrium (DCGE) model used in this study
adopted various variables both independent and dependent in order to make sure that the research
objectives were achieved (Cardenete, Guerra & Sancho, 2012). In this case, the independent
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 5
variable Brent’s crude oil prices in dollars while dependent variables were the number of
employment (indirect, direct and induced), production levels as well as capital investment in oil
and gas production. A DCGE Model is without any doubt one of the quantitative research
methods that are most rigorous and cutting-edge in evaluating the impacts of policy and
economic shocks, particularly price shocks as well as policy reforms in the economy, whether in
entirety or one sector. Because of this nature of DCEG Model, this tool is of significant
usefulness for the quantification of the impacts of drop in oil and gas prices on the future
Manpower needs in the UK’s oil and gas industry (Mitra-Kahn, 2008).
Thus, through DCEG modelling the most possible realistic status of the economic
impacts to be quantified can be reproduced, particularly by simulating the structure of the
economy, whether in entirety or one sector. Therefore, this is imperative in quantifying the
nature and status of all economic transactions done by various economic agents, including
households, productive sectors, and the government, among others (Piermartini & The, 2005).
Furthermore, data analysis based on DCEG Research Model compared to other available tools or
technique is able to capture a broader range of economic impacts already derived or anticipated
from a global price shock or formulation and implementation of a particular policy reform,
specifically on the employment dynamics, in particular, the future workforce needs to be
considered for this study (Mitra-Kahn, 2008). In that sense, it is useful to adopt the DCEG
research model approach, especially when the anticipated impacts of global price shock are
complicated, and their materialization occurs through a variety of transmission channels.
To achieve the objectives of the study, a DCEG model was used to assess the impacts
anticipated from future changes on the prices of oil on the economy of UK, particularly in the
context of three alternative scenarios. The model is used to quantify the estimates of how the UK
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 6
economy will possibly react to changes in prices, technology, policy as well as other external
factors by focusing on the envisaged interactions between varied industrial sectors, the
government, households and the rest of the world (Piermartini & The, 2005). The justification
for using this model is informed by the fact that, these models have been considered as the
standard tool in conducting economic analysis empirically, and have enjoyed wide recognition
and utilization by international financial organisations such as the OECD, the World Bank and
the IMF as well as central banks, national governments and the European Commission
(Piermartini & The, 2005; Mitra-Kahn, 2008).
The simulation was done by reducing prices of output in the economic sector of oil and
gas extraction industry and the prices of inputs from other economy sectors, which is done
carefully by taking into account the different sectors’ relative oil intensity and the assessment
during the period to 2020 were done. Different case study scenarios of an oil price shock have
been simulated of the UK economy based on DCEG model to quantify the impacts of the
dramatic drop in prices of oil and gas on the future workforce needs of the United Kingdom Oil
and Gas Industry. A three projected oil and gas price scenario based on a disparity both
magnitude and persistence of oil, and gas price’s shock against 2016 baseline have dominantly
been used for research studies. However, three projected oil and gas price scenario have been
structured to provide the statistical analysis of the future oil and gas price’s trends and the United
Kingdom trade position in oil and gas industry to provide generate study reliable and valid
research findings and the results. Scenario 1: Oil and gas price set at low level ($50/barrel),
Scenario 2: Oil and gas price in 2020 increases gradually to $73/barrel. Scenario 3: Gas and oil
price in 2020 gradually to$108/barrel. The base line is assumed to be in consistency with the
projected workforce growth for the gas and oil industry in the UK published in July 2015.
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 7
This study has applied the available statistical analysis tools in order to carry out the
analysis of the collected data to obtain results of the entire study. As such, quantitative data on
the research variables will be collected and analysed while taking note on the positivist approach
in this study in addition to anchoring it through the review of existing literature studies. Thus, the
researcher will gather the relevant information concerning the included variables in order to
ensure that the research objectives are achieved. Therefore, the data analysis in the study is
mainly done based on Microsoft Excel as well as the Statistical Packages for Social Sciences
(SPSS). This means that, the Dynamic Computable General Equilibrium (DCGE) model is an
imperative research tool that serves as a guiding tool in addressing the study objectives through
assessment of the impacts of declining oil and gas prices on the future workforce needs in the
UK’s oil and gas industry (Dixon & Jorgenson, 2013).
3.5. Data Analysis and Findings
The analysis of data collected from 2010 to 2016 on variables such as Brent’s crude oil
price in dollars, total employment levels (direct, indirect and induced), crude oil production per
year in thousand barrels and capital investment per year in billion ₤ has been present in the tables
shown below ranging from Table 1 to Table 4.
Table 1: Employment- Headcount
Year 2010 2011 2012 2013 2014 2015 2016
Direct 32,000 32,000 35,840 36,600 41,700 38,200 34,000
Indirect 307,000 307,000 300,000 198,100 201,000 160,600 151,500
Induced 101,000 100,000 112,000 206,200 211,100 170,800 144,900
Total
Employment
440,000 439,000 447,840 440,900 453,800 369,400 330,400
Table 2: Employment and Brent Crude Oil Price ($)
.
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 8
Year 2010 2011 2012 2013 2014 2015 2016
Direct 32,000 32,000 35,840 36,600 41,700 38,200 34,000
Indirect 307,000 307,000 300,000 198,100 201,000 160,600 151,500
Induced 101,000 100,000 112,000 206,200 211,100 170,800 144,900
Price 79.61 111.26 111.63 108.56 98.97 52.32 46.64
Table 3: Production of Crude oil (Thousand barrels) per Year
Year 2010 2011 2012 2013 2014 2015 2016
Production 62,962 51,972 44,561 41,101 40,328 45,698
Table 4: Capital Investment (Billion £) vs. Year
Year Cost (Billion £)
2010 10.7
2011 19.2
2012 11.4
2013 14.4
2014 14.8
2015 9.0
2016 10.1
To answer the first research question, a chi-square test was performed to determine
whether there was a significant change in the number of employees. The results are:
Table 5: Chi-square test
Data
Level of Significance 0.05
Number of Rows 3
Number of Columns 7
Degrees of Freedom 12
Results
Critical Value
21.0260
7
Chi-Square Test 184145.
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 9
Statistic 2
p-Value 0
Reject the null hypothesis
Expected frequency assumption
is met.
The results suggest that the distribution of the number of employees is not the same.
Therefore, we can state that there was a decline in the number of employees with time, which is
illustrated by a bar plot below.
2010201120122013201420152016
Year
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
Employment headcount versus Year
DirectIndirectInducedTotal EmploymentLinear(undefined)
Figure 1: Employment headcount versus Year
The Linear 0, shows a decreasing trend in the total employment.
For the second research question, the regression test was carried out and the results were
as follows.
Simple Linear Regression Analysis
Regression Statistics
Multiple R 0.6332
R Square 0.4009
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 10
Adjusted R Square 0.2811
Standard Error 23.7035
Observations 7
ANOVA
df SS MS F Significance F
Regression 1 1880.2608
1880.260
8 3.3465 0.1269
Residual 5 2809.2823 561.8565
Total 6 4689.5431
Coefficients
Standard
Error t Stat
P-
value Lower 95% Upper 95%
Intercept
16582.814
6 9017.3237 1.8390 0.1253 -6596.9539
39762.583
2
Year -8.1946 4.4795 -1.8293 0.1269 -19.7097 3.3204
The significance F value suggests that there is no significant association between the
price of the crude oil and the year. This is because, the p-value is greater than the level of
significant .05. This means that although there was a decline it was not attributed to time.
Additionally, a DCEG approach analysis based on a UK economy’s model for the
quantification of the impacts envisaged to possibly arise from the declining prices of oil in three
alternative scenarios both in permanent and temporary reduction show varied results. For
instance, a permanent reduction in oil prices, the price of around $50 per barrel was settled at and
the UK economy in terms of GDP increased by approximately 1% on average relative to
between 2015 and 2020 baseline. The same report indicated that by 2020 employment levels
would increase by around 90,000, while a peak boost to levels of employment would be realized
in 2016 by around 120,000. In contrast, smaller impacts are observed where there is a temporary
decline in the prices of oil and gas: depending on how fast and far oil and gas prices rebound,
there could be variations in the boost to GDP from 0.25 to 0.5% and the increase in employment
levels by 2020 could also vary between 3,000 and 37,000.
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 11
3.6. Discussion
Although, there is an envisaged negative impact on the future workforce needs in the
UK’s oil and gas extraction industry because of the declining prices of oil and gas, other sectors
such as transportation, oil-intensive manufacturing, agriculture, and refined petroleum
manufacturing sectors are expected to significantly benefit from these scenarios of the decrease
in the prices of their key inputs. This would play a fundamental role in boosting both capital
investment and job creation in these sectors, and the oil and gas industry can considerably
improve their revenues by expanding their downward operations by widening their
collaborations within the supply chain and service delivery. As a result, the human resources in
the oil and gas industry in the UK have a responsibility towards employment, including the to
hire people who possess the right or appropriate qualifications and skills on the job, which would
subsequently lead to improved performance as well as creation of more employment
opportunities. Moreover, the goals and objectives of companies in the UK’s oil and gas industry
should be aligned towards creation of more jobs by ensuring that they achieve improved
employee performance, which is attainable by embarking on carrying out regular employee
performance evaluations, as well as organizing routine career training and professional
development programs (Hsin-His, 2012). Furthermore, human resources can also fulfil their
responsibility on employment through appropriate changes in companies’ organizational
cultures, style of leadership, workplace environment, motivation, organization structure, as well
as job satisfaction among others (Al Muftah & Lafi, 2011).
4.1. Conclusion and recommendation
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 12
The research has pointed out that there is a change in the number of employees in the oil
and gas industry in the UK. In fact, this has a detrimental effect on the economy as well as the
social life of the citizens. The results support that there has been a decline in the number of
employees in this sector which requires UK government intervention to improve the condition as
well as create more jobs. As earlier stated to improve this condition some adjustments need to be
made like, employing highly qualified personnel, carrying performance evaluation more often, as
well as ensuring that the human resource in this sector executes their mandates as required.
Although, it was established that the price of the crude oil and the variable year, it is imperative
for the prices of the UK oil and gas to be considerably low to benefit other sectors. This is
because, if the oil and gasses’ prices are set at minimal, the cost of production, transportation,
agriculture among other will intensely benefit. Thus, it is within the UK’s government mandate
to ensure that the petroleum prices are consistently low to boost oil dependent sectors, which
improves the revenue generation, production and service’s delivery. To make this a reality, the
UK government will continue subsidizing the fossil fuel. Through this, the government will
ensure that they reap maximum returns from this sector, such as job creation, improved service
delivery, generation of revenue among others. The dynamic Computable General Equilibrium
pointed that when the oil and gasses’ prices are low, there are increases in the UK GDP.
Therefore, there is great urge to keep the prices of the oil and gasses low to boost the GDP of the
country. Therefore, the government should set up strategies that ensure that the oil and gasses are
low, like eliminating intermediaries in the supply chain, subsidizing the oil and gasses sector, or
not taxing these products.
The research was successful since the objectives of the research have been achieved.
Given another chance in the future, I would make some adjustment on the research. For instance,
Impact of the Drop in Oil on the Future Manpower Needs of the UK O+G Industry 13
an increase in the sample size of the data to increase accuracy. This can be achieved by using
monthly data instead of annual data. Also, since literature shows that from 2010 to mid-2014 the
prices were steady and after that the prices declined. A test of whether the two-period prices are
significantly different would be carried out. This will help in testing whether the claim that there
is a recent decline in the oil and gasses’ prices.
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