Scale vs. Growth: How can IOCs can map a strategy for future positioning in a low oil price environment?

The answer to that critical question is that it depends on the segment (asset type) in which an IOC chooses to compete, according to a webinar called "Strategic Conundrum Facing IOCs," which is part of the continuing 'Energy: A Turning Point' program by IHS. This webinar series seeks to shed light on some of the most important challenges and potential strategies for E&P companies in the embattled oil market today and in the coming years.

In the sharply segmented exploration and production (E&P) world of oil, big IOCs-the majors-have a preference for investing in "scale" assets which tend to be discrete, large, and capital intensive developments that involve long lead times but opportunities for achieving operating efficiencies, hence higher returns on capital employed over time.

Meanwhile, in North America many smaller players occupy the "treadmill" or unconventionals segment, where the application of new technologies continues to unlock substantial new resource. The players here are chiefly the independents who aim to deliver competitive results via high, net asset growth and are focused on cost control, innovation, and process efficiencies. By doing so, the North America independents have also "hijacked the value proposition of other independents," said Jerry Kepes, vice president of IHS Energy. The pure play North American companies delivered growth whereas other independents with a mix of assets including offshore and international assets did not.

Only a few IOCs have managed to find success in both segments, Kepes noted. The fall in oil prices served merely to expose significant challenges already underway (before low oil prices) and accelerates strategy and portfolio choices vis-à-vis the next tranche of IOC growth in both the scale and treadmill plays.

There remain yet a number of avenues open in this dynamic environment to the majors considering options for future positioning, IHS believes. IOCs can focus down on a more limited set of technology plays within their area of expertise (this could require size reduction); or they can revisit enhanced-recovery applications for revitalizing conventional assets that are currently held. Of course, they can also add a mixture of faster reaction-time shale-technology plays to their conventional assets although the larger companies have had challenges in investing in these different asset types; or they can pursue mergers in order to access the preferred, large, scale assets most consistent with their current business models.

Other peer groups have differing challenges and potential options, corresponding on their business models and access to capital. Although they have additional obligations, NOCs also face significant strategic challenges necessitating shifts in strategy and direction in the coming years.

Learn more about IHS services: Upstream Competition Service, the National Oil Company Strategies Service, and the Growth Plays Service.

IHS Energy customers can learn more from related research on IHS Connect, Energy: A Turning Point.

IHS Staff Writer
Posted 6 May 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.