The Next Energy Shortage: Big Oil CEOs

In recent years oil and gas companies have applied innovative technologies to make discoveries of vast new hydrocarbon resources. If only it were that easy for them to deal with a dire challenge above ground: identifying and training a new generation of qualified and prepared executives who are ready and willing to lead oil and gas companies at this pivotal time in the industry’s history.

As we found this month at the 2013 CERAWeek conference — the annual gathering of senior energy decision-makers from around the world — yesterday’s pessimism about “peak oil” has given way to a much different picture.  In the Arctic, Africa, and in surprising places like North America, Australia and Brazil, diverse technologies from fracking to underwater robots and more are opening up vast new reserves.  But in counterpoint to the conversation about these bright prospects, we also heard growing concern about finding the right leaders for this rapidly changing and increasingly complex industry.

The churn at the top indicates the scope of the challenge.  Using industry data, our firm examined CEO turnover at nearly 175 companies.   The research showed that during the past three years 35% of CEOs in public upstream and oil field service companies with over $1 billion in revenues were replaced. (Right now at least five companies are reportedly on the hunt for new CEOs, including Occidental Petroleum, Chesapeake Energy, Bill Barrett and Encana.)

What accounts for the high turnover rate in oil and gas?  In part, it’s a result of the waves of baby boomers retiring – the so-called “silver tsunami” that afflicts a number of industries today.  But for oil and gas companies, the structural demographic problem has been aggravated by the widespread layoffs and downsizing that swept through the industry during the late 1980s and early 1990s, especially in the E&P sector.  Many of those who were laid off left the industry and fewer recruits entered the industry from top undergraduate and graduate programs. This “lost generation” would now be reaching its peak in experience and leadership potential.  Instead, many companies today lack a deep bench of such executives.  In fact, only 15 percent of the companies we have surveyed indicated that they have the depth from which to choose an internal candidate for CEO.

The high turnover rate also includes a rising number of CEOs not succeeding in an industry that demands of top leaders a broader array of skills than ever before.  Oil and gas CEOs must adeptly handle everything from new technologies, evolving business models, more intense public scrutiny, geopolitical complexities, and greater board involvement in corporate governance.

Activist shareholders are also making life increasingly uncomfortable at the top.  Some activists are calling for the breakup of integrated companies in order to unlock additional shareholder value. Such dis-integration of the industry has already created more top spots to fill.  In 2011, Marathon Oil spun off its refining arm as Marathon Petroleum.  In 2012, ConocoPhillips spun off its refineries as Phillips 66.  Hess has announced that it will split off its refining and marketing businesses in order to refocus on its upstream business.  The clamor among investors for such break-ups will intensify the competition for CEO talent in an already limited pool of candidates.

The rapid expansion of the natural gas sector and shale plays will also require more skilled top leaders.  More midstream companies are forming.  And the ability to unlock more unconventional reservoirs than ever will see the industry – and the number of companies needing leaders – continue to expand.

What can the industry do to fill its pipeline of potential CEOs?

“Potential” is certainly the operative word.  Through rigorous assessment oil and gas companies must improve their ability to identify high potentials.  Rigor means taking care not to confuse other critical grounds of evaluation like current performance or experience with potential – the capacity to take on bigger and more complex roles.  The CEO role is like no other in size and complexity. Every aspect of the company, from the interests and pressures of stakeholders to strategy, vision and responsibility for leveraging the power of the entire organization converges in the chief executive’s office.  The leap to this qualitatively different role can be a long one, and it is essential to correctly identify those people who are capable of making it.

It is also essential to cast a wider net for talent.  For example, the industry has done a good job of attracting women at lower levels but their numbers drop dramatically at the higher levels.  Whatever the reasons for that drop-off – failure of the company to develop them or institutional biases – those who have succeeded against the odds should not be overlooked.  Similarly, companies should invest more in talent across cultural and geographical boundaries.

Having identified the right people with the requisite potential, companies should accelerate their development, given that the shortage of capable and well-prepared CEO candidates will only grow worse.  Whatever risks lie in putting less experienced high potentials in more challenging roles early on can be mitigated by giving them more development support.  That includes coaching by senior leaders, even those who may have retired, and accelerated integration to expose the executive to the people, politics and requirements of a new role far ahead of time.

Combining these steps into a systematic, intensely powerful program takes effort.  Will oil and gas companies be willing to make it?  No industry is more acutely aware of the challenges of supply and demand.  To meet this one they will need to apply to human resources all of the ingenuity they have applied to finding physical resources.

Forbes