Competing and partnering for resources and profits: Strategic shifts of oil Majors during the past quarter of a century

This article analyzes the change over the past 25 years in selected financial and operational performance indicators of US and EU based peer groups of oil Majors. After the Millennium's turn, all peer group companies experienced steep rises in their unit cost of production. Until 2000, oil Majors could replace reserves depleted by production, typically by splitting capital employed equally between upstream and downstream activities. Upstream assets include progressively more deepwater fields and unconventional resources, resulting in increased reserve replacement costs. This means the share of capital employed on upstream projects has risen to 70% in 2013. Capital expenditure (Capex) in the upstream segment for oil Majors is nearly 80% of the total, and for downstream (and other activities) Capex has been reduced accordingly (partly by asset divestures). In spite of sharply increased Capex on upstream projects, production output of the peer group has declined 6% since 2006. The profitability of upstream projects peaked in 2008, then declined and subsequently steadied at returns on capital employed (ROCEs) of about 20% in the period 2010-2012. US Majors have returned a greater proportion of cash generated from operations to shareholders than their EU counterparts, consistently so over the past 6 years. US companies achieved this better outcome in part by rapidly decreasing capital employed in downstream assets when these became less profitable. Downstream ROCEs have been weak over the past decade, but a modest recovery has begun. Downstream ROCEs of 15% in 2012 are sharply up from a low of 5% in 2009. For the coming decade, we expect fierce competition for technology leadership. To meet rising demand, oil and gas companies must increasingly produce from very complex fields, development cost of which will inevitably require high oil and gas prices. The rising cost of hydrocarbon extraction creates a strong incentive to accelerate the energy transition away from costly hydrocarbons toward progressively more affordable renewable energy resources.