DECARBONISATION

tinguish leading businesses from the rest. This is particularly the case as operators contend with the current supply chain constraints and economic uncertainty. Key enablers for decarbonization will include robust planning, speedy action, and the ability to control costs. Not all companies are equally well positioned to implement these capabilities. Indeed, 53 percent of operators say they lack the necessary expertise.11 As operators consider their options, four major themes are likely to dominate their strategic considerations: support infrastructure, fleet requirements, economics and sustainability, and vehicle types (Exhibit 3).

Any comparison is subject to volatility in the price of energy. A 50 percent increase in the price of electricity, for example, would drive the cost of battery electric vehicles (BEVs) up by 5 to 10 percent. Conversely, a 50 percent rise in the price of gasoline would spur a 20 percent increase in ICE costs, pushing the BEV advantage to 20 to 25 percent per mile. Furthermore, as demand for BEVs increases relative to ICE vehicles, the residual value of BEV assets will likely rise, driving TCO advantage. Of course, change rarely happens all at once. During the transition to BEVs and fuel cell electric vehicles powered by hydrogen, alternative power sources such as compressed natural gas and liquid natural gas may offer potential bridges before cost parity is achieved in all use cases.

Executing A Smooth Transition

Transitioning to a decarbonized fleet presents operators with significant opportunities. But with so many players looking to make the transition simultaneously, excellent execution will dis

Fleet operators planning for and executing decarbonization must grapple with complex issues, but time is of the essence. Being among the early movers in planning for infrastructure rollout and addressing operational challenges can give operators an advantage in securing assets and realizing TCO benefits. Companies that delay their transition risk lower asset availability amid rising demand and supply bottlenecks, along with significant reputational, legal, and financial risk if they cannot keep up with changing regulations and consumer expectations. In short, the industry is approaching a point at which fleet decarbonization will become a significant business opportunity and strategic differentiator. The evidence on costs and technology suggests that first movers will benefit most, by capturing value and developing the know-how that will translate into sustainable competitive advantage.

Source: mckinsey

How People And Organizational Moves Can Power Up Energy Firms In 2023

Energy companies are facing unprecedented times: crises like Russia’s invasion of Ukraine and the COVID-19 pandemic are foremost humanitarian issues, but have also highlighted the need for affordable, reliable, and secure energy. At the same time, climate-change mitigation demands a mindset reset. Although the challenges might seem daunting, energy companies can draw on the experiences of others within the sector, and beyond, who are finding solutions and scanning the horizon for new opportunities. In this article, we explore four themes energy companies could consider over the coming year: operating models, talent, portfolio shifts, and leadership. Each issue is illustrated by a company example, followed by a set of questions organizations can ask themselves when plotting their own journey in 2023.

Executing A Smooth Transition

Change can bring anxiety, but it can also bring opportunity, and 2023 offers rewards for those companies that organize to compete and win, in both their traditional core energy business and when developing and scaling new growth engines.

EXECUTING

A Smooth Transition

In the traditional business, companies are under pressure to provide affordable, reliable, secure, and cleaner energy to global markets in the near term. In addition, they recognize that the operating model for assets of the future will have to fundamentally transform to produce competitive hydrocarbons with lower carbon intensity.

Leading companies have started their journey toward the asset of the future by combining three elements:

• Radically simplifying to align standards, processes, maintenance builds, and other crucial elements, with operating strategy tailored to the maturity of the asset.

• Organizing for agility by deploying cross-functional teams built around clear business missions and implementing a rigorous quarterly prioritization of activity to create a flatter, empowered organization.

• Digitizing where it makes sense, building capabilities along the way, and integrating digital solutions with new processes and ways of working.

Such changes can position businesses to succeed in the coming decade and capture necessary value in the near term. What’s more, building such an asset of the future can bring renewed purpose and transform employee engagement in the traditional core. For example, in response to rising European gas prices, an operator altered its operating model, working on all three elements in parallel. The results were rapid: the new flexibility allowed the business to swiftly redirect and reconfigure drilling teams from plugging and abandonment activity to workovers. This reallocation of resources had not been possible in the company’s traditional model and, by rapid reprioritization, it captured $10 million in incremental value within months.

New Engines Of Growth

Energy leaders are also wrestling with how to incubate and scale new growth businesses. Success here is a delicate balancing act between giving a new-growth business independence and autonomy, and ensuring it can take advantage of the parent company’s institutional and customer muscle. The challenge is how to get that balance right. Our research shows that most corporate new-business builds are not a great success—from 2000–2019, just 16 percent of Fortune 100 companies went on to become blockbuster successes; the remainder were partially successful at best.1 Winning companies have found a solution: they put aside past biases and anchors and carefully consider both the optimal operating model for their own growth businesses (the best structure, processes, and people to drive success) and the right level of integration versus independence. This approach allows the new companies to thrive, independent of the historic mode in which the traditional parent company operates. For example, various companies are evolving to models that include separating start-ups from the mothership, allowing flexible salaries and different metrics for success, establishing governance frames to allow growth engines the freedom and responsibility to make their own decisions, and identifying different KPIs to measure success in nascent businesses.

ATTRACTING, RETAINING, AND RETRAINING TALENT FOR A NEW ERA

The COVID-19 pandemic caused a wave of attrition and movement in talent, and businesses globally are struggling to find ways to keep and upskill employees—and attract new people who have very different needs to employees of the past.2 For energy companies, the talent turmoil has been compounded by a convergence of other challenges, such as an aging workforce, skill gaps in the engineering expertise needed for renewables and digitalization, and intensified competition from nontraditional peers. Companies also need to determine what skills will be needed in ten years time. And to complicate matters further, public utilities are finding themselves in competition with big tech while oil and gas companies are shedding retirement-age workers and need to offer younger—and more idiosyncratic—workers good value propositions in a highly competitive talent market. In this environment, the solution will differ for each company based on current talent makeup, technology changes, upskilling needs, and proximity to hiring hubs. Company culture must alter, not just to keep pace with change, but to get everyone to embrace and welcome that change. This is not just about lines on an organizational chart, but core competencies, the ability to capture, scale, and sustain value, and lasting competitive advantage. One thing is sure: the companies that act on this proactively will extend their competitive distance in the industry. Businesses face an important consideration when dealing with this regeneration of talent: how to shift to a cohesive culture that speaks more clearly to the talent needed. How can a company foster ideas and behaviors conducive to maintaining and improving performance in the organization—especially when new generations entering the workforce have different expectations from those that came before? The companies that most successfully pivot start with “win rooms”: fully dedicated, small teams of recruiting and technical experts that work in competitive sprints to pilot and prove out new ways of talent attraction and retention. This includes split-testing employee value propositions (such as attracting tech talent by emphasizing the company’s role in the new energy environment), building pipelines from nontraditional sources (like insurance industries), partnering with the business to scenario test strategic workforce plans, and redesigning career paths to provide technical experts with the chance of promotion outside of management. For example, by using a win room, a Midwestern utility was able to hire more than 40 critical digital roles at a rate four times faster than prior efforts. Placement of these 40 leadership roles de-risked delivery of a $200 million annual, run-rate portfolio and allowed the utility to scale down significant reliance on external vendors.

PORTFOLIO PIVOTS TO FUTURE-PROOF PROSPERITY

The mergers and acquisitions (M&A) landscape among energy companies has evolved significantly over the last decade. Long gone is the traditional approach to M&A where companies periodically review their target list and often use low-price environments to pursue targets and make up for limited portfolio growth. Sustained high prices have allowed producers to improve their financial health by reducing debt, increasing share buybacks, and growing dividends. A renewed wave of M&A is expected in the energy sector in 2023, and it could look very different with higher prices, controlled production growth, and a renewed focus on cash flows—producers need to ensure they remain focused on delivering high total returns to shareholders. With an increased focus on resilience and carbon intensity, the boundaries for potential acquisitions have shifted out, as many more players compete for low-carbon energy opportunities. For instance, refiners are taking an interest in upstream integration of renewable feedstock, while traditional upstream players are starting to move downstream by investing in renewable energy. In addition, many energy companies have turned their attention to divestments or carve-outs to find ways to separate carbon-intensive assets. In doing so, they balance the need to achieve net-zero targets without completely foregoing valuable cash-flow streams from carbon-intensive assets (especially at today’s prices) that help fund the transition. All of this requires new skills and flexibility to look at both M&A and divestitures in parallel. The most successful mergers take a holistic, no-stoneunturned approach to value creation, with an increased focus on assessing how one’s capabilities can be transferred to adjacencies to create a “best-owner” advantage. This will ensure companies create value from M&A by opening the aperture