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Global Energy and Natural Resources

Report 2022

Acknowledgments

This report was prepared by the leadership team of Bain & Company’s Global Energy & Natural

Resources practice, with special direction from Alasdair Robbie; Peter Parry, practice chairman;

Joe Scalise, global practice leader; and Neelam Phadke, practice executive vice president.

The authors would also like to thank Bain Partners James Allen, Julie Coﬀman, Jenny Davis-Peccoud,

Torsten Lichtenau, Hugh MacArthur, Dunigan O’Keeﬀe, Dave Rennard, and Joe Terino for their

contributions to this work. Thanks also to Martin DeZell, a senior manager; Nicole Edwards, marketing

manager; and David Sims and the editorial team for their assistance.

Net Promoter ScoreSM is a service mark of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld.

Founder’s Mentality� is a registered trademark of Bain & Company, Inc.

PricefxPlasma™ is a trademark of Price f(x) AG.

Global Energy and Natural Resources Report 2022

Contents

Letter: Toward a Deeper Understanding of the State of the

Energy and Resource Transition ........................................... 2

Data-rich perspectives .................................................. 5

How Energy and Resource Executives Think about the Transition ...............6

Investing in New Growth Businesses ...................................... 15

Meeting the Needs of Capital and Energy Markets ..........................25

How Companies Are Responding to the Crisis in Ukraine ..................... 34

Transition trends ...................................................... 47

Developing Talent Strategies for the Energy Transition ....................... 48

Creating a Coordinated Approach to Decarbonization .......................55

Improving Sustainability and Circularity in Plastics .......................... 61

Strategic capabilities ..................................................69

How to Do Engine 2 ....................................................70

Managing Operations through Disruptions ................................ 74

Pricing for Inlation in Energy and Natural Resources ........................ 78

M&A Opportunities in the Energy Transition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Deliver Decarbonization with Visionary Pragmatism .........................88

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GlobalEnergyandNaturalResourcesReport2022AcknowledgmentsThisreportwaspreparedbytheleadershipteamofBain&Company’sGlobalEnergy&NaturalResourcespractice,withspecialdirectionfromAlasdairRobbie;PeterParry,practicechairman;JoeScalise,globalpracticeleader;andNeelamPhadke,practiceexecutivevicepresident.TheauthorswouldalsoliketothankBainPartnersJamesAllen,JulieCoffman,JennyDavis-Peccoud,TorstenLichtenau,HughMacArthur,DuniganO’Keeffe,DaveRennard,andJoeTerinofortheircontributionstothiswork.ThanksalsotoMartinDeZell,aseniormanager;NicoleEdwards,marketingmanager;andDavidSimsandtheeditorialteamfortheirassistance.NetPromoterScoreSMisaservicemarkofBain&Company,Inc.,SatmetrixSystems,Inc.,andFredReichheld.Founder’sMentality�isaregisteredtrademarkofBain&Company,Inc.PricefxPlasma™isatrademarkofPricef(x)AG.Copyright©2022Bain&Company,Inc.Allrightsreserved.1GlobalEnergyandNaturalResourcesReport2022ContentsLetter:TowardaDeeperUnderstandingoftheStateoftheEnergyandResourceTransition............................................2Data-richperspectives...................................................5HowEnergyandResourceExecutivesThinkabouttheTransition................6InvestinginNewGrowthBusinesses.......................................15MeetingtheNeedsofCapitalandEnergyMarkets...........................25HowCompaniesAreRespondingtotheCrisisinUkraine......................34Transitiontrends.......................................................47DevelopingTalentStrategiesfortheEnergyTransition........................48CreatingaCoordinatedApproachtoDecarbonization........................55ImprovingSustainabilityandCircularityinPlastics...........................61Strategiccapabilities...................................................69HowtoDoEngine2.....................................................70ManagingOperationsthroughDisruptions.................................74PricingforInflationinEnergyandNaturalResources.........................78M&AOpportunitiesintheEnergyTransition................................83DeliverDecarbonizationwithVisionaryPragmatism..........................882GlobalEnergyandNaturalResourcesReport2022TowardaDeeperUnderstandingoftheStateoftheEnergyandResourceTransitionDearColleague,Whatayearithasbeen,withCovidcontinuing,supplychainsdisrupted,theshockinginvasionofUkraine,andthereturnofinflationlevelsnotseenin40years.Throughout,we’vehadthecontinuedhonorandpleasuretoworkwithyou,ourclientsacrosstheenergyandnaturalresources(ENR)sectors,onyourmostimportantissues.Webelievethesearetheworld’smostimportantissues,andwe’regratefulfortheopportunity.Thisisoursecondannualreportontheenergyandresourcetransition,andourchancetosharewithyouwhatwe’reseeingandlearninginourworkandresearch.Aswehighlightedlastyear,weseethreethemesframingourworkwithyou.•Innovation.Harnessingtransformativetechnologiesandpracticeswillhelpcompaniescontinuetothrivewhilepreservingtheplanetforfuturegenerations.•Impact.WorkingwithcustomersandotherstakeholdershasneverbeenmoreimportanttoensurethatcompaniesBain’ssecondannualreporttapsourresearchwithexecutivesandinvestorstopaintapictureofprogress,mixedwithproblems,ontheroadtoamoresustainablefuture.ByJoeScalise3GlobalEnergyandNaturalResourcesReport2022maintainthesociallicensetooperatecomplexbusinessesinourcommunitiesandfragileenvironments.•Economics.Fundingthesetransitionsdemandsnewlevelsofinvestormanagementandregulatoryengagement.Companieswillneedtocreateextraordinaryeconomicvaluetodrawthecapitalandaccesstheresourcesnecessarytotacklethesechallenges.Thisyear’sreportincludesnewproprietarydataandanalysisfromseveralBainresearchinitiatives,tobetterunderstandthedepthofourcollectiveambition,theprogresswe’remaking,andthechallengeswestillface.Thefindingsmakeuscautiouslyoptimistic.ENRcompaniesareinvestingasmuchininnovationandimpact,combined,astheyareineconomics—agoodsignthatexecutivesareinvestinginthefuture.Fewerthan15%ofcapitalinvestmentdecisionsarecharacterizedasmadesolelyonaneconomicbasis.Thelargeprofitsthatsomeenergycompaniesearnedduringthefirstmonthsof2022arelikelytosharpenfocusoncapitaldecisions,asexecutivesworktogetthebalancerightbetweenfundingthecurrentbusiness,investinginthefuture,andrewardingshareholders.Thereporthasthreesections:•Data-basedinsights.Oursurveysofmorethan1,000executives,anewdatabasetrackingtheinvestmentdecisionsofthetop125ENRcompanies(coveringmorethan$6trillioninmarketcapitalization),andmorethan30hoursofinterviewswithinvestmentprofessionalsgiveusafull-spectrumviewoftheenergyandnaturalresourcessector’sintent,actions,andreactions.•Meaningfultrends.WetakeacloserlookatthreecriticalareaswheredevelopmentsarereshapingthewayENRcompaniesapproachtheirbusiness:talentmanagement,engagingwithstakeholders,andcircularity.•Essentialcapabilities.Wereportontheevolvingnatureoffivecriticalcapabilitiesessentialtonavigatingthetransitionsunderway.Theseincludeflexibleandmorenimblestrategies,anopennesstoM&Aandpartnerships,andnewperspectivesonoperations,inflationarypricing,andsustainability.Basedonourworkwithclientsandobservationsofthedramaticprogressmadebythereadersofthisreportoverthepastyear,we’resanguineabouttheoutlookforthevaluetobecreatedandthecontributionstobemadeintheENRspaceinthecomingdecades.Itwillsurelycontinuetobeachallengingride,butwelookforwardtocontinuingtoworkwithyouandcontinuingthediscussion.JoeScaliseGlobalHeadofEnergy&NaturalResourcesHowEnergyandResourceExecutivesThinkabouttheTransition................6InvestinginNewGrowthBusinesses.......................................15MeetingtheNeedsofCapitalandEnergyMarkets...........................25HowCompaniesAreRespondingtotheCrisisinUkraine......................34Data-richperspectives6Data-richperspectivesHowEnergyandResourceExecutivesThinkabouttheTransitionBain’ssecondannualsurveyfindsthatprogressisunderway,butthelandscapeismorechallengingthanmanyexpected.ByPeterParry,NeelamPhadke,AlasdairRobbie,andJosephScaliseInconversationswithourclientsoverthepastyear,we’veseenamarkedshiftinwhattheenergyandresourcetransitionmeansfortheirbusinesses.Notsolongago,theenergytransitionwasasetofchallengesthatcouldcompromiselong-termstrategicplanning.Overthepast12months,thechange-orientedexecutiveteamsweworkwithhavemovedfromjustthinkingaboutthechallengestotakingactionalongapaththeynowseewithgreaterclarity.However,afteranoptimisticstart,manyarebeginningtohitheavytrafficastheygrapplewiththeincreasedcomplexityofdeliveringonevergreaterresourceneedswithagreenfootprint.Toquantifywhatwe’reseeing,wesurveyedmorethan1,000clientexecutivesacrosstheenergyandnaturalresourcessector.Wewantedabetterunderstandingoftheirviewsontheenergyandresourcetransition;newtechnologiesandopportunities;andwheretheyseeenvironmental,socialandcorporategovernance(ESG)challengesinadditiontodecarbonization.Theresultsconfirmmanyofthetrendswesee,withmorerichness.•Industryismovingmorequicklythanpolicy.–Executivesexpecttheircompaniestoreducecarbondioxideemissions28%by2030.–Onaverage,theyexpecttheworldtoreachnetzeroby2057.7GlobalEnergyandNaturalResourcesReport2022•Mostaremorebullishabouttheirowncompanies’decarbonization,comparedwithwhattheyexpectfrompeersandtheworldatlarge,whichmightindicateagreatercommitmentthantheoutsideworldcansee.•Halfofoilandgasexecutivesexpecttheircorebusinesstodeclineinthenext10years.And72%ofO&Grespondentsbelievethey’llhaveanewgrowthbusinessthatwillcomplement(62%)orreplace(10%)theircoreby2030.•Acrosssectors,companiesnowreportallocating23%oftheircapitaltonewbusinessventures,mostlyinresponsetotheenergyandresourcetransition,upfrom16%whenaskedin2020.Ifthistrendcontinues,itsuggestsmanycouldreachnetzerowellaheadof2050.•And,theyexpectittomakeadifference:justunderhalfexpecttheircompaniestobe“materiallydifferent”by2030,upfrom36%in2020.•Mostarestillstrugglingtofigureoutbusinessmodelsfortheirnewbusinessesthatwilldeliveradequatereturns,attracttalent,andstrengthentheirorganizationalcapabilities.•ComparedwiththeirEuropeancounterparts,NorthAmericanoilandgasrespondentsarenearlytwiceaslikelytobedelayinginvestmentinnewbusinessareasduetopolicyandregulatoryuncertainties.•Thedataalsorevealsagrowingconsensusthat,inlightofthesemanychallenges,thetransitionwillbedisorderly.Weseeexcitementandambitionacrosstheboard,withindividualshavinggreaterfaithintheirfirms’abilitiesandplansthanthemarketatlarge.Inthedatathatfollows,wediveintothesetopics.Theresultsrepresentaglobalviewofourclients’perspectives,withresponsesfrom45countriesacrossthreemajorregions:theAmericas;Asia-Pacific;andEurope,theMiddleEast,andAfrica.Atleast10%oftheresponsescomefromeachofthesefivesectors:oilandgas,utilitiesandrenewables,mining,agribusiness,andchemicals.Thisdataalsocoversarangeofperspectiveswithincompanies.Justoverhalfofresponsescamefromvicepresidentsorhigher,includingC-levelexecutivesandboardmembers,withtherestfromindividualcontributorsandfrontlinemanagement.Fromtheseresponses,weseeexcitementandambitionacrosstheboard,withindividualshavinggreaterfaithintheirfirms’abilitiesandplansthanthemarketatlarge.8GlobalEnergyandNaturalResourcesReport2022However,thedataunderlinesthatthere’sstillatremendousamountofgroundlefttocover.Andasexecutiveteamsrampuptodeliverevenmoreoutput,somearefindingitchallengingtosquarethetraditionaldemandsoftheirbusiness—deliveringproductssafely,securely,reliably,andaffordably—withnewdemandstooperatemoresustainablyandwithasmallercarbonandecologicalfootprint.Forexample,withintheutilitiessector,greatercompetitionhassqueezedreturnsfromrenewables,andtheimportanceofgridreliabilityhasbecomeclearerwithintermittencyissuesinTexasandEurope.Consumersaroundtheworldarefeelingthepainofhighenergycosts.Ascompaniestrytosucceedinnewmarkets,they’refacingnewchallengessuchasfindingtherighttalentandnavigatingthepolicyregimes.Asexecutiveteamsrampuptodeliverevenmoreoutput,somearefindingitchallengingtosquarethetraditionaldemandsoftheirbusiness—deliveringproductssafely,securely,reliably,andaffordably—withnewdemandstooperatemoresustainablyandwithasmallercarbonandecologicalfootprint.Oursurveyprovideskeeninsightintowhat’sonthemindsofenergyandresourceexecutivesastheynavigatedifficultanddisruptedpathsthroughtheenergyandresourcetransition.Theirviewsshowevidenceofpositivetrajectoriesforinvestment,technology,andnewbusinessgrowth,butalsohighlighttheneedformoreattentiononhowtodeliver,aswellasthesometimes-fragilelinkbetweenpolicyandproviders.9GlobalEnergyandNaturalResourcesReport202201EmissionsreductionExecutivesoverwhelminglybelievethatreducingcarbonemissionsandreachingnetzeroaretoppriorities.sayreducingScope1and2emissionsisakeypriorityfortheircompany88%saythatanet-zerocommitmentiscritical79%expecttheircompanytochangesigniicantlyinthenext10years(upfrom36%in2020)47%expecttheirindustrytomakeprogresstowardnetzeroby203096%88%givemeaningfulweight(atleast10%)toeachimperative02Innovation,impact,andeconomicsExecutivesbelieveallthreeareimportant.Onaverage,executivesassignedtheseweightingstoeachofthethreefactorsintheirdecisions:EconomicsInnovationImpact50%28%22%10TakesontheEnergyandResourceTransitionTheshifttoagreenerfutureisunderway,butoursurveyshowsit’stoughoutthere.Here’swhatmorethan1,000energyandresourceexecutiveshadtosay.10GlobalEnergyandNaturalResourcesReport2022istheaveragereductionincarbonemissionsthatexecutivesthinktheircompanieswillmakeby2030believetheywilldecarbonizefasterthanpeersexpecttodecarbonizefasterthantheworldasawhole28%37%61%04ComparingprogressMostexpecttoreduceemissionssigniicantlyby2030,fasterthantheirpeers.63%50%PowerutilitiesOilandgasChemicalsMiningandmineralsAgribusinessexpecttheircorebusinesstogrowrapidlyoverthenextdecadeduetomoreelectriicationSomecompaniesaredevelopinggreenerandmorecircularversionsoftheirproductsOthersareexploringnewgrowthmarketsincludingmaterialsforelectricvehiclesandlow-carbonhydrogenPortfoliosareshiftingascompaniesrampuponcommoditiesfortheenergytransition,electriication,andinfrastructurewhilerunningdownthermalcoalGrowthisexpectedfromfeedingandsupplyingthegrowingpopulation,aswellasfromshiftsinconsumerpreferenceslikebioproducts,supplytransparency,andveganismseetheircorebusinessdecliningoverthenextdecade,despiterecentspikesindemandandprice05CorebusinessElectriicationwillboostsomesectors,buttheenergyandresourcetransitionwillprovemoredisruptivetoothers.Onaverage,executivesthinktheworldwillreachnetzerobyOneinfourthinktheworldwon’treachnetzerountilafter42%expecttheworldtoachievenetzeroby205720702050202203NetzeroExecutiveshaveverydiﬀerentideasaboutwhentheworldwillreachnetzero.11GlobalEnergyandNaturalResourcesReport202276%62%UtilitiesOilandgasChemicalsMiningandmineralsAgribusinessexpectsigniicantprogressfromtheirinvestmentsinlow-carbonassetsorsolutionsby2030MostarefocusedondecarbonizingoperationsManyaredivestingfromcoal,focusingonmineralsfortheenergytransition,decarbonizingoperationsexpectrealprogressfromtheirlow-carboninvestmentsby2030~50%expecttoseerealprogressindecarbonizationby2030.ManyareexpandingintonewmarketsrelatedtotheenergytransitionCO206Low-carbonassetsSomehavehadtomovequicklyandsubstantially,whileothersfacingdiﬀerentchallengeswilltakelonger.ofexecutivesacrosssectorsexpectrenewablestohaveabigimpactexpectAIandotherdigitaltechnologiestohaveabigimpactThreeoutoffourutilitiesandrenewablesexecutivesexpectenergystoragetohaveasigniicanteﬀectofoilandgasexecutivesseecarboncapture,use,andstorageascriticalThreeoutoffourchemicalsexecutivesexpectcircularitytobecomemoreimportantoffoodandagribusinessexecutivesthinkthatorganicandregenerativeagriculturalpracticeswillsigniicantlyaﬀecttheirindustriesAbouttwo-thirdsofexecutivesinchemicals,food,andagribusinessexpectbio-basedproductstobecomemoreimportant79%77%67%63%072030technologiesExecutivesexpecttheseseventechnologiesandpracticestohaveabigimpactontheirbusinessby2030.12GlobalEnergyandNaturalResourcesReport2022expecttheirnewgrowthbusinessestoscaleby2030,andaccountformorethan10%oftheircompanies’proitsorvaluation72%NorthAmericancompaniesareinvestinglessinnewgrowthbusinessesthantheirpeersinEuropeandAsia.They'reexpectinglesstooEuropeismovingaheadquickly,butNorthAmericancompaniescouldcatchupquickly,basedontheirrecordShareexpectingsigniicantcontributionfromEngine2by2030ShareofcapexforEngine2NorthAmericaEuropeAsia-PaciicAcrosssectors,executivesareincreasingcapitalallocationstonewgrowthareas2022202023%16%19%25%28%NorthAmericaEuropeAsia-Paciic63%80%77%08Engine2Executivesarebullishontheirprospectsfordevelopingnewgrowthbusinesses.MostseepartnershipsasmoreviableandabetterwaytoshareriskthanM&A,particularlysincetherearesofewgoodcandidatesforacquisitionarepursuinglargeacquisitionsarepursuingsmalleracquisitionsseepartnershipsasimportanttodeveloptheirnewgrowthbusinesses76%09PartnershipsandacquisitionsPartnershipsareemergingasthepreferredwaytomanagetransitionrisks,inpartbecausetherearen’tenoughscaleacquisitiontargets.26%48%13GlobalEnergyandNaturalResourcesReport2022Executivesseetheneedfornewexpertise,butaskillshortagehamperstheireﬀorts,andtoomanycompaniesaredrawingfromthesamewelloftalent.Ascompaniesscaleupnewventures,competitionwillbecomemoreintense,makingretentionevenmoreimportant.saytheydon’thaveenoughpeoplewiththerightcapabilitiesfortheirnewgrowthbusinessesofcompaniesarealreadyadaptingtheirtalentstrategyseediversity,equity,andinclusionasimportantforimprovingoutcomesamongexecutiveswhoexpecttheircompaniestoseetransformationalchangeby2030Aboutone-thirdofcompaniesinminingandoilandgassaythey’rehavingdiicultyattractingandretainingtalentfortheircorebusinesses,comparedwith16%to21%intheothersectorsMining,oilandgasOthersectors10ATalent93%57%Thatrisesto45%50%~33%16%–21%10BCultureAcrossmostsectors,executivesseecultureasthemostpressingbarrieraftertalent.Drillingdownonspeciics,executivessaidthebiggestroadblocksforcreatingasuccessfulEngine2businessinclude:LackofentrepreneurshipcultureResistanceofincumbentculturetochangeChallengesadaptingcompanyculturetonewbusinessdynamicsandprocessesInabilitytodevelopaninnovativeandagileculturewithinthecurrentbusinessDiicultiesincreatingaleanorganization,updatingoldbusinessprocessesandproceduresExecutivesseethesethreeissuesasthebiggestimpedimentstosuccessandreturns.14GlobalEnergyandNaturalResourcesReport202210CPolicyExecutivesexpectingthemosttransformationalchangeby2030areoutperformingpeersby:NorthAmericanoilandgascompaniesarealmosttwiceaslikelytobedelayinginvestmentinnewbusinessareasasthoseinEurope,perhapsduetogreaterclarityonregulationsinEuropeGovernmentpolicyislesscertaininsomeplacesthanothers.Butacrossregions,executivestellusthatthespeedofprocessingapprovals,ratherthanuncertainty,istheirstbarriertoprogress.ActivelyparticipatinginshapingpoliciesExecutivesexpectingmostchangeTherestDelayinginvestmentinnewbusinessareasduetopolicyuncertaintyNorthAmericaEurope35%61%42%30%43%48%15MostcompaniesarealreadybuildingseveralEngine2businesses.ByBrianMurphy,PeterParry,NeelamPhadke,andAlasdairRobbieData-richperspectivesInvestinginNewGrowthBusinessesAtaGlanceFormanycompaniesintheenergyandnaturalresourcessector,thepathtosuccessdependsoninvestinginnewgrowthbusinesses—whatwecallEngine2.Companieswhosecorebusinessesaremostaffectedbytheenergyandresourcetransitionareinvestingmostaggressively.ManyoftheseEngine2businessesarelow-carbonventures,includingrenewablepowergeneration,carboncaptureandstorage,greenhydrogen,andnewformsofelectricmobility.Theseinvestmentsareblurringbusinessboundaries,suchasEuropeanoilandgascompaniesinvestingheavilyinrenewablepowergenerationandelectricvehiclechargingstations.16GlobalEnergyandNaturalResourcesReport2022Formanyenergyandminingcompanies,bigreductionsinemissionsinrecentyearshaveresultedfromdivestments:sellingtheirmostcarbon-intensiveassetstonewowners,oftenwithless-visibleportfolios.Ofcourse,thisdidnothingtoreduceglobalemissions,sincemostoftheseassetswillcontinuetooperateundernewowners.Itdid,however,providecapitaltothesellers,morethan$100billionperyearthatthesectorcouldinvestinanumberofways,includingnewgrowthbusinessesthatmighthaveasmallercarbonfootprintthantheassetsthatweresold.Thatwouldlineupwithwhatwe’rehearingandseeingfromourlargeenergyandnaturalresourcesclients,asmoreofthemstarttodevelopopportunitiesinlow-carbonbusiness.Somearemovingfasterthanothers,hopingtoestablishleadingpositionsinthesenewgrowthbusinesses,whichBaincalls“Engine2.”Wesetouttoquantifythismovementbydevelopingadefinitivedatasetonthestrategyandresourceallocationof125ofthetopenergyandnaturalresources(ENR)firmsbymarketcapitalization,analyzingtheirpublicstatements,annualreports,andanalystreports.Wewantedtodeterminehowmuchtheiractionssupportwhatthey’resayingpubliclyandwhattheytoldusinourrecentsurvey(seethefirstchapterinthisreport,“HowEnergyandResourceExecutivesThinkabouttheTransition”).Ourresearchfoundthatoverthepasttwoyears,thesecompanieshavebecomemoreambitiousinnewmarketsandareallocatingresourcestowardtheirlower-carbongoals(seeFigure1).UtilitiesareFigure1:Utilitiesandoil&gascompaniesexpecttospendmoreonnewgrowthbusinessesoverthenext10yearsUtilitiesOilandgas2020$2.6B38%20303.037%0.811%Shareoftotalcapex2.420%Notes:NotallcompaniesannounceEngine2investment;datashowsaveragecapexforcompaniesthatreportspendingonnewgrowthbusinessesSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQ;companyandanalystreports;DealogicAveragecapexonEngine2percompany($B)17GlobalEnergyandNaturalResourcesReport2022alreadyspendingalot,oilandgascompaniesarescalingup,andcompaniesinmining,chemicals,andagriculturearestillintheearlyphasesofchange.Thegreaterresourcesoflargeoilandgascompaniescouldenablethemtocatchupquicklywiththeutilitiessector,oncetheirplanssolidify(seeFigure2).Moreinvestmentwillbeneededoverthenextdecadetoreachtheirtargetsandnet-zerocarbonemissions,buttheirplansarecomingintosharperfocus.Ifoilpricesremainhigh,thesecompanieswillhavemorefundstodeploy,whichcouldaccelerateinvestmentsinnewgrowthbusinesses.Sectorsarerespondingdifferently,dependingonhowtheircoreproductsarethreatened.•Utilitiesandoilandgascompaniesareintheeyeofthestorm,underintensepressuretochangetheirmethodsofproductionorproducts.They’reinvestinginandconvergingonsomeofthesameendmarkets,withcompaniesreportinganaverageoffourorfiveEngine2sindevelopment(seeFigure3).•Chemicalsfirmsareconcentratingmuchoftheireffortandresearchinvestmentsoncircularity—specifically,howtoaddresstheplasticwasteproblembyrecyclingmoreplasticsordevelopingbio-basedproducts.Someofthesesolutionswillinvitenewcollaborationswithcompaniesincustomersectors,includingautomotiveandconsumerproducts.Thischallengemaynotbeanexistentialthreattotheirindustries,ascarbonreductionisinoilandgas.Butthechemicalsandplasticsproducersareprobablythenaturalownersofthesolutions.Figure2:Oilandgashastheresourcestomatchandexceedtheutilitysector’sinvestmentsinrenewablesSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQIndustryspending($B)0100200300400201718192021201718192021$500BCapexDividendsBuybacksOilandgasUtilities18GlobalEnergyandNaturalResourcesReport2022•Agribusinessandminingareunderlessdirectthreat,exceptforcoal.Bothsectorsarefocusedonreducingcarboninoperationsandotherwiseimprovingsustainabilityinoperations,includingusinglesswater.Companiesarealsoinvestinginnew,sustainableproducts.Inagribusiness,thatcouldbealternativeproteinsordigitalplatformsthathelpwithfoodchaintraceability.Inmining,itmaybesupplyingtransitioncommodities,low-carboninputstometals,orevenmetalrecycling.Thetakeawayisthatcompaniesthataren’tyetinvestingseriouslyinnewgrowthbusinessesmaybefallingbehind.Butit’sstillearlyinthegame.Alookathowothercompaniesandindustriesareinvestingcanhelpcompaniesdeveloptheirnextmoves(formoreondevelopingEngine2,seeChapter8,“HowtoDoEngine2”).WhereENRfirmsareplacingbetsOuranalysisoftheseleadingenergyandnaturalresourcecompaniesrevealsthreetypesofinvestmentsinEngine2.•Bigbets.AimingformarketleadershiporexpectingEngine2tobeasimportantasthecorebusiness.•Hedgedormeasured.Investinginanewmarket,butwithlessgrandambitionsthanfortheirbigbets.•Exploratory.Evaluatingthepotentialinanewmarket,butit’snotyetamajorstrategicfocus.Figure3:SectorsareinvestinginlinewiththeeffectsthattheenergyandresourcetransitionwillhaveontheircorebusinessesNotes:NotallcompaniesannounceEngine2investments;datashowsinvestmentsforcompaniesthatreportspendingonnewgrowthbusinessesSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQ:companyandanalystreports;DealogicAveragenumberofinvestmentsinnewgrowthbusinessespercompanyUtilities4.4Oilandgas4.0Chemicals2.8Mining1.31.6AgribusinessHedgedormeasured:alreadyamarketpresence,orexpectsnewbusinesstobeimportanttocompany’sfutureExploratory:evaluatingpotential,butnotamajorstrategicfocusBigbets:aimstoleadmarket,expectsEngine2tobeasimportantascorebusinessSignificantrepositioningrequiredDiversificationtobenefitfromnewgrowthvectorsFocusonadaptingcoreforfuturegrowth19GlobalEnergyandNaturalResourcesReport2022Weseebigbets,themostaggressiveinvestments,mostcommonlyinareaswhereanincumbentseesenoughpotentialtoreplaceitslegacybusinessinthefuture,orwherethere’sanaturaladjacencythatoffersaviablepathtomeaningfulscale(seeFigure4).Hedgedormeasuredbetsareonbusinessesthatwillbepartofthefutureportfoliobutaren’texpectedtodisplacethecore.Exploratoryplaysareseeninmorenascentprofitpools,orwherethepotentialisstillundefined.Utilities.Utilitiescontinuetoinvestinrenewablepowergeneration,whichisalreadyaneconomicalalternativeforthemtoprovidetheircoreproduct(electricity)withfewercarbonemissions—albeittypicallywithlowerreturns.Meanwhile,manyareexploringnewbusinessesinservicesanddistributedsystems.Enel,forexample,isinvestingtofullydecarbonizeitspowergenerationby2040throughexpandingrenewables,andsimultaneouslyexpandingintoefficientenergymanagementthroughtechandservicesviaitsEnelXplatform.Oilandgas.Newpoliciesandsocialpressuresareshapingtheinvestmentsofoilandgascompanies.•Europeanmajors,facinggreaterregulatorypressureonScope3emissions,areinvestingaggressivelyinrenewables,hydrogen,andbiofuels.Shell,forexample,aimstoproduce560terawatthoursofrenewableelectricityandestablishanetworkof2.5millionelectricvehicle(EV)chargingpointsglobally,whilealsobuildingouthydrogen,carboncaptureuseandstorage(CCUS),andasustainableaviationfuelbusiness.TotalEnergiesaimstogenerateacombinedFigure4:CompaniesfacingthegreatestthreatstotheircoreareinvestingmostaggressivelyinnewbusinessesNote:CategorieswithasterisksrepresentthemesnotprimarilymotivatedbytheenergytransitionSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQ;companyandanalystreports;DealogicUtilitiesOilandgasChemicalsAgribusinessMiningExploratoryEvaluatingpotential,butnotamajorstrategicfocusHedgedormeasuredAlreadyamarketpresence,orexpectsnewbusinesstobeimportanttocompany’sfutureBigbetsAimstoleadmarket,expectsEngine2tobeasimportantascorebusinessElectricvehiclesandmobilityRenewablesHydrogenStorageServices(e.g.,electricitysales,smarthomes)Carboncaptureuseandstorage(CCUS)Bio-basedproductsAgrinutrientsCircularityHealthandnutritionAdvancedmaterials(e.g.,5Gmaterials,3-Dprinting)AlternativeproteinServices(e.g.,agritech)GreenmetalsandcementRenewablesTransitioncommodities(e.g.,lithium)CCUSCircularityLow-carbonfuels20GlobalEnergyandNaturalResourcesReport202220%ofitsrevenuein2030fromrenewables,biomass,andhydrogen,andanother50%fromgastoreduceitsrelianceonoil.•OilcompaniesintheUSarefocusedonproducingmoreandcleaneroil,gas,andrefinedproducts,whilemakingbetsonbiofuelsandCCUS.Chevronaimstocapture25millionmetrictonsofcarbondioxideperyearandrecentlyannounceditsacquisitionofRenewableEnergyGroupforover$3billiontohelpreachitsgoalofproducing100,000barrelsperdayofrenewablefuelby2030.•Nationaloilcompaniesfollowtheprioritiesoftheirparentgovernment.SaudiAramco,forexample,ispursuinglow-carbonhydrogen.Chemicalsisadiversesector,butwe’reseeingtwobroadthemes.Somecompaniesareinvestinginmoresustainablewaystomakeormarketcurrentproducts,suchasmakingplasticsmorerecyclableorbio-based.We’realsoseeinginvestmentsinnewproductsandmarkets,someresultingfromtheenergytransitionandothersfromnewtechnologies(suchasmaterialsfor5Gnetworks).BASFaimstodoublethesalesfromitscirculareconomysolutionsbusinessto€17billionby2030.Thetakeawayisthatcompaniesthataren’tyetinvestingseriouslyinnewgrowthbusinessesmaybefallingbehind.Butit’sstillearlyinthegame.Alookathowothercompaniesandindustriesareinvestingcanhelpcompaniesdeveloptheirnextmoves.Agribusinessisamorehighlyfragmentedgrowthindustryandmaynotfacethesameexistentialthreattoitscorebusinessasoilandgasdoes.Butthesecompaniesareinvestinginnewbusinesstocapturesomenewopportunitiesandimproveoperations.Specifically,weseenewinvestmentsalongthreethemes.First,they’reinvestingingreatersustainability,infoodproductslikealternativeproteins,andininputs,likerenewablefuelfeedstockandbio-basedfertilizers.Second,they’reinvestinginmarketsthatpromotebetterhealthandnutrition,inparttoappealtoconsumerswhowantmoretransparencyintheirfoodsourcing.Andthey’rebuildinguptheirdigitalcapabilitiestotapintonewasset-lightbusinessmodelslikeOlam’sAtSource,whichtracesthesupplychainfromgrowertocustomer.Mining.Manycoalassetshavebeendivestedbylargercompanies,andthosethathaveretainedthemhaveclearplanstorampdown.Outsideofcoal,there’slimiteddirectthreattomining’scorebusiness.Someoftheglobalminingmajorsareorientingtheirportfoliostotakeadvantageofrisingdemandformineralsassociatedwiththeenergytransition,includingstapleslikecopper,aluminium,andnickel,alongwithnewmovesintolithiumandrareearthminerals.21GlobalEnergyandNaturalResourcesReport2022BlurredbusinessboundariesandthebasisforcompetitionThisrapidredefinitionoftheenergylandscapeisblurringtraditionalboundariesbetweensectors,particularlyinfiveareas(seeFigure5).•Renewables.EuropeanoilandgasfirmslikeBPandTotalareinvestinginpowergeneration,competingwithincumbentutilities.Somechemicalsandminingcompaniesarecollaboratingwithutilitiestodevelopcleanenergyfortheiroperations.•Hydrogeninfrastructure.Oilandgas,utilities,chemicals,agribusiness,mining,andindustrialgasesareallinvestingtocaptureshareatvariouspointsalongthevaluechain.•Electricvehiclechargingstations.InEurope,utilitiesareracingwithoilandgascompaniestobuildnetworksofstations.(IntheUS,somestateslimitutilities’abilitiestopursueretailrechargingstationsorotherdownstreamopportunities.)ManyEuropeanutilities(Eon,Iberdrola,Enel)haveambitionstoservethisendofthevaluechain.Atthesametime,oilandgasplayers(BP,Total,Shell)seeanaturalopportunityhere;insteadofprovidinggasolinethroughapumptoafueltank,theywanttoconverttheirretailnetworktoprovideelectronstoEVs.Figure5:Companiesacrosssectorsareconvergingonalimitedsetofopportunities,creatingnewarenasofcompetitionSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQ;companyandanalystreports;DealogicProfitpoolRenewablesHydrogenElectricvehiclechargingLow-carbonfuelsCarboncaptureuseandstorageSectorExamplesOilandgasTotalEnergiestargets100GWofrenewablegenerationcapacityby2030OilandgasShellaimstopossess10%+shareofglobalgreenhydrogensalesby2030UtilitiesIberdrolaseekstonearlytripleitsrenewablecapacityto95GWby2030UtilitiesEngietargets4GWofgreenhydrogenproductioncapacityby2030AgribusinessYaraandpartnersprovidingrenewableenergytoproducegreenammoniaforfertilizerandindustrialmarkets,andnewapplicationssuchasmarineshippingfuelChemicalsAirProductspartneringwithSaudiArmacoandACWAPoweron$12Bhydrogenandpowerprojectincluding$5BgreenhydrogenplantMiningFortescueFutureIndustries,subsidiaryofFortescueMiningGroup,aspirestoproduce15Mtonsofgreenhydrogenby2030UtilitiesEngieaimsfor1Mchargingpointsby2025,from350KtodayOilandgasShellplans500Kchargingpointsgloballyby2025and2.5Mby2030,from90KtodayOilandgasBPseeks20%shareoftheglobalmarketforsyntheticfuelby2030UtilitiesEngieisaimingfor10%shareofbiomethanemarketinFranceviaEngieBioZChemicalsAlbemarle’sReNewFineisachemicalusedinthehydrotreatingstepofthebiorefiningprocessAgribusinessBungerecentlypartneredwithChevrononabiofueljointventureOilandgasOccidentalrecentlysoldthefirstbarrelofnet-zerooil,withcarbonemissionsoffsetviadirect-aircaptureChemicalsBASF’sOASEBlueisagas-treatmentchemicalusedtocaptureCO2inchemicalprocesses22GlobalEnergyandNaturalResourcesReport2022•Low-carbonfuels.Hereagain,weseeinterestandambitionfromoilandgas,chemicals,utilities,andevenagribusinesscompanies.•Carboncaptureuseandstorage.OilandgasplayersaremostactiveintheCCUSlandscape,buttheambitionsfortechnologiesvary.SomeseeCCUSasanopportunitytovirtuallydecarbonizetheirexistingproduct;bycapturingatmosphericcarbonasanoffset,theycangotomarketwith“net-zerooil.”OthersareseekingtocommercializeCCUSasaservice.Chemicalscompaniesarealsoprovidingtheinputsneededtocapturecarbon.Thebasisofcompetitionineachmarketisn’tclearyet,andcompaniesthathaven’ttraditionallybeencompetitorsarenowelbowingformarketleadershippositions.Forexample,9ofthetop10playersinrenewablegenerationcapacityin2020werelargepowerutilitycompanies,butby2030atleast3ofthelargeoilmajorsareexpectedtomoveintothetop10renewableplayers,perannouncedinvestmentplans(seeFigure6).Moveslikethiswillrequirenewcapabilities,andincumbentsareincreasinglyturningtopartnerships,jointventures,andacquisitionsasanimportanttooltodeveloptheirEngine2businesses(seeFigure7).ScaleM&Acanbechallenging,giventhenascentnatureofnewenergymarkets,butsmalleracquisitions(below$5billion)andeffectivepartnershipsremainimportantfordevelopingnewFigure6:Someoilandgascompaniesareinvestingheavilyinrenewablepowergeneration,whichwillchangethemakeupoftheleaderboardSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQ;companyandanalystreports;DealogicRenewablescapacityof10largestprovidersofrenewableenergy(GW)020406080100%2020197120307343OilandgasUtilitiesOilandgascompaniesinthetop1023GlobalEnergyandNaturalResourcesReport2022businesses.Thehighvaluationsforsomecleantechassetscanbedifficulttojustifywhenweighedagainstpotentialreturnsfordeployingcapitalinthecorebusiness.Partnershipsarecriticalbutarenosubstituteforaclear,well-developedstrategy.ChallengesgreaterthanexpectedWhilecompaniesareaggressivelyinvesting,it’stooearlytodeclaresuccess,andthereareplentyofchallengesinexecutingtodelivertheseambitions.Asnotedinoursurvey,executivesaregrapplingwiththechallengeofgeneratingreturnsfromthesenewventures.Evenonitsown,thetaskofnavigatingtheenergyandresourcetransitionwouldbeanunprecedentedchallengeformostenergyandnaturalresourcescompanies(seeFigure8).Theaddedcomplexitiesofpandemic-inducedsupplychaindisruptions,risingtradebarriers,theRussianinvasionofUkraine,dramaticspikesincommodityprices,andacceleratingpressurefrominvestorsandcapitalmarketsaretestingtheabilitiesofeveryseniorteamandexecutiveintheseindustries.Thelandscapeisfarmorechallengingthananticipated,andit’snotgoingtogetanyeasier.Nevertheless,ourresearchshowsthatmanyEngine2successeshavesprungfromturbulenttimes,rewritingtherulesandrevealingnewprofitpools.WithinmanylargeENRcompanies,Engine2Figure7:M&Aisemergingasacriticaltoolforaccessingtalent,capabilities,andmarketsfornewgrowthbusinessesSources:Bainanalysisof125topenergyandnaturalresourcecompanies;S&PCapitalIQ;companyandanalystreports;DealogicNumberofmergerandacquisitiondealsinEngine2growthareasUtilitiesMining201825202135930121991326OilandgasChemicalsAgribusiness24GlobalEnergyandNaturalResourcesReport2022organizationsarebeingestablishedandequippedwiththetalentandresourcesneededtomeetcustomerneeds,scalequickly,andobtainthecapitalnecessarytodeliveron2030targets.Forthem,thestatusquowon’tbegoodenough.Onetruthalreadyseemsclear:Successfulnewbusinesseswillrequiremanylargecompaniestoadoptaninsurgentposition.Ifsomefast-moving,forward-looking,nimbleattackerisgoingtocannibalizeyourbusiness,betterthatitbeonefrominsideyourownorganization.Figure8:AnacceleratingstringofdramaticdisruptionsisexacerbatingthechallengeoftheenergyandresourcetransitionNote:Brexitreferendumheldin2016,andseparationtookeffectinearly2020Source:Bain&Company20102015202020252015–2016•Parisclimateagreement•Typhoon(Taiwan,Japan)impactstechandcargo•Syrianconflict,fallofAleppo•FailureofTrans-PacificPartnership(TPP)•ZikaandEbolavirusoutbreaksemergedasglobalhealththreat2011–2014•ArabSpring•Earthquakes(Japan,Indonesia)andtsunami(Japan)•Earthquake(Russia)•Fukushimadisaster•Crimeaoccupation2017–2019•Brexit,US-Chinatradewar•Australianwildfires•HurricaneHarvey,Irma(USA),andMaria(Caribbean)•SouthAsiafloods(India,Bangladesh)2020–Present•Ukrainecrisis•Covid-19(+variants)•Californiawildfires•SuezCanalblockage•Portcongestion•Highinflation(global)•Semiconductorshortage2023andbeyond...Iftrendscontinue,thepaceofdisruptionanduncertaintymayaccelerate•Formationanddestructionofalliances•Economicgrowthorrecession•Supplychainrepatriation•Service-sectorautomation•State-societyredefinition•Exurbanmigration•Weatherevents25Energyexecutivesmustdeliverstrongfinancialperformancewhilesatisfyingtherisingdemandsofinvestors.ByGrantDougans,DebraMcCoy,PeterParry,LuisUriza,andChungYenWongData-richperspectivesMeetingtheNeedsofCapitalandEnergyMarketsAtaGlanceMoreinvestorsareconsideringtheenergytransitionandotherESGissuesintheirinvestmentdecisions.Weasked89energyinvestors(45focusedonutilitiesand44onoilandgas)howthesefactorsaffecttheirportfolios.Investorsarebullishontheutilitiessector.Theyseeelectrificationasagrowthopportunity,andtheywantmanagementteamstocapturethemoment.Despitetherecentriseofoilandgasprices,investorsaremorerestrainedaboutthelong-termprospectsforthatsector.Theywantmanagementteamstocontinuegeneratingcashandexercisingcapitaldiscipline.Manyinvestorsareconsideringusingcarbonemissionslimits,reductiontargets,orESGrankingstoguidetheirportfoliodecisionsinthefuture.26GlobalEnergyandNaturalResourcesReport2022Withchangesincapitalmarketscomingtotheforefrontofexecutiveagendas,weandourpartnerRivel,aninvestorresearchfirm,recentlyinterviewed89investorsandanalystsabouthowtheenergytransitionisshapinginvestmentdecisionsintheenergysector.Wefoundthatthetransitionissquarelyatthecenteroftheagendaforinvestors,andthatitshapesperspectivesonindividualcompaniesaswellassectors.Asaresult,the“todos”forexecutiveteamsinutilitiesandinoilandgasareverydifferent.Forallcompanies,wefoundthatenvironmental,social,andcorporategovernance(ESG)goalsareimportant,andeverycompanymustbringacompellingstorytothetable.Investorsexpectcompaniestoreducecarbonemissions,particularlytheScope1and2emissionsthattheylargelycontrol.Mostoftheinvestorswespokewitharen’tplacingfixedlimitsorexclusionsinportfoliosonthebasisoftheircarbonemissions,butthatcouldchange.Forallcompanies,wefoundthatenvironmental,social,andcorporategovernance(ESG)goalsareimportant,andeverycompanymustbringacompellingstorytothetable.Ensuringthatstrategy—andtheexecutionofthestrategy—remainsalignedwithevolvingcapitalmarketexpectationsisacriticalandincreasinglycentraltaskforexecutiveteams.InvestorperspectivesonutilitiesElectrificationplaysaleadingroleinachievinganet-zerofuture,andutilitiesworldwidestandtobenefitfromampleinvestmentopportunities(seeFigure1).Investorsandanalystsbelieveinthelong-termgrowthpotentialoftheutilitiessector,andthey’relookingformanagementteamswiththestrategyandexecutioncapabilitiestocapturethemoment.Investorswantleadershipteamsthatcan:•captureopportunitiesfromthegrowthinrenewablepowergeneration;•accelerateelectricvehicleadoption;and•maximizereturnsforeverydollarofcapitaldeployed.27GlobalEnergyandNaturalResourcesReport2022Inordertodothis,executiveteamsneedtomitigatethreecriticalrisks.•Affordabilityforcustomers•Reliabilityofserviceandintermittencyissues•RegulatorandstakeholderriskTheinvestorsweinterviewedbelieveintheutilitysectorandthestabilityoftheutilitymodel(seeFigure2).Themostcommonlycitedfactordetermininginvestmentdecisionsismanagementcredibility(93%).InvestorandanalystperspectivesonoilandgasOverthepast18months,theoilandgassectorhaswitnessedalandmarksetofshareholdervotes,acriticalcourtrulingdirectingShelltoacceleratecarbonreductions,theCOP26climateconference,andtheexpansionofnet-zerofinancialalliances.Atthesametime,commoditypriceshavesurged,pressurestoexpandproductionhaveintensified,andoilandgascompanies’sharepriceshaveoutperformedbroadindices.Figure1:Inutilities,investorsseeopportunitiesinrenewablesandelectrification,butaremostconcernedaboutaffordabilityandreliabilitySources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyPercentageofrespondentswhocitedthesefactorsGrowthofrenewables42%MoreelectricityforEVs36%Increasedreinvestment/capexopportunities36%Affordabilityforcustomersduringtransition49%Reliabilityofservice/intermittencyissues38%Managingregulatoryrisk24%OpportunitiesRisks28GlobalEnergyandNaturalResourcesReport2022Inthisdynamicenvironment,threecoremessagesemergedfromourdiscussionswithinvestorsandanalyststhatshouldhavelong-termresonanceforoilandgasexecutiveteams.First,investorsandanalystsareclearlylookingforoilandgasexecutiveteamstoremainfocusedoncashgenerationandmaintaindisciplineddeploymentofcapital.Ofthe10factorswetestedinourconversations,oilandgasproductiongrowthwastheleastimportantfactordetermininginvestmentdecisions(seeFigure3).Second,investorsseebothopportunitiesandrisksassociatedwithhowoilandgascompaniesrespondtotheenergytransition(seeFigure4).Theyseethepotentialtousetheindustry’scapabilitiesinnew,lower-carbonmarkets,butthey’realsoconcernedabouthowcapitalisallocated.Demonstratinghowstrategyandexecutionrespondtotheseperspectivesshouldbeatthecenterofoilandgasstrategiesandinvestorcommunications.Third,investorsareopentooilandgascompaniesparticipatinginlower-carbonmarkets(seeFigure5).Inthecontextofuncertaintyaboutthepaceandshapeoftheenergytransition,there’svalueinshowinginvestorsthecompanyhasplansforgrowthinalower-carbonworld.Rulesandlimitsinportfolios:carbonbudgetsandESGWe’vebeenwonderingaboutcarbonemissionsandwhethertheyplayaconsistentroleinportfolioconstruction.We’respecificallyinterestedinpotentialportfoliorulesgoverningcarbonemissions,Figure2:MostinvestorsagreeonthefactorsthatinfluencetheirdecisionsinutilitiesSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyCompellingenergytransitionstrategy67%33%Favorableregulatoryenvironment71%29%Goodpotentialforregulatedearningsgrowthtransmissionanddistribution81%13%4%Managementcredibility93%7%2%HighlyimportantSomewhatimportantNotasimportantUncertain29GlobalEnergyandNaturalResourcesReport2022Figure3:Foroilandgas,cashflowisthemostimportantinvestmentfactorandpotentialgrowthinproductionranks10thOilandgasproductiongrowth16%48%30%7%Strongbalancesheet65%25%5%5%Trackrecordofshareholderreturn73%20%2%5%Trackrecordofcapitaldiscipline79%16%5%Reliablecashflow82%11%2%5%Sources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyHighlyimportantSomewhatimportantNotasimportantUncertainFigure4:Foroilandgas,investorsseeopportunitiesinlower-carbonmarkets,butareconcernedaboutcapitalallocationanddecliningdemandSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyPercentageofrespondentswhocitedthesefactorsLeadthetransitionwithcorecapabilitiesandmarketpositions41%Supply/demandbenefits,risingpricesduetotheslowpaceoftransition36%Carboncapture25%Maintainingappropriatecapexlevels30%Lowerreturns/howwilltheymakemoney?27%OpportunitiesRisksDecliningdemandinoilandgas20%30GlobalEnergyandNaturalResourcesReport2022andeffortstotargetandreducethem.Tolearnmore,weaskedaseriesofquestionstouncoverpossiblechangesininvestordecisionmaking.Welearnedthatnearly20%ofutilitiesinvestorsand13%ofoilandgasinvestorshavefixed,emissions-basedguidelinesthatuselimitsorexclusionsintheirportfoliostosetparametersforwhattheycanown(seeFigures6and7).Whenaskedaboutcarbonlimitsorreductiontargetsinportfolioguidelines,13%ofutilitiesinvestorsand6%ofoilandgasinvestorsreportedalreadyhavingsuchgoals.Inbothsectors,16%ofinvestorsareconsideringlimitsorreductiontargets.Whilecarbonlimitsaren’tadeterminingfactorinportfoliodecisionstoday,wefounditimportanttolearnthatsomeinvestorsareconsideringitforthefuture—andnotjustinthesetwosectors,butacrossinvestmentchoices.TheinvestorswespokewithgiveESGprominentconsiderationintheirinvestmentdecisions,buttherearedifferencesinhowimportanttheybelievethesefactorsareandhowtheyuseESGratingsandrankingsintheirportfolios.Morethan70%ofinvestorsacrossutilitiesandoilandgasdescribedESGaseitherveryimportantorimportant(seeFigure8).ESGratingsaresometimesusedtocreaterulesandlimits.UtilitiesinvestorsaremorelikelytoembedESGratingsintoportfoliodecisions:29%vs.10%ofoilandgasinvestors(seeFigure9).Figure5:Investorswantoilandgascompaniestoexplorelower-carbonmarketsNote:OptionsdidnotincludesharebuybacksSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyInvestinoil-focusedupstreambusiness50%Investingas-focusedupstreambusiness66%Investinlow-carbonsolution73%31GlobalEnergyandNaturalResourcesReport2022Figure6:Someutilitiesinvestorsalreadyhavecapsortargetsfortheirportfolios,whileothersareconsideringitNote:Percentagesmaynotaddupto100%duetoroundingSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyHavetodayConsideringDon'thave/noplansWehaveacapon,orexcludeinvestmentsin,certainindustriesonthebasisoftheiremissions19%78%3%Wehaveaspecificcarbontarget(orreductiontarget)forourportfolios13%16%71%Figure7:Someoilandgasinvestorshavecapsortargetsfortheirportfolios,whileothersareconsideringitSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyHavetodayConsideringDon'thave/noplansWehaveacapon,orexcludeinvestmentsin,certainindustriesonthebasisoftheiremissions13%84%3%Wehaveaspecificcarbontarget(orreductiontarget)forourportfolios6%16%78%32GlobalEnergyandNaturalResourcesReport2022Figure8:FouroutoffiveinvestorssayESGisimportantintheirdecisionsNote:Percentagesmaynotaddupto100%duetoroundingSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&CompanyNottooimportantSomewhatimportantImportantVeryimportantUtilities16%6%32%45%Oilandgas16%13%32%38%Figure9:SomeinvestorshaveESGratingrulesfortheirportfoliosInvestorswhohaverulestoincludeonlycompaniesthatmeetspecificESGratingsthresholdsUtilities29%62%6%3%10%3%3%84%OilandgasHavetodayConsideringDon'thave/noplansUncertainSources:RivelsurveyofNorthAmericanandEuropeaninvestmentprofessionals,2021(n=89);Bain&Company33GlobalEnergyandNaturalResourcesReport2022Forexecutiveteams,themissiononESGisclear:Demonstraterealprogressandconsideraworldinwhichcarbonlimitsandexclusionsarebroadlyadoptedbysomeinvestors.ThepathforwardOurresearchwithRivelshowsthattheenergytransitionisincreasinglycentraltohowinvestorsandanalystsviewenergyandnaturalresources.Forutilities,thisisthetimetobeonthefrontfootwithinvestorsandtodeploybold,innovativestrategiestoenablemoreinvestmentintheirjurisdictions.Oilandgascompanies,ontheotherhand,willwanttomanageandevolvetheirinvestorvaluepropositionscarefully.Investorsarelookingtothesectortogeneratecash;somecompaniesmayexploitnear-termdemandforoilandgastobuildcapital.Investorsarewaitingtoseeifthecapitalwillbereturnedorusedfortransformativechange.Forexecutivesinbothsectors,embarkingonanynew,low-carbonenergybusinesseswillrequireaclearconnectiontotheprinciplesofthecorebusiness.Nowmorethanever,they’llneedtoshowhowtheircapabilities,expertise,andcustomerrelationshipsmakethemthebestownerofthenewbusiness.Forexecutivesinbothsectors,embarkingonanynew,low-carbonenergybusinesseswillrequireaclearconnectiontotheprinciplesofthecorebusiness.Thesefindingsrepresentasnapshotintime.Thecapitalmarketsandenergytransitionlandscapesremaindynamic.Howwillassetmanagersinthenet-zerofinancialcoalitionsincorporateESG,carbon,andscience-basedtargetsintotheirinvestingdecisions?Willcertaincompaniesorcategoriesofenergyinfrastructurebecomeless“investible”asaresult?Whathappensthen,toindividualcompaniesandenergymarkets?(Formore,seetheBainBrief“ManagingStrandedCostsontheLongRoadtoNetZero.”)Executiveteamsshouldstress-testtheirstrategyanddecisionsagainsttheanswerstothesequestions,whilekeepingaclosewatchondevelopmentsincapitalmarkets.34Formingaseriesoftailoredscenarioscanhelpprepareforvolatilityincommoditysuppliesandshiftingtradeblocs.ByJorgeLeis,StuartLove,PeterParry,DaveRennard,andMichaelShortData-richperspectivesHowCompaniesAreRespondingtotheCrisisinUkraineAtaGlanceEnergyandnaturalresourcescompanieshavemovedpasttheirinitialshockoverthewarinUkraineandareintegratingneweconomicandcommodity-flowrealitiesintotheirplanning.Resiliencecanbeexpensive,soexecutivesneedtodeterminewhereitmakesthemostsensetoinvest,particularlyinlong-terminvestmentsinenergyandresources.Identifyingdisruptionsatthreelevels—commodity,macroeconomic,andpolicy—helpscompaniesseehowtheirbusinesseswillbeaffected.Bytailoringscenariosofplausibledisruptionsandoutcomes,companiescanprepareforarangeofpossibleoutcomes.35GlobalEnergyandNaturalResourcesReport2022AsthewarinUkrainegrindson,companiesandtheirleadershipteamshavemovedpasttheirinitialreactionsofshockinordertointegratethecrisisintotheirmedium-andlong-termplanning.Thewarisacontinuingtragedy,butalso—whenviewedthroughthelensofcorporatestrategy—anextremeexampleinastringofglobaldisruptionsthatseemtobecomingfaster,morefrequently,andwithgreaterintensitythantheyoncedid.Formostcompanies,acriticalcomponentoftheirresponsetothecrisisisfindingwaystomaketheirbusinesses,operations,andsupplychainsmoreresilient.It’sbecomingincreasinglyprudenttoprioritizeresilienceoverlowcostorefficiency.“Justintime”hasbeenreplacedby“justincase.”Resilienceiscritical,butresilienceisalsoexpensive.Forlonger-termsurvival,companiesstillneedtopayattentiontothebasicprinciplesofleadership:innovation,impact,andeconomics.Butastheyrecoverfromtheinitialshockandbegintomakelonger-termplans,companiesneedtoanswerthequestion:Whereisresilienceworththecost?Formostcompanies,acriticalcomponentoftheirresponsetothecrisisisfindingwaystomaketheirbusinesses,operations,andsupplychainsmoreresilient.It’sbecomingincreasinglyprudenttoprioritizeresilienceoverlowcostorefficiency.“Justintime”hasbeenreplacedby“justincase.”Theanswersdifferforeachcompany.Gettingitrightrequiresatleasttwothings.First,companiesneedtodevelopacomprehensiveunderstandingoftheirvulnerabilitiestoarangeofdisruptions,includingriskstopeople,businesscontinuity,asseteconomics,andfinancialperformance.Insomecases,theserisksmayoriginatetwoorthreestepsawayfromtheirtypicalplanningview.Formostcompaniesintheenergyandnaturalresourcessectors,theresponserequiresunderstandingthesupply-sideshocksaffectingthecommoditiesforwhichRussia,Ukraine,andBelarusplayakeyroleinproductionandtrade(seeFigure1).Thesesupplychallengeswillrestructuretradeflowswhilealsoinvigoratingdomesticalternatives.Thesecondstepaimsatlonger-terminsightsandbetterdecisionmaking.Questionslike,“Whereisresilienceworththecost?”and,“CanIrespondtotoday’sshortagewithamajornewcapitalinvestment?”arebestconsideredinthecontextofscenariosthatreflectasetofplausibleoutcomes.Bydevelopingasetoftailoredscenariosspecificallyanchoredonthosepotentialdisruptionsandtheirassociateduncertainty,companieslaythegroundworkforrepositioningtheirorganizationstothriveinarapidlyshiftingbusinessenvironment.36GlobalEnergyandNaturalResourcesReport2022ScenarioplanningCompaniescanmapoutpotentialimpactsusingscenarioplanningtoaggregatedifferenttrajectoriesofthebusinessenvironment.Forexample,areturntoglobalizedtradewouldbecharacterizedbyshort-termdisruptiontocommodities,modestmacroeconomiceffects,andarenewedemphasisonenvironmental,social,andcorporategovernance(ESG)considerations.Althoughsimilartoconditionsayearago,thisscenariowouldstillbemorecautiousthanbeforeRussiainvadedUkraine,recognizingresourcesecurityasapriority.Inafracturedscenario,theworldischanging,andtheinvasionwouldbethelatestmanifestationofthatchange,markinganendtotheefficienttradeofaglobalizedworld,andthebeginningofaworldfracturedintonearlyindependenttradeblocs.Inthisscenario,lossofefficiencydrivesupcommodityprices.Tradeblocswouldfocusonsecurityofsupply,creatingredundancyandincreasingglobaldemand.Supplychainsandglobaltradewouldbeseverelydisrupted,butgrowthpossible.Companieswouldfindthatsanctionsandnationalinterestsgoverntheiroperationsmorethaninthepast.Companiesintheenergyandnaturalresourcessectorswillfeelthedisruptionofthesescenariosatthreedifferentlevels.•Commoditylevel,affectingthelocalandglobalmarketconditionsspecifictoeachcommodityandmarket(forexample,Europeangasdemand,globalwheatpricing).0255075100%Sources:UNComtrade;Refinitiv;USDepartmentofAgriculture;BP;InternationalFertilizerAssociation;Nutrien;DTN;USGeologicalSurvey;Bain&CompanyMethanolBarleySunfloweroilMaize/cornWheatUreaAmmoniaPhosphatesPotashThermalcoalAluminumPalladiumFinishednickelCopperSteelNaturalgasOilShareofworldexportvalue(%)RussiaBelarusUkraineRestofworldMiningFoodsOilandgasAgriculturalchemicalsChemicalsFigure1:PercentageofglobalcommoditiesproducedbyRussia,Belarus,andUkraine37GlobalEnergyandNaturalResourcesReport2022•Macroeconomiclevel,reflectinghowcommoditydisruptionscanaffectthebroadereconomy,includinginflationarypressureorrecessionrisk.•Policyandtechnologyimplications,includingchangesintaxes,theroleofgovernmentspendingandsubsidies,andnewtechnologydevelopments.Commodityshortagesandresultingpricespikesquicklyflowtodownstreamcustomersforwhomthesearekeyinputs(includingmanufacturing,powergeneration,fertilizers,andmanyothers).Becausesomeofthesecommodities(notablyoil,gas,andfood)areamongthebroadestinputsintotheoveralleconomy,allconsumerswillpayhigherpricesforconsumergoods.Thepressureonhouseholdbudgetswilldrivegovernmentresponsesintheformofsubsidies,taxrelief,andothermeasures,totrytoeasetheburdenonthegeneralpublic,andthoseregulatoryresponseswillfeedbackintothedynamicsthatcompaniesfaceastheydecidehowtonavigatethissetofdisruptions.Inafracturedscenario,theworldischanging,andtheinvasionwouldbethelatestmanifestationofthatchange,markinganendtotheefficienttradeofaglobalizedworld,andthebeginningofaworldfracturedintonearlyindependenttradeblocs.Companieshavebeenrespondinginrealtimeandplanninghowtooptimizetheirinfrastructureandrelationshipsforthenearterm.Now,formany,theplanningcycleintroducesanopportunitytoexplorehowtheconflictwillalternear-andlong-termdecisions,especiallyinfluencingboththecapitalcycleandportfolioviews.Overthenextfewmonths,itwillbecriticalforcompaniestoreexaminerecenteventsthroughthelensofriskandopportunity.SomeCEOsmaydeterminethatincreasinglyvolatilebusinessenvironmentsmeritinvestingingreaterresilience,whileothersmaylookforwaystopursueefficiencytoundercutcompetitorswhenmarketsarefavorable.CommoditylevelInthefaceofthesedisruptions,primarycommodityproducersarelookingtoincreasecapacitytodisplaceRussianexports.Customersandfinished-productcompaniesarehavingtoabsorbpriceshocksandsupplyconstraints,andmidstreamtraderswillneedtoforgenewconnectionsasmarketsreactandevolve(seeFigure2).Businesscustomersandgovernmentsareactingtoaddressacuteshortages.38GlobalEnergyandNaturalResourcesReport2022Marketswillrespondtothethreatofcommoditysupplyinterruptionsinfourways.•Newsourcesofsupplywillreplacethoseaffectedbysanctionsorshiftingtraderoutes.Forexample,EuropeancountriesaremakingnewagreementswithQatarandtheUSforliquefiednaturalgas(LNG)toreplacepipedgasfromRussia.•Substitutegoodsprovidealternatives.WhenRussiansunfloweroilfellundersanctions,pricesforMalaysianpalmoilsurged.•Reduceddemand,whetherresultingfromhighprices(aswithsomeammoniaproducersinEasternEurope)orcoordinateddemandresponses(suchastheIEA’scalltosetthermostats1oClower,toconsumelessgas).•Reroutingtraderoutesinresponsetosanctionsandtosupplyemergingtradeblocs.JapanandtheEU,importersofbothmetallurgicalandthermalcoalfromRussia,havebegunsourcingfromotherlocationssuchasColombia,theUS,Australia,andIndonesia.Thesechangescarryriskforeachcommoditybutmayalsocreatenewopportunitiesthatcompanieswillneedtonavigateinanuncertainandrapidlyevolvingmarketenvironment.We’llconsiderthreefundamentalinputs:gas,oil,andwheat.Notes:DataasofMarch31,2022;copperandpalladiumpriceshavebeentrendinghigheroverthelastfewyears,buthighpricesinMarch2021meantheyear-on-yearchangewasminimalSources:UNComtrade;Refinitiv;USDepartmentofAgriculture;BP;InternationalFertilizerAssociation;Nutrien;DTN;USGeologicalSurvey;Bain&CompanyMiningFoodOilandgasCommodityPricechangefromMarch2021toMarch2022OilNaturalgasEuropeAsiaAmericasSteelCopperFinishednickelPalladiumAluminumThermalcoalPotashPhosphatesAmmoniaUreaWheatMaize/cornSunfloweroilMethanolAgriculturalchemicalsChemicals100%‒400%50%‒100%20%‒50%0%‒20%>400%<0%Figure2:PriceshaverisendramaticallyformanycommoditiesthataremajorexportsofRussiaandUkraine39GlobalEnergyandNaturalResourcesReport2022Naturalgas.EuropedependsonRussiafor60%ofitsimportednaturalgas,anditsimportsconsume75%ofRussia’sexportedgasvolume.TheEuropeanUnionhasreactedquicklywithproposalsthatcouldcutthatdependenceinhalfrelativelyquickly,eveninacautiousscenario,reflectingEurope’snewfoundconcernsforenergysecurity.TheproposalsrelyheavilyonbringinginalternativesuppliesintheformofinternationalLNG,andmoreEuropeanpurchasesofLNGonthespotmarketwillraisedemandandpricesbeyondusualpatterns.Substitutionispossibleintheneartermbyprolongingthelifeofnuclearplantsthathadbeenscheduledtoshutdown,andacceleratingthequeueofwindandsolarprojects(thoughtheserenewablesourcesremainintermittentwithoutat-scalepowerstorage,sotheyaren’tperfectsubstitutes).Thesesubstitutescanintroducepowertothegridandpartiallyoffsetdemandforgas.Demandreductionisalsoinscope.Higherpriceswillreducedemandfornaturalgas.Thesehighcostswillpresentstiffchallengesforgas-intensiveEuropeanindustriesandprovideopportunitiesforlow-costmanufacturers,especiallythosethathavecheapergasandcanexporttoEuropeanmarkets.Additionaloffsettingwillbepainful.Inmoreextremescenarios,thiscouldmeannotjusthighercosts,butalsotheriskofbackslidingonenvironmentalgoals.SwappingcoaloroilforgascouldreducedependenceonRussiangassupplies,butatthecostofincreasingcarbonemissions.Evenwiththesemorepainfulmeasures,itwillbedifficultforEuropetoreduceitsdependenceonRussiangasbymuchmorethan60%withinayear,meaningcontinueddependenceonsome50billionto70billioncubicmeters(bcm)ofRussiangasperyear.BecauseRussia’sgovernmentisdisproportionatelyfundedbyoilandgas,whichtogethercompriseonly7%ofRussianGDPbutabout40%ofthegovernment’sbudget,bothpartieswillwanttoseegascontinuetoflow,atleasttofulfillexistingcontracts.Itcouldtakeatleastfiveyearstofundamentallychangethisrelationship,partlybecausetheinfrastructurewilltakethatlongtobuild.ThismutualdependenceexplainsRussia’shesitationinterminatinggasflows.RussiahastestedtheeffectivenessofusingitsgasflowsasanegotiatingtacticinpenalizingPolandandFinland,butmarketstabilitydespitethesemovesindicatestheyaretoosmallinthesummerdemandseasontohaveamaterialimpact.TheinvasionofUkrainecoincidedwiththeendofthewintergasseason,solowstocksandwinterdemandpatternscreateddramaticpricespikes.Thepriceofgashassubsequentlysettledatahighprice,supportingaEuropeanprogramtoacquireLNGandpipedgastorestockstorage.ThisefforthascreatedacushiontotemperpriceeffectsfromrecentphysicalgaspipelinedisruptionsfrombothRussiaandUkraine.Aprolongedorexpandedoutage,oranoutageatanothertimeofyear,couldhavemuchmoredireeffects,however,andthemarketremainsstrained.Theacuteawarenessoftheimportanceofenergysecurityclearlyaffectsopportunitiesandrisksforenergyplayers.GasandLNGsuppliersmayfindgoodtermsforcontractingnewcapitalprojects.Newpipelinesthatwouldhaveencounteredpublicresistanceayearagomayfindamorehospitableregulatoryprocess.Powerrates,buoyedbygasprices,mayhelpaccelerateeconomicsfornewrenewable40GlobalEnergyandNaturalResourcesReport2022powerprojects.Thesetailwindswillrunupagainstincreaseddemandforhardwareandenergyservices.Inadditiontoothersourcesofinflation,thiswilldrivehighercostsoflaborandmaterials,allofwhichwilldistorthistoricalprojecteconomics.Forenergyconsumers,especiallythoseheavilydependentongas,projecteconomicswillalsoshift.Companiesweighingapotentialmovetowardelectrificationtoreducetheircarbonfootprintmayfindthedecisioneasierinaworldwheregaspricesaresubjecttooccasionalandprolongedspikesuptofivetimesthehistoricaverageprice.Thevalueofhedgingandlong-termcontractsmaybegreatergoingforward.Andsecurityofsupplydoesn’tnecessarilytranslatetodomesticationofsupplylines;expansionintolower-pricedenergymarketsmaypresentnewavenuesforgrowth.Oil.Russiasuppliedabout7.8millionbarrelsperday(mbd)ofcrudeoilandrefinedproducts.Abouttwo-thirdsofthatflowedtocountriesthathavebackedtheideaofsanctions;theUSandtheUK,followedbytherestoftheG7,havealreadypledgedtoeliminateRussianimports,andtheEuropeanUnionmayfollow.Therestflowstocountriesthathavenot,includingChina,India,andsomeCentralandEasternEuropeancountries.BeforeRussia’sinvasion,thepriceofoilwasalreadyrisingaseconomiesrecoveredfromtheCovid-19pandemic.Crudeoilpricesrosefromabout$54perbarrelinJanuary2021to$74inDecember.Uncertaintyinthewakeoftheinvasionpushedcrudeoilpricesover$120perbarrel,indicatingahighlystressedmarket.IfasubstantialportionofRussia’soilexportsweretostayoffthemarketindefinitely,pricescouldgohigher.Butit’sunlikelythatasignificantamountofRussianoilwoulddisappearfromglobalmarkets,whicharefluidandporous.Oiltankerscanbeeasilyrerouted,andevensanctionedoilhasawayoffindingitswaytomarket.Refinedproductsareeveneasiertoreroutethanoil,andtheymakeupabout2mbdto3mbdofRussia’stotalexports,muchofwhichislikelytofindmarkets.TheshareofRussianexportsshippedwithanunknowndestinationhasincreaseddramatically,withmuchofthisblendedatseatoconcealitsorigin.Giventhis,inacautiousscenario,perhaps1millionbarrelsofRussia’sdailyexportvolumewouldbecurtailed,anamountthat’srelativelyeasyfortheglobalmarkettoadaptto.SanctionsfromtheUSandEuropeanUnionmayberelativelyeasytocircumvent,evenbylower-andmiddle-incomecountriesthatmaybeabletobuyRussianliquidsatadiscount.Indeed,IndiahasalreadyincreaseditspurchasesofRussiancrude,whichtradesatadiscountof$30ormoreperbarrel.ButRussianrefineriesarealreadyreducingoutputduetotheresistanceinmarkets.Inmoreextremescenarios,asmuchas4mbdcouldstruggletofindamarket.Westerncapitalcoulddryup,andwehavealreadyseenBP,Shell,Equinor,andExxonannouncetheirwithdrawalfromRussia.Asdepletionanddepreciationtaketheirtoll,andasforeignknow-how,expertise,andhardwarebecomescarcerintheregion,supplycoulddecreaseby3mbd,evenwithoutdirectsanctionsontheindustry.41GlobalEnergyandNaturalResourcesReport2022Itdoesn’ttakealottomovethemarket,though,andsomemarketsareparticularlyvulnerable.DieselwasalreadyinhighdemandduetoCovid-relatedsupplychainissues.Now,asEuropeanrefinersturndownRussiancrudeanddistributorsforgoRussiandiesel,Europeansupplyconstraintsbecomemorepronounced.Ontopofthis,desulfurizingdieselrequireshydrogenfromcurrentlyexpensivenaturalgas.Theresultisahighandscarcedieselmarketthatdrivesuplogisticsandmachinerycosts.Wheat.RussiaandUkraineplayanimportantroleintheglobalfoodchain(seeFigure3).Inadditiontoexportingcriticalfertilizeringredientssuchasammonia,phosphate,andpotash,theytogethermakeupabout14%ofglobalwheatproductionandone-quarteroftheglobalwheattrade.MuchofthiswheatshipstoNorthAfricaandtheMiddleEast.Egypt,forexample,istheworld’slargestimporterofwheat,importingnearly60%ofitswheatconsumption,withabout80%ofimportscomingfromUkraineorRussia.PricesonthetypesofwheatthatRussiaandUkraineexporthaverisen,soEgyptandotherimportingcountrieswillneedtopayhigherpricesforwheatontheglobalmarkettofeedvulnerablepopulations—oneofmanycausesforconcern.WheatfarmersintheSouthernHemispheremaybeinapositiontosupplementsomeoftheshortfall,benefitingfromhigherpricesastheydo.Shiftingproductionfromothercropstowheatcouldaffectthepricesofothercommoditiessuchassoy,barley,corn,andsunflowers,reducingvolumesandraisingprices.Asthewarcontinues,NorthernHemispherefarmerswillsoonfacethesamedecisionsinthenextplantingyear,spreadingtherippleeffectsonthesecommoditycrops.Sources:OECD;Bloomberg;InternationalMonetaryFundRussianandUkranianwheatexports,bydestination(2019)020406080100%RussiaEgyptTurkeyBangladeshNigeriaYemenOtherAzerbaijanSudanUnitedArabEmiratesUkraineTurkeyYemenOtherIsraelPhilippinesTunisiaSpainThailandSouthKorea18%7%ShareofglobalmarketFigure3:Disruptiontoagriculturaltradeflowscouldleadtomajorchallengesinsupplyingfood,especiallyintheMiddleEastandNorthAfrica42GlobalEnergyandNaturalResourcesReport2022InthinkingaboutwhetherandhowtosanctionRussianexports,it’simportanttorememberthatmanyfoodandagriculturalcompaniesandorganizationsfeedtheworldaspartoftheirmission.WhenfoodcompaniesweighwhethertocontinueoperatinginRussiaandothercountriesintheregion,theywillhavetoconsiderthehumancostbornebypeopleuninvolvedintheconflict,suchasthevulnerablecommunitiesinEgyptthatrelyonRussianandUkrainianwheatfortheir(subsidized)dailybread.Forsectorsdependingontheseandothercommodities,thesupplydisruptionsarecascadingdownthevaluechain,creatingvolatilityinpriceandsupplyformanyproductsthatmightnotseemtobeimmediatelyaffected.Insomecases,theeffectondownstreamindustriesmaybedramaticascompaniesstrugglewithshortage-drivenbusiness-continuityriskandspikesininputcostswellbeyondanythingthey’veplannedfor.Theimpactsdownstreamcanalsobehardtoseewhenconsideringjustthecommodities.Forexample,palladiumshortagescouldaffecttheproductionandcostsofcatalyticconverters,hamperingtheautoindustry.Companiesacrosssectors—notjustinenergyandnaturalresources,butalsoinconsumergoods,manufacturing,technology,retail,andlogistics—shouldberunningscenariostoprepareforuncertainoutcomes.MacroeconomicfactorsInafracturedscenario,persistentlyhighandfrequentlyspikingcommoditypricesanddeepeningsupplyshortageswillacceleratetheinflationthatwasalreadyunderwaybeforethewarbegan.Consumersarelikelytocutbackonnonessentialspending,dependingontheirsensitivityandexposuretopriceincreases,andcentralbankswillfallundergreaterpressuretoraiseinterestrates.Eveninacautiousscenario,elevatedcommoditypriceswillprevail.Inafracturedscenario,persistentlyhighandfrequentlyspikingcommoditypricesanddeepeningsupplyshortageswillacceleratetheinflationthatwasalreadyunderwaybeforethewarbegan.Acrossallscenarios,financialmarketsarelikelytoseeevengreatervolatilityasinvestorsreacttodevelopmentsinthewarandaffectedeconomies.CapitalflowstoEasternEuropewilldiminish,andinafracturedscenario,aliquiditycrunchcouldescalateasinvestorsexercisegreatercautionandrespondtocentralbankmoves.Thecombinationofreducedconsumerspendinganddeterioratingfinancialconditionsleadstoaneconomicslowdownorrecessioninextremescenarios.USGDPcontracted1.4%inthefirstquarter,andwhilethisisn’twhollyattributabletothewar,it’stheclearestsignpostyetofdangeraheadfor43GlobalEnergyandNaturalResourcesReport2022theUSeconomy.Thiscouldputgovernmentsbackinthepositionofintroducingeconomicstimulusmeasures,astheydidduringtheCovid–19pandemic—allwhilestubbornlyhighcommoditypricescouldsuppressanyeconomicboostthatwouldhelpconsumerscopewithrecession.PolicyandtechnologyimplicationsInafracturedscenario,sanctionsandtradeinterruptionswouldrealigngeopoliticalblocs,withtradeandinvestmentsblocsdecoupling.EuropeandtheUSarealreadyrekindlingtraderelationshipswithsomeregimesthathadbeenoutoffavor,includingVenezuelaandIran,inordertoshoreupcrudeoilinventory.Inacautiousscenario,globaltraderesumes,butapremiumwouldremainfordomesticorsecuresupplylines.Governmentsarelikelytoimplementmoreactiveindustrialpolicies,alongwithinterventionsaimedatcounteractingtheharmfromtheconflictortoacceleratetheirresponse,particularlyinnationsthatrelyonresourceimportsfromtheconflictregion.TheEuropeanUnion’sREPowerEUinitiative,forexample,aimstospeedupandstreamlinetheprocessfordevelopingrenewableenergyinfrastructure.Intheprivatesector,investorsandconsumersarelikelytofurtherincreasescrutinyonenergyandsupplychainissuesacrossscenarios.Cybersecuritywillreceiveaddedattention,especiallyinafracturedworld,andtheinvestmentsinprotectionandameliorationwillincrease.WindfallprofitsandtheenergytransitionThecrisisislikelytoacceleratetheenergytransition,asmarketsracetoincreasetheirrelianceonrenewablesaspartofabroaderstrategytoreducetheirdependenceonRussianhydrocarbons.Greenenergywillincreasinglybeassociatedwithlocalizationofenergysupply.Theimmediateincreaseinenergypricesmakesrenewablesmoreattractive.Forexample,greenhydrogenmaybemorecompetitiveinsomemarkets,givenhighergasprices.Inthenearterm,however,highpricesforsomecommodities(forexample,nickel,palladium,andpolysilicon)couldbluntdemandforrenewablesandenergystorage.Therewilllikelybeagrowingrecognitionoftheinherentvolatilityoftheenergytransition,leadingtoarecognitionthatfossilfuelswillbeneededasbridgefuels(particularlynaturalgas,andevencoal)andapotentialrenaissanceofnuclearenergy.Theriseinenergypriceswillalsodeliverwindfallprofitstomanyfossilfuelenergycompaniesfarfromtheconflict.Executiveteamswillhavetodecidewhethertoreinvesttheseprofitsinproducingmoretraditionalfuels,investtheminnewbusinessesfocusedonrenewables,ordistributethemtoshareholders.Scrutinyfrompolicymakerswillincreasethepressuretomakevisible,productiveuseofthesewindfalls.Atthesametime,energysecurityislikelytobemoreprominentlylinkedtonationalsecurity,withcallstoredesignglobalsupplychainsanddiversifyawayfromhostilestates.Theseshiftsandthetransitionfromfossilfuelswillclearlyresultinhigherpricesforconsumers,eitherdirectlyorinthe44GlobalEnergyandNaturalResourcesReport2022formoftaxes,atleastoverthemediumterm.Itremainsanopenquestionhowmuchconsumerswillbewillingtobear,particularlyinthecontextofunderlyingandacceleratinginflation.RespondandrepositionRespondingtoanunfoldingcrisis,ensuringthesafetyofemployees,andprotectingthecontinuityandresilienceofoperationshasbeenthefirstorderofbusinessforcompaniesaffectedbythewarinUkraine.Thenexttaskmustbetorepositionorganizationstothriveinachangedenvironment.Inapproachingthis,executivescanusethesamethemesthathaveguidedthemthroughtheuncertaintyofthepastfewyears.•Innovation.Howcanthecompanyadaptandevolvetochangedconditions?AswiththeongoingenergytransitionandtheCovid-19pandemic,newtechnologiesandwaysofworkingmaybecriticalassetsinsettingupnewmodels.•Impact.Howwillsupplydisruptionsimpactthecompany’sESGambitions?Someemissions-reductionambitionscouldseeasetbackintheimmediaterushtosubstituteenergyandcommoditysourcesbutcouldthenaccelerateascompaniesandcountriesinvestinrenewablestoshoreupenergysecurityandmoresustainablecommoditysupplies.•Economics.Identifyingwheretoinvestinstrengtheningresilienceiscriticalintheshortandmediumterm.Butlong-termviabilitydemandsthatexecutivescontinuetofocusongeneratingshort-tomid-termvalueinordertodrawthecapitalandaccessresourcesnecessaryforsuccess.Inthenearterm,executivescanfollowasimple,five-stepapproachfordetermininghowtorespondandbegintoreposition(seeFigure4).1.Identifyhoweachofthethreelevelsofdisruption(commodity,macroeconomic,politicalandtechnological)affectsyourbusinessoperations.Forexample,companiesshouldevaluatehowtherenewedfocusonenergysecuritymightaffecttheirownenergytransitionandhowinflationcouldraisethecostsofcapitalprojects.2.Quantifyimmediateeffectsofdisruptionandplayoutresponsesforeachlevelofdisruption.Forexample,companiesshouldconsiderwhichalternativesourcescouldcomeonlinetodisruptanybenefitsfromapotentialwindfall.Testingthemoreextremeedge,theymustalsoconsiderwhatcommoditypricewouldcompelthemtoshutdownoperations,orwhentheymightneedtobreakcontractstofindnewvendors.3.Respondwithnear-termactionsandrepositionforlonger-termsuccess.Forexample,companiesshoulddeterminewhichcapitalprojectsinthequeuetheyshouldacceleratetotakeadvantageofachangedbusinessenvironment.Companiesalsoneedtoevaluatesupplychainandstranded-assetrisksanddeterminewheretheyshouldinvestinresilience(formore,readtheBainBrief“ManagingStrandedCostsontheLongRoadtoNetZero”).45GlobalEnergyandNaturalResourcesReport20224.Tailorscenariosanddefinesignpostsandleadingindicators.Mostexecutiveswillwanttoknowhowquicklytheycangettheirbusinessbacktonormal.Identifyingtherightindicatorswillhelpthemdeterminewhetherthey’removingthroughacautiousorfracturedscenario.Thatwillshedlightonwhatchangingconditionstheyneedtounderstand—forexample,assessingwhatwouldhappenifacompetitorinChinacanaccesslow-costRussianoilwhileothershavetopaymorefornonsanctionedcrude.5.Codifyanddeployastrategicchoicesplaybook.Identifyno-regretsmovesandrisk-mitigationstrategiestocreatemoreresilienceintheiroperations.Source:Bain&CompanyRespondwithnear-termactionsandrepositionforlonger-termsuccessIdentifyhoweachvectorofdisruptioncouldmostimpactyourbusinessQuantifyimmediateeffectsofdisruptionandplayoutsystem-levelresponsesCodifyanddeploystrategicchoicesplaybook;decideonactionsandtriggersTailorscenarios,definesignposts,andmonitorleadingindicators31254CommodityMacroeconomicPolicyandtechnology•Whatisthepotentialmagnitudeofdisruptionfromeachvector?•Whatleverswillbepulledtorespondtodisruptionandresolvethesetensions?•Howwillproducersmeetdemand,andwhataretheeffectsofwindfallprofits?•What’sthebestresponsetotheimmediatesituation(next6months)?•Whereandhowdocompaniesrepositioninthemediumterm(3-to5-year)capitalplanninghorizon?•Whataretheimplicationsforlonger-termstrategy?•Whataretheplausiblescenariosforthedevelopmentoftheconflictandvectorsofdisruption?•Whatsignpostsdefinethepathtothedifferentscenarios?•Foreachsignpost,whatleadingindicatorsneedtobemonitored?•Whataretheno-regretsmovesthatmakesenseunderanyscenario?•Whatrisk-mitigationstrategiescreatethegreatestresilience?•Whatdashboardsandprocesswillbeusedtomonitorleadingindicatorsandupdatesignposts?Figure4:Afive-stepapproachhelpsdevelopconcreteactionstorespondandrepositionintheimmediateandmediumtermsDevelopingTalentStrategiesfortheEnergyTransition........................48CreatingaCoordinatedApproachtoDecarbonization........................55ImprovingSustainabilityandCircularityinPlastics...........................61Transitiontrends48TransitiontrendsDevelopingTalentStrategiesfortheEnergyTransitionAtaGlanceEnergyandnaturalresourcescompanieswillneedtofindandintegratetalentwithawiderangeofskillstoguidethemthroughtheenergytransitionandhelpbuildnew,greenerbusinesses.Manyorganizationsarestrugglingtobalanceacquiringtalentneededtopursuenewopportunitiesandretainingemployeeswiththeskillsnecessarytosupportlegacybusinesses.Bain’srecentresearchoninclusionfoundthatabout80%ofemployeesinoilandgasviewinclusionasveryimportantintheirworkplace,buttheoilandgassectorlagsotherindustriesinfosteringinclusion.Leaderscanhelpwithretentionandintegrationacrosstalentpoolsbyclearlysignalingtheircommitmenttotheenergytransition,promotinggrowthforindividuals,andfacilitatingconnectionsamongemployeegroups.Energyandnaturalresourcescompanieswillneedtocreateaninclusiveenvironmentfornewanddiverseemployees,whilealsovaluinglegacytalent.ByBrenenBlair,AndersBruhn,andEmilyEmmett49GlobalEnergyandNaturalResourcesReport2022Navigatingtheenergytransitionwillbeagenerationalchallenge,requiringtop-tiertalenttosolveincrediblycomplexproblems.Meetingthischallengewillrequireretainingandreskillingtoday’sworkers,whileintegratingnewpeoplewithvariedbackgroundsandcapabilities.Leaderswillneedtoinvestincreatinginclusiveorganizationswhereeveryonefeelslikeavaluedcontributorwithasharedpurpose.Generationsoftalentedindividualshavepursuedcareersinenergybecauseitofferedopportunitiesforlearning,teamwork,andimpactintheserviceofpoweringourcommunities.Thiswillbeastrueinthefutureasitwasinthepast.Lookingbackward,thetalentthatmadethedifferencewasconcentratedinengineeringandoperationaldisciplines.Butastheenergytransitionexpandstherangeofbusinessactivitiesthatenergycompaniespursue,thattalentbaseisexpandinganddiversifying.Engineeringproficiencyisnolesscriticaltosuccess,butcompaniesalsoneedtointegrateexpertiseinnewareassuchasproductdevelopment,human-centereddesign,andregulatoryaffairs.“Workinginenergygivesmeasenseofpurpose.ItmakesmefeelI’mworkingonsomethingbiggerthanmyself,somethingbiggerthanmycompany.”—Batteryengineer,renewableenergy,33Talentstrategyisbecominganexistentialpriorityintheenergysector.Thisistheresultofseveralpressureschallengingtheabilitytofind,hire,andretaintalent:awaveofretiringprofessionals,demandfornewrolestobuildoutnewbusinesses,andatalentdrainfromtheenergysectortotechnology,tonameafew.Toaddressthesegaps,companiesarerethinkinghowandwheretoexpandthefunnelforpotentialnewhires,whilealsoinnovatingandexperimentingwithnewstrategiestoretainandreskilltheworkforcethatkeepstheircurrentbusinessesrunning.Powerutilities,forexample,willneednewteamstobuildoutwindfarmsandbatteryarrays,butwillalsocontinuetorequireteamsthatcankeepthermalplantsrunning.Thisisn’tthefirsttimethattheenergyindustryhadtoadaptitsworkforcetomajorchangesintechnology,regulation,andeconomics.Establishingthebusinessmodelsthatbuiltthemodernenergylandscapeandbuildingtheinfrastructurethatdeliversenergyatamassivescaletopowertheglobaleconomyrequiredabroadrangeoftalent.Inmorerecentdecades,however,asmanycompanies’strategiesfocusedonincrementalgrowthandcontinuousimprovement,theworkforceevolvedtobemoregearedtodeliveroperationalexcellenceandprudentcapitalmanagement,ratherthanbuildingdisruptiveandinnovativenewbusinesses.Inthedecadeahead,botharepriorities.Aseconomiesconfronttheneedtoreducecarbonemissions,theenergyworkforceisonceagaintransforming.Energycompaniesmustdesignemployeevaluepropositionsthatinviteandappeal50GlobalEnergyandNaturalResourcesReport2022tothenewtalentneededfornewcapabilitiesandbusinesses,withoutthreateningoralienatingtheircurrentworkforce.“Multinationaloilandgascompaniesarecompetingwitheveryotherbigcompanyouttherefortalentandneedarealvalueproposition.”—Subseaengineer,oilandgas,29WinningnewtalentwithdiversenewperspectivesEnergycompaniesknowtheyneedtoattractemployeeswithnewskillsandcapabilities,oftenfrommorediversedemographicsthanthecurrentworkforce.Someofthistalentwillneedtobewonoverfromthetechnology,finance,andpublicsectors,andthey’llbringnewperspectivesonteaming,compensation,andlocation(includingremoteoptions).Likecurrentemployees,theywanttofeelincludedinthecompaniestheyworkfor,andtheywanttoknowthey’reexperiencinganequitabletalentjourney,nomattertheirrole.Butinourinterviewsoverthepastyearwiththepeoplethatenergycompaniesaretryingtowinover,manyareskepticalofthemotivesoftheindustry,anddoubtfuloftheirabilitytosucceedinincumbentenergycompanies.Seniormanagerswillneedtofindwaystoreassurethesenewworkersthatthey’reanessentialpartoftheteam,valuedfortheiruniquecapabilitiesandperspectives.“IwantittobeclearthatgreeninvestmentsarenotjustaPRstunt...trustwouldbetheNo.1factortodetermineifIaminterestedinajobornot.”—PhDstudent,organometallicchemistry,29However,ingoingforthisnewcohort,energycompaniesfindthemselvesinachallengingstartingposition.Inadditiontoweakrepresentationofdiversetalent,theindustrylagsonoverallmeasuresofinclusivity(seeFigure1).Whilemostenergyexecutivesareawareofthetalentcrunchintheirsectorsandtheobstaclespreventingthemfromdrawinginmorediversetalent,theymaybeoverlookingsomeimportantkeystosuccess.Inclusivityisanimportantfactorforcareersuccessineverysector,butespeciallyinsomeenergyandnaturalresources(ENR)industries.Bain’srecentresearchfoundthatnearlyfouroutoffiveemployeesintheUSoilandgassectorrateinclusivityasveryimportantinanemployer,themostofanysectorwesurveyed.51GlobalEnergyandNaturalResourcesReport2022“Iwantdiversityinthinking,diversityingender...moreinclusionofpeoplefromdifferentculturesandbackgroundsisnecessaryforgettingdifferentideasonthetable.”—Undergraduatestudent,mechanicalengineering,22However,Bain’sresearchalsofoundthatmanyseniorleadersmayhavearosierpictureofinclusivityintheircompaniesthanthenewhiresthey’rehopingwillbuildtheircareersthere(seeFigure2).Acrossfactors,seniorexecutivesratedtheirorganizationsasmoreinclusivethandidmorejuniorteammembers.Theseblindspotsmakeitharderforenergyandnaturalresourcescompaniestoknowhowtomaketheirorganizationsmoreinclusivetoamorediversepooloftalent.Theycanmakeithardtostemthe“leakybucket”effect,inwhichwell-intentionedrecruitingeffortsbringinraciallyorgender-diverseemployees—whothenleavesoonafterbecausetheydon’tfeelliketheybelongorareincluded.Figure1:OilandgastrailsotherindustriesinmeasuresofinclusivityNote:EmployeessurveyedinAustralia,Canada,France,Italy,Germany,UnitedKingdom,andUnitedStatesSource:BainInclusiveOrganizationSurvey,2021(n=9,494)Percentageofemployeeswhofeelfullyincluded,byindustry0102030%ConsumerproductsFinancialservicesProfessionalservicesRetailOilandgasTelecomMediaAutomotiveTechnologyIndustrialsandmanufacturingHealthcare52GlobalEnergyandNaturalResourcesReport2022“MyperceptionisthattraditionalenergycompaniesrightnowaremisalignedwithwhatIbelieve.”—Associateengineer,renewableenergy,22Bain’srecentresearchoninclusivityidentifiedthefactorsthatmakeENRemployeesfeelincluded.Topfactorsincludedgrowthopportunities,transparentfeedback,amindsetforgrowthamongleadership,andstrongcoachingandprofessionaldevelopmentrituals—thingsthatwouldbeimportanttoanyonenavigatingacareerpath.Peopleinunderrepresentedgroups(includingwomen,Black,Asian,Hispanic,andLGBTQ+)reportedgreaterinclusioniftheysawinclusioninthecompany’sdiversitymissionandgoalsandexperienceditinteammeetings,performancereviews,andteambuilding.Theyalsofeltmoreincludediftheyworkedwithleaderswhohadagrowthmindsetandacommitmenttotransparentfeedbackandwereopentouniquepointsofview.SupportingcurrenttalentWhileenergycompaniesscrutinizeandadapttalentstrategiestoincludenewsourcesandtypesofskills,itwouldbeamistaketoassumethat“legacy”talentprofilesandpreferenceswillremainunchanged.MostofthecurrentenergyworkforceishighlymotivatedtosupporttheenergyFigure2:UnconsciousblindspotsamongseniorleaderscanlimittheirabilitytodesigntherightsolutionsforinclusivityNotes:Majoritydefinedasstraight,white,male;minorityincludesracialandsexualminorities;respondentswereaskedtorateeachsystemonascaleof1to7Source:BainInclusiveOrganizationSurvey(n=9,494,ENRsectorn=406)Extenttowhichrespondentsbelievesystemsareinclusiveintheirorganization1357RecruitingPay/bonusstructureFormalmentorshipPerformancemeasurementPromotionopportunitiesFullyinclusiveNotatallinclusiveMajority,seniorexecutivesMinority,entrylevel53GlobalEnergyandNaturalResourcesReport2022transitionandeagertoapplytheircurrentcapabilitiesandnewskillstonewmissions.They’realsokeentoremainrelevantandvaluableinanuncertainfuture.“Youwouldn’twanttobestuckinanindustrythatispotentiallygoingtobegonein20years;you’relookingatbuildinga30-to40-yearcareer.”—Subseaengineer,oilandgas,29Theenergysectorneedsaskilledworkforcedoingmanyofthesamethingsthathavekepttheindustryrunningfordecades—andwillremainimportantforyearstocome.Yetevenestablishedrolesarechanging.Leadersneedtocontinuallyinspireandmotivatetheworkforce,makingsureskillsdon’terode,andshowingtheseworkerstheyremainimportant,valued,andincluded,evenastheircompaniesaretransformed.“Howwillthecompanyhelpmetransitionmyknowledgeandexperiencesintosomethingthatcouldhelptheenergytransition?”—Telecomengineer,oilandgas,30TheinclusionimperativeThere’snosimplesolutionforthecomplextalentchallengesfacingtheenergysector.Successwillrequirecompaniestodeeplyengagewithanddrawoutthefullpotentialofnewandcurrenttalentpopulations,andtoinspirethemtoinnovateandsolveproblemstogether,notjustinparallel.Webelievethatimprovingthesenseofinclusionforallemployees,oldandnew,willbeacriticalenableroftheevolvingtalentenginerequiredtopowertheenergytransition.Asincerecommitmenttoinclusionmakesorganizationsbothhigherperformingandmorewelcomingforallworkers,acrosslinesofcapability,demographics,andtenure.Bain’srecentreportoninclusionshowsthatemployeeswhofeelfullyincludedareuptosixtimesmorelikelytoremainwiththeircurrentemployer,andaremuchmorelikelytopromotetheirplaceofemploymenttoothers(+71vs.–83,usingBain’semployeeNetPromoterScoreSMmethodologyofcalculatingthepercentageofpromotersminusthepercentageofdetractors)thanthosewhofeel“notatallincluded.”Newemployeeswanttohaveaseatatthetable—tobeinvitedtohelpsolvethechallengeofhowtoservetheircommunitiesinmoreenvironmentallysustainableways.Existingemployeesalsowanttocontributetonewprioritiesandwanttoknowtheiruniqueskillsandexperiencesremainvaluableinanuncertainfuture.Inclusionwon’tsolveallofthecomplextalentchallenges,butitwillplayafoundationalroleinanystrategy.54GlobalEnergyandNaturalResourcesReport2022Gettingthisrightasanorganizationiscomplexinanyscenario,evenmoresoinanindustryunder-goingmajordisruption.Thetacticsthatsupportandimproveinclusionarenuanced.Butwe’vefoundafewcommonthemesacrossindustriesthatfeelespeciallyrelevanttotoday’senergylandscape.•Signalcommitment.Peopleworkinginenergy,bothnewandexistingemployees,arelookingtoknowthatthey’reapartofthesolution;thattheirorganizationiscommittedtothoughtfullynavigatingthetransition;andthattheirperspectivesarevalued.Leadersshouldlistendeeply,thentalkopenlyandfrequentlyaboutasincerecommitmenttoboththetransitionandfullyincludingadiversetalentbase.“Iwanttoseeaclearroadmaptodecarbonizationandactualmetricstomeasurethat...wordswithoutmeasurablemetricsarenotasconvincing.”—Developmentengineer,renewableenergy,25•Promotegrowth.Everyonewantstobuildskillstonavigatetotheotherside.Everyonewantstolookaheadtoarewardingcareerpath,characterizedbydeeperskillsandexpandingautonomyandauthority.Investinbuildingclear,transparentcareerpathsfornewtalentandhelpingexistingtalentunderstandlateralopportunities.Cultivateagrowthmindsetinleadersandgivedecision-makingauthorityandleadershipopportunitiestothenextgenerationtohelpbuildskillsandconfidence.Recognizethatmakingthissuccessfulwillrequireacomplexsetofchangestobothingrainedbehaviorsandstandardtalentoperations.“Idothinkthescaleupofenergytechnologiesisgoingtorequirenewskillsthathavetobelearnedanddeveloped.”—Analyticalscientist,renewableenergy,30•Facilitateconnection.Scrutinizetheorganizationalsilosthatexisttoday,andguardagainstreinforcingthemorcreatingnewones.Newandexistingemployeesneedtobetrulyintegrated,withanappreciationfortheroleseveryoneplaysinservingtheorganization’slong-termpurposeandnear-termstrategy.Identifyandexperimentwithtacticstostrengthenconnectionacrosspotentialsilos,forexample,throughAgileteaming,cross-training,mentoringprograms,anddiversityaffinitygroups.Navigatingtheenergytransitionwillrequirethedeliberatemarriageofnewandexistingtalentcommunitiesovermanyyears,joiningtogethertoadoptnewwaysofworkinginsupportofnewproductsandservicesaswellaslegacybusinessmodels.Thesearethebuildingblocksofinclusionforadiversepopulation,whichweseeasessentialtoattracting,retaining,andbenefitingfromthefullpotentialofthediversetalentbaseneededtothriveintheenergytransition.55Energyandnaturalresourcescompaniesarebuildingbroadcoalitionstodeveloppoliciesthatacceleratedecarbonization.ByJulianCritchlow,AaronDenman,DaleHardcastle,andCateHightTransitiontrendsCreatingaCoordinatedApproachtoDecarbonizationAtaGlanceCompanieshavealwaysneededtopayattentiontostakeholders,butmoresophisticationisrequirednowsincethechangesrequiredbytheenergytransitiontouchmanyaspectsofindustryandsociety.ExecutivesofENRcompaniesarefocusedondecarbonizationbutseethelackofclearandstablegovernmentpolicyasamajorbarriertoinvestmentinnewgrowthbusinessesandtransformationalchange.Acomprehensivedecarbonizationeffortdemandsacoordinatedapproach.Coalitionsofcompanies,governmentagencies,citizengroups,andothernongovernmentalorganizationscanbecatalyststoaccelerateessentialpolicychanges.56GlobalEnergyandNaturalResourcesReport2022Europe’seffortstoreducedependenceonRussianoilandgashavehighlightedtheissuesofenergysecurityandsupplytoadegreenotseenindecades.Formany,theimpetustodecoupleEurope’senergydemandfromRussiansupplycreatesalogicalincentivetoacceleratetheenergytransition.TheEuropeanUnion’sREPowerEUprogram,forexample,includesabroadcollectionofmeasures,includingdiversifyingthesupplyofnaturalgas,speedingupelectrificationofmobility,andimprovingtheelectricalsystembyremovingbottlenecksininfrastructure.Atthesametime,othersseethecurrentmomentasrequiringastepbackfromtheracetodecarbonize,encouragingmorefossilfueldevelopmentanduseasawayofoffsettingthelostsupplyofRussianoilandgas—lost,atleast,toWesternnationsimposingsanctions.Somecoalsharepricesroseasmuchas400%inthefirstweeksofthewar,astraderspreparedforglobaldemandtospike.Mostoftheenergyexecutivesthatwespeakwithagreethatthelong-termdirectionisclear:Wemustcontinuetodecarbonizeandcreateamoresustainable,lower-carboneconomy.Everyoneseemstoagreethat’swherewewanttheworldtogoby2050.But2050islongwayoff.Themoreimminentquestionis,“Howdowenavigatethetransitioninthenext5to10years?”DeliveringtheenergytransitioniscomplexWe’vealreadycomealongway.Inmostplaces,thecostofrenewableenergyisalreadycompetitivewithfossilfuelpower.Withtheprecipitousfallinbatterypricesandlongerlifetimes,electricvehicles(EVs)havereachedlifetimecostparityinkeymarkets.Executivesarefocusedondecarbonization,buttheyseethelackofclearandstablegovernmentpolicyasamajorbarriertotransformationalchange.What’smore,energyexecutivestellusthey’reeagertoinvestmore(andmorerapidly)insustainable,lower-carbonassets.They’reunderpressurefrominvestors,customers,suppliers,employees(currentandfuture)andawiderangeofnongovernmentalorganizations(NGOs)askingthemtoleadonclimatechange.Indeed,withmorethan$130trillionofglobalcapitalnowundermanagementthathasagreedtoconsidercarbonintheirinvestmentdecisions,thesecompanieshavelittlechoicebuttopursueamoresustainablefuture,iftheywantitfunded.57GlobalEnergyandNaturalResourcesReport2022Executivesarefocusedondecarbonization,buttheyseethelackofclearandstablegovernmentpolicyasamajorbarriertotransformationalchange.IntheUS,somepolicieshavebeenenacted,likethe2021infrastructurepackagethatinjectedcapitaltospeedupthetransition—updatingelectricgrids,addingEVchargingstations,investingingreenhydrogenanddirectaircarboncapture.Butingeneral,alackofcomprehensivefederalcarbonpolicydampenstheprivatesector’sabilitytoinvestwithconfidenceindecarbonization;nearlyhalfofexecutivesinutilities,oil,andgascitepolicyuncertaintyasareasonfordelayinginvestment(seeFigure1).Apatchworkofstateclimatepoliciesremediesthistosomeextent,butthisfragmentedlandscapeisn’tareliablefoundationforthelong-term,capital-intensivechangethat’srequired.Deliveringtheenergytransitionrequiresnavigatingacomplexenvironmentwheremanypartieswanttobeinvolvedineverydecision.Considertheelectrificationofmobility.TheEuropeanUnionandsomestatesintheUShavesettargetdatestostopsellingcarswithinternal-combustionengines,tospeedupadoptionofelectricvehicles.Butautomanufacturerscan’tproducemoreEVswithoutenoughbatteries,andthebatterymakerscan’tproduceenoughbatterieswithoutamuchlargersupplyoflithiumandmoregigafactoriestobuildthem.OncetheEVsareontheroad,whowillensurethereareenoughchargingstationsintherightplaces?Andasthechargingstationsappear,howwillthegridbefortifiedtohandlethetransmissionanddistributionoffarmoreelectricitythanthepowerutilitieswereexpectingjustafewyearsago?ThelackofcoordinationacrossthiscomplexlandscapeFigure1:PolicyuncertaintyisdelayinginvestmentinnewbusinessesbyoilandgascompaniesandutilitiesSource:BainENRTransitionsurvey,2022(n=1,037,oilandgasn=297,utilitiesn=229)PercentageofexecutivesdelayinginvestmentsinnewbusinessesduetouncertaintyaboutpolicyOilandgas46%Utilities49%58GlobalEnergyandNaturalResourcesReport2022threatensthepaceofchangerequiredfortheenergyandresourcetransition,whichexplainswhyit’severmoreimportantforcompaniestoengagewithstakeholdersacrossthevaluechain.StakeholdersprovidethecatalystCompanieshavealwaysneededtopayattentiontostakeholders,butmoresophisticationisrequirednow.Settingcleartargetsandshowingprogresstowardthemwillbecomemoreimportant.Gettingthisrightwillgoalongwaytowardgivingcompanieslicensetotransformtheirbusinessandlaunchnewgrowthbusinesses.Gettingitwrongcanupendcompaniesandriskthewrathofinvestorsandthescornofconsumers.•Civilsociety.GretaThunbergisjustoneperson,butsherepresentsmillionsofotheryoungpeopleinthe“climateanxiety”generation.AstudypublishedinTheLancetlastyearreportedthathalfofkidsstudiedwereworriedaboutclimatechange,andnearlyhalfsaidithadaffectedtheirdailylifeandfunctioning.Theyhaven’tknownaworldwhereclimatechangewasn’tamajorissue,andthey’reskepticalofcompaniesaspartofthesolution.Settingtargetsforreducingemissionsisastepintherightdirection,butfewskepticswillbewonoveruntilcompaniesstartreportingsignificantemissionsreductionsalignedwithParisAgreementtargets.•Investors.Vastportfoliosandassetsarebeingcommittedtoclimategoals.AtCOP26lastNovember,theGlasgowFinancialAllianceforNetZerobroughttogethermorethan$130trillionofprivatecapitaltosupportreachingnetzeroby2050.Investorswanttransparencyandinternationalstandardstomeasureprogress.OrganizationsliketheScience-BasedTargetsinitiative,CDP,andtheTaskForceonClimate-relatedFinancialDisclosuresaresteppingintofillthoseneeds,supportedbyanecosystemofsoftwareplayers.Privateequitycouldplayalargerole.Aspubliccompaniesandbanksmoveawayfrom“gray”investment,privateequityandsmallerfirmsaregatheringuptheseassets,whichwillcontinuetoserveconsumerdemandformanyyears.•Customers.Corporatecustomersaremakingtheirownsustainabilitycommitments,andtheywantgreenersupplychains—bothfuelsandmaterial.Individualcustomerswantgreenergoodsandfoodproducts.Buthowmuchofapremiumaretheywillingtopay?Whataretheequityimplications?Coalitionsthatpooldemandcouldspeedupthedevelopmentofgreenproductsandbringpricesdown.GroupsliketheFirstMoversCoalition,theSustainableAviationBuyersAlliance,andBreakthroughEnergy’sCatalystProgramcouldhelpmakegreentechnologiesabetterfinancialbetthangrayassets.•Mineralandfuelsuppliers.AgrowingfocusonScope3emissionsisputtingmorepressureonthesesuppliers.ProjectslikePathfinderandHorizonZeroareworkingtomakethecarbonembeddedinproductsmorevisible,evenastheUSSecuritiesandExchangeCommissionconsiderswhichScope3emissionsareconsideredmaterialinfinancialreporting.Commoditiescompaniesaretryingtofigureouthowtoimproveexistingoperationswhilestillprovidingthefuelandmaterialsthattheworld’seconomiesneedtokeeprunning.Manyareinvestinginsecond59GlobalEnergyandNaturalResourcesReport2022enginesofgrowth—includingfuels,technologies,andprojectslikegreenhydrogen,directaircapture,andnature-basedoffsets—tostrengthentheirbusinessacrosstheenergytransition.•Talent.Youngworkers,inparticular,saytheywanttojoinfirmswithclearlyarticulatedvalues,includingcommitmentstoreducingcarbonemissionsandaddressingclimatechange.ThreeoutoffourUSadultsages18to34expecttheiremployerstotakeastandonimportantissuesincludingclimatechange,and40%ofmillennialsreporttakingajobbecausethecompanyperformedbetteronsustainabilitythanalternatives.PolicytakerstoshapersCoalitionscanbecatalyststoacceleratethepolicychangesessentialtothetransition.Weseecompaniesbringingtogetherstakeholdersfrommanygroupstosendclearmessagesaboutclimatepolicy.OneinternationalexampleistheMissionPossiblePartnership,acoalitionofcorporations,investors,andcustomersfocusedonaligningsupplychainsandinvestmenttodecarbonizesomeoftheworld’shardest-to-abatesectors,suchascement,steel,andchemicals.Coalitionscanbecatalyststoacceleratethepolicychangesessentialtothetransition.Weseecompaniesbringingtogetherstakeholdersfrommanygroupstosendclearmessagesaboutclimatepolicy.IntheUS,coalitionsareplayingoutatthestatelevel.InMichigan,ConsumersEnergyformedacoalitionwiththeNaturalResourcesDefenseCouncil,theSierraClub,VoteSolar,andtheCitizensUtilityBoardofMichigantosettlealandmarkintegratedresourceplanthatwouldacceleratecoalretirementsfrom2040to2025,enablenetzeroontheelectricsystemby2040,andsavecustomers$600million.Traditionalgovernmentorcorporateaffairsapproachesmaynotbeenoughtomanagethecomplexityofthestakeholderlandscapethathasemergedaroundtheenergyandresourcetransition.Executiveswhoareabletousecoalitionsasacatalysttobringstakeholderstogetherdoafewthingswell:•Developafullmapoftheirstakeholderlandscapeanddeveloprelationshipswitheachkeygroup.Treatstakeholderslikecustomers.Developpersonalrelationshipstounderstandstakeholders’motivationsandidentifyareasofcommonground.•Engageearlyandoftenwithpolicymakersatdifferentlevelstoraiseawarenessaboutwhatthecompanyisdoingandaskfordiscretesupportthatcanhelpaccelerateit.Considerhowacoalition-basedapproachmightfurthertheseobjectives.60GlobalEnergyandNaturalResourcesReport2022•Recognizethat,inmanyplaces,they’llneedtoengageatbothfederalandstateorprovincelevels.Federalistcountriesoftenpilotnewapproachesatregionallevelsbeforethefederalgovernmentadoptsthem.•Aretransparentaboutwherethey’respendingonlobbying,toavoidanyriskofappearingtosayonethingwhilefundingaconflictingobjective.Corporationscan’tplaneffectivelyforthefuturewithoutclearpolicydirection,andpolicyisateamsport.Acomprehensiveefforttodecarbonizetheenergyandnaturalresourcessectorsdemandsacoordinatedapproach.Assemblingcoalitionsofstakeholdersisthesurestwaytodeveloppoliciesandprogramsthatarebuilttoendureandlessvulnerabletothewindsofpoliticalchange.61AtaGlanceImprovingthecircularityofplastics—returningusedplastictothesupplychainratherthanhavingitbecomewaste—willbecriticaltomeetsustainabilitygoals.Atthecurrentpace,only10%to14%ofplasticswillberecycledby2030,fallingwellshortofannouncedtargets.Companiesthatmakeanduseplasticsneedtoestablishpartnershipsandchangethewaytheyoperatetodevelopjointsolutionsthatimprovecircularity.Supportivelegislationandindustrystandardsarealsoneededtohelpchangebehaviorsandstrengthencirculareconomics.Recyclingratesaregrowing,butstillfarfromwheretheyneedtogo.BySabineAtieh,JayantGotpagar,PeterMeijer,HarryMorrison,andMarkPorterTransitiontrendsImprovingSustainabilityandCircularityinPlastics62GlobalEnergyandNaturalResourcesReport2022Asattentionhasfocusedontheproblemofplasticpollutionintheenvironment,governmentsandtheprivatesectorhavetakenstepstopromoterecyclingandreduceplasticwaste.Thesemeasuresincludephasingoutcertainsingle-useplasticsandsettingspecificgoalsonplasticsrecycling.Targetsvarybyregion.Forexample,theEuropeanUnionaimstorecycleallplasticpackagingby2030,whereastheUSaimstorecyclehalf.Intheprivatesector,companiesthatmakeanduseplasticsaremakingnewcommitmentstoexpandtheuseofrecycledandbio-basedplastics,reducingtheamountofplasticused,andincreasingrecyclingthroughbetterdesignandnewinvestmentsininfrastructure.Therearealsomanynewrecyclinginitiativesandpartnerships,alongwithinnovationinnewplastictypessuchaslow-carbonplasticsmadefrombiomaterials.Ourclientstellustheyunderstandthatmoreneedstobedonetoimprovethesustainabilityandcircularityofplasticproducts,thatis,theabilitytoputmaterialsbackintothesupplychainratherthandepositingthemaswaste.Plasticsproducersandusersknowthatifconcernsaren’taddressed,theyriskfacingmorestringentregulationandmorepressurefromcustomers.Butthey’vealsosaidthisisoneoftheirmanypriorities,alongwithbroaderenvironmental,social,andcorporategovernance(ESG)commitments,includingemissionsreductions(seeFigure1).Inmanycases,improvingplasticcircularitywillalsoreduceemissions,makingitessentialfordeliveringFigure1:PetrochemicalexecutivesseecircularityasatopESGpriority,moresothanusersofplasticNotes:Scope1measuresgreenhousegasesdirectlyemittedbyanorganizationorbyactivitiesunderitscontrol;Scope2measuresindirectemissionsfromelectricityorotherpowerusedbyanorganization;Scope3measuresotherindirectemissionsrelatedtoanorganization,includingthoseresultingfromtheuseofitsproducts;ESGreferstoenvironmental,social,andcorporategovernanceSources:Leftchart,BainEnergy&NaturalResourcessurvey,2021(n=175);rightchart,BainCircularitysurvey,2021(n=191)PlasticproducersPlasticusersOfthefollowing,whicharethe3highestpriorityESGtopicsforyourcompany?Howdoescircularityrankinprioritycomparedwithothersupplychaininitiatives(onascalefrom0to7)?Highestpercentageofrespondents2ndhighestpercentageofrespondents3rdhighestpercentageofrespondentsPetrochemicalsScope1and298%Circularity85%Scope356%Sustainability(environmental)Sustainability(regulatory)TraceabilitySustainability/circularity70ImprovedefficiencySustainability(people)DigitalizedoperationsIncreasedadaptability/resiliencetorisk63GlobalEnergyandNaturalResourcesReport2022ontheindustry’sdecarbonizationgoalsandensuringthelicensetooperateamonggrowingconcernaboutplasticwaste.CircularityeffortsfallshortThere’salotofactivityunderwayonrecyclingandcircularity,butit’sstillnotenoughtoprovidetheamountofrecycledmaterialthatindustrywillneed.Ourrecyclingscenarios,basedoncurrentindustryeffortsandtrajectories,suggestthatby2030,between50millionand70millionmetrictonsofplasticswillberecycledannually,or10%to14%oftotalplasticconsumption(seeFigure2),wellbelowthetargetssetbycompaniesandgovernmentsin,forexample,theUSandtheEU.Thismisalignmentbetweenwhatcompanieswanttobuyandwhatwillbeavailablecouldinflatepricesforrecycledplastics,ascompetitionheatsupforthelimitedsupply.Also,asthefeedstockrequiredforproducingrecycledplasticsbecomesbottlenecked,plasticsproducerswillneedtosecuresuppliestoremaincompetitiveasthemarketscales.Thesedynamicsaddtotheuncertaintyoftheprospectsforrecycledplasticsgrowthandwillhinderinvestment.Ashortageofrecycledandrenewableplasticscouldalsopermanentlyreducedemandfortheseproductsifusersshifttoalternativestomeettheirrecyclingtargets.Thiswillbeinadditiontocustomereffortstoreducetheamountofplasticsused,andtheriskofcostincreasesforvirginplasticsduetonewFigure2:Themarketforrecycledplasticcouldgrowsignificantly,butislikelytomakeuplessthan15%oftotalplasticssupplyby2030Source:Bain&CompanyanalysisMillionmetrictonsofrecycledplastic,global02004006008001,000TotalplasticssupplyRecycledplastics(upperrange)Recycledplastics(lowerrange)20202030204020506%–9%Recycledplasticsasashareoftotal10%–14%14%–23%17%–45%64GlobalEnergyandNaturalResourcesReport2022taxesliketheUK’splasticstaxorotherextendedproducerresponsibilitymeasures.Soit’simportantforplasticsproducerstoscaleuptheirrecyclingeffortsanddevelopsolutionstomeettheircustomers’needsforsustainableandlow-carbonsolutionsatscale.Fasterindustrializationoftherecyclingindustry,betterwaste-sortingsolutions,andmoretechnicalexpertise,especiallyinchemicalrecycling,willallbeneeded.AcceleratingplasticscircularityAswetalkwithourclients,we’reseeingthreetypesofactionsaimedatacceleratingthemomentumbehindplasticsrecycling.•Innovationandnewtechnology•Partnershipsandnewbusinessmodels•LegislationandstandardsInnovationandnewtechnology.Onereasonthatrecyclingratesaresolowisthatthetechnologiesinvolvedaren’twell-developed.Recyclingratesarehigherincategorieswheretechnology,infrastructure,andpublicandconsumerengagementaremoremature—forexample,mechanicalrecyclingforPETbottlesinEurope,whichisaround50%.Scalinguprecyclingalsocomeswithchallenges,though,asitgetsincreasinglydifficultandcostlytoincreasecollectionrateswhilealsocapturingsmallerandless-efficientvolumesofusedplastic.Intheprivatesector,companiesthatmakeanduseplasticsaremakingnewcommitmentstoexpandtheuseofrecycledandbio-basedplastics,reducingtheamountofplasticused,andincreasingrecyclingthroughbetterdesignandnewinvestmentsininfrastructure.Mostplasticrecyclingtodayismechanical—processingthematerial,butkeepingthemoleculeintact.Chemicalprocessing—changingthechemicalstructureofpolymericwaste—canrecyclemoreplastic.ButchemicalrecyclingremainsmostlyatR&Dlevels(1kilotonorless)orpilot-programscale(10to30kilotons),focusedmostlyonpolyolefins.Pilotshelpovercometechnicalchallenges,demonstratescalabilityandcommercialviability,andprovideexperiencethatimprovesprocessstabilityandyield.Weexpectsomeoftheseeffortstoscaletocommerciallevelsoverthenextfiveyears.65GlobalEnergyandNaturalResourcesReport2022Advancesinchemicalrecyclingtechnologiestargetingotherplastics,suchaspolystyreneandPVC,arealsogainingtraction.ImprovingcircularityforthoseplasticswillbeanimportantbuildingblocktoboostoverallplasticsESGperformanceandcircularityacrosssuchendmarketsaselectronicsandautomotive,wheremorecompaniesarethinkingaboutcircularity.Recyclingadvancesaren’tlimitedtotechnology,butalsoextendtocollection,sorting,andprocessingtoimprovethequalityofwastestreams—anecessarysteptoboostrecyclingrates.Somecompaniesarebuildingupthesecapabilities.Forexample,beforedivestingtheassettoPreZeroRecycling,wastemanagementcompanySuez(nowVeolia)openedEurope’smostadvancedfacilityforsortingusedpackaginginGermany.Thatplantcanprocess100kilotonsannually,usinganinnovativeopticalsystemtoimprovewasterecovery.Anotheradvancementunderdiscussionissecondarymaterialrecoveryfacilities(MRFs),whichaggregateresidualwastestreamsfromprimaryMRFstopulloutlower-valueplasticsandpapercartonsmoreeffectively.Thismisalignmentbetweenwhatcompanieswanttobuyandwhatwillbeavailablecouldinflatepricesforrecycledplastics,ascompetitionheatsupforthelimitedsupply.Severalmaterialinnovationshavealsobeenpushedbyresinproducerstoimprovecircularity,whicharenowbeingadoptedbyplasticconverters.Theseinnovationsincludebetter-performingmonomaterials,whichimprovetherecyclabilityoftheapplication,andlightweightpolymerstohelpreducepackagingvolume.Finally,low-carbonsolutionsarealsodevelopingquickly,withgreateremphasisonproducingchemicalsfromrenewablesources.Forexample,OriginMaterialsfocusesonimprovingproductionofplant-basedbuildingblocksforPETasanegative-carbonsolutiontoreplacefossil-basedPET.Partnershipsandnewbusinessmodels.Scale,sustainablesolutionswillrequirepartnershipsthatensureasteadysupplyofrenewablematerialsandamarketforrecycledmaterial.Supplychainpartnershipscanhelpensureaconsistentflowofrenewableinputs,whichisessentialtodevelopamarket.Thesepartnershipsneedtoextendbeyondthelocalinitiativesthathaveemergedinsomeregions.Plasticsusersarealsoformingpartnerships.MondelezInternationalisworkingwithwastemanagementstart-upPlasticEnergytouseitspolypropylenefeedstockmadefrompostconsumerplasticsforPhiladelphiaCreamCheesecontainers.Offtakeagreementsarecriticaltoensuredemandforrecycledmaterialsasproductionscalesup.Theseagreements,whichensuredeliveryoftherecycledmaterialsproduced,giveproducersarunwaytogainexperience,becomemoreefficient,andreducecosts.Wetypicallyfindthatearlyofftake66GlobalEnergyandNaturalResourcesReport2022agreementsarewithcustomerswillingtopayapremiumforbetterESGperformance,whetherbecauseofindividualcommitmentsorlocalregulation.CompanieslikeTheCoca-ColaCompany,Nestlé,andPepsiCohavemadecommitmentstoincreasingrecycledcontentinplasticbottles.Ourcustomerresearchhasfoundthatbrandsaretypicallywillingtopayinitialpremiumsofupto25%abovevirginpricingfortheseapplications.Dependingontheapplication,therelativechangeinproductpricewillbemuchlowerastheplasticformsonlyasmallpartofthetotalcost.Inplasticresinsforbottles,forexample,apremiumofaround20%forrecycledplasticsraisesthepriceoftheendproductbyabout2%.ABainsurveyacrosstheUK,France,andtheNetherlandsfoundthat75%ofconsumerssaidthey’dpaymoreforsustainableproducts.Legislationandstandards.Plasticproducers,recyclers,andconsumerswillneedtoworktogethertobuildsupportforchange.They’llneedtodevelopbetterpoliciesforcollectingandmanagingplasticwaste,supportedbybetterconsumereducationandbehavioronwastesorting.They’llneedtoencourageinvestmentsandfundingfornewtechnologies,forexample,throughtheOECD’sExtendedProducerResponsibilityproject.They’llneedtoagreeontaxonomyaswellasstandards,forexample,aroundusingamassbalanceapproachorsegregatedsupplychainsforvirginandrecycledplastics.Governmentscanalsotakespecificactionstosupportgrowthinrecycling.Forexample,theycouldrestricttheuseof,ortax,virginplastics,thuspromotingtheuseofrecycledcontent.Theycouldalsoconsiderminimumrequirementsofrecycledcontentinplasticsbyextendingrenewableblendingrequirementstochemicals,similartorenewablefuelstandards,whichwillhelppromotetheuseofrenewablehydrocarbonsinpetrochemicals.Theoutcome,withinternationallybindingcommitments,couldbeanimportantstepincreatingaglobalenvironmentwithinvestmentschanneledtowardbuildinguprecyclinginfrastructure.Supportisalsodevelopingaroundtheworld.InMarch2022,theUNagreedtodevelopatreatydesignedtoendplasticpollution.Detailsarestilltobeironedout,butthespecificresolutionislikelytoaddressthefulllifecycleofplastic,includingproduction,design,anddisposal.Theoutcome,withinternationallybindingcommitments,couldbeanimportantstepincreatingaglobalenvironmentwithinvestmentschanneledtowardbuildinguprecyclinginfrastructure.Companiesandassociations,suchastheInternationalCouncilofChemicalAssociations,haveendorsedthetreatyasanimportantsteptoaddressplasticpollution.67GlobalEnergyandNaturalResourcesReport2022•••Althoughcurrenteffortsaren’tyetatthescalerequired,plasticsrecycling,theuseofrecycledcontent,andtheuseoflow-carbonplasticsaresuretoincrease.Companiesthatpreparenowtoscaleup,connecttohigh-qualitywastestreams,andensurealong-termsupplyoffeedstockcanputthemselvesinastrongerpositioninsustainableplastics.HowtoDoEngine2.....................................................70ManagingOperationsthroughDisruptions.................................74PricingforInflationinEnergyandNaturalResources.........................78M&AOpportunitiesintheEnergyTransition................................83DeliverDecarbonizationwithVisionaryPragmatism..........................88Strategiccapabilities70Energyandnaturalresourcesexecutivesneedtobeclearontheirmissionandmodel.BySteveMcGrath,BrianMurphy,DuniganO’Keeffe,andNeelamPhadkeStrategiccapabilitiesHowtoDoEngine2AtaGlanceEnergyandnaturalresourcescompaniesarerampingupspendinginnewgrowthbusinessestocomplementorreplacetheircore.Successdependsonmissionclarity,aboldvisionthatpragmaticallylaysouttheobjective.Modelclarityisessential,too,defininghowanewentrepreneurialventurecanthrivealongsidethelegacybusiness.71GlobalEnergyandNaturalResourcesReport2022Fewsectorshaveeverhadtochangeasquicklyandcompletelyastheenergyandnaturalresources(ENR)sectorsarechangingnow.Executivesknowtheyneedtodevelopnewgrowthbusinessesthatareinsomecasesverydifferentfromtheircore.Mosthavealreadymovedpasttalk:WefoundthatENRcompaniesincreasedthecapitalallocatedtogrowingnewbusinessesbyabout50%,onaverage,from2020to2022—ahugejump.Seniorleadersexpecttoseeresultsquicklyfromsuchalargeinvestment:72%toldustheyexpecttomovetheseinvestmentstoscaleby2030—notfaraway.Executivesknowtheyneedtodevelopnewgrowthbusinessesthatareinsomecasesverydifferentfromtheircore.Mosthavealreadymovedpasttalk:WefoundthatENRcompaniesincreasedthecapitalallocatedtogrowingnewbusinesses.Challengeacknowledged,goalsset,capitalallocated.Nowcomesthehardpart.Howdotheygrowthesenewbusinesses,whichwecallEngine2?Whatarethepreconditionsforexecutingsuccessfully?EssentialclarityonmissionandmodelFormostENRsectors,there’salimitedsetofpromisinggrowthopportunitiesthatmakegooduseoftheincumbents’capabilitiesandofferacompellingstoryforinvestors.Asaresult,manyENRcompaniesarepursuingthesameEngine2growthareas.Theycan’tallwininthesamespace.It’sOKtohaveanEngine2missionthatoverlapswithothers’,butit’snotOKtolackclarityonwhatyourmissionis.Missionclarity.Missionclaritystartswithaboldobjective.Noonegainsaleadingpositioninanewprofitpoolbydippingtheirtoeinthewater.Still,themissionneedstobepragmaticandstrikeabalancebetweenbeingboldenoughtochangetheworld’senergyinfrastructure,whilenotspendingcapitalimprudently.Missionclarityisalsonotassimpleasjustchoosinggreenhydrogen,sustainableagriculture,orcarbonoffsets.Themissionmustincludeaclearsenseofwhichcustomerneedsyou’readdressing,whetheryouhavethecapabilitiestoachieveit,orwhetheryou’llneedtofindthosethroughM&Aandpartnerships.72GlobalEnergyandNaturalResourcesReport2022Modelclarity.Traditionalenergyandresourcecompanies,theincumbents,usuallymoveataslowerpacethantheirstart-upcompetitors.That’spartlegacyinfrastructureandoperations,andpartcompanyculture.SuccessfulEngine2effortsplaybyadifferentsetofrules.Theyfindwaystooperateinamiddlezone,takingadvantageofallthebenefitsofalargecompany(accesstocapital,deepexperience,largenetworksofsuppliersandcustomers)whilesteeringclearofthedrawbacks(excessivecaution,bureaucraticbottlenecks,await-and-seeattitude).Tomakethishappen,Engine2initiativesneedtodesignforgrowthfromthestart.OneoftheelementsweseeENRincumbentsstrugglewithmostiswhatwecalltheFounder’sMentality�.Thismeanssettingupateamthatcanactlikeinsurgents,notincumbents,andclearingthewaysothattheycandothat.SuccessfulEngine2effortsplaybyadifferentsetofrules.Theyfindwaystooperateinamiddlezone,takingadvantageofallthebenefitsofalargecompanywhilesteeringclearofthedrawbacks.SomecompanieshavefoundwaystolaunchEngine2swheremissionandmodelclarityworkwelltogether.Forexample,ItalianenergyproviderEnelsetaboldvisiontoreplaceitscorebusiness.Itapproachedseveralnewmarketswithamindsetof“whynotus?”andfoundcustomersasitdevelopeditsEngine2capabilitiesinhydroelectric,onshorewind,andsolarpower.Enel’sleadershipcombinedallitsrenewableassetsintoonebusinessunit,alongwiththepeoplewhoknewthembest.ThatallowedEnelGreenPowertostartwithasizablebaseofabout$1billioninearnings,goingfrom4.5gigawattsofinstalledcapacityin2008tomorethan50gigawattsby2021.Thecompanyhasmaintaineditsboldambitionandplanstodedicate43%ofcapextoaffordableandcleanenergy,adding105gigawattsofrenewablescapacityby2030.Inanotherexample,AustralianironoreproducerFortescuehassetouttobecomealeadingplayeringreenhydrogen,aimingtoproduce15milliontonsby2030.FortescueFutureIndustries(FFI),adistinctentityinthecompany,isbuildingcollaborativerelationshipsaroundnewhydrogenprojects,includinganelectrolyzermanufacturingplantinQueensland,Australia,whichwillprovidegreenhydrogentopoweramanufacturinghub.FFImovesrapidlywhilebenefitingfromtheparentcompany’scashflowandrelationships.73GlobalEnergyandNaturalResourcesReport2022BuildingmissionandmodelclarityAmongthecompaniesthatweseesuccessfullyexecutingEngine2strategies,missionandmodelclarityleadtobetterdecisionmakingonarangeoffactorsthatinfluencesuccess(seeFigure1).ManygreatENRcompaniesstartedoutasinsurgents.AllgreatENRcompanieshavehadtoevolvewithcyclesandtechnology.Thesuccessfulonesgrewlargeandevolvedtheiroperatingmodelstomanagescaleoperationsthatoftenspantheglobeandawiderangeofbusinesses.DevelopingEngine2initiativesoffersincumbentsthechancetoigniteanentrepreneurialspiritintheirDNA,inordertodevelopnewgrowthbusinessesthatwillleadthemtothriveintheenergytransition.Figure1:SuccessfulEngine2initiativesdemonstratemissionandmodelclaritySource:Bain&CompanyMissionclarityBoldambitionBalanceambitiousgoalswithpragmatism.Customer-ledFocusoncustomerneeds,ratherthantheresourceortheinfrastructure.Bewarethatyoumayhavetohelpcustomerscrystalizetheirneeds.CapabilitiesandconditionsMakeuseofthecorebusiness’sexpertise,andcapitalizeonfavorableconditions.PartnershipsandM&AFindtheskillsandcapabilitiesthatcomplementyourown.Don’tdefaulttoorganicgrowth.ModelclarityOperatingmodelDeterminetherightstructureandsystemstosupportEngine2growth.Setamodeltoinspireinsurgency,notencumberitwithincumbency.Founder’sMentality®Putinplacetalentandculturetogrowlikeachallenger,somein-house,somefromoutside.ScalingSustainyourfocusonmovingquicklydownexperiencecurves,supportedbyjudiciousinvestment.RepeatableinnovationChoosetherightinnovationandscalingmodels,andconsideropeninnovation.74Operationschiefsaremorevisibleandundermorepressurethaneverbefore,astheybalancetraditionalprioritieswithsustainabilityefforts.ByFrancescoCigala,PeteGuarraia,AndrewWelch,andJeffWenStrategiccapabilitiesManagingOperationsthroughDisruptionsAtaGlanceChiefoperatingofficershaveneverbeenmorevitaltocorporatestrategy—andnevermorevisible.Supplychaindisruptions,includingthosedrivenbythepandemic,inflation,semiconductorshortages,andwarinUkraine,haveputoperationsintheheadlinesandmadetheCOO’sroleintegraltocorporatestrategy.Ascompaniespledgetoreachnetzero,operationsteamsarebalancingtheirtraditionalimperativesofdeliveringproductsandserviceswiththeneedtodecarbonizeandmeetinvestors’expectationsaboutsustainability.75GlobalEnergyandNaturalResourcesReport2022Theroleofthechiefoperationsofficerhasalwaysbeenessential,butformanyyearsitwasalow-profilerole,chargedwithsafelyproducinganddeliveringproductontimeandatareasonablecost.That’schangedquickly.Overthepastfewyears,theresponsibilitiesandmeasuresofsuccessforCOOsandtheirglobaloperationshaveexpandedsignificantly(seeFigure1).TheCOO’srolehasbecomedramaticallymorecomplexasaseriesofglobaldisruptionshavemadetheroleofoperationschiefmorevisibleandmoreessentialtocorporatestrategy.ThesedisruptionsincludeCovid-19,thewarinUkraine,tradeconflicts,semiconductorshortages,andinflationofcommodityprices.Butamongoperationschiefsintheenergyandnaturalresourcessectors,themostenduringandsignificantdisruptionistheenergytransitionandtheaccompanyingdrivetomakecompaniesandtheiroperationsmoresustainable.Everyday,wetalkwithCOOswhoareworkingtobalancetheirtraditionalimperativesofdeliveringproductsandservicesreliablyandatapricethatcustomerscanafford,alongwiththeneedtodecarbonizeandmeetinvestors’expectationsaboutsustainability.Thehighprofileofthesetrendsanddisruptions,alongwiththeirinfluenceontheavailabilityofconsumerandbusinessgoods,meansthattheroleofoperationscannolongerbetakenforgranted.Oneindicatorofthisistheprominenceofoperationstopicsinthemedia.Forexample,overthepasttwoyears,thenumberoftimes“supplychain”wasmentionedduringcorporateearningscallsmoreFigure1:TheCOO’sjobhasbecomemuchmorecomplexSource:Bain&CompanyOldprioritiesNewprioritiesEnsuringdiversityandequitabilityinsuppliersManagingcostReducingcostSupportingportfolioexpansionSupportingportfolioexpansionEstablishingresilienceOperatingsustainablyMonitoringtheentiresupplychainAdapttoshiftingtraderoutesCompetingforlaborCreateadigitalizationagendaMitigatingsupplychaineffectsofwarinUkraineReducinginventory76GlobalEnergyandNaturalResourcesReport2022thandoubled,highlightinginvestors’recognitionofthecriticalityofoperations.Supplychainsandotheroperationsarenews.AllofthisraisesthestakesfortheCOOandreducesthemarginoferror.Thesmallestofmisstepscancreatedisruptionsthatcanleavebusinesscustomerswithouttheinputstheyneedtoruntheiroperations,andcustomersstaringatemptyshelves.Everyday,wetalkwithCOOswhoareworkingtobalancetheirtraditionalimperativesofdeliveringproductsandservicesreliablyataffordableprices,alongwiththeneedtodecarbonizeandmeetinvestors’expectationsaboutsustainability.Buttheseshiftsalsomeanthatoperationscanbecomeanevenmorepowerfulcompetitivetool.Beingalow-carbonprovider,forexample,canbecomeacompetitiveadvantagewhenitenablescompaniestochargeapremiumforgreenerproducts.Itcanalsoprovideotherbenefitstobuyers.Whenasupplierreducesitscarbonfootprint,itsbuyerscanreapthebenefitsastheytallytheupstream,Scope3emissionsoftheirownproduction.Thatcanbecomeakeybenefitinsalesdiscussions,justasthelackofprogressonemissionsreductionorotherenvironmental,social,andcorporategovernancefactorscanbecomeabarrier.Increasingly,supplierswon’tmakeitpasttheRFPprocessunlesstheycanattesttotheirownprogressonissueslikediversity,transparency,andemissionsreductions.HowCOOsarerespondingCOOsaredoingseveralthingstosuccessfullynavigatethischanginglandscape.First,manyofourCOOclientstellusthey’remorecloselyinvolvedwithsettingcorporatestrategythantheywerejustafewyearsago.Thisgivesthemaseatatthetableandavoiceinorganizationaldecisions,includingsettingpriorities,weighingfinancialtrade-offs,andmanaginginternalandexternalcommunications.Thisenablesthemtoconveythepossibleeffectsonthesupplychainandotheroperationsofcertaindecisionsbeforethey’remade.Moreimportant,theCOOisincreasinglyinapositiontodeterminehowquicklythecompanycanadapttodisruptions,andalsohelpsetstrategicdirectionthatcanallowthecompanytomakethemostofexternalconditions.Closelyrelated,they’rebuildingupthecapabilitiestheyneedtosupporteffectivestrategicplanning.Datahasalwaysbeenanimportanttoolinoperations,butmanyoperationsteamsaredoublingdownonadvancedanalytics,whichhelpthemdevelopawiderrangeofmorespecificscenarios—essentialforplanningunderuncertainty.77GlobalEnergyandNaturalResourcesReport2022TheCOOswetalkwitharealsolaser-focusedonimprovingtheresilienceoftheirsupplychains.Intheshortterm,they’reassessingtherisksfromimmediatecriseslikethewarinUkraine,commoditiesinflation,andongoingshortagesduetoCovid.Gettingahandleontheprimaryrisks,basedonrealdataratherthanconjecture,allowsthemtocreaterealisticscenariossotheycanreactquicklywhentheyseesignpostsindicatingwhereconditionsareheaded.Thisisachallengingbalancingactrightnow.Operationsteamsmayneedtoinvestmoretoensureareliablesupplyofinputswhileatthesametimefindingthemselvesunderpressuretomanagecoststightlyagainsttheheadwindsofinflation.There’snosimpleanswer,andeachsituationrequiresthoughtfulanalysisandcarefuldecisionmaking.Operationsteamsmayneedtoinvestmoretoensureareliablesupplyofinputswhilealsounderpressuretomanagecoststightlyagainsttheheadwindsofinflation.Overthelongerterm,opschiefsarebuildingresiliencewithalargersuiteoftools,suchasredesigningproductsandprocesses,findingbackupandalternativesources,buildingcapacitybuffers,andcontinuallyimprovinglogistics.Akeypartofresilienceisjustacknowledgingthatdisruptionsarehappeningfasterandmorefrequently,soadaptionandrecoveryarecapabilitiesthatneedtobedevelopedandrefined.Blackswaneventsaren’tquiteasrareastheyoncewere.78Companiesarebuildingdynamicpricingcapabilitiesastheycometotermswiththepersistenceofvolatilityandinflation.ByJensFriisHjortegaard,EmilyKasavana,NimitMehta,andDavidSchottlandStrategiccapabilitiesPricingforInflationinEnergyandNaturalResourcesAtaGlanceManyexecutivesatenergyandnaturalresourcescompaniesthoughtinflationwouldbeshort-livedandthattheirpositionsonthevaluechainwouldprotectthemfromincreases.Butinflationhaspersistedandlookslikelytocontinue,alongwithpricingvolatility.Companiesneedtoadjusttheirpricingpolicies.Thecurrentcrisiscouldspurcompaniestobuildupdynamicpricingcapabilitiesthatadapttoinflationspikesandpreventmarginleakage.Carefullyevaluatingtheprofitabilityofcustomersandproducts,effectivelyenforcingcontractterms,andcentralizingpricingdecisionsarejustsomeofthewayscompaniesareresponding.79GlobalEnergyandNaturalResourcesReport2022Nocompanyisimmune.Afteryearsoflowvolatilityandstableinflationrates,energyandnaturalresources(ENR)companieshavefacedasteadystreamofdisruption:Covid-19anditsbounceback,unpredictableeventsliketheTexaselectricityblackoutsorthecontainershipEverGivenblockingtheSuezCanal,andnowthewarinUkraine,whichwillreverberateincommoditymarketsforalongtime.Pairthesedisruptionswithbroad,continuinginflation,workershortages,andrisinglaborcosts,anditisn’tnewsthatmanycompaniesarestrugglingtorecoupcostincreases,leadingtoflatorevendecliningmarginsevenastheypostrecordtop-lineresultsandsellouttheirproducts(seeFigure1).SeeingtheblindspotsUntilrecently,manyexecutiveshaveheraldedtwoprevailingresponsestothisenvironmentthat,whentakentogether,createablindspotforENRcompaniesandtheirapproachtopricing.“Thisistemporaryandwillsoonpass.”Overthepastyearortwo,manyexecutiveshavetakenthestancethattheyjustneedtogetthroughthenextthreeorfourmonths,untilbusinessasusualreturns.However,ifhistoryisaguide,whileinflationspikesmayresolveafteracoupleofyears,possiblytemperedbyrecession,volatilityislikelytopersist.Considerchemicals.Comingoutofthe2008financialcrisis,pricevolatilitycontinuedfornearlysevenyearsbeforethesectorstabilizedFigure1:Margingrowthhasn’tkeptupwithrevenuegrowthfor63%ofenergyandresourcescompaniesNotes:Dataincludestop125companiesintheENRsector;afewcompaniesthatareprivateornotreportingdatahavebeenexcludedSource:RefinitivShareofcompanieswithrevenuegrowthhigherthanmargingrowth(H12021–H22021)TotalENR63%37%103Oilandgas20Powerandutilities23Chemicals22Metalsandmining19Agribusiness19020406080100%NumberofcompaniesMarginsoutgrewrevenueRevenueoutgrewmargins80GlobalEnergyandNaturalResourcesReport2022(seeFigure2).Therealityisbeginningtosinkinformanyexecutives:Thismaybemorethanatemporaryphenomenon.“We’restructurallyprotectedfromthis.”ManyENRcompaniesfeelthattheirpositionsnearthebeginningoftheirvaluechainsprotectsthemfromcostpressures.Evenwhenthecostofinputsrises,theycanusuallymakeupmarginsintheirsales.Butthisfocusonrawinputsoverlookstheothercostsofdoingbusiness,whicharealsorising.ShippingcostshavedoubledsinceMarch2021,andlaborcostsintheUSwereup4.5%inthefiscalyearendedMarch2022,anincreasefrom2.6%thepreviousyear(seeFigure3).Amidallthisturbulence,executiveteamshavebeenapplyingthesamepricingplaybooks,policies,andapproachesthattheyusedbeforethisupheaval.Maybeitshouldn’tbesurprising;prolongedinflationlikethishasn’treareditsheadsincethe1970s.Mostcorporateleadershaven’thadtodealwithmacroinflationduringtheircareers,leavingthemunsureofhowtoproceed.Onethingisbecomingclear,though:Whatworkedbefore,nolongerworksaswell.Dynamicpricingwillbecomemoreimportant.Frequencyofincreases,decisionrights,rigorofcostforecasts,back-orderandfreightpolicies,contracttermsandconditions—everythingisonthetableasexecutiveteamsgrapplewithhowbesttoprotectmarginswithoutupsettingcustomers.Figure2:In2021,pricingwasmorevariablethaninanyyearsince2008Source:FederalReserveEconomicResearchIndustrialChemicalsProducerPriceIndex(indexedto100in1982)Annualstandarddeviation0102030100200300400020000510152120Steadypriceincrease2008HigherpricevarianceLowerpricevarianceHigherpricevariancePricestabilityStandarddeviationsPriceindex81GlobalEnergyandNaturalResourcesReport2022ThecrisisascatalystOverthepastyear,executiveshavebeentryingoutarangeofactionstoredefinetheirapproachtopricing.Volatilityandinflationmaybetheforcingmechanismofthemoment.Butbybuildingpricingcapabilitiesthatallowthemtoreactandadjustquickly,they’repositioningtheircompaniesforlong-termsuccess.•Recognizenotallcustomersarethesame.Aseconomicschange,sodoestheprofitabilityofproductsandcustomers.Inavolatileenvironment,companiesneedtounderstandthosechangesandtakeaction.Someproductscostmoretodeliver,andthoseincreasesneedtobepassedalong.We’veseenmorecompanieswillingtowalkawayfromlow-valuecustomers,especiallywhencapacityisconstrained—althoughsalesteamsshouldn’tbearthebruntofthisapproach.Atonepowergridhardwarecompany,areviewshowedwhereinflationwascreatingagapbetween“sold”profitabilityand“delivered”profitabilityonmanyprojects.Byadjustingcontractsandpricingtoaccountforthis,thecompanyensuredtheywerecapturingthevaluetheyintended.•Exchangepriceforothervaluablefeatures.Aspricesincrease,somecompaniesareofferingotherincentivestocustomers,likevolumeguarantees,exclusivityperiods,orbetterservice.Whenpricesroseatoneagrichemicalscompany,itbeganofferingpricehedgingtocustomers.DevelopingFigure3:Companiesfaceaperfectstormofrisingcostsfortransportation,labor,energy,andrawinputsNotes:TheInternationalMonetaryFund’sEnergyPriceIndexincludescrudeoil,naturalgas,coal,andpropaneindices;CommoditiesPriceIndexincludesbothfuelandnonfuelpriceindexes;compensationincludeswages,salaries,andbenefitsSources:USBureauofLaborStatistics;IMF;FreightosChangeintransportation,energy,andcommoditiesprices(indexedto100inJanuary2019)Changeincompensation5%2%0250450650100ChangeinBLSEmploymentCostIndexFreightosBalticIndexIMFEnergyPriceIndexIMFCommoditiesPriceIndex2019202122116%70%137%1.9ppChange(March2021–March2022)82GlobalEnergyandNaturalResourcesReport2022thecapabilitiestomanagethehedgingactuallymadepricingmorepredictableforcustomersandcreatedanewrevenuestreamthathelpedstemamarginleak.•Enforcewhat’salreadyinthecontract.Priceincreasecontingenciesincontractsareoflittlevalueifcompaniesdon’tenforcethem.Manyarenowgoingbacktoreviewthoseterms,estimatingthevalueofenforcingthem,andequippingtheircommercialteamswiththerightdataandscriptstohavethesedifficultconversationswithconfidence.Onecompanyfoundithadsimplymisappliedindexesononecontract,leadingtomorethan$10millionofmissedrevenueoverseveralyears.•Considerindirectincreases.Inadditiontopriceincreasestiedtoinflationindexes,companiesaregettingmorecomfortableaddingsurchargesforfuel,expeditedshipping,inventoryholding,andlongerpaymentterms.Cost-of-livingadjustments(COLA)arealsoplayingameaningfulroleinrecoveringcostincreasesinrecentmonths.Somearetighteninguponspecialexceptions,likesmallorrushorders,thatcreatemarginleaks.Theaverageindustrialcompanylosesover6%ofrevenuethroughoff-invoicediscountsandleakage,accordingtoaglobalsampleanalyzedbyBainandPricefxPlasmaTM.•Adjusttheproductmix.Duringaperiodofinflationandsupplyshocks,decidingwhattosellcanbeevenmoreimportantthandecidingwhomtosellto.It’scriticaltohaveaviewofprofitabilitybySKU,aswellasbycustomer.Onepowerproducerhasreactedtovolatilecostsbysellingdifferenttypesofpowerpackages,whilealsorethinkingthemixofitspower-generatingassets.Justasfiringbadcustomersmakessense,sodoesshiftingawayfrommarginallyprofitableproducts.•Centralizepricingdecisions.Companiesoftenpushpricingdecisionsclosetothecustomer,butinvolatileorinflationarytimes,centralizeddecisionscanmakemoresense.Individualsandsalesteamscan’talwaysmakedecisionsthatreflectcompanywideconstraintsandoptions.Dataoncostincreasesmaynotshowupinsalestools.We’reseeingcompaniesorganizeglobalpricingprogramsthatarefarmoredirectivetoregionalorbusinessunitchampions,toensurethatinflationcostsareaddressed.Noonecanbecertain,buthistorysuggeststhatinflationboutstypicallylastabout30months.However,thecureisoftenarecession,sovolatilitymaypersistevenaspricesleveloff.Therearealsoplentyofsignstosuggeststructurallylong-terminflation,includinganagingworkforce,investmentcostsoftheenergytransition,andrepatriationofsupplychains.Evenafterthehigh-single-digitinflationnumbersarereinedin,wemayreturntohigherbaselevelsthaninthe2010s.Inanycase,thevariouspotentialoutcomesallleadtothesametakeaway:Companiesthatacknowledgethepersistenceofvolatilityandrewritetheirpricingplaybooksaremorelikelytomaximizepricerealization,expandmargins,andtakeadvantageofpricingasacompetitiveweapon.83Manyenergyandnaturalresourcescompaniesareturningtoacquisitionstorebalancetheircarbonportfolioandtogreentheiroperations.ByWhitKeuer,HyukjinLee,andArnaudLeroiStrategiccapabilitiesM&AOpportunitiesintheEnergyTransitionAtaGlanceDespitelowdealactivityin2021,morecompaniesareturningtoM&Atoacquirelower-carbonassets,particularlyinrenewablepowergeneration.Energytransitiondealsaccountedforabout20%ofallenergy-sectordealsgreaterthan$1billionin2021.MorecompaniesareusingdealstogreenexistingoperationsandstrengthenESGassets;buildgreenenergyhubsandanintegratedvaluechaintoassisttheenergytransition;reshapebusinessmodels;andinvestinstart-upstoacquiredisruptivetechnology.84GlobalEnergyandNaturalResourcesReport2022M&Aactivityintheenergyandnaturalresourcesindustryremainedsluggishin2021,reboundingonlyaround20%from2020andnotyetrecoveringtoprepandemiclevels.Partly,thiswastheresultofcompanieslookingfordemandtostabilize.Then,asstabilizationlargelytookplace,asecondfactorcameintoplay:Companiesbegansharpeningtheircapitaldiscipline,whichsloweddealmakingasfewerdealsmettheirhigherhurdlerates.Webelievethatconditionsareprimedforanupswingpropelledbyaresurgenceinindustryconsolidationandportfoliomanagement.Theoilandgasindustryisstillhighlyfragmentedinmanysectors,andmultiplesremaindepressed,settingthestageforconsolidationtounlocknewlevelsofefficiency.TheconflictinUkraineaddsmorecomplexitytothemarket,withmanycompaniesactivelyreviewingtheirportfolioandsomeexitingtheirRussianpositionsasBPhasdone.Theoilandgasindustryisstillhighlyfragmentedinmanysectors,andmultiplesremaindepressed,settingthestageforconsolidationtounlocknewlevelsofefficiency.Meanwhile,therewillbegrowingopportunitiesforportfoliomanagementacrossenergyandnaturalresources,especiallyinchemicals.Overtheyears,companieshaveexpandedtheirportfoliostothepointthatthere’snowalackofnaturalsynergiesamongassetsandahighdegreeofcomplexity.Aboveall,though,companieswillturntoM&Atomakemoreprogressonthemonumentaljourneyofmovingtheworldclosertoalower-carbon,sustainablefuturewhilealsokeepingtheircurrentbusinessesrunning.Manylargecompanieshavealreadypursueddealsthatacceleratetheirparticipationintheenergytransitionthat,atitsheart,requiresallcompaniestoreinventthemselves.In2021,energytransitiondealsaccountedforabout20%ofallenergy-sectordealsgreaterthan$1billion(seeFigure1).Theenergyandnaturalresourcesindustry’srelianceonM&Ain2022todelivertheenergytransitionwillplayoutacrossseventhemes.Greeningexistingoperationsandstrengtheningenvironmental,social,andcorporategovernance(ESG)assets.Companiesareaggressivelymakingdealsaimedatreducingcarbonproductionfromtheiroperationstomeetnet-zerotargets.Forexample,OccidentalPetroleum,oneofthetopproducersintheUS’sPermianBasin,isacquiringsolargenerationassetstopoweritsdrillingandcompletionsoperations.Atthesametime,Suncorispartneringwithotheroilsandsproducerswhileinvestingtocommercializecarbon-capturetechnology.85GlobalEnergyandNaturalResourcesReport2022Buildinggreenenergyhubs.Dealsarealsofuelingcompanies’effortstomovebeyondgreeningtheirexistingoperationsandtowardfundamentallychangingtheirinputs,productionprocesses,orproducts.BPandEquinor’sstrategicpartnership,NorthernEndurancePartnership,wasformedtogetherwithEni,NationalGrid,Shell,andTotaltocreatearefineryofthefuturethatwillactasagreenenergyhubwithinanindustrialcluster.Itwillmaintainintegratedsourcingandproductionofrenewableenergy,withnewfeedstockstreamsandlowergreenhousegasfuelsandproducts.Repositioningportfoliostowardtheenergytransition.CompaniesareusingM&Atoaccelerateshiftsintheirportfolios.Thisinvolvesbothdivestmentsofhigh-carbonassetsaswellasinvestmentsintheenergytransition.AnexampleisShell,whichsoldacreageinthePermianBasintoConocoPhillipsfor$9.5billion,inamovetohelpacceleratethecompany’sportfolioshiftdrivenbytheenergytransition.AnotherexampleisLyondellBasell’sjointventurewithSuez(nowVeolia)andacquisitionofEuropeanplastics-recyclingcompanyQualityCircularPolymerstomechanicallyconvertconsumerwasteinto25,000tonsofpolypropyleneandhigh-densitypolyethyleneperyear.Utilitieshavebeenacquiringmorerenewableassets,andathighermultiplesthanwe’veseenfortraditionalgas-poweredassets.Someutilitiesalsoareseizingopportunitiesinsmartgridtechnologiesanddistributedstorage,suchasSouthern’s2016acquisitionofPowerSecure,aproviderofsmartgridservices.Privateequityfirmsplayabigroleinthisshifttogreenoperationsbybuyingenergycompanies’traditionalhigh-carbonassets.Figure1:Energytransitionthesesaccountedforabout20%oflargedealsintheenergyindustryin2021Source:Dealogic2021energydealswithdealvaluegreaterthan$1billionEnergytransitionthesisEnergytransitionthesisOtherenergydealsOtherenergydealsDealvalue200406080$484B100%141Dealcount86GlobalEnergyandNaturalResourcesReport2022Establishingacriticalpositiononthevaluechaintodeliverenergytransitionproductsandservices.BPmadeamoveinthisdirectionwhenitacquiredtheUK’slargestelectricvehicle-chargingcompany,whichatthetimeoperatedmorethan6,500chargingports.UsingM&Atoreshapebusinessmodels.Somecompanieshavefoundthatfullymonetizingenergytransitionassetsrequiresthemtobuynewcapabilitiesfortransformedbusinessmodels.Forexample,ShellhasalicensetosellpowertoindustrialcustomersintheUKelectricitysector.Carvingoutnewgrowthbusinesses.Morecompaniesarecarvingout,or“ring-fencing,”assetsthattakeadvantageoftheenergytransitionopportunities.Forexample,LGEnergySolution,whichLGChemspunoutasaseparateentityin2020,raised$10.7billiontoreachavaluationof$98billioninaJanuary2022IPOonenthusiasmforitsEVbatterybusiness,amovethatallowedthenewsubsidiarytotradeatamultipleabouteighttimesgreaterthanitsparent.Thesectordidsomethinglikethis10to15yearsago,whenmanycompaniesputtheirinfrastructureassetsintomasterlimitedpartnerships(MLPs),atrendthatraisedvaluationsacrosstheboard.Managingnewgrowthbusinessesinthiswaycanattractanewclassofinvestorsthataretargetingthisassetclassinexpectationofhighermultiplesthanforthelegacybusiness.Makingstrategicinvestmentsinstart-upstoacquiredisruptivetechnology.Finally,morecompanieswillmakeearly-stageinvestmentsin,orpartnerwith,youngcompaniesthatcanhelpthembecomedisruptersthemselves.That’sthegoalofalargepetrochemicalcompany’sinvestmentinablockchaincompany,orBASF’scorporateventurecapitalinvestmentinLanzaTech,acarbon-recyclingcompany.Aboveall,though,companieswillturntoM&Atomakemoreprogressonthemonumentaljourneyofmovingtheworldclosertoalower-carbon,sustainablefuturewhilealsokeepingtheircurrentbusinessesrunning.HowwinningcompaniesdoitIntheirefforttorelyondealstodelivertheenergytransition,somecompanieswillemergeasleaders.Here’showM&Apractitionersinenergyandnaturalresourcescanboosttheoddsofsuccess.Takeanactivistapproachtoportfoliomanagement.Asportfolioschangeandbecomemorediverse,companiesneedtoundertakemorefrequentassetreviewstomanagetheirbusinessthroughthischange.Thisreviewiscriticalinensuringthattheexistingbusinesscontinuesto87GlobalEnergyandNaturalResourcesReport2022meetcurrentgoalsandwouldclearthesamehurdlesforinvestmenttoday.Leadersneedtobepreparedtoeitherinvestinimprovementordivestthoseareaswhereperformanceisfallingshortofwhat’sneededfortoday’scorporatestrategy.Setacapitalallocationstrategythat’stiedtothecorporatestrategy,andleantowardtheenergytransition.Thatmeansrecognizingthatinvestmentsshouldtargetmaturesolutionslikerenewables,aswellaslessmatureandmoreinnovativesolutions.Italsomeansbeingdisciplinedaboutexploringprofitablegrowthoptionsinlowcarbonalongmultiplegrowthhorizons.IncorporateESGconsiderationsintoduediligence.BuyersneedtoactivelyunderstandandassesstherelativeperformanceofthetargetacrosscriticalESGdimensions.Thisbenchmarkingexerciseallowscompaniesnotonlytounderstandthetarget’struevalue,butalsoanticipateanycostsassociatedwithbringingthetargetinlinewiththebuyer’sESGstrategy.Thisneedstofeedintovaluecreationplanningandintegrationinordertounlockthefullpotentialofthecombination(formore,seetheBainBrief“TheESGImperativeinM&A”).Evolvethejointventureplaybooktoaccelerateanenergytransitionstrategy.Thisisahistoricareaofstrengthformanyenergyandnaturalresourcescompaniesasthey’veusedjointventurestopartnerinthedevelopmentofoilandgasfieldsorlargepetrochemicalcomplexes,oftenwithstate-ownedenterprises.Inadditiontothesetraditionalusesofjointventures,companiesincreasinglyarefavoringjointventurestoaccelerateenergytransitionstrategiesandcombineexpertisealongthevaluechain,asit’sdifficultforonecompanytohaveallthecapabilitiesrequired.Forexample,thereareseveraljointventuresgloballyrelatedtothechemicalrecyclingofplasticwaste.Thesejointventuresinvolvethreeparties:traditionalwastecompanieswithexpertiseinthecollectionandpreparationofwasteandrecyclablematerials,acompanywithproprietarymechanicalorchemicalrecyclingtechnology,andatraditionalchemicalcompanywithexperienceinprocessingandoperatinghydrocarbonandchemicalplants(formore,seetheBainBrief“DeliveringResultsinJointVenturesandAlliancesRequiresaNewPlaybook”).FluidM&Amarketdynamicswillprovidemyriadopportunitiesforresilientcompaniestotransformtheirportfoliosandrepositionthemselvesforthegreatenergytransition.Thebestcompaniesviewtheindustry’seraofcomplexuncertaintiesandunprecedentedchangeforwhatitis:atimeofhistoricpossibilities.88Goalsaresetandtargetshavebeenannounced.Thenextstagesoftheenergyandresourcetransitiondependonbeingboldandrealistic.ByCateHight,TorstenLichtenau,BrianMurphy,andNiteshPrakashStrategiccapabilitiesDeliverDecarbonizationwithVisionaryPragmatismAtaGlanceHavingsetaggressivedecarbonizationtargets,companiesacrosssectorsnowfacethechallengeofexecutingatpaceduringatimeofunprecedentedturbulence.Manycompaniesintheenergyandnaturalresourcessectorshavebeenworkingtowardthesegoalsformanyyears,withvaryingdegreesofsuccess.Indicatingthedifficultyofachievingthoseambitions,31%ofENRcompaniesmissedScope1and2targetstheysetfor2020.Companiesthatmakethemostprogresswillstayfocusedontheirvisionarynet-zeroambitionwhileshowingruthlesspragmatismindeliveringstrategically.89GlobalEnergyandNaturalResourcesReport2022Iftheyear2021wasaboutsettingambitions,2022isaboutcomingtogripswithhowchallengingtheenergyandresourcetransitionislikelytobe.Overthepasttwoyears,thenumberofcompaniesestablishingscience-basedtargetsforreducingtheircarbonemissionsaccelerateddramatically,asmanypreparedfortheCOP26climatechangeconferencelastNovember(seeFigure1).Butforcompaniesinenergyandnaturalresources(ENR),decarbonizationishardlynew.Decarbonizationandsustainabilityhavebeenhighontheiragendaforseveralyearsbecausetheseindustriesareamongthehighestandmostvisibleofcarbonemitters,andbecausethey’reunderintensescrutinytodecarbonize.Asanindicationofhowdifficultitistoturnambitionintoreality,considerthat31%ofcompaniesmissedtheScope1and2targetstheysetfor2020,eventhoughtheseemissionsarethemostcontrollable,andaddressingthemoftenmakesgoodeconomicsense(seeFigure2).FormanyENRcompanies,mostemissionsaredownstreamScope3,whencustomersusetheirproduct.Noneofthisishappeninginagreenvacuum.Executivesaretryingtopursuetheirdecarbonizationtargetsduringaperiodofturbulencethathascreatedhistoriclevelsofuncertainty.They’relearningFigure1:Thenumberofcompaniespursuingscience-baseddecarbonizationtargetshasnearlyquadrupledsince2020Note:TheCOP26UNclimatechangeconferencetookplaceinEdinburgh,Scotland,fromOct.31toNov.12,2021Sources:CDP;ScienceBasedTargetsinitiative;BainanalysisNumberofcompanieswithSBTicommitmentsortargetsset201819202122(Jan–Apr)01,0002,0003,0001473667752,16657%24%19%2,843x2.8AmericasAsia-PacificEurope,MiddleEast,andAfricaCOP26jump90GlobalEnergyandNaturalResourcesReport2022howtomakeanorderlycarbontransitionamidanunsettlinggeopoliticalatmosphere,chronicsupplychaindisruptions,andrampantinflation.Progressinthenextstagesofthetransitionwilldependonvisionarypragmatism.Ourclientsareexperimentingwithmoreflexibleandnimbleapproachesthatwillhelpthemworkthroughthemanydisruptions.Here’sashortlistofsomeeffectivestrategies.1.Putapremiumonstrategicadaptability.Companiesdon’tneedmoreclimatescenarios,justclarityontherelevantones.Theyneedtoidentifythesignpoststhatshowthedirectionoftravel,especiallyregulationsandadvancesonthetechnologyexperiencecurve.We’reseeingcompaniesadoptamoreadaptableapproachtostrategy.Forexample,insteadofsettingfive-yearstrategicplanswithyearlyrefreshes,strategybecomesamorecontinuousactivity,takingaccountofdeliverycommitmentsandthedevelopmentagenda.Continuouslyassessingthesignpostscanguideongoingandquarterlydiscussionswithintheexecutiveteamandtheboardaspartofalivingstrategy.2.Proactivelyaddressinvestordissonance.Investorsandlendersareraisingtheirexpectationsaboutdecarbonization.Amongutilitiesinvestors,forexample,13%saytheyalreadyhavecarbontargetsorlimitsthatguideinvestmentdecisions,andanother16%saythey’reconsideringit.Figure2:Aboutone-thirdofENRcompaniessaidtheymissedtheirScope1and2targetsin2020Notes:ENRincludesagriculturalcommodities,chemicals,coal,electricutilities,metalsandmining,andoilandgas;Scope1measuresgreenhousegasesdirectlyemittedbyanorganizationorbyactivitiesunderitscontrol;Scope2measuresindirectemissionsfromelectricityorotherpowerusedbyanorganizationSources:CDP2017–2020data(n=67);Bain&CompanyEnergyandnaturalresourcescompanies’resultsforScope1and2emissionreductions22%Missedbyalot(achievedlessthan80%oftarget)Missedslightly(80%–100%)Overachieved(100%ormore)69%9%91GlobalEnergyandNaturalResourcesReport2022Atthesametime,theyoftenaren’twillingtocompromiseonnear-termreturns.Thiscreatesdissonanceincapitalmarkets,ascompaniesbalancethetrade-offsbetweentheirgreenambitionsontheonehand,andtheirgrowthandfinancialaspirationsontheother.Capitalmarketdaysformanycompanieshavebecomelonger,butnotnecessarilyclearer.Executivesneedtostrengthentheinvestordialogue.Thatmeansfocusingonstrategicclarity,withspecificnear-termplansfordecarbonizationandlonger-termpathwaystonetzero.Formanyenergyandresourcescompanies,italsomeansshowingplansfornewgrowth,includingEngine2initiatives(formore,seeChapter2,“InvestinginNewGrowthBusinesses”).Botheffortsshouldmakethebusinessmorevaluable.CompaniesneedtodemonstrateprogressineverythingfromScope1and2decarbonizationtocustomercollaborationongreenproductsandmeaningfulinvestmentsinnewgrowth.3.Decarbonize“customer-back.”Customerpreferencesdeeplyinfluencethelevelofemissionsgeneratedduringproductionandinthesupplychain.Throughprocurementdecisions,customerscanhaveasmuchcontrolovertheirupstreamScope3emissionsastheydooverScope1and2activities.Leaderswillsettargetsforallthreelevels.DownstreamScope3emissionsalsoprovidenewopportunities,eventhoughENRcompaniessometimesviewthemwithtrepidation.Visionarypragmatistswillworkwithcustomerstodeveloplower-carbonproductsthatmeettheirneedsandsupporttheirowndecarbonizationefforts.Beyondthewell-knownexampleofsubstitutingrenewableelectricityforhigher-emittingalternatives,otheropportunitiesincluderesponsiblyproducednaturalgas,carbon-neutralLNGcargoes(throughoffsets),low-carboncopper,carboncaptureservicesforcementproducers,greenhydrogenforsteelproducers,greenmethanolforshipping,andsustainableaviationfuelforairlines.Sincecustomerswillwanttoknowwhatthey’regettingwhentheypayapremiumforthesegreenerproducts,transparencyonmaterialsandemissionswillbeimportant.4.Collaboratewhereitmattersandforresults.Carbontransitionisaproblemfartoobigtobesolvedbyanycompanyonitsown,andtheneedtoengagethewiderecosystemofcustomers,suppliers,peers,governments,andcivilsocietyisincreasing.Knowwheretocollaborateandwheretocompete.Pickthefewpartnershipsthatcanmakeadifference.Thosepartnershipsshouldbemadeacrossthevaluechain,withpeersandwithkeystakeholdergroups,toreachacriticalmassforchange(formore,seeChapter6,“CreatingaCoordinatedApproachtoDecarbonization”).Avoidlosingprecioustimeoninitiativeswherethere’salotoftalkbutlittleaction.Ruthlesslydeliverresultswithaclearintentforthepartnership,andwithearlyproofpointsthroughexperimentation.5.Creategreenheroesinmiddlemanagement.Topmanagementmaybefullyconvincedoftheneedforaggressivedecarbonization,giveninteractionswithinvestors,theboard,andkeycustomers.Newrecruitsoftenhavechosenanemployerbasedonitsgreencredentials.Yetsomecompaniesunderinvestinempoweringmiddlemanagementtogetthejobdone,sendingconfusingsignalsonhowenvironmental,social,andcorporategovernance(ESG)considerationsshouldconnectwithothergoalsforrevenues,costs,andsafety.Decarbonizationcan’tbeachieved92GlobalEnergyandNaturalResourcesReport2022withoutmanagerswhohavethetoolstomakeithappen.Theonlywaytoeffectivelyempowerthesepotentialgreenheroesistobeextremelyclearonwhatdecisionstheyneedtomakedifferentlyandhowtoresolvetrade-offswhentheyoccur.Theorganizationneedstobetrained,guided,andalignedtoembeditsgoalsasrealisticdeliverables.Asanexample,procurementiscriticaltoaddressupstreamScope3emissions.Managerswhohavebeentrainedforyearstofocusonoptimizingcostforcertainspecificationsneedclearguidanceonhowtoreflectcarboninprocurementdecisions,nexttospecsandprice(forexample,throughinternalcarbonpricing)andthetoolstopragmaticallyassesswheretopushinthesupplychain.Skillsmustbeupgradedthroughouttheorganization,buttailoredtospecificpurposesandpeople.Thatstartsbyinvestingtounderstandwho’smostaffectedandwhoneedsthemosttraining,thenrollingoutsupportaccordingly.WhilemanycompaniesracedtoestablishtheirtargetsintimeforCOP26,companiesintheenergyandnaturalresourcessectorsoftenwerealreadymanagingthedifficulttaskofdeliveringonthoseambitionsandbuildinggreenerbusinesses.Theimportanceandurgencyofdecarbonizationandtheneedtolimitglobalwarmingto1.5°Carelargelyundisputed.WhilemanycompaniesracedtoestablishtheirtargetsintimeforCOP26,companiesintheenergyandnaturalresourcessectorsoftenwerealreadymanagingthedifficulttaskofdeliveringonthoseambitionsandbuildinggreenerbusinesses.Theleadersthatcombinevisionandpragmatismwillgettherefirst.Boldideas.Boldteams.Extraordinaryresults.Bain&Companyisaglobalconsultancythathelpstheworld’smostambitiouschangemakersdefinethefuture.Across65officesin40countries,weworkalongsideourclientsasoneteamwithasharedambitiontoachieveextraordinaryresults,outperformthecompetition,andredefineindustries.Wecomplementourtailored,integratedexpertisewithavibrantecosystemofdigitalinnovatorstodeliverbetter,faster,andmoreenduringoutcomes.Our10-yearcommitmenttoinvestmorethan$1billioninprobonoservicesbringsourtalent,expertise,andinsighttoorganizationstacklingtoday’surgentchallengesineducation,racialequity,socialjustice,economicdevelopment,andtheenvironment.WeearnedagoldratingfromEcoVadis,theleadingplatformforenvironmental,social,andethicalperformanceratingsforglobalsupplychains,puttingusinthetop2%ofallcompanies.Sinceourfoundingin1973,wehavemeasuredoursuccessbythesuccessofourclients,andweproudlymaintainthehighestlevelofclientadvocacyintheindustry.Formoreinformation,visitwww.bain.com

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