Hess CRO Jonathan Stein prepares for shake-up

As Hess turns into a leaner, upstream-focused oil company, chief risk officer Jonathan Stein tells Alexander Osipovich how enterprise risk management will assist in the firm’s transformation

As chief risk officer (CRO) of New York-based oil firm Hess, Jonathan Stein has helped reshape the company by pulling its globe-spanning array of assets into the framework of an enterprise risk management (ERM) programme. That programme, he says, has helped Hess manage assets as diverse as offshore oil platforms in Equatorial Guinea, refineries in the Caribbean and trading floors in London.

"We have a lot of different assets, and the question is, how do you look at all those different risks?" Stein says. "The risks in the Bakken are very different from those in the Gulf of Mexico or Kurdistan. We need to have some way to evaluate those risks on a consistent basis."

Now, risk management at Hess is experiencing some big changes, as the 80-year-old firm undergoes a major shake-up. On May 16, Hess reached a deal to settle a bitter proxy fight with Elliott Management, a New York-based hedge fund that had amassed a minority stake in Hess and had been urging it to tighten its focus on oil production, while selling off less profitable downstream assets. As part of the deal, Hess agreed to put three of Elliott's nominees on its board of directors and accelerated plans to transform itself into a pure exploration and production (E&P) company.

That divestment programme is in full swing. On July 30, Hess announced a deal to sell its energy marketing business, which supplies natural gas and electricity to the eastern US, to Houston-based Direct Energy, a subsidiary of UK-based Centrica, for just over $1 billion. Hess also plans to sell Hess Energy Trading Company, its New York-based trading arm, as well as its refineries, storage facilities and filling stations.

Stein's job is set to change along with Hess. He expects his team's efforts to focus less on managing the price risks of marketing and trading; instead, they will spend more time assessing the risks of individual E&P projects and evaluating their risk-reward profiles. Luckily, he says, Hess's well-established ERM programme provides a framework for conducting these project-level assessments and bringing them to the attention of senior management.

"As we move towards more E&P, that's probably going to be the biggest focus area. We'll still have some controls around the marketing of our equity production, but clearly more of our time will be focused on enterprise risk," Stein says.

Stein grew up in Boston, where his father was a car parts salesman and his mother worked as a secretary. Drawn to engineering, he attended Rensselaer Polytechnic Institute in New York state, graduating in 1991. His first job out of college – working in IT for Goldman Sachs – gave him a taste of finance, and he decided to go to Columbia Business School, earning his MBA in 1996. He then moved to Merrill Lynch, where, working in a fund-of-funds group, he learned to assess risk in an investment portfolio using value-at-risk and other techniques that are now part of the standard toolkit for risk managers.

"I really kind of fell into risk management," Stein says. He left Merrill when London-based consultancy Ernst & Young started a new risk management practice and chose him as the group's first hire. As a consultant, Stein spread knowledge about the budding field of risk management to banks and, increasingly, energy companies. One of his clients was Hess, which hired him in 2001 as its head of corporate risk management, a newly created role. In 2004, Stein was promoted to CRO, a position he has held ever since.

Over the past decade, one of the biggest shifts Stein has witnessed is the growing role of regulation in risk management. In his early days at Hess, Stein spent his time dealing with changes required by the Sarbanes-Oxley Act of 2002, but says the challenges of Sarbanes-Oxley were easy compared with the huge burden imposed by the Dodd-Frank Act of 2010. "Dodd-Frank has just been a huge, steep curve, to the point that it has consumed resources across all parts of our businesses," he says.

Nonetheless, Stein feels his biggest accomplishment has been the firm's ERM programme, which he believes will continue to play a critical role as the company turns itself into a leaner, meaner firm focused on the risky but potentially rewarding E&P business. "Ultimately the goal of ERM is to give us better transparency into the risk, so we can make better decisions," he says.