Presented by:

Oil and Gas Investor

[Editor's note: A version of this story appears in the April 2021 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

On Oct. 22, 2020, video-conferencing platform Zoom Video Communications Inc. zoomed past Exxon Mobil Corp. in total market value. This was not widely noted at the time outside the petroleum industry, but for the sector’s leaders it became an unsettling market metaphor. Coming toward the end of a year in which uncertainty, volatility and hardship had already become commonplace, that moment followed an even more catastrophic moment in April, when WTI traded below $0/bbl.

Coupled with longer-term underperformance and pressure from activist investors, and the quickening pace of the energy transition, it seemed as if everything in the energy industry was turning upside down. Most industry leaders were unprepared for this new reality. How they lead in the next decade could very well make or break the industry.

As the petroleum industry continues to navigate unprecedented price and secular decline and falls out of favor with investors, the real competition in the next decade will not be for customers, but leaders. From front-line managers to operating executives, CEOs and corporate directors, these new leaders will be in urgent demand to reshape, reposition and transform an industry that the world requires—and depends upon—more than we know.

This paper is a result of over a year-long effort which included more than 400 conversations with industry leaders, a survey of almost 100 CEOs, directors and investors, and our analysis of assessments of 183 industry leaders using Heidrick & Struggles’ proprietary leadership assessment framework, META (Mobilize, Execute and Transform with Agility).

The foundational energy source

Energy, specifically petroleum-based energy—which fueled the Industrial Revolution, modernized agriculture and powers the digital age—literally powers almost every other industry in the world. Though renewable sources are taking some market share (supported by the petroleum energy supply chain), most experts acknowledge that the vast majority of the increasing demand for power cannot be generated or supplied by renewable sources in the next, or even following, decade. According to the International Energy Agency, fossil fuels make up 81% of global energy demand today, dropping to only 78% in the next 20 years, while overall demand is expected to grow by as much as a 50% by 2050.

Furthermore, energy poverty remains a global crisis, especially in sub-Saharan Africa, parts of Latin America, China and India: roughly 3.3 billion people still live with little or no electricity. All this means the energy business will remain fossil fuel-based for decades. David J. C. Mackay, a physicist at the University of Cambridge, summarized the situation clearly: “I love renewables, but I am also pro-arithmetic.”

Already the protector of billions of lives on the planet, the petroleum industry provides electricity for clean water, heating, sanitation, cooking, refrigeration, communication, illumination and, most notable recently, the polypropylene-based materials used for N-95 masks, hundreds of life-saving petroleum-based plastics used in the production of vials, screening and protective gear, and machines in hospitals around the world. COVID-19 vaccines would not be possible without America’s plentiful supply of oil and natural gas. And it is petroleum-based power, not intermittent solar or wind energy, that cools COVID-19 vaccines to the necessary minus 70 degrees Celsius for months on end.

Put another way, Exxon Mobil would survive, perhaps even thrive, without Zoom and its sophisticated communication platform; but Zoom, nor any major technology company for that matter, could exist nor survive without the reliable, cheap and plentiful energy and materials (power, plastics, lubricants, solvents) that Exxon Mobil and its peers produce.

Built on bad economics

Petroleum-company leaders faced the events of 2020 having managed a paradox for the prior decade or so. On one hand, many companies had soaring success during the American shale renaissance, which increased U.S. energy independence generating untold global geopolitical benefits, and providing even more plentiful, reliable and cheap energy.

On the other hand, the industry delivered significant shareholder value destruction: the U.S. shale industry peaked without ever making money—production boomed, yet profits shrank.

Over the past decade, the U.S. nearly doubled global market share, from 8.9% to 17%, but the sector delivered an average return on capital employed from 2010 to 2020 of 4%, well below the industry weighted average cost of capital. The decline was reflected in the S&P 500 Index, on which oil and gas companies represent less than 3% of the total number of companies, down from 10% a decade ago.

Furthermore, in January 2021, the S&P warned 13 oil majors that they were at risk of downgrades because of growing competition from renewables. And, as some upstream investors have bluntly noted, value destruction and indebtedness occurred precisely when the average exploration and production CEO earned well over 100% of their target performance, while delivering massive share price underperformance.

The shale sector industry got religion about its business model in 2020 with companies embracing the concept of capital discipline and the need for free-cash-flow generation versus growth. But if the discipline fails to stick when prices recover, the industry will regress to its old “spend, baby, spend” habits, generating another cycle of share value destruction and broken trust. If so, the industry will increasingly fall further out of favor.

To thrive going forward, energy leaders will need to maintain the discipline of their newer mindset: reducing cost, finding operational efficiencies, leveraging data/AI, and allocating capital smartly while also mitigating the carbon footprint and making new investments in the energy transition already underway. The industry must invest in a different frontier basin closer to home: the discovery, exploration and production of a new breed of leadership. Our research and decades of experience working with the industry suggest that successful leaders will need to:

■ Think like an activist;

■ Relate like a diplomat;

■ Serve as an advocate; and

■ Develop a new humility.

1. Think like an activist

A number of upstream investors have noted that many E&P stocks often trade below the value of their proved developed producing reserves, and therefore the market no longer believes in the reinvestment economics of unconventional oil and gas. Nor do investors trust the executives or board members who oversee capital allocation. Therefore, despite historically attractive valuations, there does not appear to be any incentive for generalist investors to come back to the sector, and dedicated capital is shrinking due to the truncated investment timeframe of most public equity investors. The cost and capital efficiency discipline energy leaders have begun to embrace—essentially, an owner’s mindset—is therefore essential to rebuilding trust and investment.

The approach is one often brought by shareholder activists, who in recent years have expressed concerns about underperformance and weak governance in the sector and sought to influence the makeup of boards and management teams.

Viewed suspiciously, perhaps because activists have had, at times, an obsession with shortterm financial gain, shareholder activism performed in the right way can serve as an effective monitoring tool for financial performance, governance and decision-making in areas such as M&A and capital allocation, balance sheet liquidity and complex people decisions.

What if, for example, executive leaders embraced an “activist” mentality and brought it in-house?

Or what if directors were less deferential to the CEO and demanded greater performance and accountability?

When calling for more robust governance, Warren Buffett, certainly no activist, once said of board directors, “We need more Doberman pinschers and less cocker spaniels.” The necessary shift in focus on what creates actual economic value requires, among other things, a culture of accountability and healthy internal dissent at the CEO and board level with a built-in rigorous system of checks and balances. In addition, adopting an activist attitude internally can also create the ancillary, yet not insignificant, effect of mitigating the risk of an activist campaign.

2. Relate like a diplomat

Ambassador Richard Haass, the president of the Council on Foreign Relations (and former senior diplomat for two American presidents), was prescient when in 2009 when he spoke of the CEO as a diplomat. In energy in particular, over the past decade, the average day of a CEO, or local region or asset leader, has become increasingly complex and volatile, particularly for E&P and service companies trying to earn or retain the right of a “social license to operate.”

Global energy companies have always had to navigate through international complexity, adherence to foreign corrupt practices acts and foreign government partnerships and concessions agreements. Looking ahead, nearly all (97%) of the executives we surveyed think that the regulatory pendulum will likely swing more in the direction of greater government intervention. This will mean businesses will need to work in even closer partnership with governments on a series of issues that include climate change, trade, investment, health, corporate security and cyber-security.

In addition, the urgent rise in environmental, social and governance (ESG) accountability, particularly in the wake of the pandemic and the global calls for greater racial and social equity, and a more active investor base, are together requiring business executives and government officials to manage an increasingly overlapping landscape of interest groups, stakeholders and regulatory agencies. Indeed, the survey showed that 47% of industry leaders think ESG compliance is one of the top three issues facing the industry in the next decade.

A recent Edelman survey of 600 institutional investors representing over $20 trillion in assets in the U.S. underscores the financial risks and opportunities across all three elements of ESG: 87% of investors agreed their firm monitors specific ESG key performance indicators to inform investment decisions on an ongoing basis, and 88% say that companies that prioritize ESG initiatives represent better opportunities for long-term returns. In addition, investors increasingly want executive pay tied to ESG.

All this, as Ambassador Haass suggested a decade ago, will require diplomatic skills.

There have been periods in the industry when leaders have followed others’ strategies without taking the time to assess whether their organizations have the capabilities to execute them. Some refer to this corporate peer pressure as the “lemming effect,” when companies follow each other to their demise by submersion.

The strongest diplomats will be able to take their ESG performance from a routine “check the box” exercise or basic table stakes to creating competitive advantage with best-in-class performance on the mandates expected by regulators, proxy advisory firms and investors. Closely following the sustainability accounting standards board practices, among other ESG rating firms, is a start. Understanding the BloombergNEF, which assesses the energy transition risk of petroleum companies, will also help. In addition, diplomacy can foster best-in-class ESG performance across the board:

Environmental—Leaders should consider more aggressive initiatives to achieve effective environmental stewardship, such as inviting experts with external perspectives to boardrooms and executive offices to inform and advise them. Also, a rigorous examination of environmental targets and disclosures in areas such as upstream emissions, methane and flaring intensity, and attaching real, not discretionary, compensation targets to specific plans will build both real progress and trust.

Social—The S&P Global Ratings consider oil and gas to have extreme high exposure to social factors in all ESG categories. This means leaders should make an intensive effort to further heighten their companies’ sensitivity in areas such as safety, health and community partnerships. Though sector leaders have traditionally been defensive, the new energy leader should articulate the social benefits of oil and gas production and consumption.

Furthermore, energy companies are on the whole far behind peers in other industries in terms of diversity and inclusion, with most employees coming from the largely male-dominated technical fields of engineering and geology. Setting and tracking progress toward more aggressive diversity targets will be a start, and building consensus for doing so, as well as creating the inclusive culture that is crucial to companies’ seeing the business benefits of diversity, will take new diplomatic skills for most industry leaders.

Governance—Boards should address board tenure and committee structure issues, and, instead of deferring to the CEO as has often been the case in energy companies, they should respectfully yet forcefully press for real ESG results that are transparent and actionable.

In addition, rather than resisting reforms in executive compensation, the new energy leader will need to lead a renegotiation of their renumeration with the shareholder interests foremost in mind. Investors and boards should work collectively to create long-term compensation structures that disclose and reward cash-on-cash returns and long-term value creation. This creates alignment with long-term owners (not speculators) and enhances transparency at a time when trust is in short supply.

While companies have made progress on executive compensation reforms and diversity and inclusion (D&I) initiatives, substantial work remains. Indeed, two-thirds of executives surveyed rated the industry’s progress on D&I as “below expectations” or “poor.” Transformational success depends upon real commitment as well as mastering the art of diplomacy. Leaders can build on their relative strength in adaptability to bolster their capabilities in areas such as learning, inspiring and influencing, and building talent and teams to become more successful diplomats.

3. Serve as an advocate

One of the greatest threats that CEOs we have talked with and our survey respondents identified is talent risk. This is a crucial, but far from the only, reason leaders must become advocates for their enterprises.

If leaders cannot be talent magnets, they will risk losing real talent share. Energy companies face not only fierce competition for technology talent specifically, but also serve in an industry that is increasingly becoming unpopular with many potential recruits.

Attracting diverse candidates is often even harder. Furthermore, most company engagement surveys show that employees, especially millennials, tend to remain in a company (or an industry) where they find purpose and meaning, and flee businesses considered harmful to their communities or the environment. Recruitment and retention in an industry that is losing the battle in the public relations narrative, and identified by some investors, policymakers and the general public as a pariah will only become more acute.

The road to transforming industry leadership begins with a recommitment to the development of leaders as well as thinking about leadership differently.

More than half of the executives we surveyed said that the industry had been too weak and defensive in its advocacy to date. By almost every measure, life has improved dramatically for humans over the decades because of increasing fossil fuel use (in areas such as life expectancy, standard of living, reducing extreme poverty, cleaner water, a drop in climate related deaths per capita, and yes, the decrease in CO2 emissions in the U.S. as a result of the transition from coal-fired to gas-fired power generation).

However, there are indications sector leaders are finding the courage to speak up.

Consider Adam Anderson, the CEO of Innovex Downhole Solutions Inc., who placed an order with a leading U.S. clothing manufacturer for 400 jackets as Christmas gifts for his employees. But the order was immediately rejected. Claiming consistency with its policy against co-branding with companies that sell alcohol, tobacco and pornography, the company said it could not co-brand with an oil and gas company either. The fact that these jackets are made with Nylon, a petroleum-based product, was not lost on Anderson or other industry leaders.

Anderson wrote a letter to the manufacturer’s CEO arguing that “low-cost, reliable energy is critical to enable humans to flourish,” and trumpeted the progress the industry has made in reducing harmful emissions. Touching a nerve, the letter went viral, especially among industry leaders who have grown weary of apologizing for the products they provide. Anderson chose another jacket manufacturer for his employees.

4. Develop a new humility

When Albert Einstein said that the “greatest measure of intelligence is the ability to change,” he was likely considering both the cognitive and emotional kind. His point about change rings particularly true as it relates to leaders whose success or failure now almost entirely falls or rises on the depth of their emotional intelligence (EQ).

The ability to change and heighten EQ is a key lever of all the attributes above. For decades, the energy industry hired and developed smart, dynamic, sometimes charismatic, leaders and granted them huge incentives based on volume, not returns. Those incentives and perks in turn often created what some might call a “sense of entitlement.”

For example, consolidation has been necessary to reduce costs in the industry for more than a decade, but our survey shows that almost half of executives cite “social issues” as the biggest limitation to successful M&A. This suggests that at least some boards (and their CEOs) are consumed with their own professional and financial security rather than their companies’ and stakeholders’ best interests.

Another failure we have seen is some executives’ inability to act with agility over a failed strategic plan, such as overbuilding based on hyped geological potential or rosy financial projections. Moreover, the organizational cultures many energy executives create around themselves do not encourage the kind of humility in which dissent is not only allowed by the CEO and the senior team, but embraced as a way of challenging assumptions and creating diversity of thought. This is likely one reason that so many leaders in the industry find it hard to be constructive disruptors.

In addition, there have been periods in the industry when leaders have followed others’ strategies without taking the time to assess whether their organizations have the capabilities to execute them. Some refer to this corporate peer pressure as the “lemming effect,” when companies follow each other to their demise by submersion. During the Enron era, for example, CEOs of many other companies ventured into ancillary noncore businesses, with well-known consequences. In recent years, leaders showed interest in complex financial tools to quarantine risk or raise additional capital to spend outside of cash flow, which in the end only created more indebtedness.

As leaders seek to change how they lead in a decidedly secular—not cyclical—downturn, they will have to resist the temptation to follow peers, remain disciplined, be agile when strategic plans go awry, all by building a more humble mindset. It begins by placing the interests of others, their shareholders and the industry itself ahead of their own. A focus on talent and teams will help.

A renewed need for
leadership development

We know the world will need more energy, not less. We also know that the petroleum industry will provide the vast majority of that energy for the foreseeable future. Returning the energy sector to prosperity depends not only upon price recovery and resurgent investment capital, but also on a new kind of human capital that inspires, models and invests in the production of a new leadership model.

The road to transforming industry leadership begins with a recommitment to the development of leaders as well as thinking about leadership differently.

Theories on leadership vary, but perhaps none have been more discussed in energy in the last decade than Jim Collins’ epic “Good to Great,” which found that Level 5 leaders tend to be proverbial “hedgehogs,” doing one thing well. Collins’ work underscores the attributes we see as necessary: discipline, diplomacy, advocacy and humility. However, when William Thorndike published “Outsiders” in 2012, which was also widely noted in the industry, he focused on a kind of leadership that is both transformational and urgent, especially relevant in the petroleum industry today.

Like Collins, Thorndike defined exceptional executive performance as “returns for the shareholders over the long-term.” And he also emphasized some common characteristics of effective leaders, namely humility, frugality and tenacity. Thorndike’s “outsiders” amplified the importance of having a laser-sharp focus on per-share value as opposed to earnings or sales growth, exceptional talent for allocating capital and a belief that cash flow, not reported earnings, determines a company’s long-term value. And Thorndike found that his successful executives were more like foxes, “knowing many things,” and thus were more versatile.

Successful energy leaders for the next decade will need more adaptability than ever before. This means keeping their heads down like a hedgehog inside the corporation, executing on generating cash flow and savvy capital allocation—building on their strengths in driving results and resilience. Yet they will also need to be like a fox, able to be diplomats and advocates, disrupting and challenging, inspiring and influencing, able to anticipate, learn and react to the dangers looming outside.

Countless CEOs and directors have told us they are concerned about whether they and their teams are sufficiently prepared to meet the challenge of the next decade. To prepare for the energy transition and ESG requirements, anticipate the next black swan event and seize opportunities for growth, they must heavily invest in a new leadership transition. This begins with leaders developing a new humility and then building the capabilities to think like activists internally, relate like diplomats externally and serve as effective advocates for the industry that powers all others.

The fiercest competition in business has never been for customers, but for the best leaders, those who can anticipate, meet any crisis and build companies and industries that last.

Les Csorba ( is a partner in Heidrick & Struggles’ Houston office and a member of the CEO and board and industrial practices. David Pruner (dpruner@ is the partner-in-charge of the Houston office and a member of the CEO and board and industrial practices.