Energy organizations in transition

The coming decade will be a defining moment for the global energy system. Institutional and public interest is at an all-time high, driven by the ever-increasing need for affordable, reliable, secure, and competitive energy.1An affordable, reliable, competitive path to net zero, McKinsey, November 30, 2023. Companies must navigate the task of maintaining a strong, high-return “traditional” core, while building businesses in the fast-moving, high-growth space of renewables, low-carbon solutions, power, and retail. This challenge demands bold action and innovative solutions, as we work toward a sustainable energy future that benefits our planet and our economies.

For the world, solving this energy quadrilemma will require significant investment, technological advancements, and a favorable operating environment. However, at the heart of this journey are energy organizations and their leaders. Being fast, agile, and efficient will be essential for survival as competition for talent intensifies, integration of mergers and acquisitions becomes crucial for value creation, and generative AI (gen AI) changes the workplace as we know it.2The state of AI in 2023: Generative AI’s breakout year, McKinsey, August 1, 2023.

There are four organizational themes that are top of mind for energy executives: operating models, leadership, talent, and mergers and acquisitions, with gen AI becoming a key trend to watch. In this article we will identify and explore these themes, frame potential choices, and offer reflective questions for organizations to consider as they navigate through 2024 and beyond. While there is often no right or wrong answer, doing nothing seems to no longer be an option.

Choices to define the next decade

Over the past 18 months we have seen several energy companies announce strategic adjustments that reemphasize the importance of their traditional core businesses. This reflects the growing importance of energy reliability and security, as well as slower than expected cash flows from new energy businesses. Against this backdrop, companies are recognizing that now is the time to maximize value creation in the traditional business, grow cash flows, and take advantage of the high returns. However, as this momentum grows, an old question has resurfaced: business unit- or function-first for the traditional core business?

What primary axis should be used for the traditional core?

The choice between business unit (BU)—whether asset, regional, or value chain—or function-centric as the primary organizational axis has been a hot topic for several decades, with many companies switching between these models over time.

The choice of model essentially reflects a fundamental belief about how a company creates distinctive value: on the one hand, a functional model enables you to optimize across portfolios, and drive global scale, standardization, and functional excellence. On the other, anchoring ownership in the BU incentivizes local optimization, aiming to capture value in each and every facility, with the potential to move more quickly and unlock significant growth.

Over the past year, we have seen an increasing number of companies begin to revisit this choice and we expect this to be a growing theme through 2024. To contribute to this debate, we reviewed over 20 years of McKinsey proprietary performance datasets to draw insights linking asset performance with operating model choices. We found, on average, that BU or asset-centric models have the edge in terms of operational performance, but that they can compromise on consistency and produce a wider range of outcomes on both operating cost and production efficiency.3

Irrespective of the choice made, companies can also go back to basics by focusing on some fundamental step changes across their operating model: radical simplification, value-backed technology deployment, delivery through agile teaming, and other efforts to close the productivity gap.

Additionally, we are observing a trend of companies going even deeper into their operating model—reimagining both technical and nontechnical support models. Naturally, gen AI and digital will play a leading role, however, many companies are rethinking their geographic footprint, tapping into large engineering talent markets, and revisiting their operating models for technology development and deployment to ride the next technology S-curve.4

Key questions to consider

  • Do you have the right tension between a BU- and function-centric organization to deliver your ambitions?
  • What are the big unlocks in 2024 that would drive performance?
  • How could changes to your geographic footprint or technology operating model enable stronger performance?

Should new energy businesses be integrated in or independent from the core?

Most energy players have ambitions to grow new energy businesses alongside enjoying continued success in their existing core. These twin objectives require winning simultaneously in very different markets, with different drivers of success and, therefore, different operating model needs. As a result, we see energy companies around the world grappling with profound questions over how to set up their organization to win in both worlds.

First, the bad news. The data shows that most corporate new business builds are not a great success. Just 16 percent of all new business builds in Fortune 100 companies since 2000 have turned out to be blockbuster successes; the remainder were partial successes at best.5How industrial incumbents can create new businesses,” McKinsey, November 13, 2019. Overcoming these odds will not be easy and the fundamental question is how to harness the advantages of being an incumbent while providing the freedom to deliver with the agility of a start-up.

The answer is not the same for all; however, purposeful decisions are needed sooner rather than later to deliver on the growth promised to investors.

Key questions to consider:

  • At the strategic level (including capital allocation) how autonomous should your new energy business be?
  • What are the right key success factors that will enable your new energy business to grow?
  • What are the right architecture, corporate functions, technical support, midstream gas, or trading decisions that will set your new energy business up for success?

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What are the talent and leadership needs for a new era?

The focus in recent years has been to secure specialist engineering, digital, and commercial talent to develop new businesses and capabilities. This challenge remains alive, and competition for talent continues to be fierce.

However, a new challenge of equal proportion is bubbling under the surface: the need to retain and refresh the skill base to sustain the existing core business. This challenge will grow in prominence against a backdrop of significant retirements, with 400,000 oil and gas employees in the United States approaching retirement, and the increasingly negative perception of the traditional energy sector among younger workers in some parts of the world.6

The good news for employers in the new energy space is that knowledge, expertise, and competencies gained in more traditional energy businesses are relatively easily transferred.7 However, this transferability further compounds the challenges in retaining and attracting talent to the historic core.

To enhance their attractiveness to the talent market, many firms are reevaluating their employee value proposition (EVP), focusing on creating broader, or faster career opportunities, reshaping the corporate culture, and changing the perceptions of senior leaders. At the same time, many firms are broadening their accessible talent market, taking advantage of the global talent pool to strengthen their bench. Whichever way this challenge is addressed, it seems that early and purposeful moves in 2024 may position firms ahead of their peers for the next decade.

Beyond the talent squeeze, leaders hold a unique position in the journey ahead. The leaders of today are shaped by their traditional business and corporate histories; however, what lies ahead will be different in terms of challenges and opportunities—and only accelerated through the emergence of new technologies like gen AI. These will place different demands on leaders and require an evolved leadership model.8Powering up new leadership for a changing energy environment,” McKinsey, February 3, 2023.

Our survey of over 140 senior leaders indicates the change needed as leaders move from a “traditional leadership” style prioritizing elements such as planning, directing, and controlling to an “emerging leadership” approach that values a visionary style where leaders act as an architect, catalyst, and coach.9 Achieving this goes far beyond defining desired leadership behaviors and running development programs, but into the DNA of corporations—requiring a culture and operating system that reinforces and rewards the desired behaviors rather than hindering or—worst of all—punishing them.

Key questions to consider

  • Do you have sufficient strategic talent plans for the next five years, and do they take advantage of the global talent market?
  • Does your EVP fit the modern expectations of employees?
  • Do you and your leaders understand the transformation ahead and are you ready for it?

How do you create value from M&A in an era of consolidation?

Operators are already taking advantage of the high cash flows generated in the latest market cycle, with many pulling the traditional levers of capital management, shoring up their balance sheets, and returning cash to shareholders.

However, we are already seeing the next wave of M&A activity globally, with a high likelihood of acceleration in 2024.10Success in the M&A rebound: Riding the coming wave of upstream deals,” McKinsey, February 24, 2023. Oil and gas is moving with this trend, with recent megadeals such as ExxonMobil—Pioneer Natural Resources, Chevron—Hess, and Occidental Petroleum—CrownRock LP, with new energies following closely behind with a more programmatic approach.11

Executing the deal is one thing, and for many, acquisitions are seen internally as “bread and butter,” however, more than 50 percent of deals in the exploration and production sector don’t create value for shareholders.12 As we begin the next wave of M&As, it is clear that it must be different—the creation of value will underpin success, with organizational unlocks at the center.

There are three characteristics we observe to create value in both the short- and long-term. First, integration—capturing value far beyond general and administrative expense synergies is critical.13Beyond G&A: Maximizing synergy from oil and gas mergers,” McKinsey, April 18, 2023. The best use the moment of transaction to catalyze a step change in performance across all levers and create an inherent “deal and integration machine” to deliver value creating integrations over and over again. Second, enabling long-term growth by selecting the right end-state operating model, striking the right balance between dependent and independent. Third, focusing on managing culture from the very start of the M&A process is important to delivering long-term success.14The State of Energy Organizations 2024, McKinsey, January 25, 2024.

Key questions to consider

  • Do you have the inherent capability to build the “deal and integration machine” required?
  • How can new opportunities be catalyzed at the point of integration to realize step changes in performance?
  • How will you make the right decision when selecting the end-state operating model?

What role can gen AI perform for energy organizations?

Gen AI has the potential to revolutionize the energy industry by enabling more efficient operations, better decision making, and improved resource management. Potential applications include data analysis and interpretation, predictive maintenance, and virtual monitoring and simulation—among many more yet to be imagined.15The state of AI in 2023: Generative AI’s breakout year, McKinsey, August 1, 2023.

Gen AI can analyze large volumes of data from sources such as seismic surveys, well logs, and production logs to identify patterns, anomalies, and correlations that can help optimize production, reservoir modeling, and allow for higher quality decision making.16The economic potential of generative AI: The next productivity frontier, McKinsey, June 14, 2023. It can analyze sensor data and historical maintenance records to predict equipment failures and recommend proactive maintenance actions to improve operational efficiency, reduce downtime, and improve safety.

The technological side of the equation is complex but may not be the biggest challenge. There will be a huge impact on people: the capabilities and skills they need and how their day-to-day jobs might change. The introduction of gen AI could lead to the evolution of existing job roles and the emergence of new ones. It opens up amazing opportunities as well as challenges. To make the most of both, it will be critical to stay ahead of the trend and plan for how this may impact your people model and require investments in reskilling and upskilling parts of the workforce.

Key questions to consider

  • What proportion of jobs will be significantly exposed to automation due to gen AI in the next decade?
  • What impact does gen AI have on the capabilities needed in your workforce in the coming decade?
  • Do you have a plan in place to close the capability gap and capture the gen AI revolution?

Faced with change—and opportunity—on several fronts, energy organizations have critical choices to make to shape their future in a low-carbon world. Thinking strategically now about operating models, leadership, talent, and M&A could position energy organizations to evolve ahead of these major trends. Those who don’t plan now risk being left behind.

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