How does spending impact productivity?

As we head into 2018, there’s a sense of optimism that oil prices are stabilizing at a level that is more sustainable for energy companies. Regardless, we anticipate that companies will remain focused on efficiencies and productivity improvements.

Productivity for Canada’s oil and gas industry is measured by the barrels of oil produced per day per employee. So, ironically, when the industry is growing and hiring lots of workers, productivity invariably declines; when industry is contracting, productivity usually improves.

Why is this important? Productivity is a key factor in Canada’s oil and gas industry’s ability to remain competitive – particularly at lower oil prices.

From 2010 to 2014, Canada’s oil and natural gas industry was booming and it took advantage of the high energy prices. Companies invested capital in technologies and innovation, people, equipment and buildings. Spending increased by 36 percent, from $60.8 billion in 2010 to $82.5 billion in 2014. During the same time period, productivity declined six percent. While workers were hired to drill and complete new wells and develop mining areas, tie in and build facilities – all with the intent to increase production – typically there is a delay of at least two to five years for any of that new production to begin.

From 2015 to 2016, capital spending in the oil and gas industry decreased by 48 percent, from $82.5 billion to $43.1 billion. As prices declined, companies were no longer investing in growing their business or their workforce. Thousands of jobs were lost. Because of the reduced workforce size and the capital investments that were made from 2010 to 2014, primarily in the oil sands, the oil and gas industry experienced a 30 percent increase in productivity.

Going forward, as drilling activity picks up, we will begin to see the same pattern, new wells will be drilled and brought online to offset wells with production declines. Additional capital will be spent, some workers will be rehired and that will restrain productivity. However, new oil sands facilities previously under construction and just moving into production as a result of investment during the boom years, will help to offset those productivity declines and improve productivity. Overall, the industry should experience a two percent increase in productivity between now and 2021.

Interested in finding out more about how each of the industry sub-sectors have done? Check out our report, Labour Productivity in Canada’s Oil and Gas Industry: A Discussion of Historical Trends and Future Implications. If you want to know more about innovation, human capital, competition and other factors that influence productivity, stay tuned!

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