At a Glance:

• For many companies in the energy and natural resources sector, the path to success depends on investing in new growth businesses—what we call Engine 2.
• Companies whose core businesses are most affected by the energy and resource transition are investing most aggressively.
• Many of these Engine 2 businesses are low-carbon ventures, including renewable power generation, carbon capture and storage, green hydrogen, and new forms of electric mobility.
• These investments are blurring business boundaries, such as European oil and gas companies investing heavily in renewable power generation and electric vehicle charging stations.

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For many energy and mining companies, big reductions in emissions in recent years have resulted from divestments: selling their most carbon-intensive assets to new owners, often with less-visible portfolios. Of course, this did nothing to reduce global emissions, since most of these assets will continue to operate under new owners.

It did, however, provide capital to the sellers, more than \\\$100 billion per year that the sector could invest in a number of ways, including new growth businesses that might have a smaller carbon footprint than the assets that were sold. That would line up with what we’re hearing and seeing from our large energy and natural resources clients, as more of them start to develop opportunities in low-carbon business. Some are moving faster than others, hoping to establish leading positions in these new growth businesses.

Bain & Company set out to quantify this movement by developing a definitive data set on the strategy and resource allocation of 125 of the top energy and natural resources (ENR) firms by market capitalization, analyzing their public statements, annual reports, and analyst reports. 

Their 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. Utilities are already spending a lot, oil and gas companies are scaling up, and companies in mining, chemicals, and agriculture are still in the early phases of change. The greater resources of large oil and gas companies could enable them to catch up quickly with the utilities sector, once their plans solidify. More investment will be needed over the next decade to reach their targets and net-zero carbon emissions, but their plans are coming into sharper focus. If oil prices remain high, these companies will have more funds to deploy, which could accelerate investments in new growth businesses.

Where ENR firms are placing bets

Bain & Company's analysis of these leading energy and natural resource companies reveals three types of investments in Engine 2:

• Big bets. Aiming for market leadership or expecting Engine 2 to be as important as the core business.
• Hedged or measured. Investing in a new market, but with less grand ambitions than for their big bets.
• Exploratory. Evaluating the potential in a new market, but it’s not yet a major strategic focus. 

The most aggressive investments, most commonly in areas where an incumbent sees enough potential to replace its legacy business in the future, or where there’s a natural adjacency that offers a viable path to meaningful scale. Hedged or measured bets are on businesses that will be part of the future portfolio but aren’t expected to displace the core. Exploratory plays are seen in more nascent profit pools, or where the potential is still undefined.

Oil and gas. New policies and social pressures are shaping the investments of oil and gas companies.

• European majors, facing greater regulatory pressure on Scope 3 emissions, are investing aggressively in renewables, hydrogen, and biofuels. Shell, for example, aims to produce 560 terawatt hours of renewable electricity and establish a network of 2.5 million electric vehicle (EV) charging points globally, while also building out hydrogen, carbon capture use and storage (CCUS), and a sustainable aviation fuel business. TotalEnergies aims to generate a combined 20% of its revenue in 2030 from renewables, biomass, and hydrogen, and another 50% from gas to reduce its reliance on oil.
• Oil companies in the US are focused on producing more and cleaner oil, gas, and refined products, while making bets on biofuels and CCUS. Chevron aims to capture 25 million metric tons of carbon dioxide per year and recently announced its acquisition of Renewable Energy Group for over \\\$3 billion to help reach its goal of producing 100,000 barrels per day of renewable fuel by 2030.
• National oil companies follow the priorities of their parent government. Saudi Aramco, for example, is pursuing low-carbon hydrogen.

Mining. Many coal assets have been divested by larger companies, and those that have retained them have clear plans to ramp down. Outside of coal, there’s limited direct threat to mining’s core business. Some of the global mining majors are orienting their portfolios to take advantage of rising demand for minerals associated with the energy transition, including staples like copper, aluminium, and nickel, along with new moves into lithium and rare earth minerals.

Blurred business boundaries and the basis for competition

This rapid redefinition of the energy landscape is blurring traditional boundaries between sectors, particularly in five areas. 

• Renewables. European oil and gas firms like BP and Total are investing in power generation, competing with incumbent utilities. Some chemicals and mining companies are collaborating with utilities to develop clean energy for their operations.
• Hydrogen infrastructure. Oil and gas, utilities, chemicals, agribusiness, mining, and industrial gases are all investing to capture share at various points along the value chain.
• Electric vehicle charging stations. In Europe, utilities are racing with oil and gas companies to build networks of stations. (In the US, some states limit utilities’ abilities to pursue retail recharging stations or other downstream opportunities.) Many European utilities (Eon, Iberdrola, Enel) have ambitions to serve this end of the value chain. At the same time, oil and gas players (BP, Total, Shell) see a natural opportunity here; instead of providing gasoline through a pump to a fuel tank, they want to convert their retail network to provide electrons to EVs.
• Low-carbon fuels. Here again, we see interest and ambition from oil and gas, chemicals, utilities, and even agribusiness companies.
• Carbon capture use and storage. Oil and gas players are most active in the CCUS landscape, but the ambitions for technologies vary. Some see CCUS as an opportunity to virtually decarbonize their existing product; by capturing atmospheric carbon as an offset, they can go to market with “net-zero oil.” Others are seeking to commercialize CCUS as a service. Chemicals companies are also providing the inputs needed to capture carbon.

Challenges greater than expected 

While companies are aggressively investing, it’s too early to declare success, and there are plenty of challenges in executing to deliver these ambitions. As noted in our survey, executives are grappling with the challenge of generating returns from these new ventures.

Even on its own, the task of navigating the energy and resource transition would be an unprecedented challenge for most energy and natural resources companies. The added complexities of pandemic-induced supply chain disruptions, rising trade barriers, the Russian invasion of Ukraine, dramatic spikes in commodity prices, and accelerating pressure from investors and capital markets are testing the abilities of every senior team and executive in these industries. The landscape is far more challenging than anticipated, and it’s not going to get any easier.

Nevertheless, the research shows that many Engine 2 successes have sprung from turbulent times, rewriting the rules and revealing new profit pools. Within many large ENR companies, Engine 2 organizations are being established and equipped with the talent and resources needed to meet customer needs, scale quickly, and obtain the capital necessary to deliver on 2030 targets. For them, the status quo won’t be good enough.

Source: Bain & Company

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