Labor, Supply-Chain Woes Dog US Projects

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US producers are facing multiple headwinds from labor constraints, equipment shortages and supply squeezes on goods and services. On top of the labor shortages and inflationary pressures oil and gas companies are seeing, there are growing concerns that similar hurdles could hinder the new wave of clean energy projects, spurred by the recently passed Inflation Reduction Act, with its $369 billion in climate provisions. Labor shortages have been well documented, with the Bakken shale in North Dakota having the most visible struggles attracting workers. After years of paring back costs and instituting layoffs, exacerbated by the Covid-19 pandemic, the oil-field labor force of several years ago has dwindled and been dispersed, leaving service firms struggling to keep crews staffed. Smaller E&Ps and private firms have felt the squeeze more than majors, with drilling activity levels affected at some companies; those pressures have made it harder for contractors to invest enough to keep pace with demand. Oil-field service firms have had among the most high-profile constraints in staffing crews, impacting crude production growth projections for the better part of the year, with some companies getting into labor bidding wars.

Supply-chain issues and equipment availability — primarily fracking equipment — have been a sizable constraint. Some top fracking providers like Halliburton have idled or scrapped equipment to reduce their fleets, and companies have generally been reluctant to build new equipment on spec. E&Ps, looking to accelerate activity to keep pace with demand, have also run into supply-chain bottlenecks with steel sourcing for well bores, with inventories reportedly lower than previous years. Given high steel prices, suppliers have been less likely to hold more robust high-cost inventory in case drilling enthusiasm tapers off again amid mounting concerns about a recession, which has weighed on US oil and gas prices recently.

Frack sand availability in key US shale plays has become another thorn in the side of efforts to boost output amid inflationary pressures. Prices since the pandemic started have more than doubled from less than $20 per ton to $50-$70/ton, according to Rystad Energy data, although operators switching to in-basin sand in recent years rather than sourcing it from Wisconsin sand mines has helped defray some of the costs. Antero Resources and Devon Energy recently reported using more locally sourced sand in Appalachia and West Texas, respectively, to bypass high cost and supply-chain issues.

Clean energy projects have not been immune from the labor and supply constraints, especially with a slew of potential new hydrogen, carbon capture and other projects that stand to get a boost from the new US tax incentives. That could help propel a new labor force, because the investments now have a 10-year time horizon compared to the piecemeal, short-term tax credits for clean energy in recent years. “You can’t do a lot of workforce training based on a tax credit that has been allowed for one to two years,” said David Foster, a former US Department of Energy official now with the Energy Futures Initiative. The crossover with oil and gas workforce skill sets could also minimize the amount of new training infrastructure, although it also adds a layer of competition for skilled workers in some cases. But supply shortages could affect clean energy projects just as heavily, especially factoring in that some of the new tax credits are tied to domestic content requirements. Global demand for electrolyzers, used in green hydrogen production, for example, has been on the rise, raising questions about the equipment sector’s ability to source materials and deliver products given ongoing supply-chain challenges.

Conventional Oil and Gas, Low-Carbon Policy, Hydrogen, Carbon Capture (CCS)
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