The energy transition is gaining momentum, forcing established oil and gas companies to ponder their collective role in the global economy of the future. There’s no doubt that the world will continue to rely on products from the oil and gas industry for decades to come, but if industry organizations hope to retain their spots among the world’s most valuable companies in a zero-carbon future and fulfill their mission, they must be prepared to change at the organizational level.

Renowned 20th-century economist Joseph Schumpeter was perhaps the first to observe the manner in which groundbreaking ideas percolated throughout the mainstream economy; namely, in a series of gradually shortening cycles, dubbed innovation cycles. In the past, transformative inventions—things like the steam engine, internal combustion engines, electricity and aviation, for example—would take half a century or more to reach mass adoption. Thanks to ongoing technological advancement, today’s innovation cycles might run their course in less than 25 years.

Innovation is now the prevailing currency of commerce, especially in the energy industry. As the world rallies around clean energy technologies, oil and gas companies are under constant attack from competing energy providers. Wind and solar power aren’t exactly new developments, and perhaps it’s naïve to think we’re just 25 years away from the widespread adoption of technology that renders oil and gas products obsolete, but industry leaders know that they must find ways to compete in this new energy world to meet the promise of the future. If they hope to succeed in that endeavor, they must rebuild their organizations around completely new objectives.

The Call for Urgency

Historically, oil and gas companies were perfectly optimized to deliver the energy products that powered everything from global healthcare systems to transportation to agriculture. Now and in the future, these companies must be designed around a different goal. Oil and gas leaders must build organizations that are, in essence, innovation factories. They must continue meeting the world’s demand for hydrocarbons (and maximizing their profits from that business) while simultaneously implementing operational changes that facilitate the shift toward carbon neutrality. Of course, that’s no easy task.

Importantly, the mindset and approach that industry leaders must now adopt isn’t necessarily about supporting a massive shift away from hydrocarbons. Rather, it’s about realizing that we are currently at the beginning of the next proverbial S-curve and that we’ll reach the end much sooner than we would have, say, a century ago.

No one can say what the future of energy looks like, but with the time to disruption steadily increasing, organizations can’t afford not to have a hand in the game. That means working to shape a future that includes them while developing the processes and competencies that will ultimately enable them to compete in that future.

Destination Unknown

When observing the path that we’re currently on, it’s easy to conclude that wind and solar energy will be the prevailing power sources of the post-carbon world. After all, the sun shines and the wind blows. However, wind and solar leaders know that the sun and wind are often less reliable than this maxim implies, and these energy producers are essentially non-factors in certain parts of the world. As such, there’s a growing demand for custom business and technology solutions that overcome inconsistency in power output and a need for innovation in areas such as battery storage and long-distance high-voltage power lines.

Despite a precipitous drop in the price of lithium-ion batteries in recent years, current battery storage capabilities aren’t advanced enough to provide an economical solution to the long-term storage of excess renewable energy. Similarly, long-distance high-voltage power lines remain prohibitively expensive. In Morocco, a country that has set ambitious goals in the quest toward shrinking its carbon footprint, the desert terrain provides an ideal venue for solar energy production. Indeed, the country is home to some of the largest clean energy projects on the planet, with plans to export enough solar energy to power about 7 million households in the U.K. by 2030 via submarine cables. Yet it still imports more than 17% of its electricity from Spain at a cost that critics say is difficult to justify. Even so, the challenges inherent in the development of solar storage and transmission technologies underscore the potential rewards for those who can develop custom business and technology solutions—and oil and gas companies shouldn’t ignore these areas as targets for innovative disruption.

Wind and solar aren’t the only energy sources vying for dominance in the carbonless future. Other renewables include hydroelectric and geothermal power, which come with their own unique challenges and opportunities. Nuclear power, though often the subject of criticism, could also be a compelling energy solution with advancements in modular design that make nuclear plants safer. And then there’s the promise of nuclear fusion, which would upend the energy industry like no other development ever has. Chevron’s 2020 investment in fusion startup Zap Energy is evidence that oil and gas giants aren’t discounting fusion's potential, though harnessing the same energy source that powers the stars remains a massive technological undertaking.

Rethinking What's Realistic

While developing the ability to create electricity from any of the sources above represents progress, electrification alone will only get us so far—at least with our present understanding of the potential energy density of current battery technology. As such, we will continue to rely on liquid fuels. The question then becomes: How do we do that and solve the fossil fuel problem?

One answer is to look to biofuels and hydrogen. The latter is tricky, as most of the world’s hydrogen supply comes from fossil fuels. If you use coal to produce natural gas, you get brown hydrogen. If you're creating hydrogen from natural gas but don’t capture the CO₂ produced as a result, you get gray hydrogen. If you do capture the carbon, you get blue hydrogen. And finally, if you use the renewable energy to drive the electrolysis to separate hydrogen from water, you get green hydrogen. In theory, because hydrogen provides triple the energy density that gasoline provides, it could be a clear winner—but the economics of production, transportation and storage remain very real barriers.

In short, countless unknown variables will play a role in determining the future of the energy industry. Knowing this, many oil and gas companies are sticking to business as usual to maintain revenue while taking small steps toward exploring various clean technology capabilities. The energy transition could take the world in so many different possible directions that for oil and gas companies that have spent decades focused on minimizing risk, trying to predict which clean energy source will ultimately prevail is an entirely foreign challenge. Most would rather not even try.

Chevron CEO Mike Wirth highlighted the complexity of the current situation in laying out the company’s strategic direction, which doesn’t include initiatives around wind and solar. Wirth conceded that the economics of these efforts are at odds with the company’s ability to deliver shareholder value. Instead, he believes that the most viable course of action for Chevron is to do what they do best: Try to do it cleaner and generate returns for shareholders that can be reinvested in clean technologies. But where will that path lead?

Playing the Game

If you aren’t solving for risk, then you’re building for innovation. Oil and gas companies aren’t seeing the energy transition as an infinite game but rather as a zero-sum game with clear winners and losers. As such, they’re managing risk and destroying innovation. Sure, they might dabble in clean energy technologies (as Chevron certainly has), but they’re mostly waiting for the market to show them a path toward the energy future. In the meantime, organizations are being born with a focus on nothing but clean technology, and they’re ready to respond quickly to each new development that occurs as the transition from fossil fuels to renewable energy unfolds. As these companies mature, oil and gas companies are merely stagnating.

At Pariveda, we’ve worked extensively on helping clients optimize organizational design in a way that allows them to fulfill their enterprise potential. We've found that virtually all organizations eventually face a form of entropy, in which navigating and participating in embedded business processes and relationships requires employees to spend time “working the system.” The wasted time and energy that results can ultimately be a company's downfall. In our experience, this entropy often manifests itself in the same ways, regardless of an organization’s size or industry. Some of the symptoms include:

  • Jumping through hoops: In a working environment characterized by low autonomy and trust, decisions and actions are delayed. Micromanagement prevails, and productivity suffers as a result.
  • The treadmill effect: An endless cycle of meetings and rework contributes to missed deadlines and employee burnout. In the modern era of remote work, meetings are more pervasive than ever, and they’re likely hurting performance.
  • Hero dependency: The organization relies on a relatively small number of high-performing employees to get things done. Because these workplace heroes are in short supply, bottlenecks are inevitable, leading to more burnout and, ultimately, attrition.
  • Political maneuvering: Accomplishing anything requires overcoming bureaucratic hurdles and political jockeying, which delays decisions and slows time to market.

Of course, these key indicators aren’t unique to the oil and gas industry, but they will inhibit an organization’s ability to respond and adapt amid the energy transition. Those that don't work quickly to identify and eliminate these barriers will struggle through any sort of large-scale business transformation and be too slow to capitalize on potentially transformative opportunities.

Many oil and gas companies are decades old, and some have been around for more than a century. They have proven business processes and well-established structures in place, and these have served them well in the past. Now, however, the industry is at a critical turning point, and many of its venerable companies are likely battling some combination of the above symptoms.

To mitigate these and better position their organizations to navigate ongoing disruption, oil and gas leaders can take several key steps to create better experiences and ensure success:

  1. Choose a strategy and commit. Driving carbon neutrality across operations or all Scope 1, 2 and 3 emissions is becoming table stakes. Soon, survival in the energy industry will require the pursuit of innovation around clean energy technology. In turn, that pursuit requires substantial investments—in R&D, partnerships (both private and public), and human and technology resources. It also inevitably involves making mistakes. If the energy market looks too crowded or you recognize the potential race to the bottom as energy generation becomes more commoditized, then perhaps consider strategies for competing in the climate transition space. By committing to a particular direction, you'll better position your organization to have a hand in shaping the direction of the industry at large.
  2. Use the strategic organization design framework to catalyze innovation. Care must be taken to ensure the new organization isn't overly encumbered by the risk and cost management thinking that largely defines modern oil and gas workflows. Over-managing risk will stifle innovation; over-managing cost artificially limits resources and creative thinking. Ensuring success means striking the correct balance. Strategic organization design is driven by this polarity management objective.
  3. Focus on accountability and structure. To prevent the inefficiencies that inevitably arise from “working the system,” implement an organizational directive and ensuing initiatives that include well-defined work with clear roles and accountabilities and with a unified understanding of the strategic context and the objectives required. Where the problem domain is large enough, implement cross-function teams and processes, which will enable you to navigate a more complex space.

Disruption is coming and will likely move faster than anticipated. Overnight business transformation isn't a viable course of action for most companies, and oil and gas leaders should prepare for a long-term transformation. For all of them, success will depend on effectively pursuing a dual objective: ensuring continuity in the operations that anchor revenue generation today while driving innovation in the energy and climate transition landscape to enable them to compete in the global economy of tomorrow.

About the author: Alan Henson is a vice president at Pariveda, a consulting firm driven to create innovative, growth-oriented and people-first solutions.

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