Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

Focus on Labor: The Hidden Cost Driving Midstream Projects (1/3)

February 4, 2015 at 1:50 PM / by PowerAdvocate

Labor: it’s the greatest expense for any midstream project (55% of total costs) and the most difficult to predict. In this 3-part deep dive, we’ll give you the tools to understand and respond to the rising labor costs that are driving the midstream market in 2015. You’ll learn:

1.Why labor is the fastest rising and most significant cost of any midstream project
2.What the labor shortage means for your company
3.Strategies to proactively mitigate the impact of high labor costs

The Economics Behind Rising Labor Costs

Skilled labor shortages have caused labor costs to skyrocket, and high prices won’t subside for years to come. That’s because of a fundamental mismatch between high demand for labor and low supply of qualified workers.

Let’s take a look at the driving forces behind that mismatch:

Labor Supply and Demand
Welder Costs Rising

Skilled laborers are retiring at a faster rate than ever before as Baby Boomers reach retirement age all at once. At the same time, fewer and fewer craft laborers have been trained with each coming generation. More laborers are flowing out of the workforce than are flowing back in, and the resulting labor shortage has been inflating wages.

Not only does the scarcity of skilled laborers increase labor costs, but incoming replacements also lack the experience and skills of their predecessors. The result of this knowledge gap is a less efficient labor force that costs far more.

On the demand side, we’re seeing fierce competition for urgently needed talent at project sites. Midstream companies compete among each other and with E&P companies for a limited labor pool in the same areas. Such intense competition drives up costs even more.

The two converging trends of declining supply and rising demand are putting dual pressure on midstream companies who need ever more labor for their growing capital projects.

The Bottom Line

Without a sustainable way to address the skilled labor shortage, midstream companies risk exposure to unexpected price spikes and workforce shortages that delay projects from being completed on time. In the second installment of our labor deep dive, we’ll show you exactly how labor shortages will affect midstream companies in the coming year.

Read Part 2: How Rising Labor Costs Affect You 

 

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