The energy and natural resources industry has weathered a year of remarkable upheaval. However, executives continue to push forward on the energy and resource transition, potentially moving faster than the outside world is seeing and outpacing policy. These are among the findings of Bain & Company’s second annual Global Energy and Natural Resources report, launched June 14.
“It’s been a year like no other for energy and resource executives as they’ve grappled with climbing inflation and ongoing supply chain challenges,” said Joe Scalise, global head of Bain & Company’s Energy and Natural Resources practice.
“Therefore, it might be surprising to hear that they remain optimistic on the energy and resource transition while showing tangible signs of progress. However, they often feel regulation is lagging and creating implementation bottlenecks. This is particularly true in the US, where progress has been disorderly and low-carbon investments can face delays in the absence of concrete policy guidance.”
Bain & Company surveyed more than 1,000 global energy and natural resources executives to understand how the energy and resources transition is playing out in real time, which technologies and opportunities they are prioritizing, and the pain points involved in squaring the traditional demands of their business with new demands to operate more sustainably.
“We have seen a marked shift in what the energy and resources transition means to executives over the past year,” said Peter Parry, chairman of Bain & Company’s global Energy & Natural Resources practice.
“Energy and natural resources industries are moving from ambition to action. While close to a quarter of capital expenditure in 2021 was directed toward change, we can expect this to grow toward 50% by 2025, establishing a transition path with greater clarity. This study highlights the positive trajectories for investment, technology and new business growth, as well as the urgent need for attention on how to deliver on the transition.”
Signals show business outpacing policy on energy and resource transition
Bain & Company’s executive survey offers keen insight into what’s on the minds of energy and resource executives as they navigate difficult and disrupted paths through the transition, including:
- Executives overwhelmingly see decarbonization as a top priority, and they have higher expectations than they did two years ago. 88% say reducing Scope 1 and 2 emissions is a key priority for their company, 47% expect their company to change significantly in the next 10 years—up from 36% in 2020, and 96% expect the industry to make progress toward net zero by 2030.
- Executives expect the world will reach net zero by 2057, but most are more bullish on their own trajectories compared to the rest of the market. This may indicate a greater commitment than the outside world sees. Executives expect to reduce emissions by 28% by 2030 and 61% expect to decarbonize on a faster track than the world as a whole.
- Half of oil and gas executives expect their core business to decline in the next 10 years, and 72% believe they’ll have a new growth business that will complement or replace their core by 2030. 63% of power utilities executives expect their core business to grow rapidly over the next decade due to more electrification.
- Talent, culture and policy are the biggest impediments to success. A third of companies in mining and oil and gas say they’re struggling to attract and retain talent for their core business, and across sectors, executives cite a resistance of incumbent culture to change. North American oil and gas companies are almost twice as likely to be delaying investment in new business areas as those in Europe, perhaps due to greater clarity on regulations in Europe.
Increasing capital allocations to new growth areas
For many companies in the energy and natural resources sector, the path to success depends on investing in new growth, and often low-carbon, ventures, such as renewable power generation, carbon capture and storage, green hydrogen, circularity and new forms of electric mobility. The executives Bain surveyed say they are investing 23% of their capital to new business ventures, up from 16% in 2020.
Companies whose core businesses are most affected by the energy and resource transition are investing most aggressively, and these investments are blurring business boundaries. For example, European oil and gas companies are investing heavily in renewable power generation and electric vehicle charging stations, creating new competition for utilities.
Bain & Company analyzed the strategy and resource allocation of 125 of the top energy and natural resources firms by market capitalization to determine how much their actions support what they’re saying publicly. This research found that over the past two years, these companies have become more ambitious in new markets and are allocating resources toward their lower-carbon goals.
Bain’s research shows that the average company in utilities or oil and gas is currently pursuing at least four new growth areas. In utilities, this is mostly focused on renewable power generation and exploring new businesses in services and distributed systems.
Oil and gas companies are focusing mostly on renewables, carbon-capture, hydrogen and low-carbon fuels. Mining companies are focusing on the resources the world needs to develop and decarbonize, and chemicals firms are concentrating investments on circularity and bio-based products. Agribusinesses are investing in alternative proteins and digital platforms to support food supply chain traceability.
Satisfying the rising demands of investors
Bain & Company partnered with Rivel, an investor research firm, to interview 89 investors and analysts about how the energy transition is shaping investment decisions in the energy sector. This research showed the transition is squarely at the center of the agenda for investors, shaping perspectives on individual companies as well as sectors.
- Investor perspectives on oil and gas: For oil and gas, cash flow is the most important investment factor; potential growth in production ranks last. While 73% of investors want oil and gas to invest in lower-carbon markets, they remain concerned about capital allocation and declining demand.
- Investor perspectives on utilities: In utilities, investors see opportunities in renewables and electrification, but they are most concerned about affordability and reliability. Successful executive teams will mitigate risks on affordability, reliability and regulation.
For executives in both sectors, embarking on any new, low-carbon energy businesses will require a clear connection to the principles of the core business. Now more than ever, they’ll need to show how their capabilities, expertise and customer relationships make them the best owner of the new business.
Responding to the war in Ukraine
As the war in Ukraine grinds on, energy and natural resources companies have moved past their initial reactions of shock in order to integrate the crisis into their medium- and long-term planning. For most companies, a critical component of their response to the crisis is finding ways to make their businesses, operations and supply chains more resilient. It’s becoming increasingly prudent to prioritize resilience over low cost or efficiency.
Resilience is critical, but it is also expensive. For longer-term survival, companies need to pay attention to the basic principles of leadership: innovation, impact and economics, and they’ll need to determine where it makes most sense to invest. Identifying disruptions at three levels—commodity, macroeconomic and policy—helps companies see how their businesses will be affected to scenario plan accordingly.
Improving circularity in plastics
As attention has focused on the problem of plastic pollution in the environment, governments and the private sector have taken steps to promote recycling and reduce plastic waste. However, Bain’s research shows that at the current pace, only 10-14% of plastics will be recycled by 2030, falling well short of announced targets. And while the market for recycled plastic could grow significantly, it is likely to make up less than 15% of total plastics supply by 2030.
This misalignment between what companies want to buy and what will be available could inflate prices for recycled plastics as competition heats up for the limited supply. Petrochemical executives are motivated to find solutions, and they see circularity—returning used plastic to the supply chain rather than having it become waste—as a top priority, even more so than plastic users.
Companies that make and use plastics need to establish partnerships and change the way they operate to develop joint solutions that improve circularity. Supportive legislation and industry standards are also needed to help change behaviors and strengthen circular economics.
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