Guest Editorial: Three Pathways to Relevance and Profitability

Abstract

For most of the past 160 years, the exploration and production (E&P) sector earned outsized economic rent for finding new oil and gas (O&G) resources and making them economically viable for production. This was possible because of the perceived scarcity of such resources; demand expectations for hydrocarbon products far exceeded their likely supply. During that period, E&P companies focused on building functional expertise to enable growth and operate assets safely. Exploration and appraisal capabilities were particularly revered as key drivers of value. Other areas of the value chain such as field production management, logistics, or even marketing were not seen as critically differentiating. Understandably, building expertise in those areas was never made the primary focus. What a difference a decade makes. Perpetual Disruption Is the New Normal Today, we live in a completely different world. The challenges facing upstream companies simply did not exist 10 years ago. Six compressive forces, in particular, are bringing about a sea change in the industry. Earlier this year, COVID-19 brought with it a sharp and palpable drop in demand for transportation-related crude. With the dramatic structural changes we have made to the ways we live and work in response to the pandemic, low crude demand is expected to continue. This will only exacerbate resource holders’ concerns about supply overabundance. E&P companies that hold hydrocarbon resources were already worried that the resources they own could go unmonetized. Now, that threat is stronger than ever. So is the incentive to monetize their resources as quickly as possible. Ironically, their actions to do so will make the oversupply situation worse. Beyond the issues of supply and demand, the industry’s general economic climate is wreaking havoc. O&G companies typically focus on half-cycle economics or lifting costs when making production decisions. That is because land acquisition and development costs are considered sunk. If oil prices stay in the $40-50/bbl range, many asset classes will simply be uneconomical from a full-cycle standpoint.