Oil prices experienced a well-publicized decline in the second half of 2014 due to a combination of rising supply and decreased demand. The trend has continued through this year, which created significant volatility in the oil market that isn’t likely to dissipate any time soon.
A similar phenomenon to what’s currently being experienced within the oil industry occurred in the natural gas sector a couple of years ago, when technology evolved to allow us to produce natural gas using stores that were previously inaccessible. Almost overnight, the concerns of industry members shifted from finding the supply to meet demand to finding the demand to meet supply. The increase in supply caused the price of natural gas to fall significantly, and companies experienced a rude awakening, especially those that were operating inefficiently or resting on their laurels with the expectation that high prices would continue indefinitely.
After gas became abundant and the cost of the resource fell considerably, many firms switched their focus to oil or natural gas liquids. In addition to being more highly priced, these forms of energy allowed enterprises to earn more for their investment. However, the solace that these organizations found in the oil sector was short-lived. Now, technological developments are transforming the oil industry in a similar manner to the metamorphosis that occurred with natural gas – and this time, there is no other resource to switch to.
There is an ongoing debate – is this just a temporary downturn, or is this an example of game-changing technology that has transformed yet another industry indefinitely? Although some believe the former, many are starting to think the future of oil and gas won’t be ruled by demand but by supply – and now we have plenty of it.
“It is imperative for executives to resist the urge to bury their heads in the sand.”
Evolve or die
If you subscribe to the new paradigm, now is the time to act. Companies that refuse to acknowledge this shift and fail to adapt to the conditions of today or put plans in place for tomorrow risk having their future determined for them. To avoid potential negative fates befalling their organizations, it is imperative for executives to resist the urge to bury their heads in the sand. After all, as the famous quote goes, “It is not the strongest of the species that survives, nor the most intelligent that survives; it is the one that is most adaptable to change.” Instead, leaders must broaden their thinking, accept the current reality and look for opportunities to be successful in this new era.
“The people who figure out how to do this in the energy sector will reap huge rewards, while those who don’t may not even survive,” warned Les Gombik, managing partner of Caldwell Partners’ Calgary office.
Ultimately, North American energy companies need to recognize that they are at a disadvantage in comparison to enterprises in other areas of the world. Specifically, as Gombik pointed out, the cost of oil production in the Middle East can be up to one-fifth of the cost in the U.S. or even one-tenth of the cost of some of Canada’s oil sands producers. Needless to say, this fact has made many North American energy basins less competitive, and some possibly even obsolete.
The need for wartime leadership
Before the game-changing technological evolution that turned Canada’s oil and gas industry on its head, a style of management known as peacetime leadership was prevalent within the sector. Executives who ascribe to this approach prioritize blue-sky thinking and culture-making to help their firms thrive, and many oil and gas leaders who took this path ended up finding tremendous success before the economic climate shifted.
During peacetime, leaders typically direct their companies’ efforts toward realizing goals such as pulling ahead in the industry, improving performance metrics, empowering employees, facilitating innovation, expanding the market and similar pursuits. During wartime – i.e. periods of threat and upheaval – members of the C-suite must shift their focus.
“Peacetime leaders employ techniques to encourage broad-based creativity and contribution across a diverse set of possible objectives,” explained Ben Horowitz of venture capital firm Andreessen Horowitz in a defining blog post on the subject penned back in 2011. “In wartime, by contrast, the company typically has a single bullet in the chamber and must, at all costs, hit the target. The company’s survival in wartime depends upon strict adherence and alignment to the mission.”
In terms of the oil and gas industry, the peacetime paradigm is well and truly over, at least for the time being. Now, companies need to ask themselves whether they have wartime leadership in place. If not, they should either look for wartime leaders internally or seek them out and bring them on board.
“Companies like Kodak, Borders and Blockbuster noticed the evolution happening within their industries, but they didn’t do anything about it because they wrote it off as a phase,” Gombik noted. “Needless to say, it didn’t pass – technology changed their industries, and by then it was too late. The same thing is happening within the energy sector. Many people will say that what’s going on is just another phase because the energy sector has experienced so many ups and downs before – it’s the hallmark of the industry and the industry always bounces back, but will it this time? Many aren’t sure, and if you make the wrong bet, it could be too late.”
Characteristics of a wartime leader
Enterprises eager to ascribe to wartime leadership need to know what skills and attributes to look for before they engage in finding different leaders. As listed by Horowitz, these include:
- A willingness to break protocol when this is deemed necessary.
- A focus on establishing and maintaining quality recruitment processes, but also downsizing.
- An understanding of the need to let what’s going on in the industry define corporate culture.
- An appreciation of the idea that taking high-risk, high-reward actions is sometimes the best way forward.
- A healthy distrust of the competition.
- A desire to win the market, not simply expand it.
- An unbreakable rigidity and complete intolerance of deviations when it comes to following a plan.
- Training employees to survive, rather than working to develop their careers, bolster their satisfaction rates, etc.
“The oil and gas sector needs wartime visionaries.”
In a time of such uncertainty, one thing is for sure: The oil and gas sector needs wartime visionaries who can inspire members of the workforce and adopt a “command and control” style of leadership to rally employees. Leaders of companies in the industry need to roll with the punches and strive to identify opportunities to innovate if they want their organizations to survive and thrive. This is not going to be the best approach for all energy companies of course, but for some, it may be the only way to make it.
About Caldwell Partners
Caldwell Partners is a leading international provider of executive search and has been for more than 40 years. As one of the world’s most trusted advisors in executive search, the firm has a sterling reputation built on successful searches for boards, chief and senior executives, and selected functional experts. With offices and partners across North America and in London, the firm takes pride in delivering an unmatched level of service and expertise to its clients.