How GCC energy and chemical companies can use corporate venture capital funds for their strategic priorities

Published: 17 July 2020 - 8:15 a.m.
Even before the COVID-19 pandemic, energy and chemical companies in the GCC faced a volatile market, with disruptive forces such as demands for sustainability and local content gaining momentum. The dual shock of COVID-19 and the steep drop in oil prices has compounded the disruption. Responding to these challenges is difficult, especially as most companies in the sector are large, complex organizations. However, they can use corporate venture capital (CVC) funds to manage these challenges by putting in motion three strategic moves: supply chain localization, technology innovation, and environmental sustainability.

CVC funds function in a similar fashion to traditional venture capital firms. They make strategic investments in early-stage companies with attractive technology, capabilities, and assets. The difference is that they are funded by, and benefit, a single company. They hold the potential to generate attractive financial returns, with similarly important strategic advantages. In the GCC, only a few energy and chemical companies already have active CVC funds, including Saudi Aramco and SABIC. Most other GCC organizations in the industry have yet to establish such funds.

The first strategic move for energy and chemical companies to address through CVC funds is localizing supply chains. This will improve business and operational resilience and is at the top of energy and chemical company agendas following the pandemic. Previously, local-content initiatives in the GCC sought to create jobs and diversify economies. Those were noble aims, but the pandemic has demonstrated the fragility of global supply chains and the imperative to produce vital goods within your borders. Already, some prominent GCC energy and chemical firms are investing in domestic ventures to develop local talent and businesses.

These investments aim to localize parent companies’ value chain to build a resilient domestic supply network, and a new customer base at home. In particular, CVC investments represent a quick and effective means to provide much needed capital for local ventures to develop and thrive, supported by the parent company’s capabilities and demand potential.

The second strategic move is to innovate and find new ways to remain competitive. By enabling companies to invest in innovative start-ups, CVC funds give parent companies faster access to new capabilities, products, markets, and tools that would otherwise take years to develop organically. In the current market, companies should focus on technology with readily available commercial opportunities—as opposed to more speculative concepts. In that way, they can catalyze the pursuit of innovation. Saudi Aramco Energy Ventures and SABIC Ventures were established precisely to invest in start-ups at technology commercialization phase.

The third strategic move is for companies to become more environmentally sustainable. Growing demands from the public, governments, and shareholders for action on sustainability are reinforcing the need to make faster progress. Moreover, there are growing substitution risks from alternative energy sources such as batteries or hydrogen. Increasingly, energy and chemical firms establish, or focus, their CVC funds to invest in energy efficiency and renewable energy growth companies.

For example, Equinor, a leading global oil and gas company from Norway, established Equinor Technology Ventures in the early 2000s. More recently, it set up Equinor Energy Ventures with a special focus on the company’s sustainability agenda. In the GCC, SABIC’s Nusaned Fund recently completed a joint venture with the German SCHMID Group to develop advanced rechargeable batteries and build a world-class manufacturing plant in Saudi Arabia for utility-scale energy storage.

Now more than ever, given the recent global health pandemic and economic crisis, CVC funds can help energy and chemical companies make faster progress toward their strategic goals. With valuations now lower for energy and chemical companies, and some organizations likely to run out of cash, companies have acquisition and investment opportunities that can assist their strategic moves. Parent companies should therefore increase investment in their CVC funds, and equip them with the capabilities to ensure that they can remain competitive in this more challenging market.

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