Turning Green into A Source of Competitive Advantage

National Energy Efficiency Conference 2012 September 20, Singapore

1

Energy prices are rising rapidly…

SOURCE: McKinsey; EIA – Reference case; McKinsey Global Power Model

3.76.0-8.0

3.65.0-7.0

3.5 4.0-5.0

2.63.5-4.5

2.2

6.0-10.0

2.4 2.0-2.6

1.1

2015

1.5-2.5

2006

U.S. cent/KWh, real

…leading to globally increasing electricity prices

Rapidly rising oil prices…

$/barrel (Real terms in 2009 $)

0

10

20

30

40

50

60

70

80

90

100

110

2025 2015 2020 2010 1995 2005 2000

+2% p.a.

60-120%

40-100%

10-40%

30-70%

170-350%

±20%

30-130%

2

Percent of total costs, %

SOURCE: Global Insights; Mining Association of Canada; AME; EPA McKinsey analysis; Need.org; EIA glass report; CIPEC;CPBIS; UNIDO 2011, UN

5

7

10

12

15

15

24

30

30

32

Food and beverage

Oil refining

Glass

Paper & Pulp

Chemicals1

Metal ores mining

Coal mining

Cement

Steel

Aluminium

1 Based on US basic chemicals plants. Costs may vary by region and nature of chemical

Top 10 industries with the highest share of energy costs

… imposing a significant cost challenge across industries …

245

482

123

62

59

428

86

17

131

185

Absolute annual global energy costs, US$ bil Industry

3

Range of energy savings with payback of up to three years

… at the same time a major profit improvement opportunity Percent of total energy cost

Impact achieved

Min Max

SOURCE: McKinsey, UNIDO 2011, Global Insights

0 10 20 30 40 50 Industry sector

Food and beverage

Improvement potential, US$ billion

10-15% Average

Oil refining 13-20

Steel 24-72

Coal mining 3-9

Chemicals 43-128

Pulp and paper 9-13

Glass 5-7

9-93

~340

Aluminum 73-86

Cement 25-31

Metal ores mining 6-9

4

… for an average oil refinery this could be a game changer …

1 Limits of Quartile 1 approximate as actual limit changes with every survey

2 In 2010 Shell Malaysia reported an annual cost of sales of $3.3 billion. Assuming energy cost to be 7% of annual

cost of sales and that Shell can reduce energy cost by 40% to move up to Quartile 1

SOURCE: Solomon Associates, Annual reports 2010 – Shell Refining Company Malaysia, Reliance Industries, McKinsey

Solomon’s Energy Intensity Index (EII)

EXAMPLE

Qu

arti

le 1

1

Qu

arti

le 4

1

150

140

130

120

110

100

90

80

70

60

50

Reliance Jamnagar Refinery (most energy efficient refinery WW)

Reducing energy costs by US$1 per barrel …

… would translate into a Solomon’s Q1 position

“Mediocre” Refinery

5

However, Green improvements are hard to sustain, with 90% of transformations failing after 4 years…

Cost reduction sustainability among the S&P 500 Percent of companies

10

100

Year 4+ Year 3

15

Year 2

18

Year 1

57

Year 0

Initiated cost reduction

Failed to achieve cost improvement

Failed to maintain

improvement

Sustained Improvement

SOURCE: Bloomberg; Factiva; Transformation Compendium; Beer and Nohria; Conference Board report (Fortune 500 interviews)

90% of all transformation efforts fail to sustain

improvement after 4 years

6

…mostly because of lacking focus on “soft” issues…

“… leadership mindset…”

“… capabilities to sustain …”

“… accountability …”

“… misaligned aspirations …”

Factors contributing to failures

Miscellaneous 14%

Insufficient Resources 14%

~70%

Employee resistance

~39%

Management behaviour

~33%

SOURCE: McKinsey research

Typical reasons

7

… in response McKinsey has developed an integrated system to enable sustainable energy efficiency transformations

Management

system (MS)

Technical

system (TS)

People

system (PS)

8

T12

Best practice technical toolkit: Identify & Quantify

T2 T3

T5 T6 T4

T8 T9 T7

Energy value chain Current state analysis

Theoretical limit

Load curve Process parameter analysis

Network loss analysis

Motor analysis

Contracts

Pinch analysis

Energy loss framework

Create energy consumption baseline along energy value chain

Identify minimum level of energy consumption

Map and quantify energy as it flows through system

Identify energy losses

Quantify operational losses (distillation column as example)

Quantify losses due to sub-optimal control of key para-meters (furnace as example)

Quantify losses due to sub-optimal reuse of heat (heating network as example)

Structure and optimize contracts

T10 Cost curve Quantify losses due to energy demand-supply mismatch (cooling systems as example)

Quantify losses in distribution networks (compressed air system as example)

Quantify losses due to inefficiencies in motors and their applications

T11 Energy sourcing Determine right sourcing strategy

T1

SOURCE: McKinsey

TS

9

Proprietary Loss Framework: “The 9 energy losses”

7. Over processing

8. Re processing

5. Energy intensive downtime

4. Transfer loss

9. Low recovery

6. Excessive Storage

3. Conversion inefficiency

1. Sub optimal energy source

2. Sub optimal raw material

Losses

SYSTEM

OUT

IN

SOURCE: McKinsey

TS

10 SOURCE: McKinsey

RedE database system: Identify and drive execution of energy levers

RedE Resource Efficiency Deployment Engine

(Web-based system)

Proprietary database of energy saving levers

Instant estimation of energy and CO2 savings

Detailed explanation on how to execute lever

End-to-end project management of initiative

TS

11

Best practice management toolkit: Track & Implement

Energy performance review

Performance monitoring Implementation road map

Performance dialogues

Transformation design M2

M4

M1

M3

M5

Develop insights on management and people system diagnostics

Design effective KPIs, targets and performance dashboards

Prioritize and sequence initiatives to draw up transformation workplan

Develop system and practice coaching employees

Understand overall transformation framework: technical, management and people systems

SOURCE: McKinsey

MS

12

Heat exchanger performance Heater inlet temperate (C)

Time

Furnace efficiency Energy output/energy input (%)

Time

Quality of distillate Gas oil flash point (C)

Time

Flue gas outlet temperature C

Time

Oxygen level Percentage of excess O2 (%)

Time

Energy consumption Energy/distillate (t SRF/100 t-crude)

Time

Real-time performance dashboard

Energy index of plant Energy efficiency of equipment Percentage of process target in control

Energy performance dashboard Plant: Date: Responsible:

Target

Actual

Heat exchanger cleaning

Soot blower broken

MS

13

Best practice people toolkit: Mindset to Sustain

P2

P4

P1

P3

Communication and influencing techniques

Root cause problem solving

Continuous improvement

Conflict management

Learn storytelling and influence model to motivate organization

Diagnose key drivers and develop solutions

Learn best practices in sustaining ongoing transformation impact

Practice resolving conflicts

30

In all interactions, we need to be cautious of two forms of potential conflicts – overt and covert

HighPassive –

“I don’t really matter”

▪ Don’t express needs, opinions or feelings

▪ Don’t speak up even as others violate their rights

▪ Avoid conflict even at own discomfort

Assertive –

“Take control of your own life”

▪ Respect needs, opinions, and feelings of others

▪ Maintain rights of both parties whenever possible

▪ Deal with conflict in healthy ways

Passive aggressive –

“I don’t know what matters”

▪ Deal with needs, opinions and feelings by not dealing with them

▪ Respect rights of others but dislike it, often secretly sabotaging process

▪ Avoid conflict but quietly resents others

Aggressive –

“You don’t really matter”

▪ Don’t respect needs, opinions or feelings of others

▪ Have tendency of violating others’ right

▪ Willing to risk conflict to address personal discomfort

Low

Low High

Degree ofcooperation by others

Acknowledge of conflict by others

Overt conflictCovert conflict

Constructive debate

May turnpassive-aggressive

Important to recognize and prepare for both covert and overt conflicts

Positive relationship, no conflict

Four forms of interaction:

SOURCE: McKinsey

P2: Conflict management

SOURCE: McKinsey

PS

14

Green accreditation program

Green Practitioner

Green Expert

Sr. Expert

Green Architect

▪ Practicing ▪ Learn by doing

following an expert

▪ Teaching ▪ Coach others

without leading

▪ Maintaining ▪ Mentor larger

group of experts and maintain knowledge

▪ Architecting ▪ Design

integrated people and transformation programs 0-6 months

6-18 months

18-36 months

36+ months

SOURCE: McKinsey

PS

15

Knowledge retained from different learning approaches

As adults learn best through learning-by-doing…

SOURCE: McKinsey

Knowledge retained

10% 32%

65%

Learning by Hearing Seeing Doing Doing

65% Books and

PowerPoint

Simulations and games

Pilot for a lean transformation

Shop floor training

Concept experienced

Transformation executed

Experience gained

Theory understood

Adults learn best through learning-by doing

16

DISTILLATION LEARNING STATION

HEAT EXCHANGERS LEARNING STATION

FURNACE LEARNING STATION

FIN FANS LEARNING STATION

COOLING WATER SYSTEM LEARNING

STATION AIR COMPRESSORS LEARNING STATION

DISTILLATION LEARNING STATION

HEAT EXCHANGERS LEARNING STATION

FURNACE LEARNING STATION

FIN FANS LEARNING STATION

COOLING WATER SYSTEM LEARNING

STATION AIR COMPRESSORS LEARNING STATION

…the Green Campus uses a live but risk-free refinery setting…

SOURCE: McKinsey

17

…to enhance learning through a suite of experiential and interactive learning tools…

Real-life case on transformational journey

Realistic role-plays

Proprietary toolbox Interactive apps

1 2

3 4

18

“To define a true competitive advantage we must find at least 30%

energy reduction” CEO, OmCo

…where participants go through an accelerated real-life 2 year transformation

1

Implement and sustain “Sustain implementation progress”

Design “Design transformation roll-out”

Diagnose “Identify losses, define levers”

Prepare “Build baseline”

Ener

gy C

on

sum

pti

on

Time

How do I create a transformation with

How do I design a

How do I ensure ubstantial impact so there is a convincing case for change?

ustainable impact where my team has the right mindset and capabilities to drive continuous improvements?

calable transformation where the blueprint can be replicated and cascaded?

Inflexion points

19

…using role-playing to simulate real-life scenarios…

SOURCE: McKinsey

Operations manager

“I am more concerned

about throughput,

quality and safety”

Technical & planning manager

“I am very

busy”

Operator “I just do what

I’m told to do”

“I set the targets” Plant manager

“I seldom

communicate directly

with the operators”

HR & corporate transformation director

“Energy is not part

of my KPI” Maintenance manager

“Yet another

corporate

initiative…”

Shift supervisor

2

20

Cost curve T10

Root cause problem solving

P1 People system

Technical system

Management system

Theoretical limit T3

Energy value chain T1

Current state analysis T2

Energy sourcing T11

Contracts T12

Network loss analysis T8

Energy performance review

Transformation design

M1 Performance dialogues

M5 M2

Continuous improvement

P4 Communication and influencing techniques

P3

Module number

Load curve T5

Pinch analysis T7

Motor analysis T9

Performance monitoring

M3

Implementation road map

M4

Process parameter analysis

T6

Energy loss framework

T4

SOURCE: McKinsey

Prepare Implement and sustain

Design Diagnose

… leveraging the integrated toolkit of TS, MS and PS

Conflict management P2

3

21

…and interactive Green Campus iPad apps to enhance the learning experience

4

22

The Green Campus caters to all levels of management …

SOURCE: McKinsey

Duration Objective

▪ 1 day Understand drivers of success behind Green transformations

▪ 5 days

Acquire tool-kit for an end-to-end Green transformation

▪ 6-12 months

Develop full capabilities for a Green transformation

▪ 12 months Provide Green transformation capabilities to SME segment

For

CxOs

Change leaders Energy managers

SMEs

23

In short …

1. Energy efficiency represents a massive opportunity …

2. …however, most Green transformations fail

3. In response a capability driven Green transformation approach was developed …

…brought to life by the Green Campus…

4. …brought to life by the Green Campus in Singapore