From silos to synergy: Integrating traditional and low-carbon value chains in oil, gas, and chemicals

Commercially enabling these new value chains likely requires a customer-focused mindset and agile operating model. The operating model used in traditional supply-driven petroleum refining, for instance, cannot be directly applied to the demand-driven renewable fuel business. To overcome this incompatibility, companies should consider:

• Discovering which new opportunities might align with existing corporate strategies
• Defining market potential and optimizing synergies
• Developing a robust risk-adjusted commercial plan
• Delivering enterprise-level business outcomes through streamlined decision-making and data-led management systems

At the same time, digital technologies are expected to continue to play a crucial role in identifying new areas of efficiency across value chains, as they have in the past. These technologies could become integral to management’s decision-making around value chain integration. By implementing integrated systems and advanced analytics capabilities, companies could link cost-to-serve data with profit pools, thereby informing complex trade-off decisions and identifying efficiencies along the value chain. This approach can enhance transparency, foster agility to unlock commercial outcomes, and empower decisions that optimize enterprise margins over individual functional silos.

Exploring the nexus

To help improve operational efficiency, the oil, gas, and chemicals industry has made investments in technological advancements, including automation, the Internet of Things, cloud analytics, and data integration, and effectively deployed capital within its portfolios. Deloitte’s analysis of industry metrics shows that over the last five years, the industry’s capital expenditures increased by 19%,² while information technology spending has increased by 26%.³ This has helped improve efficiency and reduce environmental impacts, with US shale operators improving their production output-per-rig from new oil wells by 58% over the last five years.⁴ While the focus of the industry’s digital transformation has largely been on cost reduction and efficiency enhancement, these investments have also improved the environmental impact of the oil and gas (O&G) industry operations, reducing emissions for the top 25 O&G companies by 3% during the same period.⁵ However, these digital advances have likely not yet been fully leveraged to develop new businesses, particularly low-carbon businesses, or to integrate these effectively with existing operations.

Despite the numerous new low-carbon opportunities that exist, Deloitte’s analysis identified the following low-carbon areas, which can be categorized into molecules, materials, electrons, and all (figure 1).

• Molecules: Carbon capture, utilization, and storage; bio-based fuels (such as biofuels, renewable diesel, and sustainable aviation fuel), bioplastics, e-fuels, and hydrogen
• Materials: Advanced materials and critical minerals
• Electrons: Renewable energy and battery storage, including electric vehicles
• Convergence of all: Recycling and circularity initiatives

Although these opportunities might seem diverse at first glance, the potential complexity involved in integrating these opportunities within the traditional value chain might be a barrier to some new entrants. Viewed through the lens of molecules, materials, and electrons, however, the analysis reveals opportunities that can support their integration (figure 2; for a more clearer view of figure, please click here to download the PDF version).

• Dual functionality of feedstock and end product: Many of these opportunities, notably hydrogen, serve a dual role by acting both as fuel and feedstock for other products. Managing such dual functionality is not new to the industry as downstream oil and gas refiners have balanced such considerations with propane and butane that serve as both fuel (liquified petroleum gas) and petrochemical feedstock.⁶
  
• Complexity creates differentiated value: The complexity of value chain integration and its resulting differentiated value is highly variable across the stages of the value chain. Feedstock options now also include co-products and byproducts. Similarly, evolving consumer choices and end-market applications require several niche yet sustainable solutions.
• Enhanced flexibility in feedstock and product selection: Enhanced interconnectivity between existing and new value chains can provide feedstock and product flexibility, including numerous opportunities to switch between product and processes, thereby helping to minimize the exposure to cost and price volatility. One such example is integrating biofuel processing capabilities within existing refining operations, which can help manage the demand challenges for diesel and gasoline, while capitalizing on clean energy incentives such as renewable identification numbers and California’s Low Carbon Fuel Standard.
  
• Multiple circularity loops: Waste and by-products from one process can be repurposed as inputs for another, potentially extending beyond the boundaries of a single facility.
  

A successful integration of new value chains with the existing base business could have the potential to retain the company’s focus not only on functional excellence (for example, sales, finance, marketing, etc.) but also on value chain excellence (for example, business units, products, logistics, etc.). 

A decision framework for integrating new low-carbon opportunities

On the path to a future defined by demand-driven, customer-focused, and seamlessly integrated value chains, each company should craft its own strategy. Finding ways to participate and compete could be considered within a four-stage decision framework with digital technologies reinforcing each stage (figure 3).

1. Discover: Outlining the organization’s ultimate goals and fostering consensus among leadership
2. Define: Uncovering opportunities to lengthen, strengthen, and integrate value chains 
3. Develop: Crafting a competitive, risk-adjusted go-to-market plan
4. Deliver: Accelerating decision-making and business outcomes at the enterprise level 

Discover: Aligning goals with business strategy and fostering consensus among leadership

Applying Deloitte’s “4D framework” to low-carbon business models involves addressing the commercial challenges inherent in new business ventures. Businesses should work to align business goals with corporate strategies, break operational silos by developing an “enterprise-first” mindset, and foster strategic consensus among the leadership. Areas for management to consider include: 

• Conducting frequent decision assessments: While adhering to proven traditional business models might seem like a safe choice, periodic evaluation of decisions or inaction can help gauge if the existing processes are preferred because they are status quo and if newer and better alternatives can be considered.
  
• Integrating innovation across businesses: Rather than isolating innovation within new business areas, management could redefine its guidance on encouraging innovation to also include creating value “between” new and traditional processes.
• Harnessing experience to overcome first-mover disadvantages: The technology landscape is currently changing faster than traditional financial or insurance instruments, introducing additional costs and risks for companies. To navigate these risks, oil, gas, and chemical companies could capitalize on some of their core competencies such as collaboration, risk assessment, and mitigation expertise in large projects, phased implementation, and portfolio diversification and integration.
• Balancing priorities and expectations across time horizons: Companies could benefit from integrating a balanced focus on near-term, mid-term, and long-term priorities into their strategic decision-making, while incorporating scenario planning for varying carbon emission costs in their risk and financial modeling. This can be especially true if the development of these priorities avoids basing expectations about the future of the business on what is true today by instead responding to evolving expectations from stakeholders, including investors.
  
• Broadening regional adaptations: The varied political, economic, and cultural landscapes across regions pose challenges to the uniform implementation of low-carbon strategies. But these regional differences could require tailored strategies, which can serve as valuable testing grounds for diverse approaches.
  

Only about 16% of oil, gas, and chemical companies highlight integration as a priority in their latest annual management discussion.⁷ By redirecting some focus toward synergistic integration of existing and new businesses, companies could enhance their strategies to amplify their returns and achieve their aspirations. This may be a better path toward accelerating low-carbon technologies since some sections of the investor community have been driving the separation of low-carbon opportunities through divestiture, resulting in niche and specialized companies. Considering the challenges in scaling such low-carbon businesses, this stand-alone approach may require reevaluation to effectively advance low-carbon initiatives. 

Define: Uncovering opportunities to lengthen, strengthen, and integrate value chains

Shifting from a traditional, top-down business model centered on a few key products to a complex and integrated portfolio may not be straightforward. Each business faces decisions specific to them on where and how to expand its value chains and where to integrate. But evaluating various low-carbon opportunities through the considerations of market potential and business synergies can help companies in narrowing their options.

Once goals have been aligned with corporate strategy, evaluating the market potential of new low-carbon opportunities broadly includes examining demand growth, returns, and innovation potential (figure 4; refer to the endnotes section for detailed information on the sources used in the figure).⁸

Part of that innovation potential can be opportunities to address unmet customer needs, the ability to build or sustain competitive advantage or to further differentiate in the market.

• Demand growth potential: A challenge in scaling low-carbon opportunities is often quantifying end-user demand. Developing opportunities with strong demand prospects, or demand sources that could be aggregated, can reassure investors of their commercial viability. Opportunities like carbon capture, utilization, and storage; sustainable aviation fuel; and electric vehicles, for example, are likely to experience the fastest growth in their peer group,⁹ but there is also growth expected for low-carbon opportunities entering an existing market in which upstream Scope 3 emissions are substantial. In these instances, key brands are often the first movers, adapting relatively short value chains to reflect the shift in customer expectations. Circular plastics, which can be effectively recycled many times, and bio-derived surfactants are some familiar examples of this process, but there are emerging ways to apply this to more extended value chains as well.
  
• Return potential: Among various opportunities, critical minerals have the potential to offer high long-term returns of up to 30%,¹⁰ depending on supply-demand dynamics and geopolitical complexities. Similarly, low-carbon opportunities involving advanced materials could also yield high returns due to their specialized applications and potential for premium pricing, although this could depend on technological advancements and market expansion across industries. However, some policies can impact the returns of a low-carbon opportunity and its path to commercialization.
• Innovation potential: Identifying low-carbon opportunities in the early stages of commercialization can involve commercial risks, but also offer scope for innovation that can unlock competitive advantages via differentiated products or services. Opportunities such as hydrogen, ammonia, and critical minerals, which have a substantial number of technologies in the conceptual or prototype stages, exhibit a higher potential for innovation compared to other low-carbon areas.¹¹ For instance, direct lithium extraction (DLE) technology, though still in the prototype stage, is expected to drive improvement in efficiency and reduce the costs of lithium extraction from brine.¹² In fact, DLE technologies can achieve lithium recovery rates of up to 90% (compared to the 60% recovery rate of traditional brine evaporation ponds) while also reducing operational expenditure by as much as 27%.¹³

The market potential for various low-carbon opportunities is expected to differ significantly across applications, regions, and countries. This variation is likely influenced by several factors, including demand, pricing, tax credit design or other policy incentives, infrastructure, supplier ecosystem, the complexity of the value chain, and the presence of established market players. Consequently, it is important to evaluate each opportunity based on the trade-off between risk and return. Leveraging business synergies with existing operations and infrastructure can help navigate these challenges and act as a potential impact multiplier in delivering gains that exceed the average market potential.

Evaluating the business synergies between the selected low-carbon opportunity and the existing value chain can be done by focusing on compatibility at the facility, resource, market, and end-use application levels (figure 5).

• Facility synergies: Leveraging existing physical assets and resources can reduce the time to market and accelerate revenue generation. Some refiners and chemical producers are already repurposing their existing downstream facilities for producing biofuels and other sustainable products. For instance, BASF SE is leveraging its existing infrastructure and reusing by-products and waste heat to expand its product portfolio in a sustainable manner.¹⁴
• Resource and process synergies: Integrating new opportunities that are compatible with existing resources and processes can enhance the scalability of an opportunity. For example, shared utility systems such as steam, power, and water treatment can serve both traditional chemical and refining processes as well as new hydrogen and ammonia production units, leading to cost efficiencies and improvement to its environmental footprint. Similarly, employees with experience in the operation of high-pressure and high-temperature systems in refineries and chemical plants can adapt to the similar conditions required for hydrogen and ammonia synthesis. This can help reduce training needs and reduce costs by leveraging existing human resources.
• Market and supply chain synergies: Shared market access can tap into established customer segments and build on existing marketing knowledge, thereby lowering marketing and promotional expenses while enhancing supply chain efficiency. Opportunities such as electric vehicles, advanced materials, and biofuels have significant marketing and distribution overlap with existing hydrocarbon businesses. Shell plc, for example, is leveraging destination charging and fleet charging initiatives to improve engagement and retention of its EV customers, who have a 30% higher spend compared to its traditional customers.¹⁵
  
• End-use application synergies: Shifting consumer patterns can lead to substitution of some traditional products by newer, high-value, and sustainable products.¹⁶ Therefore, it’s likely that synergies in end-use applications can help retain the customer base and offer high-value and sustainable products. In fact, offering advanced materials could help chemical companies replace traditional plastic products while tapping into a higher-value market segment.

After selecting an appropriate opportunity, companies can then focus on developing go-to-market strategies that maximize rewards and manage risks.

Develop: Crafting a competitive, risk-adjusted go-to-market plan

Oil, gas, and chemical companies have extensive experience developing, monitoring, and reassessing their strategic plans. However, as the industry moves toward more demand-driven products and integrates with new value chains, developing a strategy that builds on differentiation and leverages its competitive advantage will likely become increasingly important.

The value proposition for those entering low-carbon markets may offer access to expanded customer bases or certifiable low-carbon products and services that help a company reduce its carbon footprint. Elements that can help a company deliver on its value proposition include:

• Value creation: Companies create value for their customers by leveraging their competitive advantages to develop unique solutions that serve their customers’ needs. Companies can invest in partnerships and resources such as assets and talent to create this value for their customers. For instance, a company could form partnerships to pool expertise, technology, and market access to drive down costs and provide cost-competitive services or products. Companies can also create value by reutilizing their conventional methods and existing infrastructure in innovative ways that align with emerging value chains. By repurposing traditional assets, these companies could accelerate their entry into new markets with minimal capital outlay and disruption to operations.
• Value delivery: Companies deliver value through go-to-market strategies that target relevant customer segments, ensure access to the product or service, and foster strong customer relationships through various communication channels. For instance, a company might target both its existing large industrial customers and a growing market of smaller mobility customers for green hydrogen sales. A company can use various digital platforms and marketplaces to promote continuous customer engagement, improve its knowledge of the customer, and tailor its customer interactions.
  
• Value capture: Companies can capture value back from their customers by optimizing revenue generation. This can be done by selling a product or in other ways, such as licensing technology, selling comprehensive end-to-end services, or offering access to specialized infrastructure to their customers. Additionally, some companies may be able to leverage tax credits or government grants.

When commercializing new and evolving energy opportunities, there is often more uncertainty around the build-out of value chains, markets, and technological maturity. These risks can directly increase a company’s cost of capital, making financing challenging; so identifying, assessing, and developing strategies through a robust risk and opportunity assessment process is critical.

While companies face a number of risks, the focus here is on those risks and risk mitigation strategies that apply specifically to companies entering new value chains and/or adopting new technologies (figure 6). When evaluating these strategies, it can be helpful to consider the interdependencies and trade-offs between different risks and different mitigation instruments; how to optimize risks and rewards between contracted parties; and which strategies best suit their company and position.

• Market competitiveness risk: This includes risks associated with demand maturity (such as barriers to entry from competing opportunities), offtake risk stemming from insufficient demand or cost competitiveness, and access to markets. Companies can reduce these risks by establishing partnerships with companies already active in the market or leveraging economies of scale to reduce costs and maintain competitiveness.
  
• Financial risk: This refers to the risk of financial loss, insufficient economic returns, or lack of available capital. To help reduce financial risk, companies could sign multi-year contracts or offtake agreements with customers, use expressions of interest to gauge demand or help aggregate demand, enter joint ventures or partnerships to share the risk, or identify a project’s eligibility for tax credits and other grants to help ensure economic viability.
• Supply chain risk: This refers to risks that disrupt the flow of goods and services within a value chain network. These risks can arise from environmental, economic, political, or cybersecurity events, and include risks associated with material and mineral availability as well as infrastructure risks. Companies can transfer risk through insurance policies that cover damages or losses due to infrastructure. Alternatively, companies can reduce risk by diversifying their suppliers, building redundancy into their infrastructure, or using digital technologies to improve real-time communication along the supply chain to increase flexibility.
• Technology risk: This refers to risks associated with functional performance, accessibility for customers as they switch from the incumbent technology to the new technology, and technological maturity and integration. It can also include cost overruns resulting from construction delays or higher-than-expected operational and maintenance expenditures. Companies could reduce risk by forming partnerships with those that have experience using the new technology, piloting projects before building them on a commercial scale, or using digital technologies to monitor asset performance and predict when maintenance needs to be done to reduce outages.
• Regulatory and policy risk: This includes risks from exposure to changes in regulation, changes in policy or policy incentives, complex administrative procedures (such as lengthy permitting processes), and safety and environmental risks. Companies can navigate such risks by engaging in policy advocacy; developing safety protocols; ensuring sufficient employee training; or implementing compliance, incident, and audit management systems.
  
• Reputational risk: This risk can arise from failures to comply with industry standards, failure to meet stated emissions targets or sustainability objectives, or lack of clear communication with stakeholders. A company can prioritize transparency and accountability so that stakeholders understand how its actions align with company strategy and can trust the company will communicate its failures as well as its wins.
  

Deliver: Accelerating decision-making and business outcomes at the enterprise level

Establishing robust management systems is essential for driving consistent performance and ensuring value from integration. This involves designing operational models and organizational structures to support more dynamic and agile decision-making.

As companies move from supply-driven to demand-driven operating models, they will likely begin to rethink the structure, process, workflow, systems, and talent strategies of their organization. This will be important as goals expand from reducing costs and improving efficiency to also differentiating products and services.

The organizational structure will likely evolve alongside the operational model. Considering the industry’s capital-intensive and safety-focused nature, about 90% of the top 100 oil, gas, and chemical companies globally follow a centralized divisional structure to ensure consistent risk management and effective project management.²⁰ This extends to even their low-carbon initiatives. By contrast, about 70% of leading innovative and low-carbon businesses adhere to decentralized functional or matrix structures to better integrate new ventures and adapt quickly to market and technological changes.²¹

Is there room for change? By integrating elements of both centralized and decentralized structures, oil, gas, and chemical companies can offer some flexibility to foster innovation and improve agility in decision-making while also balancing compliance and risk obligations. This could involve forming autonomous, multidisciplinary teams for new energy projects, complemented by centralized governance.

The industry has invested in establishing a robust digital foundation to enhance operational efficiency and data-informed decision-making. Over the past five years, spending on software-as-a-service by the O&G industry has surged by 63%, surpassing the 14% increase in O&G capital expenditures during the same period, reflecting the value in outsourcing nonstrategic capabilities through best-in-class or custom solutions.²² Now the industry faces an opportunity to add new capabilities and complement existing systems—from enterprise resource planning to artificial intelligence, which have played a key role in building an integrated system within enterprises (figure 7). Put simply, companies with an established digital foundation and integrated systems will likely be able to leverage generative AI more swiftly and effectively.

How should organizations get started? There is a need to tailor the foundational models (like large language models) by integrating industry, functional domain, and corporate-specific institutional knowledge into the corpus of knowledge available to the models. The key to unlocking value from generative AI is more than simply deploying technology—true value realization comes from providing the technology access to the robust and relevant data set through a process that delivers trusted and relevant results to the business. This is expected to require robust and enterprise-level data engineering practices that ensure data accessibility across departments while maintaining established risk and ethical guardrails that ensure unbiased, reliable, and legal operations, which all contribute to fostering trust.

Way forward

The oil, gas, and chemical industry has a long history of integrating businesses. From the landmark 1999 merger of Exxon Corp and Mobil Corp to the 2007 acquisition of General Electric Company’s plastics business division by Saudi Basic Industries Corp, the industry has witnessed a broad spectrum of transformative integrations.²⁴ While there have been numerous smaller acquisitions in the green energy space, integrating traditional hydrocarbon operations with emerging low-carbon businesses is a relatively newer frontier for the industry. As the industry transitions from the “discovery” phase to the “define” phase, it should continue optimizing existing business practices while integrating new ventures. The focus now should shift toward the latter stages of decision-making: “develop” and “deliver.” Factors to consider that support this decision-making include:

• Adopting an “enterprise-first” mindset that can align integration activities with the organization’s financial goals, preventing initiatives that increase scope or costs without corresponding bottom-line benefits, thereby preventing financial overreach. 

• Implementing adaptive performance measures to account for dynamic variables and necessary operational adjustments, facilitating real-time recalibrations in response to evolving project needs and external conditions.

• Developing a technology road map that aligns with the enterprise’s long-term strategy, emphasizes necessary innovations, adapts to include relevant emerging technologies, and avoids transient technology trends can help eliminate barriers and silos across business systems.

• Prioritizing tailored, user-centric business models by engaging stakeholders to discuss trade-offs, helping to ensure alignment through clear communication, and refining strategies based on market feedback.

Implementing an integrated set of key performance indicators (KPIs) spanning financial, operational, sustainability, and human resources to work to align all departments, articulate the cumulative impact of changes across a company, and avoid over-indexing on a single KPI.