Labour costs curtail competitivenessJuly 26, 2017
Nicholas R. Mike, Lennox Petroleum Services COO, talks to TOGY about competitive labour pricing in Trinidad and Tobago and the company’s current operations. Established in 1976, Lennox Petroleum Services provides general oilfield services and equipment to companies operating in Trinidad and Tobago's hydrocarbons industry.
The company also provides highly qualified personnel for oil and gas operations, and acts as a general agent and logistics manager. In 2017, Lennox Petroleum Services will provide labour for two rigs that have been contracted for BPTT. As gas curtailments continue to negatively affect Trinidad and Tobago’s oil and gas market, the Caribbean nation has begun to look towards outward to supplement its gas supplies. Guyana presents a promising developing market and may require labour, supplies, services and infrastructure from Trinidad and Tobago, providing an economic boon. However, in order for Trinidadian labour to be an attractive option for operators, labour costs must realign to match international expectations.
• ON UNIONS AND LABOUR: The union tends to take positions that are at times more aggressive than those of the workers they represent; they seek to price the contractor out of the market and in some cases out of business. Parties who are not on the offshore installation, who do not negotiate with the foreign contractors and who do not face competition are becoming the final decision-makers in this highly volatile and increasingly competitive industry.
• ON GUYANA: Yes, Guyana, based on the scale of the finds, will encourage quite a large volume of interest and FDI. However, we must have a conversation about how we are going to be competitive with a Trinidad and Tobago business model in Guyana. On the services side, we are [competitive], but on the labour side, we are pricing ourselves out of the equation. Something’s got to give.
Mike also discussed the influence of Trinidad and Tobago’s trade union on the cost of Trinidadian labour. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Nicholas R. Mike below.
How does Lennox deal with insecurity inherent in the market?
Insecurity is characteristic of most markets and none more so than the oil and gas industry. This insecurity arises from the price volatility and can take various forms. Would the operating companies cut back on exploration because the price is below their projected breakeven? Would they reduce the number of workovers (preferring to keep their reserves until they can fetch a better price)? All of these decisions impact us as a supplier of manpower and other energy services. The question is how can we best mitigate such risks?
We are price takers and have no control over which direction the price of hydrocarbons. So what can we do? We actively maintain existing relationships while building new ones. We are consistently marketing our capabilities, keeping a fine eye on upcoming activity all the while conducting extensive market research to ascertain who the next best candidate for any developmental work is.
In spite of these efforts, we remain exposed to those larger local decisions, which we are not in control of such as our competitiveness as a destination or our local fiscal regime. We advise the local stakeholders such as the trade union to be mindful that we are price takers.
What is the outlook for the regional hydrocarbons industry?
Locally, the volatility in oil prices has dampened the scale and volume of activity in the sector forcing many services companies to look to the region. Activity is buoyant in nearby Suriname and particularly in Guyana and Colombia, which makes the region still attractive.
Trinidad and Tobago can become an important player regionally. We are an attractive location with an English speaking, highly skilled and experienced workforce. These characteristics bode extremely well for us being a regional logistics hub. However, in order to extract the maximum value from this, we must be competitive in our pricing and more forward thinking in our services offerings. If we can accomplish this, any slowdown domestically can be augmented by additional or new revenue streams captured (abroad) regionally.
How does Lennox distinguish itself in the oilfield services sector?
We have been quite fortunate being the preferred partner of choice for long-term labour contracts. This likely is attributed to the sustained quality of our work and the length of time that we have been offering such services. This is an industry that can be quite unforgiving when mistakes are made and while we have shown that we can manage and for a considerable period of time, we have to refrain from complacency. It is a national challenge overcoming the rise of complacency.
What is happening with the settling of Lennox’s services rates?
At the moment, Lennox is still in the process of negotiating its 2015-2017 CBA [Collective Bargaining Agreement]. There are certain factors that are key to the settling this issue with the trade union. The union tends to take positions that are at times more aggressive than those of the workers they represent; they seek to price the contractor out of the market and in some cases out of business. Parties who are not on the offshore installation, who do not negotiate with the foreign contractors and who do not face competition are becoming the final decision-makers in this highly volatile and increasingly competitive industry.
The oil and gas industry began to undergo profound changes around mid-2014. There has been a rush for cost efficiencies as companies seek to establish where their break-even [point] lies. As one looks to the future, it is increasingly evident that the previously set-rate structure on the table is [no longer] feasible and lacking competitiveness under current market conditions. This explains why we are still negotiating after such a long time.
[Trinidad and Tobago] is possibly number two in the world with regard to wage costs in the oil and gas sector both on the labour and catering side. We have some of the lowest reserves and production figures in the world and our climate is not as challenging as say the North Sea. However, the country is quite high in regard to [labour] costs at a time when activity in the oil and gas industry is contracting. How can we have escalating labour costs when oil prices and associated rig rates are depressed? There must be some sort of re-alignment unless one is living in a fool’s paradise. The matter is currently before the Industrial Court and it is our hope that the court will use the opportunity to demonstrate much needed national awareness of what is going on in the sector locally and internationally.
What are Lennox’s regional and global aspirations?
[In H2 2016], we provided Trinidad sourced labour on a rig operating in Suriname. However, that contract has since come to an end. Operating abroad is almost every company’s goal – to expand outside these shores. However, you must do so within a competitive framework. Based on our current CBA, we need to compensate our workers an additional 25% to work abroad, which makes us even more uncompetitive.
Trinidad and Tobago is pricing itself out of the market, which will affect the [hiring] of Trinidad nationals for nearby regional projects in Suriname and Guyana. We need to realign ourselves within the current industry parameters so as to remain relevant and sustainable.
What is Lennox’s strategy to maintain or expand its market share?
We currently have the majority market share, at 66.7%. Obviously, that can change as new opportunities present themselves. We are constantly adding value to our technical offering based on lessons learned on our active contracts.
We have been in business for a long time. Clients know us, but we are not taking that for granted. We are revamping [our] business model to meet the challenges of today. [The market] is becoming increasingly competitive. We need to illustrate clearly to our clientele our unparalleled contract management experience and industry know-how.
What are Lennox’s long-term objectives?
Our long-term objectives are to remain competitive and innovative in our services offering and to maintain our reputation as a safety conscious and responsible employer.
I think Trinidad and Tobago’s talent pool is world class and by extension Lennox’s management of labour contracts is unparalleled. We hope to expand our offerings overseas in neighbouring regions where drilling activity is more buoyant.
Is Guyana still the most favourable market in the region, given recent discoveries?
Yes, Guyana, based on the scale of the finds, will encourage quite a large volume of interest and FDI. However, we must have a conversation about how we are going to be competitive with a Trinidad and Tobago business model in Guyana. On the services side, we are [competitive], but on the labour side, we are pricing ourselves out of the equation. Something’s got to give.
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