Environmentally Sustainable GCC Petrochemicals

Environmentally Sustainable
GCC Petrochemicals
Gateway to growth or just a mirage?
I
s the chemical manufacturing industry about to enter a new era of
intense global competitiveness? This is the hope of many Gulf petrochemical manufacturers. With easy access to inexpensive feedstock
and increasingly sophisticated processes and personnel, they could
penetrate bigger global markets, increase market share, and move
beyond their traditional focus on the CHIMEA region — China, India,
Middle East and Africa. Yet with globalization comes new challenges.
As the GCC petrochemicals industry competes with multinational players worldwide, environmental and sustainability issues are poised to
become important competitive differentiators.
Globalization in the Gulf Cooperation Council
(GCC) petrochemicals industry is set to bring
exciting new possibilities, but also new challenges.
One challenge that playing in a globally competitive field brings is new standards of conduct or
minimum requirements. An example is sustainability, an issue that many Gulf petrochemical
manufacturers may have overlooked. In the past,
downplaying the importance of sustainability was
understandable. After all, why would it matter to
an industry that so heavily relies on nonrenewable,
hydrocarbon-based feedstock? As sustainability
gains traction among customers, shareholders,
and mainstream media outlets, however, all companies in all regions face twin questions: What
does sustainability mean for our company? Could
committed environmental responsibility actually
lead to growth? In the Middle East, the prospect
of competing with multinational players gives
these questions urgency, because despite inherent
cost disadvantages, the multinationals have had
some success with sustainability strategies. So will
environmental initiatives be a competitive differentiator? If so, is it possible to overcome the multinationals’ lead — or is it pointless to even try?
This paper provides an overview of sustainability as it relates to GCC petrochemical manufacturers, an outline of three tangible sources of
value that can result from stronger environmental
stewardship practices, and a brief overview of
a five-pronged plan to develop a sustainability
strategy that is both environmentally and economically responsible.
The “Triple Bottom Line”
Worldwide, the chemical manufacturing industry
contributes 5 percent of total greenhouse gas emissions and represents 10 percent of nonrenewable
resource consumption (including oil, gas and coal)
according to the International Energy Agency
(IEA). As the world becomes increasingly concerned about climate change and begins shifting
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consumption to more renewable resources, petrochemical manufacturers will either be seen as
contributors
to
a growing problem or leaders in mitigating a global
environmental crisis.
Although “sustainability” can be an elusive
term, long-accepted sources define sustainable
business development as “adopting business strategies and activities that meet the needs of the
enterprise and its stakeholders today while protecting, sustaining and enhancing the human and
natural resources that will be needed in the
future.”1 In this region and industry, prevailing
natural resource concerns focus on oil and gas.2
Using less oil or gas today will leave more available
for future generations. Additional resource issues
to be concerned about include emissions of
greenhouse gases (those suspected of contributing
to warming the earth’s surface, including water
vapor, carbon dioxide, nitrous oxide, methane
and ozone), electricity (can it be shifted from
non-renewables such as oil or gas to renewables
such as wind or solar?) and water conservation
(a strong concern in GCC countries).
Sustainability advocates often sum it up as
a quest for triple-bottom-line growth (see figure 1).
Note that with the triple bottom line, limiting
environmental impacts is just one component of
a sustainability strategy. Another is economic
development: An environmental initiative that
subtracts from an organization’s profit is not in
fact sustainable, because the organization cannot
afford to sustain it. Indeed, it should contribute
to shareholder returns by cutting costs or increasing revenues. Social well-being also plays a role,
with issues such as maximizing worker health and
safety and minimizing toxic spills and other
impacts on the community. For many companies,
addressing these issues supports their right to
operate. In the GCC region, the role of the petro1
2
2
chemical industry in job creation and links to
downstream industry developments are of utmost
importance and, as such, are major contributors
to sustainability.
Obviously, the three components of the triple
bottom line potentially conflict. Critics contend
that seeking to balance them—or merely talking
about seeking to balance them — is little more
than a passing fad. But many leading global
companies, including chemical companies, have
embraced sustainability. They have done so in spite
of the lingering effects of the global financial crisis.
Indeed, the successful ones have used sustainability
as a principal differentiator for all stakeholders:
• Investors reward a sustainability focus because
it represents long term value and low risk.
• Customers seek sustainable products and services because of their own commitments and
because sustainability signifies an ethical way of
Figure 1
The triple bottom line creates competitive
advantage
Economic
development
(impact on shareholder returns)
Growth and
environment
Efficiency
and society
Area of
maximum
benefit
Environmental
protection
(impact on the
environment)
Environment
and welfare
Social
well-being
(impact on society)
Source: International Institute for Sustainable Development, et al., 1992. Business
Strategy for Sustainable Development: Leadership and Accountability for the 90s.
International Institute for Sustainable Development, et al., 1992. Business Strategy for Sustainable Development: Leadership and Accountability for the 90s.
See CHIMEA: A Global Trading Force and Petrochemicals Hub at www.atkearney.com
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doing business.
• Employees like to know that their work has
a broader purpose.
• The public favors companies that show true leadership in seeking solutions to global problems.
Sustainability: Three Paths to Value
Focusing on sustainability has led to measurable
results. An A.T. Kearney analysis of companies
with varied levels of commitment to sustainability
found a compelling correlation between sustainable practices and positive stock performance.
Within the chemicals industry in particular, the
stock price of sustainability-focused manufacturers out-performed peer companies by 7 percent
between January 2008 and June 2009. (From
May to November of 2008 — the heart of the
economic crisis—the differential was 30 percent.)
Although other factors may have contributed, it
seems likely that investors are rewarding these
companies out of a belief that a sustainability
focus implies stronger corporate governance mechanisms and better risk-management processes than
their peers.3 Or, to put it more bluntly, investors
see that sustainability can create value.
Sustainability remains top-of-mind because
many companies worldwide have used it to generate top-line growth while simultaneously cutting
costs to achieve meaningful bottom-line returns.
In other words, when it works, sustainability is
not only about environmental benefits, but it’s
also about profitability. Regional industry players
are already recognizing the potential of sustainability within the petrochemicals industry. The
value from sustainability will likely come from
one or more of the following three paths:
Cost reduction. Any company determined to
reduce its negative environmental impact must
start by benchmarking and tracking resource use,
waste and greenhouse gas emissions. A chemical
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manufacturer undertaking such an effort would
become more disciplined and familiar with every
detail of its supply chain and production processes.
Sustainability improvement opportunities — in
manufacturing processes, energy efficiency, logistics, risk management and other capabilities —
naturally lead to cost reduction. But viewing
such improvements through a “sustainability lens”
often uncovers cost savings that might otherwise
go unrecognized.
In the most obvious example, when a company rethinks its manufacturing processes or
develops a more efficient catalyst to use fewer
inputs (feedstock, energy, water, among others),
it ends up saving money on those inputs. These
process improvements have been a tremendous
source of value for U.S. and European chemical
companies — which, after all, pay much more
than Middle Eastern companies for feedstock.
Such improvements can drive further profits to
Gulf companies’ bottom lines while simultaneously preparing them for a possible future of
increasing prices for basic inputs. Companies are
already fighting for access to stock, and Middle
Eastern governments are finding it difficult to
balance fuel for exports, electricity and petrochemical production while also complying with
global petroleum trade rules. Improved efficiency
may also be an effective argument in convincing
governments to increase allocations of stock.
Several Gulf petrochemical manufacturers
have already begun sustainability-driven costreduction initiatives. In general, we can classify
these activities into the following four categories:
Improve internal manufacturing process to
optimize yields. As noted above, companies can
increase yield from chemical feedstock with the
use of new processes, equipment or more efficient
catalysts (that can also be greener using bioprocesses). Increasing the amount of final product
See Chemical Company Targets: Agility, Risk, Sustainability and “Green” Winners: The Performance of Sustainability-Focused Companies During
the Financial Crisis at www.atkearney.com.
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that can be created from the same input of feedstock is a critical sustainability lever. Some examples undertaken by Gulf companies include the
adoption of zero- or minimum-effluent processes
using an environmental management system
based on the ISO 14001 and ISO 9001 standards
Reduce waste from the process of direct
and indirect inputs. The use of pollution-control
facilities—including wastewater treatment plants,
waste collection and disposal mechanisms, and
plants designed to minimize air emissions—will
reduce the waste of direct and indirect inputs.
Sample waste management activities undertaken
in the region include recovering noble metals,
recycling used oil and using dust from industrial
air filters (baghouse dust) in concrete cement.
As the Gulf is a water-stressed region, several
companies are also promoting water efficiency via
minimization, recovery and recycling.
Increase energy efficiency. Utility expenses
can be reduced by cutting usage of secondary
energy through improved operating efficiency,
cogeneration, and integrating electricity from
internally generated solar, wind or geothermal
sources, among other steps. Energy conservation
measures are applicable not only to the core processes but also to relevant indirect energy usage
(such as lighting and HVAC equipment).
Improve supply chain efficiency. While the
above levers concentrate on operations within manufacturing facilities, a sustainability strategy can
also help improve supply chain efficiency and
reduce net consumer costs. Indeed, optimizing an
entire supply chain network can eliminate logistics
and transportation costs, rationalize assets and
facilities, improve demand forecasting and determine use of more energy-efficient transportation
modes. A comprehensive supply chain sustainability strategy uses advanced scheduling to minimize
transportation trips and optimize routes — thus
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having a direct impact on a manufacturer’s environmental footprint—and addresses ways to reduce
penalties and fines within environmentally regulated markets. While the benefits may not appear
crucial today, they will become more relevant as
Gulf companies become more global.
Brand enhancement. Sustainability can be an
attribute for investors, customers and the public.
Some influential stakeholders view a company’s
environmental practices as a proxy for corporate
attributes that are otherwise difficult to quantify.
For example, investors may view a company’s sustainability practices as an indicator of the quality
of its corporate governance, risk management and
customer responsiveness.
Sustainability can also be a vehicle to build
brand loyalty. Petrochemical-based products often
bear the brunt of public criticism regarding environmental and biological impacts. Thus a company could mitigate some of the brand risks that
accompany this increased public scrutiny by
making a strong commitment to — and measuring progress toward — reducing its environmental
impacts. In a global study by A.T. Kearney and
the Institute for Supply ManagementTM (ISM),
we found that most companies develop their sustainability strategies with an eye toward building
their brands, improving their reputations or differentiating their products.4 Of executives surveyed,
54 percent said their sustainability strategies were
geared toward improving a brand’s appeal or reputation and 50 percent said their strategies were to
differentiate their products from competitors. As
the CEO of SABIC, Mohamed H Al-Mady, said
in a recent interview, “Sustainability will enhance
our long-term competitive edge and global reputation, while differentiating us in the minds of
customers and fueling our growth engine.”5
Finally, for some companies, sustainability represents a corporate social responsibility, enhancing
See “Chain Reaction” at www.atkearney.com.
“Sustainability: Changing the Business Landscape,” SABIC Magazine, Issue 95, January/February 2010.
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the brand by demonstrating an ability to be an
upstanding corporate citizen and giving back to
the community. One regional example is Borouge,
which co-founded the global Water for the World
program (www.waterfortheworld.net).
Revenue generation. Perhaps the most significant source of potential value from sustainability—
although arguably also the hardest to attain—is the
promise of harnessing customers’ interest in sustainability to generate new revenues. We can classify
these opportunities into three categories:
Develop new products. Because many endconsumers are concerned about making a smaller
impact on the planet, companies that serve them
are seeking to design products that meet those
needs. These new products need new inputs. For
example, to improve fuel efficiency, automobile
manufacturers are increasingly looking for lightweight components. A petrochemicals manufacturer that can contribute to lighter-weight plastics
will open a potentially large new revenue stream.
Likewise, many manufacturers are seeking products with higher recyclability or lower greenhouse
gas emissions (perhaps made with alternative
feedstock). In any industry, one of the surest ways
to grow revenues is to develop new products that
meet current demands — and today’s demands
center on sustainability.
Innovation and new product development
require a deep understanding of customer needs,
internal capabilities and resources. Consider Dow.
Its corporate mission statement is “To passionately
innovate what is essential to human progress by
providing sustainable solutions to our customers.”6
Its innovations have included the Powerhouse
solar shingle (named among Time’s top 50 Best
Innovations of 2009), omega-9 oils from canola
and sunflower seeds, the world’s largest bioderived plastics facility (in Brazil), and work on
next-generation high-power battery technology
6
(supported by a $161 million U.S. government
grant). Not all of these innovations will succeed;
some may even drag down short-term performance. But the sustainability focus offers promise
of significant long-term revenues.
Create competitive differentiation. As players at the top of the multinational product value
chain — such as Wal-Mart — embrace sustainability, they are realizing they are only as sustainable
as their supply chains and the products they sell.
Thus they are starting to demand, and pay for,
more active environmental footprint management
from their suppliers. The resulting trickle-down
effect to tier 1 and 2+ suppliers is causing
a massive scramble to find the most strategic and
cost-effective solutions to improve sustainability.
Petrochemical manufacturers with a sustainability
focus can provide added value to their customers
in the form of clear improvements in environmental measures. These companies can use this
added value as a differentiator to crack particularly difficult accounts — which, we believe, are
likely to increase in number.
Leverage downstream pricing. Gulf petrochemical companies are strategically positioned as
key suppliers to some of the world’s largest, most
resource-intensive and environmentally effective
industries. For example, petrochemicals are critical
inputs to the housing and transportation industries,
which emit 15 percent and 10 percent of global
greenhouse gas emissions, respectively, according to
the IEA. As these customers (and end-consumers)
demand access to environmentally sustainable solutions, petrochemical manufacturers have an opportunity to extract premium pricing for products that
reduce downstream greenhouse gas emissions and
other negative environmental impacts.
Globally, BASF is a leader in quantifying the
downstream benefits of a sustainability initiative.
It conducts eco-efficiency analyses that sum up the
http://www.dow.com/about/aboutdow/vision.htm.
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ecological impacts of a product or process across
its entire life cycle, allowing BASF customers and
end-consumers to weigh costs and impacts for
themselves. Most impressively, BASF regularly
compiles details of its carbon footprint and
recently used them to show that the savings in
greenhouse gas emissions from customers using
BASF products outweigh by a ratio of 3 to 1 the
emissions caused during production and disposal.7
This example and others used in this paper
are from global companies based outside of the
Middle East. The reason? Until recently, very few
Gulf companies have embraced sustainability
efforts. Is this because Gulf companies care less
about the environment or have not put enough
effort into sustainability? Not at all. Rather, to
achieve these sorts of meaningful revenue increases,
sustainability efforts must be elevated to the strategic level. If sustainability is going to drive future
growth—rather than merely helping company
stakeholders feel better about their place in the
environment—sustainability must be meaningfully incorporated into the highest levels of corporate strategy and corporate culture.
Prepare for the Future
When it comes to determining an appropriate path
forward, there is no one-size-fits-all approach to
sustainability any more than there is a single right
answer to any other business question. Some petrochemical manufacturers will benefit from getting
ahead of the curve and reaping the rewards. Others
will recognize that, for them, these rewards are not
attainable in the near term. Some may choose to
grab instead the low-hanging fruit of energy efficiency, waste reduction and many other fairly easy
sustainability decisions; others may conclude that
the prudent path is to continue the status quo.
For all companies, the key is to align all corporate environmental initiatives with corporate
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strategy and the creation of shareholder value. Just
as corporate strategy takes into account a firm’s
position in the value chain, competitive positioning, and brand differentiators so must sustainability. Without this link, sustainability initiatives
tend to be “knee-jerk” reactions or marketing fluff,
offering only lip service to sustainability goals.
The key to moving forward is to make the most
informed and strategically aligned decision, based
on current operations and an analysis of environmental sustainability trends.
As a simple guide to this process, we’ve
mapped the three value drivers in the previous
section against three sustainability scenarios that
might represent one company’s situation — now
or in the future. As figure 2 illustrates, the potential value of a sustainability focus increases with
the increased appetite for sustainability. Thus
Company X may perceive that for its market, sustainability is in the early stages (the green shoots
scenario), with little green-product market potential or regulatory threat. Thus Company X should
require that any investments in sustainability be
justified with tangible cost savings and quantifiable marketing impact. Such a strategy may lead
to results in the form of lower costs through production efficiencies, or it may lead to a continuation of the status quo. Either way, the payback is
not very large, but it has required little investment
or risk.
By comparison, Company Y might see expanding green markets (the growing greener scenario)
and may therefore seek to capture additional value
through brand enhancement. Brand-related sustainability initiatives may require larger investments and are likely to be harder to quantify, but
they represent potentially larger returns due to
increased revenues and cost reductions. Finally,
Company Z (or perhaps Company Y looking
five years into the future) may see the sustainability
www.basf.com
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revolution scenario and thus want to invest heavily
in new environmentally friendly products because
of their long-term potential.
In short, a decision regarding sustainability
depends on where the company is in the sustainability spectrum. The following is a brief overview
of our five-pronged sustainability plan, designed to
help develop a sustainability strategy that is both
environmentally and economically responsible:
1. Assess future-state scenarios. What is (will
be) the market for sustainable products? Does the
company operate in areas that may be subject to
increased regulation? Does the company have certain capabilities, such as intimate knowledge of its
customers’ needs, to take advantage of changing
trends? The degree to which the answer to these
and other questions is “yes” (moving rightward
in figure 2) will suggest the degree to which the
company should invest in a sustainability strategy.
2. Align sustainability concerns with the corporate strategy. After assessing likely future-state
scenarios and understanding which values could
turn into opportunities, we then gauge how they
fit against the company’s competitive dynamics. Is
the company an innovative leader with a strong
consumer brand linked to its reputation? Or is it
a virtual unknown to the masses, producing at
earlier stages in the value chain? Does the company’s strategy center on lowest-cost basic materials?
Or does it provide customers with the products
they need (sometimes even before they know what
they need)? The answers will determine how to
gain maximum value from a sustainability strategy.
For some firms, significant investment, industry
leadership and public commitment to sustainability will reap valuable rewards. For others, such
actions would stray from their core strategies and
what their customers need.
Figure 2
As market appetite for sustainability increases, so does the value of sustainability
Green shoots
Value drivers
Growing greener
Sustainability
revolution
Revenue generation
• Create new enviro-friendly products
• Strengthen pricing position
• Develop new revenue streams
Brand enhancement
• Improve competitive differentiation
• Increase positive messaging
Cost reduction
• Eliminate waste
• Improve production efficiencies
• Increase regulatory compliance
Low
Source: A.T. Kearney analysis
Petrochemicals market appetite for sustainability
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High
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3. Assess current sustainability efforts. Here a
company’s sustainability baseline against industry
benchmarks is determined. How do current sustainability initiatives stack up against the new sustainability strategy and against world-class efforts?
4. Prioritize future efforts. Armed with an
analysis, several potential types of sustainability initiatives will emerge. Now we analyze and compare
costs and benefits of the various initiatives to determine which ones offer the most significant returns.
5. Execute. With the top priority sustainability initiatives identified, the next step is to establish
a program-management office to pursue them. It is
important to establish key performance indicators
(KPIs) right from the start to measure and demonstrate success, such as greenhouse gases per metric
ton of product or percentage of materials used that
are recycled input materials. After all, “what gets
measured gets managed.”
This five-pronged plan is not simple. It
involves self-examination and debate by company
leadership, which must then be complemented
by ongoing industry, competitor and value chain
analyses. But the result will likely be a profitable
and sustainable path to future growth.
Gateway to Growth
The petrochemicals industry is clearly preparing
for a new era of intense global competition in
which environmental initiatives and sustainability
could be a tremendous source of value. Three
paths to this value exist—reducing costs, increasing brand value and generating revenues — but
choosing which (if any) of these paths to take
requires weighing the value of sustainability against
corporate goals. If the two are ill-matched, it is
wiser to do nothing than to invest in meaningless
gestures. If there is a potential match, however,
there is value in capitalizing on customers’ and
investors’ interests in alleviating environmental
risks. Above all, it is important to remember that
sustainability initiatives generate true success only
when they are fully and meaningfully integrated
into corporate strategy. In this way, sustainability
can be the gateway to growth for the Middle East’s
petrochemicals industry.
Authors
Louis Besland is a partner in the oil, gas and energy practice. Based in the Dubai office, he can be reached
at louis.besland@atkearney.com.
Jamie Ponce is a consultant in the oil, gas and energy practice. Based in the Dubai office, he can be reached
at jamie.ponce@atkearney.com.
Howard Connell is a consultant in the oil, gas and energy practice. Based in the Atlanta office, he can be reached
at howard.connell@atkearney.com.
Ojas Wadivkar is a consultant in the oil, gas and energy practice. Based in the Dubai office, he can be reached
at ojas.wadivkar@atkearney.com.
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