(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Feb 21 (Reuters) - Personnel shortages at the U.S. Department of the Interior are causing delays in issuing oil and gas drilling permits as well as missed targets for important oversight work, according to a government performance audit.
"Interior continues to face challenges hiring and retaining key oil and gas staff - particularly petroleum engineers, inspectors and geologists," the Government Accountability Office (GAO) warned in a report to Congress released on Wednesday.
The explosion and fire onboard the Deepwater Horizon drilling rig in the Gulf of Mexico in 2010 underlined the importance of effective regulation.
But with skilled staff in short supply, oil and gas companies continue to complain about long delays in obtaining drilling permits and all the other paperwork needed to comply with environmental regulations before they can begin drilling on federal lands.
The problem is most pressing at regional offices such as the one in North Dakota, where industry has expanded rapidly and regulators are competing for the same limited pool of talent, often in remote locations where the cost of living is high.
GAO has identified lower salaries and a slow hiring process compared with similar positions in industry as the main reason federal agencies are struggling to hire and retain staff and then falling behind on drilling permits and inspections.
Congress has authorised the Interior Department to pay higher salaries, above the normal federal pay scale, to petroleum engineers, geologists and geophysicists but has made no additional funding available to pay them.
As a result, the department has made limited use of the extra flexibility, and important offices remain understaffed, according to GAO ("Oil and gas: Interior has begun to address hiring and retention challenges but needs to do more" Feb 19).
The department's Bureau of Land Management (BLM) must approve and supervise drilling on a total of more than 700 million acres of land, mostly in the western United States, much of which is rich in oil, gas and other minerals.
Permission is required to drill on the 245 million acres of federal lands as well as about 450 million acres now in private ownership, for which the federal government has reserved the mineral rights.
In addition, the department's Bureau of Ocean Energy Management (BOEM) and Bureau of Safety and Environmental Enforcement (BSEE) oversee oil and gas drilling on 1.7 billion acres offshore in the Gulf of Mexico as well as off the east and west coasts and the shores of Alaska.
According to GAO: "Interior's responsibilities include administering leases; reviewing and approving oil and gas companies' plans and applications for permit to drill (APD); inspecting oil and gas operations, such as drilling rigs and production platforms, to ensure compliance with safety and environmental regulations; and determining how much oil and gas is produced from federal lands and waters to calculate royalties."
Much of the work is technical and can be performed only by highly trained staff including petroleum engineers, geologists and geophysicists as well as archaeologists, biologists and environmental protection specialists.
The Interior Department's field offices employ 328 inspectors, 177 petroleum engineers, 122 geologists, 52 geophysicists, as well as 199 natural resources specialists and 22 environmental protection specialists.
But GAO has been warning since 2005 that BLM, BOEM and BSEE, and their forerunners, do not have sufficient staff to manage the increasing demand for onshore and offshore drilling permits while fulfilling their safety and environmental protection responsibilities.
The upsurge in drilling caused by the shale revolution has made those shortages more severe. In February 2011, GAO put the Interior Department's management of oil and gas resources on its "high-risk list" of government programmes that are most in danger of "waste, fraud, abuse and mismanagement".
Not all specialist staff are proving hard to hire and retain. The problem is concentrated on the professionals who are also most in most demand from industry - petroleum engineers, geologists, geophysicists and inspectors.
In 2012, BLM had an attrition rate of almost 22 percent among its petroleum engineers, more than double the 9 percent rate for all federal positions. BSEE's offshore inspectors had an attrition rate of 10 percent. Attrition rates in other professions were below average.
"Resignations rather than retirements accounted for nearly half of BLM's petroleum engineer attrition rate, suggesting that petroleum engineers sought employment opportunities outside the bureau," according to GAO.
"Hiring and retention problems appear to be more acute at offices where industry activity is greatest," it concluded.
BLM managers in North Dakota, which has been at the centre of the shale boom, complain they have been understaffed for years and have struggled to hire enough skilled professionals to cope with all the drilling applications and inspections.
The biggest problem is the wide and growing gap between salaries at the Interior Department and private firms for similar professions.
The average salary for a petroleum engineer in the private sector was around $160,000 per year in 2012, compared with around $100,000 for a similar position in the federal government. For geologists, respective pay rates were about $150,000 and $90,000.
"Top applicants are typically hired by the petroleum industry, leaving Interior with less-skilled applicants," GAO warned.
The problem is compounded by lengthy delays in hiring. It takes BOEM/BSEE an average of 197 days to hire a petroleum engineer and 182 to hire an inspector, compared with a government-wide target of just 80. BLM is faster, but not by much, taking 126 days to hire a petroleum engineer and 149 to hire an inspector.
"Contacting qualified applicants is delayed by weeks or months, and by the time they contact the applicant, the applicant has found other work," GAO observed.
Staffing shortages could worsen significantly in the next few years. The whole federal workforce is aging rapidly. But more than half of BLM's petroleum engineers and BOEM's geologists will be eligible to retire by 2017, compared with a government-wide average of around 25 percent.
Federal salary rates are strictly controlled by the Office of Personnel Management (OPM). Once a job is graded by an agency according to criteria such as difficulty, responsibility and qualifications required, pay is set according to a government-wide schedule administered by OPM.
Agencies can pay salaries in excess of the standard schedule only with specific approval from OPM or Congress.
OPM has generally discouraged above-schedule salaries, because it has been trying to hold down the federal payroll.
In 2012, BLM asked for permission to pay higher rates for some positions in North Dakota and Montana, but was asked by OPM to provide more data to justify its request.
All three agencies are currently working on a coordinated request for special salary rates to be submitted to OPM.
Following the Deepwater Horizon spill, Congress did approve a special 25 percent pay rise for petroleum engineers, geologists and geophysicists at BOEM and BSEE working in the Gulf of Mexico.
However, permission to pay higher salaries is useful only if the agencies can obtain more funding. So far Congress has not approved additional appropriations, however, because of the general move to squeeze the federal budget, not specifically to starve oil and gas regulation of funds.
Paying higher salaries is not a panacea. Skill shortages are plaguing both the public and private sectors as soaring oil and gas production has outstripped the number of experienced petroleum engineers and geologists.
While the number of graduate students studying related disciplines at U.S. universities has more than doubled from its low in 1997, many working oil engineers are nearing retirement age, and skill shortages could last for another five to 10 years.
But unless federal salaries become competitive, regulatory agencies will continue to suffer staffing problems, and the backlog of drilling applications and inspections will act as a bottleneck to the expansion of oil and gas production.
Given how much the shale revolution is benefiting the U.S. economy, there is a strong case for Congress to increase the funding for the Interior Department's oil and gas activities to enable it to hire and train more staff. (editing by Jane Baird)