WHITE PAPER

Energy Transition
Transformation
To Build Optionality and Resilience, Align the Why,
What and How of Energy Transition Transformation

September 2023
By Stephanie Del Carpio, Kenny Kurtzman, Ming Teck Kong,
Andrea Ostby Syth, Prashant Mehrotra and Tom SteinerAccelerating change, greater
uncertainty, and conflicting priorities

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nergy companies’ new reality is faster changing and more uncertain than ever before.
Faced with conflicting priorities, they must strike a winning balance between maximizing returns, decarbonizing at speed, and investing for value. This means transforming
how energy companies do business today and how they build resilience for the long term.
This paper shows how developing an effective, ‘always-on’ operating model that integrates
purpose, strategy and executional certainty will enable companies to sustain competitive
performance in any environment.

All energy companies must address
two core issues

While challenges differ by segment, to succeed in the medium- to long-term, energy
companies must address two core issues. The first is finding the right balance
between competing demands and priorities. The second is sustaining performancein the face of rising headwinds.

Strike a winning balance between competing demands
Companies must balance valuations, capital investment decisions, and decarbonization
ambitions in a world where there are many paths available and it is not always clear what
the market will reward (Figure 1). Investors report a strong preference for low carbon capital
investments. But despite European IOCs’ seemingly aligned capital allocation strategies,
their valuation multiples remain depressed compared to peers (Figure 2).

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ENERGY TRANSITION TRANSFORMATION

Figure 1 | Energy companies must balance three competing demands
Maximize valuations

Obligation to continuously deliver
above market performance andreturn value to investors

Is our portfolio optimized
forour beliefs of future
uncertainty andin whichassets are we exposed?

Will investors reward us more
for replacing reserves oraccelerating decarbonization?

Decarbonize at pace

Invest for value

Deliver on ambitious
decarbonization targets
within agreed

Balance capital allocation between
strategic 'big bets', option plays andlegacy businesses required to fundthe transition

Do we have the right exposure
between clean tech development and core business?
Note: EV/EBITDA calculated based upon calendar year average
Source: S&P Capital IQ; BCG ValueScience® Center

Figure 2 | Mixed signals from the market highlight the need to maintainoptionality
Investors state a preference for low
carbon capital investment…

Which aligns to the European IOC
capital allocation strategy…

However, European IOCs continue
to show depressed multiples vspeers

ExxonMobil

Importance of investment types in O&G
Low carbon
solutions
Upstream

43%

23%

Midstream 12%

Downstream

37%

15%

9% 10%

50%

19%

53%

25%

40%

25%

Extremely Important
Uncertain

8%

ExxonMobil

16%

17% 8%

28%

24% 1%

BP

29%

20%

Shell

22%

15%

TotalEnergies

26%

Somewhat important

15%

19%

28%

15%
1%

2%
10%

36%

3%
17%
9%

Conventional

13% 6% $15B

8% $15B

27%

15%

27%

$24B
$15B

20

Unconventionals

Future is unclear as green
energy rapidly grows

15

10

5

0
2012

Deepwater

LNG/Integrated Gas
Downstream

EV/EBITDA (x)

25% 3% $22B

31%

Chevron8%

Somewhat unimportant

Unimportant

Estimated 2022 CAPEX by Segment

2014

2016

2018

2020

2022

US IOCs

Green Energy

European IOCs

O&G

Low Carbon Spend

Note: Low Carbon Spend based on company disclosed capex spend. Low carbon spend not inclusive of customer and mobility focused spend. EV/EBITDA determinedbased upon calendar year market cap weighted average EV/EBITDA for all 24 Green Energy (e.g., NextEra, Iberdrola, ERG) / 64 O&G (excluding NOC)
Source: Global S&P; Rystad Energy (Nov 2021); company reports/presentations and estimates based on available information; IEA; Capital IQ; BCG CEIBOSTON CONSULTING GROUP

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Different challenges faced by different energy segments
The benefits of successful transformation are similar for all energy companies, and include cost efficiency, improved employee satisfaction and productivity, and faster, more effective decision-making processes. But each energy related sector
will have specific challenges it needs to address.

International Oil Companies (IOCs)
IOCs face conflicting priorities and must urgently find the right balance between maximizing shareholder returns, decarbonizing at speed, and investing for long term value. When it comes to portfolio management and capital allocation, unprecedented strategic uncertainty creates pressure for IOCs to build optionality. To address these challenges IOCs should
consider• Establishing a lean, efficient operating model for legacy upstream businesses, including streamlining processes to monitor and replace reserves and building capabilities required to reduce costs and execute projects quickly.
• Defining a new operating model to enable optionality in low carbon businesses. This will require embedding agile governance processes that promote rapid decision making, establishing an ‘always on’ dynamic strategy team to assess andact on opportunities and building capabilities to strengthen local customer and partner relationships.

National Oil Companies (NOCs)
NOCs are moving from a world in which inefficient operators were able to flourish to one where only low-cost and low-carbon operators will survive. To be the ‘last man standing’ they will need to invest capital in inorganic growth opportunities,
alliances, and partnerships across the low-carbon value chain and rapidly develop internal capabilities that have traditionally been provided by IOC or service company partners. To transition successfully NOCs should consider:• Reducing cost and carbon intensity to extend reserve lifespans with fit for purpose technology and support functions.
• Refocusing portfolios on the desired mix of hydrocarbon and new energy assets.
• Accelerating timely and cost-efficient capital delivery programs to take advantage of current high pricing, using innovative digitally enabled capital delivery models.

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ENERGY TRANSITION TRANSFORMATION

Upstream independents
Independent upstream players face high degrees of uncertainty and price volatility as the market shifts towards growth inrenewable and low-carbon fuels. These companies must seek to cultivate a truly lean and agile organization that drives
operational efficiency through digital tools while also maintaining their “social license” by demonstrating commitment to
responsible, lower-carbon operations. To address these issues upstream players should consider:• Future-proofing their hydrocarbon portfolios with fit for purpose support functions and asset-specific decarbonization plans.
• Transforming their core functions using digital to reduce costs and improve decision making while implementing standardized delivery models to maintain high asset utilization.
• Building and scaling material lower-carbon businesses leveraging new methods of capital deployment and a supplierecosystem to secure access to technology.

Downstream independents
Downstream oil and gas companies face shrinking demand and margins, compounded by high projected decarbonization
costs. However, as investor interest moves away from traditional refining towards adjacent value pools in retail and mobility, companies are also seeing new opportunities arise. To navigate these challenges and take advantages of opportunities
companies should consider:• Defending their core businesses and improve margins, including maturing trading capabilities to manage volatile market conditions and extract full value from assets beyond intrinsic product margins.
• Growing by attacking in adjacent areas, facilitated by an ‘always on’ dynamic strategy and capital allocation team, andsupported by investment in reskilling / upskilling the workforce.
• Creating optionality and scalability in low carbon businesses, including partnership and M&A opportunities, as well as
abatement or divestment plans for existing assets.

Power and Utilities (P&U)
P&U players are being pushed to make capital investments in modernizing, digitizing, and enhancing grid reliability, while
decarbonizing and minimizing stranded assets. Consequently, it’s crucial to redouble sustainable efficiency efforts (costs
and carbon), while investing for the future with integrated planning for new generation and loads. Companies looking toaddress these issues should consider:• Building efficiencies through a robust operating model to increase / preserve their regulated rate of return and decrease
the cost of capital.
• Investing in integrated planning and a modernized grid, including a delivery model to incorporate asynchronous anddistributed generation.
• Growing their asset base and explore diversification opportunities.

BOSTON CONSULTING GROUP

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IOCs in particular have an obligation to:• Continuously deliver above market performance and return value to investors• Balance capital allocation between strategic ‘big bets’ such as power or mobility, option
plays in less mature low carbon businesses, and legacy businesses required to fund thetransition• Deliver on ambitious decarbonization targets within agreed timeframes
Unprecedented strategic uncertainty means it is important for companies to build optionality into their portfolio management and capital allocation practices. In addition to self-funded organic growth, companies are pursuing a range of pathways to build new energy positions while leveraging expertise and minimizing exposure. These include M&A, joint
ventures, and strategic alliances.

Sustain performance in the face of increasing headwinds
Irrespective of the pathways a company choses to prioritize, strong headwinds will threaten
its ability to deliver sustained results. These are industry-wide trends that all energy companies must find ways to navigate:• Declining talent pipeline for both traditional and new businesses. Degrees held by workers
and unemployment levels in extractive industries are both at their lowest levels since 2006.
These industries have also seen a 90% decrease in job seekers between 2019 and 2022.
• Growing organizational complexity. Companies have been addressing external complexity
by bolting on new business units. The result is cumbersome organizational structures anddecision making processes.
• Rising cost base combined with increased commodity volatility. Annual Brent price swings
have widened since 2019, reaching $44/bbl in 2022 and challenging M&A fair value agreements and upstream investment.
• Declining resilience to supply chain, regulatory, and geopolitical shocks. Sustained underinvestment in supply chains since 2014, combined with repeated cost and environmental
shocks, have undermined resilience across the board.
Today’s increasingly uncertain reality demands that companies find ways to do business thatbuild resilience. Yet few are equipped with the tools needed to make this transformation.

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ENERGY TRANSITION TRANSFORMATION

“

Aligning purpose, strategy
and executional certainty
via an effective operating
model is essential to sustain
competitive performanceImportance of a holistic approachTo meet these two challenges – simultaneously balancing competing demands while
sustaining performance despite rising headwinds – companies must adopt a holistic
approach that integrates an inclusive and compelling purpose with a clearly articulated strategy and robust performance agenda. Such an approach helps leaders manage key
tradeoffs and create the right organizational context to efficiently execute their strategy. It
begins with defining and aligning organizations’ ‘Why’, ‘What’ and ‘How’ to deliver sustained
results in the face of ongoing uncertainty (Figure 3).

Figure 3 | A holistic approach to integrating purpose, strategy and execution
will deliver sustainable performance against a backdrop of uncertainty
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SUSTAINABLE PERFORMANCE

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ENERGY TRANSITION TRANSFORMATION

Why: purpose and vision
The why establishes the company’s purpose for existence and defines the vision for where itis headed. These elements are essential as they provide an authentic foundation for thechanges that are needed to thrive in a new, lower carbon reality. The Brighthouse Productivity Index suggests that helping people understand why what they do matters energizes themand results in 2.25x more productivity. Purpose also makes change personal and is the required foundation for a transformation to take root.
One North American oil and gas player applied this principle to an enterprise-level transformation. The company faced issues in connecting prior business unit transformations to an
overall change agenda and operationalizing this broader agenda to improve performance.
Leaders decided to ground the company’s transformation in its vision of being the producer
and supplier of choice. They equipped leaders throughout the organization with the rightcommunications and tools to align employees and drive changes across upstream, downstream, midstream and corporate functions. This shared consistency of purpose helped todeliver $4bn in additional value across more than 5,000 separate initiatives.

What: strategy, performance expectations, and energy transition plan
The ‘what’ defines the path forward to achieve the company’s stated purpose and vision. Mapping this path requires companies to understand and balance trade-offs across the enterpriseand to develop a clear strategy and performance agenda. The what should encompass:• A dynamic strategy that reflects the company’s purpose and vision and is ‘always on’
to allow agile response to high levels of uncertainty and change (e.g., dynamic portfolio
management / capital allocation processes).
• Mechanisms to ensure competitive performance, including challenging and specifictargets informed by external benchmarks and allowing leaders to make trade-offs between
parts of the value chain.
• A substantive plan for energy transition including placing strategic bets, setting up option plays, and balancing investment between new business models and the core operations needed to fund the transition.
Companies that do this well are able to deliver market-leading shareholder returns, resilientbusiness models and sustainable results. One example is a North American power andutility company that was seeking to reduce costs and optimize its operational design in
response to activist pressure to improve efficiency. They developed a strategy considering
trade-offs and identifying a winning combination of growth activities, policy changes and cost
reduction opportunities supported by clear targets for operational, cost and capital performance improvements. The company was able to deliver close to $500M in efficiencies andimprove its competitive performance.

BOSTON CONSULTING GROUP

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How: talent, organizational context, and execution
Having a winning strategy is not enough. Companies also need to design the right organization and operating model to deliver it. This ‘how’ is often the most difficult element to getright. Many companies struggle to tailor the traditional businesses operating model required
to fund the transition while also capturing new, low-carbon opportunities. These opportunities have very different risk and return profiles and require different skills and capabilities to
execute. An effective how hinges on the company’s ability to secure or develop:• Leading talent with the right capabilities. Such a talent pool requires a combination of
upskilling, reskilling, and market sourcing, as well as leaders that are aligned on the company’s purpose and role model desired behaviors.
• An advantageous operating model, reflecting fit-for-purpose organization design, clear
performance management (with goals and incentives aligned at the highest level and cascaded through the organization), efficient processes executed by cross-functional teams,
and streamlined, agile decision making to monetize low carbon opportunities in a fastpaced market.
• Culture and behaviors that are clearly articulated and tied to company purpose. These
are activated by the leaders and teams driving performance and must be embedded sustainably throughout the organization.
• Executional certainty delivered through a high-powered transformation team equippedwith the right processes and tools to ensure rigor in the transformation while also providing human-centered change management (i.e., focusing not just on the business but on
the people who support it).
A UK-based upstream independent applied many of these elements in their operating model transformation. The company is an efficient North Sea operator looking to sustain asteady cash flow from its asset base and expand its portfolio. To deliver on this strategy thecompany revisited its organizational design based on a campaign approach1 and defined atransformation plan including change management and upskilling requirements. A dedicated and empowered Transformation Management Office increased executional certainty. As
a result, the company is expected to deliver ~$30M in annual savings from contract labour
reductions with 15-20% of roles optimized through multi-skilling.

1. A campaign approach refers to moving from a scheduled inspection and maintenance regime delivered byoffshore personnel to a targeted campaign of maintenance delivered by a dedicated crew who move between
facilities to complete a pre-agreed scope of work. It can be applied to both traditional oil and gas andrenewables assets / operations.

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ENERGY TRANSITION TRANSFORMATION

Benefits will depend in parton transformation context

C

ompanies that move quickly towards a holistic, always-on approach to integrating
purpose, strategy and execution will deliver sustained performance that defends
against existential threats while positioning themselves to take advantage of future
opportunities (Figure 4).

Figure 4 | Examples of major existential threats and future opportunities

Defending against existential threats

Positioning for future opportunities

Stranded assets with inaccessible capitalsavings from fit-for-purpose
25-40% Cost
operating models and digitization

Non-competitive cost position along the
supply curve+10%

Employee satisfaction from new ways
of working

Undervalued by the market where some of theparts greater than enterprise value

30-40%

Faster decision making from streamlined
and clear processes

Source: BCG case experience

BOSTON CONSULTING GROUP

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However, it is important to acknowledge that every company will start from a different position and must design the right transformation for its unique context. We can think of thisperformance context and associated priorities in terms of archetypes: ‘good to great’; ‘fit to
grow’; and ‘crisis to resilience’ (Figure 5).
• Companies that are performing well today with no cash flow or earnings issues but with astrategic need to transform should consider taking a ‘good to great’ approach. This focuseson enhancing their maturity and capabilities to enable future growth in adjacent sectors
like CCUS, hydrogen and biofuels that position them for differentiation and leadership.
• Other companies with less pressing cash or financial issues should take a ‘fit to grow’approach to recover and position for long-term growth and capability building. This starts
with developing and delivering on strategic priorities (e.g., climate action, growth agenda)
to satisfy investors while looking to enhance capabilities for future growth opportunities.
• Some companies are in crisis mode, facing activist challenges, reputational issues or having to quickly address short term liquidity needs. For these companies the primary focus
should be on moving from ‘crisis to resilience’ using restructuring, zero-based budgeting,digital/genAI tools, etc. to restore financial performance and create capacity and resources
to invest for the future

Figure 5 | Performance context and timeframe orientation inform
transformation priorities
Transformation archetypes• Strong cash position• Strategic need to transform,
no current liquidity or
earnings issues• Focus on capabilities andgrowth• Address earnings/ liquidity
issues first• Then position for long-term
growth and capability
building

Business as usual

Crisis to Resilience

ta
No

io
at
rm
fo
s
n
tra

n

• Long term strategy is robust• May be liquidity issues(more severe) and/or
earnings issues (less severe)

Low
Low

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Urgency to deliver near-term
breakthrough valueHigh(e.g., EVP, ways of working, culture

Good to GreatFit to Grow

Improving Maturity and Capabilities(e.g., tech-led digital/Al transformation
Fit to Grow

Need/desire tobuild long-term
resilience

Reimagining Employee Experiences

Good to Great

Crisis to ResilienceHigh

Typical transformations given archetype

Developing and Delivering On Strategic Priorities(e.g., Climate action, growth agenda, portfolio, strategy)

Creating Capacity and Resources to Invest(e.g., cost-out, zero-based budgeting)

Restoring Financial Performance(e.g., (di)stressed, restructuring, insolvency situations)

ENERGY TRANSITION TRANSFORMATION

Transformation is daunting
but doableFacing this new, uncertain reality can be daunting for energy companies, as they must
strike a delicate balance between delivering on their climate and sustainability commitments and maximizing market returns. However, a tailored approach that addresses thewhy, what and how of a transition transformation can facilitate the process and build resilience for a fast-paced and uncertain future. With a holistic and dynamic ‘always-on’ approach, companies can successfully navigate the difficult trade-offs that are inherent in theenergy transition and position themselves to win in the future.

BOSTON CONSULTING GROUP

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About the Authors
Stephanie Del Carpio (lead) is an Associate Director based in London.
DelCarpio.Stephanie@bcg.com
Kenny Kurtzman is a Managing Director and Partner based in Houston.
Kurtzman.Kenny@bcg.com
Ming Teck Kong is a Managing Director and Partner based in Singapore.
Andrea Ostby Syth is a Managing Director and Partner based in San Francisco.
Syth.Andrea@bcg.com
Prashant Mehrotra is a Managing Director and Partner based in Houston.
Mehrotra.Prashant@bcg.com
Tom Steiner is a Project Leader based in Houston.
Steiner.Tom@bcg.com

For Further Contact
If you would like to discuss this report, please contact the authors.

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