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.
Dubai, United Arab Emirates, 19 July 2022— Bain & Company launches its second annual Global Energy and Natural Resources report. The consultancy 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.
“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.”
“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.”
The findings of this year’s report make us cautiously optimistic. ENR companies are investing as much in innovation and impact, combined, as they are in economics—a good sign that executives are investing in the future,” said Raja Atoui, partner and a leader of Bain & Company’s Energy and Natural Resources practice in the Middle East. “The large profits that some energy companies earned during the first months of 2022 are likely to sharpen focus on capital decisions, as executives work to get the balance right between funding the current business, while also investing in future engines of growth.”
Signals show business outpacing policy on the 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.
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 or blue 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.
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.
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.