As the race to net zero accelerates, low-carbon solutions (LCS) are quickly becoming the primary new growth opportunity for companies that historically have focused on oil and gas (O&G) production. According to the International Energy Agency, remaining on track for net zero will require $21 trillion in capital investment by 2030. Companies that have the right capabilities in place stand to benefit greatly.
LCS are products, services, and technologies that have a limited carbon footprint and can serve as alternative energy sources or tools for decarbonizing operations and consumption. These offerings fall into six categories: hydrogen and ammonia; carbon capture, utilization, and storage (CCUS); bioenergy; green mobility and battery electric storage; decarbonization technologies; and renewable power.
The opportunity has not escaped O&G companies, which are increasingly developing LCS to diversify their operations and ensure future revenue generation. BCG’s analysis of the largest players found that integrated energy companies (IECs), supermajors, international oil companies (IOCs), and national oil companies (NOCs) are all getting into the game.
As competition in the LCS space heats up, the most advanced players are standing apart from their peers both commercially and organizationally. Companies that focus on developing the organizational capabilities of their LCS businesses will position themselves to take full advantage of the opportunity. Those that don’t are at risk of falling behind.
In 2022, to understand this rapidly evolving sector, BCG assessed 17 companies in the O&G industry. Our analysis covered the LCS ambition, portfolio choices, technology access, and organization models of six IECs/supermajors, eight NOCs, and three IOCs, with the goal of analyzing how these companies are setting themselves up for success in the low-carbon space.
Except for a temporary slowdown during the height of the COVID-19 pandemic in 2020 and 2021, O&G investments in LCS have increased rapidly over the past five years, and all signs indicate that the pace of investment will continue to accelerate. From 2017 to 2022, 17 companies invested approximately $74 billion. Of that amount, 55% went to inorganic growth, which suggests that O&G players are actively acquiring external capabilities to accelerate their transition to net zero. Extrapolating from companies’ public statements of commitment, we estimate that investments will reach $134 billion over the next five years, an increase of nearly 80%. (See Exhibit 1.)
Together, the six largest publicly traded energy companies—including BP, Chevron, Eni, ExxonMobil, Shell, and TotalEnergies—contributed about 80% of investments. These companies will continue to dominate investment activity. Their share of low-carbon capital expenditures averaged 5% over the past five years, and analysts predict that it will soon surpass 15%. Some IOCs, along with some NOCs, plan to increase their spending, on average, by 3.2 times during the same period.
During the period from 2017 to October 2022, O&G companies focused on building renewable power capabilities: solar and wind accounted for 75% of their low-carbon investments, and bioenergy approximately 10%. But the situation is changing rapidly. Both M&A activity and venturing activity indicate that hydrogen, CCUS, and bioenergy are rapidly taking center stage. (See Exhibit 2.)
In 2018, renewables accounted for 80% of M&As; in 2022, that percentage has dropped to 60%. There were no hydrogen or CCUS transactions prior to 2020; these two domains now account for 22% of transactions, with 16 transactions so far in 2022. The shift is even more visible in the venture capital space. Renewable power deals dropped from 52% in 2018 to 21% in 2022, while hydrogen, CCUS, and bioenergy together rose from 8% to 44%. Bioenergy is enjoying strong interest, receiving $7 billion in investments over the past two years.
O&G players are positioning themselves to become market leaders in these emerging low-carbon technologies. They will likely hold a large amount of green hydrogen capacity by 2040—second only to the pure-play hydrogen companies—and more than 45% of global capture capacity by 2030. The shift to hydrogen and CCUS reflects the importance of these solutions for reaching net-zero goals and achieving synergies with existing O&G assets and operations. However, we see a different situation in the solar photovoltaic subsector. O&G players account for only 15% of solar photovoltaic asset ownership in 2022, while independent power players and institutional investors combined own over 60%.
O&G companies are adjusting their organizational structures to support their LCS strategies. This is evident from our analysis of players across two dimensions: commercial maturity, which reflects an LCS business’s ability to generate positive cash flow at scale; and organizational maturity, which reflects its reporting lines and degree of business autonomy.
LCS businesses fall into four main categories that encompass a wide range of commercial and organizational maturity. (See Exhibit 3.) Those categories are as follows:
A higher degree of autonomy and separation from the core business typically translates into higher commercial maturity. In the companies we observed, LCS activities are moving toward becoming independent business entities driven by their agenda rather than being incubated by core segments.
Diving deeper, we identified four distinct organizational models that companies have deployed in support of low-carbon pursuits:
Many O&G players adopt a hybrid combination of capability-aligned and market-aligned models. This approach helps accommodate a wide range of LCS technological and commercial maturity.
O&G companies may eventually need to evolve their low-carbon businesses to give them greater operational independence to capture the fair market value of low-carbon opportunities as the technology matures. Such a move follows recent trends in other industries such as automotive, where some players are separating their electric vehicle operations from their traditional business of producing internal combustion engine vehicles. This empowers the new businesses to develop their own business models unhindered by legacy operations, business models, and valuations.
O&G players are making great strides in the LCS space, but none is best in class today. All continue to grapple with various pain points. Four of these are particularly noteworthy:
No matter how much progress their companies have made in the journey, CEOs and CSOs should consistently keep three priorities in mind over the next few years:
LCS represent a new frontier, with phenomenal potential for O&G companies seeking growth in the years ahead. Players that focus on building their organizational maturity to accommodate such solutions will be best positioned to capture this opportunity.
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