Strategic choices for upstream O&G companies

Picking peer groups: The upstream oil and gas corporate landscape

Oil and gas operators seem cautiously optimistic, based on Deloitte’s recent oil, gas, and chemicals industry executive survey, and US upstream oil and gas capital spend is up in 2018¹. To help companies assess their options in the current climate, Deloitte has identified six peer groups that hold different comparative advantages and face different competitive landscapes.

In New Horizons: Strategic choices for upstream oil and gas companies in a volatile oil price environment, Deloitte outlines the defining characteristics for each group, companies that fit into each group, and suggested strategies for future growth.

Picking your poison: Choices facing oil and gas operators today

Continuing a 2018 trend, we expect to see upstream oil and gas companies refocusing portfolios as commodity prices evolve. In addition to competitive position, four factors stand out as important considerations:

1. Scale—How much oil and gas is the company producing? From how many fields and regions does the company produce?
2. Scope—How many different types of projects (fields, pipelines, processing plants) and resource themes (e.g. shale, deepwater, oil sands) does the company operate?
3. Cost—How do capital and operating costs stack up? Are projects short or long cycle? Do they require continuous or upfront investment?
4. Running room—Can the company increase production and throughput with small or large incremental costs? What are the barriers to expanding capacity?

Each peer group could differ significantly across these factors. A major might produce several million barrels of oil equivalent per day from shale, conventional onshore, offshore, and deepwater fields, as well as from the oil sands, while also operating midstream, downstream, and trading assets that diversify its overall portfolio. A small, international independent would likely be the opposite with a handful of high-impact upstream exploration investments in a single resource theme (with commensurately high risk) and limited exposure in midstream or downstream operations.

Considering these differences, how can each peer group make the right strategic choices to navigate the markets in the current oil price environment?

Picking and choosing your strategy: Building a better portfolio for tomorrow’s oil price

Whether you’re running a large integrated oil and gas company with operations that span the globe or are proving up a few thousand acres in the Eagle Ford, making strategic choices is likely imperative to successfully growing your business. Those choices can have a direct impact on your company’s portfolio by changing scale, scope, costs, or running room.

Portfolio management is about making choices, some simple but many quite complex. Looking to the future, it’s hard to say whether oil prices will be closer to $30 or $130 five years from now. There appears to be more risk to upside due to low investment in recent years, but the oil and gas markets remain volatile. Business planning and portfolio management, therefore is less about optimizing around a price deck and more about preparing for the inevitable boom and bust cycles.

It seems prudent to plan for expansion and production growth, but fortune may favor the prepared over the bold, so companies would do well to position for price drops whenever they might occur. And of course, as novel technologies come to the fore, oil and gas companies should assess, acquire, and deploy to drive the most value from existing and future assets.

As always, companies need to decide where to play, how to win, and ultimately what their long-term vision is to grow sustainably while generating acceptable margins.

¹Conglin Xu, “US oil, gas industry capital spending to increase in 2018,” Oil and Gas Journal, accessed November 7, 2018.