In their efforts to improve margins, many upstream oil and gas players are turning their attention to workforce productivity. This focus on productivity may prove especially important given industry headwinds: a looming retirement wave, the sometimes negative perception of the traditional energy sector among younger generations, significant talent outflow from the industry, and increasing competition for talent and capital from new energy industries—all of which are likely to make it harder for oil and gas producers to maintain and improve their productivity.
A recent study of workforce productivity in the upstream oil and gas industry, using McKinsey’s Energy Solutions Organization Benchmark, found a substantial productivity gap across operators.1 Analysis of over 50 business units from more than 30 oil and gas companies from the global data set found that the most productive companies were 150 percent more productive than the average operator. This productivity gap is driven by all functions across the typical organization. Analysis of these top performers indicates there is significant room for improvement for much of the sector, representing a major “productivity prize.”.
Analyzing the productivity gap
The productivity gaps we observed between upstream oil and gas companies are substantial—a top quartile peer can deliver 150 percent of the output of the average organization with the same-sized workforce. Remarkably, this increase in productivity does not come at a cost in terms of operational performance—top quartile peers on average have similar levels of production efficiency and safety performance, delivering these outcomes with lower operating costs.2
Top quartile organizations are delivering 2.5 times the drilling activity, managing more complex reservoirs, operating twice the number of assets, and spending 20 percent less on maintenance costs. Top performers can also deliver the same output as an average peer with 40 percent fewer full-time equivalent (FTE) employees (Exhibit 1).
Measuring productivity in a targeted way
One of the most important ways to assess organizational performance is to measure productivity and the potential to improve it. At its core, and simplest means of expression, productivity is the output for a given input.
Traditionally, workforce productivity has been measured by labor input such as working hours and financial output, including revenue.3 However, these measures typically mask many of the underlying reasons for high or low productivity, and do not consider the nuances of each individual organization or provide specific insights into which levers have the greatest productivity potential.
Measuring staffing intensity offers an alternative approach that assesses workforce size per unit of activity, or the number of FTE employees and contractors (input) per unit of activity (output)—an inverse of productivity. An advantage of this approach over traditional productivity measures is that it provides a way to normalize for different activities conducted by different functions. The activity set for Finance and Accounting, for example, looks very different from the activity set for the Subsurface or Wells functions, and traditional methods of productivity make it hard to compare across functions. It also provides a way to adjust for structural differences between companies for things like scale, portfolio composition, asset complexity, and growth plans. Different “activity drivers” are used to normalize each function’s size to provide a like-for-like comparison against peers. For example, reservoir complexity can be used as an activity driver for the Subsurface function, while an index of drilling activity could be used for the Wells function. This removes any differences in performance due to factors outside of productivity and ways of working, which helps managers understand their organization’s true productivity opportunities.
How operators improve their productivity
There are many levers that organizations can pull on to drive productivity. These fall into the three main categories of people, processes, and structure.
People levers include improving the culture to create a more collaborative work environment, reconsidering the size of the workforce, enhancing talent through skills building (for example, multiskilling offshore personnel), and acquiring talent from outside the company. McKinsey research shows that the best performers are 800 percent more productive than the average employee in highly complex roles, highlighting the potential that can be unlocked by focusing on people levers.4 However, people levers are often enabled or magnified by improvements to process and structure.
Process levers can be used to streamline workflows, improve the efficiency of decision making, or enhance technology systems to support more efficient processes (for example, deploying advanced analytics systems in maintenance processes to improve equipment reliability).
Finally, structure levers include reconfiguring the “boxes and lines” of how the company is organized to better align to sources of value creation. For example, our research shows that an asset-centric axis of organization can yield better operational performance than a function-centric orientation (see article, “Five features of operational excellence in oil and gas organizations”). This includes rethinking the location footprint to provide better access to assets and talent or altering roles and responsibilities to align the highest performers with the biggest sources of value.
McKinsey’s oil and gas workforce productivity study found that the productivity prize applies across all functions, both technical and nontechnical, meaning there is no one functional culprit for low productivity (Exhibit 2). Rather, leading producers tend to apply multiple levers across multiple functions to drive holistic productivity improvements. Sometimes, a specific functional transformation is needed (such as a financial system digital transformation) in order to enable additional operating model changes to drive productivity improvements.
The upstream oil and gas productivity gap—and on the flipside, the potential productivity prize—presents a significant opportunity for upstream oil and gas companies to improve their resiliency as they face pressure to provide affordable, reliable, secure, and cleaner energy. A holistic approach that encompasses people, processes, and structure could help under-pressure oil and gas producers achieve the productivity levels of their top-performing peers.