sustrainability

Environmentally Sustainable GCC PetrochemicalsGateway to growth or just a mirage?

ENVIRONMENTALLY SUSTAINABLE GCC PETROCHEMICALS | A.T. Kearney 1

Is the chemical manufacturing industry about to enter a new era of intense global competitiveness? This is the hope of many Gulf petro-chemical 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 play-ers 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 competi-tive field brings is new standards of conduct or minimum requirements. An example is sustain-ability, 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 com-panies 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 differ-entiator? If so, is it possible to overcome the multi-nationals’ lead—or is it pointless to even try? This paper provides an overview of sustain-ability as it relates to GCC petrochemical manu-facturers, 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 eco-nomically responsible.

The “Triple Bottom Line”Worldwide, the chemical manufacturing industry contributes 5 percent of total greenhouse gas emis-sions 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 con-cerned about climate change and begins shifting

ENVIRONMENTALLY SUSTAINABLE GCC PETROCHEMICALS | A.T. Kearney2

consumption to more renewable resources, petro-chemical 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 strat-egies and activities that meet the needs of the enterprise and its stakeholders today while pro-tecting, 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 increas-ing 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 petro-

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 ser-

vices because of their own commitments and because sustainability signifies an ethical way of

Figure 1The triple bottom line creates competitive advantage

Source: International Institute for Sustainable Development, et al., 1992. Business Strategy for Sustainable Development: Leadership and Accountability for the 90s.

Economicdevelopment

(impact on shareholder returns)

Environmentalprotection

(impact on theenvironment)

Socialwell-being

(impact on society)Environmentand welfare

Growth andenvironment

Efficiencyand society

Area of maximum

benefit

1 International Institute for Sustainable Development, et al., 1992. Business Strategy for Sustainable Development: Leadership and Accountability for the 90s. 2 See CHIMEA: A Global Trading Force and Petrochemicals Hub at www.atkearney.com


doing business.• Employees like to know that their work has

a broader purpose.• Thepublic favors companies that show true lead-

ership in seeking solutions to global problems.

Sustainability: Three Paths to ValueFocusing 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 sustain-able practices and positive stock performance. Within the chemicals industry in particular, the stock price of sustainability-focused manufactur-ers 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 mech-anisms 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 gener-ate 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 sustain-ability 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

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, logis-tics, 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 com-pany 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 simultane-ously 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 petro-chemical 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 cost- reduction 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 biopro-cesses). Increasing the amount of final product

3 See Chemical Company Targets: Agility, Risk, Sustainability and “Green” Winners: The Performance of Sustainability-Focused Companies During the Financial Crisis at www.atkearney.com.


that can be created from the same input of feed-stock is a critical sustainability lever. Some exam-ples 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 pro-cesses 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 man-ufacturing 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 deter-mine use of more energy-efficient transportation modes. A comprehensive supply chain sustainabil-ity strategy uses advanced scheduling to minimize transportation trips and optimize routes—thus

having a direct impact on a manufacturer’s environ-mental footprint—and addresses ways to reduce penalties and fines within environmentally regu-lated 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 sus-tainability 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 envi-ronmental and biological impacts. Thus a com-pany could mitigate some of the brand risks that accompany this increased public scrutiny by making a strong commitment to—and measur-ing 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 sus-tainability strategies with an eye toward building their brands, improving their reputations or differ-entiating their products.4 Of executives surveyed, 54 percent said their sustainability strategies were geared toward improving a brand’s appeal or repu-tation 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 repu-tation, while differentiating us in the minds of customers and fueling our growth engine.”5

Finally, for some companies, sustainability rep-resents a corporate social responsibility, enhancing

4 See “Chain Reaction” at www.atkearney.com.5 “Sustainability: Changing the Business Landscape,” SABIC Magazine, Issue 95, January/February 2010.


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 signifi-cant source of potential value from sustainability—although arguably also the hardest to attain—is the promise of harnessing customers’ interest in sus-tainability to generate new revenues. We can classify these opportunities into three categories: Develop new products. Because many end- consumers 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 light-weight components. A petrochemicals manufac-turer that can contribute to lighter-weight plastics will open a potentially large new revenue stream. Likewise, many manufacturers are seeking prod-ucts 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 bio-derived plastics facility (in Brazil), and work on next-generation high-power battery technology

(supported by a $161 million U.S. government grant). Not all of these innovations will succeed; some may even drag down short-term perfor-mance. But the sustainability focus offers promise of significant long-term revenues. Create competitive differentiation. As play-ers at the top of the multinational product value chain—such as Wal-Mart—embrace sustainabil-ity, 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 environ-mental measures. These companies can use this added value as a differentiator to crack particu-larly difficult accounts—which, we believe, are likely to increase in number. Leverage downstream pricing. Gulf petro-chemical 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 solu-tions, petrochemical manufacturers have an oppor-tunity 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

6 http://www.dow.com/about/aboutdow/vision.htm.


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 stra-tegic 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 meaning-fully incorporated into the highest levels of corpo-rate strategy and corporate culture.

Prepare for the FutureWhen 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 petro-chemical 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 effi-ciency, 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 cor-porate environmental initiatives with corporate

strategy and the creation of shareholder value. Just as corporate strategy takes into account a firm’s position in the value chain, competitive position-ing, and brand differentiators so must sustainabil-ity. 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 environ-mental 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 poten-tial value of a sustainability focus increases with the increased appetite for sustainability. Thus Company X may perceive that for its market, sus-tainability is in the early stages (the green shoots scenario), with little green-product market poten-tial or regulatory threat. Thus Company X should require that any investments in sustainability be justified with tangible cost savings and quantifi-able marketing impact. Such a strategy may lead to results in the form of lower costs through pro-duction efficiencies, or it may lead to a continua-tion 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 expand-ing green markets (the growing greener scenario) and may therefore seek to capture additional value through brand enhancement. Brand-related sus-tainability initiatives may require larger invest-ments 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

7 www.basf.com


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 sustain-ability 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 cer-tain 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 cor-porate 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 compa-ny’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 sustainabil-ity will reap valuable rewards. For others, such actions would stray from their core strategies and what their customers need.

Figure 2As market appetite for sustainability increases, so does the value of sustainability�

Source: A.T. Kearney analysis

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

Value driversGrowing greenerGreen shoots Sustainability

revolution

Petrochemicals market appetite for sustainabilityLow High


3. Assess current sustainability efforts. Here a company’s sustainability baseline against industry benchmarks is determined. How do current sustain-ability initiatives stack up against the new sustain-ability strategy and against world-class efforts? 4. Prioritize future efforts. Armed with an analysis, several potential types of sustainability ini-tiatives will emerge. Now we analyze and compare costs and benefits of the various initiatives to deter-mine which ones offer the most significant returns. 5. Execute. With the top priority sustainabil-ity 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 demon-strate 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 GrowthThe 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, increas-ing 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 [email protected].

Jamie Ponce is a consultant in the oil, gas and energy practice. Based in the Dubai office, he can be reached at [email protected].

Howard Connell is a consultant in the oil, gas and energy practice. Based in the Atlanta office, he can be reached at [email protected].

Ojas Wadivkar is a consultant in the oil, gas and energy practice. Based in the Dubai office, he can be reached at [email protected].

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