Diversifying into innovative product categories provides a platform for sustainable growth
A major oil and gas company was coming under increasing government and public pressure to commit to more sustainable forms of development. It decided to embark on a comprehensive green growth strategy that involved two key types of green products: chemicals made from renewable feedstocks, such as bioplastics, and materials that would help users reduce their carbon footprint and energy requirements, such as insulation materials.
This was an entirely new venture for the company, and so it asked McKinsey to help it assess growth options in these areas, identify the capabilities it would need to capture them, and develop a detailed implementation plan.
Together with the client team, we conducted a detailed opportunity screening of chemicals that could be produced from renewable resources, including biofuels from biomass, oleochemicals, bioplastics, and oils from algae. We also screened chemicals that could help reduce energy and carbon emissions, such as lightweight materials for cars, insulation materials, and chemicals for electric vehicle batteries. The team identified more than 150 materials that could both be produced economically and offer significant growth opportunities over the next 10 years.
In the first phase of the project, which lasted for about four weeks, we helped the client prioritize the main areas for growth, which included automotive, health and nutrition, packaging, and construction. We also worked together to develop a list of carbon abatement ideas using renewable chemicals.
To assess market potential, we used a modeling tool to explore whether bio-based materials could compete with their petrochemical-based equivalents. This established, for instance, that certain bioplastics produced from biomass would be competitive with fossil-based alternatives if long-term oil prices rose above $70 to $80 per barrel and biomass could be purchased for $20 to $30 per tonne. We then helped the client develop a portfolio of business initiatives that took into account the attractiveness of individual markets in terms of size, growth, and margins, and the client’s distinctive profile in terms of capabilities, assets, market access, and partnerships.
In the second phase, which took another four weeks, we worked with the client to draw up a business-building strategy in green chemicals covering the next 10 years. This included a detailed implementation plan setting out investment requirements, a survey of potential acquisition targets, and an analysis of the capabilities the client would need to manage the growth of the new business.
Just two days after the last steering committee meeting, the company announced its new aspirations to the press. It outlined plans to spend $500 million per year in green capital expenditures, including carbon abatement measures to improve its own energy consumption.
Six months later, the client had already spent more than $500 million and had completed three acquisitions of leading companies identified by the project team. It had also announced a major investment in building a new bioplastics joint venture. The McKinsey team helped to conduct due diligence on several of the targets that the client was looking to purchase.
The company was applauded by the government for its innovative strategy to develop renewable and environmentally friendly materials, and received a great deal of positive coverage in the press – a rare event for companies in the petrochemicals business.